item 14 exhibits financial statement schedules reports form 8k 1 financial statements following consolidated financial statements company incorporated herein reference part report item 8 hereof report independent auditors consolidated statement operations years ended december 31 1994 1993 1992 consolidated statement shareholders equity years ended december 31 1994 1993 1992 consolidated balance sheet december 31 1994 1993 consolidated statement cash flows years ended december 31 1994 1993 1992 notes consolidated financial statements 2 financial statement schedule ii valuation qualifying accounts page 49 report schedules omitted applicable required information included consolidated financial statements notes thereto 3 exhibits see index exhibits b reports form 8k none signatures pursuant requirements section 13 15d securities exchange act 1934 duriron company inc duly caused report signed behalf undersigned thereunto duly authorized 24th day february 1995 duriron company inc william jordan william jordan president chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf duriron company inc capacities dates indicated index exhibits 22 subsidiaries duriron company inc direct indirect subsidiaries beneficially owned controlled ii business name organized iii included consolidated financial statements company name jurisdiction incorporation subsidiary set forth 23 consents experts counsel 231 consent ernst young llp 57 27 271 financial data schedule submitted secs information 58 indicates exhibit incorporated reference annual report form 10k previous filing commission companys file number commission 0325 indicates document relates class indebtedness exceed 10 total assets company subsidiaries company furnish copy document commission upon request documents identified item 10 include management contracts compensatory plans arrangements required filed exhibits ronkeep213nanitem 14 exhibits financial statement schedules reports form 8k 1 financial statements financial statements appearing pages 21 38 1998 annual report shareholders together report thereon ernst young llp dated february 9 1999 appearing page 13 1998 annual report shareholders report price waterhouse llp dated january 28 1997 listed accompanying index page incorporated herein reference 2 financial statement schedules required financial statement schedule together reports thereon ernst young llp dated february 9 1999 price waterhouse llp dated january 28 1997 listed accompanying index page filed part form 10k 3 exhibits listed accompanying index exhibits pages 13 18 filed part form 10k b reports form 8k none c see item 14a 3 see item 14a 2 index exhibits signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 19th day february 1999 flowserve corporation registrant bernard g rethore bernard g rethore chairman president chief executive officer pursuant requirements securities exchange act 1934 report signed following persons capacities dates indicated flowserve corporation index financial statements financial statement schedules item 14a1 2 financial statement schedules included annual report form 10k omitted applicable required information shown consolidated financial statements notes thereto report independent accountants board directors stockholders bwip inc opinion consolidated statements income retained earnings cash flows bwip inc presented separately herein present fairly material respects results operations cash flows bwip inc subsidiaries year ended december 31 1996 conformity generally accepted accounting principles financial statements responsibility companys management responsibility express opinion financial statements based audit conducted audit statements accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audit provides reasonable basis opinion expressed price waterhouse llp los angeles california january 28 1997 report independent auditors financial statement schedules board directors shareholders flowserve corporation audited consolidated financial statements flowserve corporation subsidiaries december 31 1998 1997 three years period ending december 31 1998 issued report thereon dated february 9 1999 appearing page 13 1998 annual report consolidated financial statements incorporated reference form 10k audits also included financial statement schedule listed item 14a form 10k schedule responsibility companys management responsibility express opinion schedule based audits audit 1996 financial statements bwip inc wholly owned subsidiary statements reflect total assets constituting 49 related consolidated total december 31 1996 total revenues constituting 45 related totals year ended december 31 1996 furnished report auditors respect financial statement schedule listed item 14a form 10k bwip inc opinion based audits report auditors financial statement schedule referred considered relation basic financial statements taken whole presents fairly material respects information set forth therein sernst young llp dallas texas february 9 1999 report independent accountants financial statement schedules board directors bwip inc audit consolidated financial statements presented separately herein referred report dated january 28 1997 bwip inc appearing page annual report form 10k also included audit financial statement schedules bwip inc year ended december 31 1996 presented separately herein opinion financial statement schedules present fairly material respects information set forth therein read conjunction related consolidated financial statements price waterhouse llp los angeles california january 28 1997 flowserve corporation schedule ii valuation qualifying accounts dollars thousands deductions reserve represent accounts written net recoveries b deductions reserve represent inventory written index exhibitsitem 14 exhibits financial statement schedules reports form 8k 1 financial statements financial statements appearing pages 32 48 1999 annual report shareholders together report thereon ernst young llp dated february 10 2000 appearing page 23 1999 annual report shareholders incorporated herein reference 2 financial statement schedules required financial statement schedule together report thereon ernst young llp dated february 10 2000 listed accompanying index page filed part form 10k 3 exhibits listed accompanying index exhibits pages 13 17 filed part form 10k b reports form 8k none c see item 14a 3 see item 14a 2 index exhibits exhibit description 21 agreement plan merger dated may 6 1997 among company bruin acquisition corp bwip inc bwip filed annex 1 joint proxy statementprospectus part registration statement form s4 dated june 19 1997 22 agreement plan merger among flowserve corporation forrest acquisition sub inc innovative valve technologies inc dated november 18 1999 filed exhibit 99c1 schedule 14d1 tender offer statement schedule 13d dated november 22 1999 31 1988 restated certificate incorporation duriron company inc filed exhibit 31 companys annual report form 10k year ended december 31 1988 32 1989 amendment certificate incorporation filed exhibit 32 companys annual report form 10k year ended december 31 1989 33 bylaws duriron company inc restated filed exhibit 32 companys annual report form 10k year ended december 31 1987 34 1996 certificate amendment certificate incorporation filed exhibit 34 companys annual report form 10k year ended december 31 1995 35 amendment 1 restated bylaws filed exhibit 35 companys annual report form 10k year ended december 31 1995 36 april 1997 certificate amendment certificate incorporation filed part annex vi joint proxy statementprospectus part registration statement form s4 dated june 19 1997 37 july 1997 certificate amendment certificate incorporation filed exhibit 36 companys quarterly report form 10q quarter ended june 30 1997 41 lease agreement indenture dated january 1 1995 bond purchase agreement dated january 27 1995 connection 8 taxable industrial development revenue bond city albuquerque new mexico relates class indebtedness exceed 10 total assets company furnish copy documents commission upon request 42 rights agreement dated august 1 1986 company bankone na rights agent includes exhibit b thereto form rights certificate filed exhibit 1 companys registration statement form 8a august 13 1986 43 amendment dated august 1 1996 rights agreement filed exhibit 45 companys quarterly report form 10q quarter ended june 30 1996 44 amendment 2 dated june 1 1998 rights agreement dated august 13 1986 amended august 1 1996 filed exhibit 1 companys form 8aa dated june 11 1998 45 interest rate currency exchange agreement company barclays bank plc dated november 17 1992 amount 25000000 filed exhibit 49 companys annual report form 10k year ended december 31 1992 46 credit agreement dated october 7 1999 among flowserve corporation bank america na administrative agent letter credit issuing bank one texas na syndication agent abn amro bank nv documentation agent financial institutions party thereto filed herewith 47 material subsidiary guarantee dated october 7 1999 flowserve fcd corporation flowserve fsd corporation flowserve red corporation flowserve international inc favor benefit bank america na administrative agent representative banks issuing bank defined credit agreement filed herewith 48 rate swap agreement amount 25000000 company national city bank dated november 14 1996 filed exhibit 49 companys annual report form 10k year ended december 31 1996 49 rate swap agreement amount 25000000 company key bank national association dated october 28 1996 filed exhibit 410 companys annual report form 10k year ended december 31 1996 49 note agreement dated november 15 1996 bwip international inc note purchasers named therein respect 30000000 principal amount 714 senior notes series due november 15 2006 20000000 principal amount 717 senior notes series b due march 31 2007 filed exhibit 41 bwips registration statement form s8 registration 33321637 filed february 12 1997 101 flowserve corporation incentive compensation plan senior executives amended restated effective january 1 1994 incentive plan filed exhibit 101 companys annual report form 10k year ended december 31 1993 102 amendment 1 incentive plan filed exhibit 102 companys annual report form 10k year ended december 31 1995 103 amendment 2 incentive plan filed exhibit 103 companys quarterly report form 10q quarter ended september 30 1998 104 amendment 3 incentive plan filed exhibit 104 companys annual report form 10k year ended december 31 1998 105 supplemental pension plan salaried employees filed exhibit 104 companys annual report form 10k year ended december 31 1987 106 flowserve corporation amended restated director deferral plan filed attachment companys definitive 1996 proxy statement filed march 10 1996 107 form change control agreement executive officers company filed exhibit 106 companys annual report form 10k year ended december 31 1996 108 first master benefit trust agreement dated october 1 1987 filed exhibit 1024 companys annual report form 10k year ended december 31 1987 109 amendment 1 first master benefit trust agreement dated october 1 1987 filed exhibit 1024 companys annual report form 10k year ended december 31 1993 1010 amendment 2 first master benefit trust agreement filed exhibit 1025 companys annual report form 10k year ended december 31 1993 1011 second master benefit trust agreement dated october 1 1987 filed exhibit 1012 companys annual report form 10k year ended december 31 1987 1012 first amendment second master benefit trust agreement filed exhibit 1026 companys annual report form 10k year ended december 31 1993 1013 longterm incentive plan longterm plan amended restated effective november 1 1993 filed exhibit 108 companys annual report form 10k year ended december 31 1993 1014 amendment 1 longterm plan filed exhibit 1013 companys annual report form 10k year ended december 31 1995 1015 flowserve corporation 1989 stock option plan amended restated effective january 1 1997 filed exhibit 1014 companys annual report form 10k year ended december 31 1996 1016 flowserve corporation second amendment 1989 stock option plan previously amended restated filed exhibit 1014 companys quarterly report form 10q quarter ended june 30 1998 1017 flowserve corporation 1989 restricted stock plan 1989 restricted stock plan amended restated effective january 1 1997 filed exhibit 1015 companys annual report form 10k year ended december 31 1996 1018 amendment 1 1989 restricted stock plan amended restated filed exhibit 1033 companys annual report form 10k year ended december 31 1997 1019 flowserve corporation retirement compensation plan directors director retirement plan filed exhibit 1015 companys annual report form 10k year ended december 31 1988 1020 amendment 1 director retirement plan filed exhibit 1021 companys annual report form 10k year ended december 31 1995 1021 companys benefit equalization pension plan equalization plan filed exhibit 1016 companys annual report form 10k year ended december 31 1989 1022 amendment 1 dated december 15 1992 equalization plan filed exhibit 1018 companys annual report form 10k year ended december 31 1992 1023 flowserve corporation executive equity incentive plan amended restated effective july 21 1999 filed exhibit 102 companys quarterly report form 10q quarter ended september 30 1999 1024 flowserve corporation deferred compensation plan executives filed exhibit 1019 companys annual report form 10k year ended december 31 1992 1025 executive life insurance plan flowserve corporation filed exhibit 1029 companys annual report form 10k year ended december 31 1995 1026 executive longterm disability plan duriron company inc filed exhibit 1030 companys annual report form 10k year ended december 31 1995 1027 flowserve corporation 1997 stock option plan included exhibit companys 1997 proxy statement filed march 17 1997 1028 first amendment flowserve corporation 1997 stock option plan filed exhibit 1028 companys quarterly report form 10q quarter ended june 30 1998 1029 amendment 2 flowserve corporation 1997 stock option plan filed herewith 1030 flowserve corporation 1999 stock option plan included exhibit companys 1999 proxy statement filed march 15 1999 1031 amendment 1 flowserve corporation 1999 stock option plan filed herewith 1032 bwip international inc supplemental executive retirement plan amended restated filed exhibit 1027 companys quarterly report form 10q quarter entered march 31 1998 1033 flowserve corporation 1998 restricted stock plan included exhibit companys 1999 proxy statement filed april 9 1998 1034 amendment 1 flowserve corporation 1998 restricted stock plan filed exhibit 10 companys quarterly report form 10q quarter ended march 31 1999 1035 amendment 2 flowserve corporation 1998 restricted stock plan filed exhibit 101 companys quarterly report form 10q quarter ended june 30 1999 1036 amendment 1 amended restated director deferral plan filed exhibit 1032 companys annual report form 10k year ended december 31 1997 1037 amendment 2 amended restated director deferral plan filed exhibit 1034 companys quarterly report form 10q quarter ended september 30 1998 1038 form employment agreement company certain executive officers filed exhibit 1031 companys annual report form 10k year ended december 31 1997 1039 employment agreement effective july 22 1997 company bernard g rethore filed exhibit 1053 companys quarterly report form 10q quarter ended september 30 1997 1040 amended employment agreement effective november 24 1999 company bernard g rethore filed herewith 1041 amendment 1 amended employment agreement effective february 29 2000 company bernard g rethore filed herewith 1042 employment agreement effective july 1 1999 company c scott greer filed exhibit 102 companys quarterly report form 10q quarter ended june 30 1999 1043 loan agreement company c scott greer filed exhibit 101 companys quarterly report form 10q quarter ended september 30 1999 1044 amendments form change control agreement executive officers company filed herewith 131 1999 annual report shareholders filed herewith part report extent incorporated herein reference 211 subsidiaries company filed herewith 231 consent ernst young llp filed herewith 271 financial data schedule submitted sec electronic format filed herewith signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 24th day february 2000 flowserve corporation registrant c scott greer c scott greer president chief executive officer pursuant requirements securities exchange act 1934 report signed following persons capacities dates indicated flowserve corporation index financial statements financial statement schedules item 14a1 2 financial statement schedules included annual report form 10k omitted applicable required information shown consolidated financial statements notes thereto report independent auditors financial statement schedule board directors shareholders flowserve corporation audited consolidated financial statements flowserve corporation subsidiaries december 31 1999 1998 three years period ending december 31 1999 issued report thereon dated february 10 2000 appearing page 23 1999 annual report consolidated financial statements incorporated reference form 10k audits also included financial statement schedule listed item 14a form 10k schedule responsibility companys management responsibility express opinion schedule based audits opinion based audits financial statement schedule referred considered relation basic financial statements taken whole presents fairly material respects information set forth therein sernst young llp dallas texas february 10 2000 flowserve corporation schedule ii valuation qualifying accounts dollars thousands deductions reserve represent accounts written net recoveries b deductions reserve represent inventory written index exhibitsitem 14 exhibits financial statement schedules reports form 8k 1 financial statements financial statements accompanying notes appearing pages 33 60 2000 annual report shareholders together reports thereon pricewaterhousecoopers llp dated february 5 2001 ernst young llp dated february 10 2000 appearing page 24 2000 annual report shareholders incorporated herein reference 2 financial statement schedules required financial statement schedule together report thereon pricewaterhousecoopers llp dated february 5 2001 listed accompanying index page filed part form 10k 3 exhibits listed accompanying index exhibits pages 14 18 filed part form 10k b reports form 8k none c see item 14a 3 see item 14a 2 index exhibits exhibit description 21 purchase agreement among flowserve corporation flowserve red corporation idp acquisition llc ingersollrand company dated february 9 2000 filed exhibit 21 companys quarterly report form 10q quarter ended march 31 2000 22 amendment 1 dated july 14 2000 purchase agreement dated february 9 2000 among flowserve corporation flowserve red corporation idp acquisition llc ingersollrand company filed exhibit 21 companys report form 8k dated july 19 2000 23 agreement plan merger among flowserve corporation forest acquisition sub inc innovative valve technologies inc dated november 18 1999 filed exhibit 99 c1 schedule 14 d1 tender offer statement schedule 13d dated november 22 1999 31 1988 restated certificate incorporation duriron company inc filed exhibit 31 companys annual report form 10k year ended december 31 1988 32 1989 amendment certificate incorporation filed exhibit 32 companys annual report form 10k year ended december 31 1989 33 bylaws duriron company inc restated filed exhibit 32 companys annual report form 10k year ended december 31 1987 34 1996 certificate amendment certificate incorporation filed exhibit 34 companys annual report form 10k year ended december 31 1995 35 amendment 1 restated bylaws filed exhibit 35 companys annual report form 10k year ended december 31 1995 36 april 1997 certificate amendment certificate incorporation filed part annex vi joint proxy statementprospectus part registration statement form s4 dated june 19 1997 37 july 1997 certificate amendment certificate incorporation filed exhibit 36 companys quarterly report form 10q quarter ended june 30 1997 41 lease agreement indenture dated january 1 1995 bond purchase agreement dated january 27 1995 connection 8 taxable industrial development revenue bond city albuquerque new mexico relates class indebtedness exceed 10 total assets company furnish copy documents commission upon request 42 rights agreement dated august 1 1986 company bankone na rights agent includes exhibit b thereto form rights certificate filed exhibit 1 companys registration statement form 8a august 13 1986 43 amendment dated august 1 1996 rights agreement filed exhibit 45 companys quarterly report form 10q quarter ended june 30 1996 44 amendment 2 dated june 1 1998 rights agreement dated august 13 1986 amended august 1 1996 filed exhibit 1 companys form 8aa dated june 11 1998 45 rate swap agreement amount 25000000 company national city bank dated november 14 1996 filed exhibit 49 companys annual report form 10k year ended december 31 1996 46 rate swap agreement amount 25000000 company key bank national association dated october 28 1996 filed exhibit 410 companys annual report form 10k year ended december 31 1996 47 indenture dated august 8 2000 company guarantors identified therein bank new york trustee 290000000 aggregate principal amount 1225 senior subordinated notes due august 15 2010 filed exhibit 47 form s4 registration statement dated september 27 2000 48 indenture dated august 8 2000 flowserve finance bv guarantors identified therein bank new york trustee 100000000 aggregate principal amount 1225 senior subordinated notes due august 15 2010 filed exhibit 48 form s4 registration statement dated september 27 2000 49 dollar notes registration rights agreement dated august 3 2000 among company dollar notes guarantors credit suisse first boston bank america securities inc abn amro incorporated banc one capital markets inc filed exhibit 410 form s4 registration statement dated september 27 2000 410 euro notes registration rights agreement dated august 3 2000 among ffbv euro notes guarantors credit suisse first boston europe limited bank america international limited abn amro international limited first chicago limited filed exhibit 411 form s4 registration statement dated september 27 2000 101 flowserve corporation incentive compensation plan senior executives amended restated effective october 1 2000 filed herewith 102 supplemental pension plan salaried employees filed exhibit 104 companys annual report form 10k year ended december 31 1987 103 flowserve corporation director deferral plan amended restated effective october 1 2000 filed herewith 104 form change control agreement executive officers company filed exhibit 106 companys annual report form 10k year ended december 31 1996 105 first master benefit trust agreement dated october 1 1987 filed exhibit 1024 companys annual report form 10k year ended december 31 1987 106 amendment 1 first master benefit trust agreement dated october 1 1987 filed exhibit 1024 companys annual report form 10k year ended december 31 1993 107 amendment 2 first master benefit trust agreement filed exhibit 1025 companys annual report form 10k year ended december 31 1993 108 second master benefit trust agreement dated october 1 1987 filed exhibit 1012 companys annual report form 10k year ended december 31 1987 109 first amendment second master benefit trust agreement filed exhibit 1026 companys annual report form 10k year ended december 31 1993 1010 longterm incentive plan amended restated effective october 1 2000 filed herewith 1011 flowserve corporation 1989 stock option plan amended restated effective january 1 1997 filed exhibit 1014 companys annual report form 10k year ended december 31 1996 1012 flowserve corporation second amendment 1989 stock option plan previously amended restated filed exhibit 1014 companys quarterly report form 10q quarter ended june 30 1998 1013 amendment 3 flowserve corporation 1989 stock option plan filed herewith 1014 flowserve corporation 1989 restricted stock plan 1989 restricted stock plan amended restated effective january 1 1997 filed exhibit 1015 companys annual report form 10k year ended december 31 1996 1015 amendment 1 1989 restricted stock plan amended restated filed exhibit 1033 companys annual report form 10k year ended december 31 1997 1016 amendment 2 flowserve corporation 1989 restricted stock plan filed herewith 1017 flowserve corporation 1989 restricted stock dividend plan effective october 1 2000 filed herewith 1018 flowserve corporation retirement compensation plan directors director retirement plan filed exhibit 1015 companys annual report form 10k year ended december 31 1988 1019 amendment 1 director retirement plan filed exhibit 1021 companys annual report form 10k year ended december 31 1995 1020 companys benefit equalization pension plan equalization plan filed exhibit 1016 companys annual report form 10k year ended december 31 1989 1021 amendment 1 dated december 15 1992 equalization plan filed exhibit 1018 companys annual report form 10k year ended december 31 1992 1022 flowserve corporation executive equity incentive plan amended restated effective july 21 1999 filed exhibit 102 companys quarterly report form 10q quarter ended september 30 1999 1023 flowserve corporation deferred compensation plan filed herewith 1024 executive life insurance plan flowserve corporation filed exhibit 1029 companys annual report form 10k year ended december 31 1995 1025 executive longterm disability plan duriron company inc filed exhibit 1030 companys annual report form 10k year ended december 31 1995 1026 flowserve corporation 1997 stock option plan included exhibit companys 1997 proxy statement filed march 17 1997 1027 first amendment flowserve corporation 1997 stock option plan filed exhibit 1028 companys quarterly report form 10q quarter ended june 30 1998 1028 amendment 2 flowserve corporation 1997 stock option plan filed exhibit 1029 companys annual report form 10k year ended december 31 1999 1029 amendment 3 flowserve corporation 1997 stock option plan filed herewith 1030 flowserve corporation 1999 stock option plan included exhibit companys 1999 proxy statement filed march 15 1999 1031 amendment 1 flowserve corporation 1999 stock option plan filed exhibit 1031 companys annual report form 10k year ended december 31 1999 1032 amendment 2 flowserve corporation 1999 stock option plan filed herewith 1033 bwip international inc supplemental executive retirement plan amended restated filed exhibit 1027 companys quarterly report form 10q quarter entered march 31 1998 1034 flowserve corporation 1998 restricted stock plan included exhibit companys 1999 proxy statement filed april 9 1998 1035 amendment 1 flowserve corporation 1998 restricted stock plan filed exhibit 10 companys quarterly report form 10q quarter ended march 31 1999 1036 amendment 2 flowserve corporation 1998 restricted stock plan filed exhibit 101 companys quarterly report form 10q quarter ended june 30 1999 1037 amendment 3 flowserve corporation 1998 restricted stock plan filed herewith 1038 flowserve corporation 1998 restricted stock dividend plan effective october 1 2000 filed herewith 1039 form employment agreement company certain executive officers filed exhibit 1031 companys annual report form 10k year ended december 31 1997 1040 employment agreement effective july 1 1999 company c scott greer filed exhibit 102 companys quarterly report form 10q quarter ended june 30 1999 1041 loan agreement company c scott greer filed exhibit 101 companys quarterly report form 10q quarter ended september 30 1999 1042 amendments form change control agreement executive officers company filed exhibit 1044 companys report form 10k year ended december 31 1999 1043 credit agreement among registrant certain subsidiaries referred therein lenders referred therein credit suisse first boston new york branch syndication agent bank america na administrative agent collateral agent swingline lender abn amro bank nv bank one na salomon smith barney inc codocumentation agents dated august 8 2000 filed exhibit 1045 form s4 registration statement dated september 27 2000 1044 security agreement among registrant certain subsidiaries referred therein bank america na dated august 8 2000 filed exhibit 1046 form s8 registration statement dated september 27 2000 1045 amendment master benefit trust agreement filed herewith 131 2000 annual report shareholders filed herewith part report extent incorporated herein reference 211 subsidiaries company filed herewith 231 consent pricewaterhousecoopers llp filed herewith 232 consent ernst young llp filed herewith exhibits company incorporated reference annual report form 10k previous filing commission companys file number commission since july 1997 113179 previous file number 0325 management contracts compensatory plans arrangements required filed exhibits annual report form 10k signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 21st day february 2001 flowserve corporation registrant c scott greer c scott greer chairman president chief executive officer pursuant requirements securities exchange act 1934 report signed following persons capacities dates indicated flowserve corporation index financial statements financial statement schedules item 14a1 2 financial statement schedules included annual report form 10k omitted applicable required information shown consolidated financial statements notes thereto report independent accountants financial statement schedule board directors shareholders flowserve corporation audit consolidated financial statements referred report dated february 5 2001 appearing 2000 annual report shareholders flowserve corporation report consolidated financial statements incorporated reference annual report form 10k also included audit financial statement schedule listed item 14a2 form 10k year ended december 31 2000 opinion financial statement schedule presents fairly material respects information set forth therein read conjunction related consolidated financial statements financial statement schedule company december 31 1999 1998 two years ended audited independent accountants whose report dated february 10 2000 expressed unqualified opinion financial statement schedule pricewaterhousecoopers llp dallas texas february 5 2001 flowserve corporation schedule ii valuation qualifying accounts dollars thousands deductions reserve represent accounts written net recoveries b deductions reserve represent inventory written index exhibits company incorporated reference annual report form 10k previous filing commission companys file number commission since july 1997 113179 previous file number 0325 management contracts compensatory plans arrangements required filed exhibits annual report form 10kitem 14 exhibits financial statement schedules reports form 8k 1 financial statements financial statements listed accompanying index financial statements financial statement schedule page hereof filed part form 10k 2 financial statement schedule required financial statement schedule together report thereon pricewaterhousecoopers llp dated february 5 2002 listed accompanying index financial statements financial statement schedule page hereof filed part form 10k 3 exhibits listed accompanying index exhibits pages 13 17 filed part form 10k b reports form 8k none c see item 14a 3 see item 14a 2 index exhibits company incorporated reference annual report form 10k previous filing commission companys file number commission since july 1997 113179 previous file number 0325 management contracts compensatory plans arrangements required filed exhibits annual report form 10k signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 21st day february 2002 flowserve corporation registrant c scott greer c scott greer chairman president chief executive officer pursuant requirements securities exchange act 1934 report signed following persons capacities dates indicated flowserve corporation index financial statements financial statement schedule item 14a1 2 financial statement schedules included annual report form 10k omitted applicable required information shown consolidated financial statements notes thereto report independent accountants financial statement schedule board directors shareholders flowserve corporation audits consolidated financial statements referred report dated february 5 2002 appearing 2001 annual report shareholders flowserve corporation report consolidated financial statements incorporated reference annual report form 10k also included audit financial statement schedule listed item 14a2 form 10k december 31 2001 2000 two years ended opinion financial statement schedule presents fairly material respects information set forth therein read conjunction related consolidated financial statements financial statement schedule company december 31 1999 year ended audited independent auditors whose report dated february 10 2000 expressed unqualified opinion financial statement schedule spricewaterhousecoopers llp dallas texas february 5 2002 flowserve corporation schedule ii valuation qualifying accounts dollars thousands deductions reserve represent accounts written net recoveries b deductions reserve represent inventory written offitem 14 controls procedures information required item 14 set forth pages 39 40 caption controls procedures companys 2002 annual report shareholders incorporated herein reference part iv item 15item 14 principal accounting fees services information required item 14 set forth heading audit information 2004 proxy statement incorporated herein reference part iv item 15item 14 principal accountant fees services independent registered public accounting firm fee information pricewaterhousecoopers llp “pwc” began serving company’s independent accounting firm 2000 role pwc audits financial statements company chart summarizes fees professional services incurred company audits 2004 2003 financial statements fees billed company pwc 2004 2003 general company retains pwc services logically related natural extensions annual audit nonaudit fees audit committee preapproved audit nonaudit fees described year ended december 31 2004 accordance audit committee’s preapproval policy audit committee preapproval policy audit committee preapproves services whether audit nonaudit provided pwc related fees itemized annual audit nonaudit services audit committee focuses matters may affect scope audit pwc’s independence end receives certain representations pwc regarding independence permissibility applicable laws regulations nonaudit services provided pwc company audit committee also preapproves internal audit plan company scope timing external audit plan company audit committee may delegate preapproval authority chairman audit committee extent allowed law case delegation chairman must disclose preapproval determinations full audit committee soon possible determinations made part iv item 15item 14 principal accountant fees services information required item 14 incorporated reference definitive proxy statement filed sec later april 10 2007 part iv item 15item 14 principal accountant fees services information required item 14 incorporated reference definitive proxy statement filed sec later april 30 2008 part iv item 15item 14 principal accounting fees services information required item 14 incorporated reference definitive proxy statement relating 2009 annual meeting shareholders held may 14 2009 proxy statement filed sec later april 30 2009 part iv item 15item 14 principal accounting fees services information required item 14 incorporated reference definitive proxy statement relating 2010 annual meeting shareholders held may 14 2010 proxy statement filed sec later april 30 2010 part iv item 15item 14 principal accounting fees services information required item 14 incorporated reference definitive proxy statement relating 2011 annual meeting shareholders held may 19 2011 proxy statement filed sec later april 30 2011 part iv item 15item 14 principal accounting fees services information required item 14 incorporated reference definitive proxy statement relating 2013 annual meeting shareholders held may 23 2013 proxy statement filed sec later april 30 2013 part iv item 15item 14 principal accounting fees services information required item 14 incorporated reference definitive proxy statement relating 2015 annual meeting shareholders held may 21 2015 proxy statement filed sec later april 28 2015 part iv item 15item 14 principal accounting fees services information required item 14 incorporated reference definitive proxy statement relating 2016 annual meeting shareholders held may 19 2016 proxy statement filed sec later april 26 2016 part iv item 15item 14 principal accounting fees services information required item 14 incorporated reference information caption “other audit information” definitive proxy statement relating 2017 annual meeting shareholders held may 18 2017 proxy statement filed sec later april 26 2017 part iv item 15item 14 principal accounting fees services information required item 14 incorporated reference information caption “other audit information”in definitive proxy statement relating 2018 annual meeting shareholders held may 24 2018 proxy statement filed sec later april 30 2018 part iv item 15item 14 principal accounting fees services information required item 14 incorporated reference information caption “other audit information” definitive proxy statement relating 2019 annual meeting shareholders held may 23 2019 proxy statement filed sec later april 12 2019 part iv item 15item 14 principal accounting fees services information required item 14 incorporated reference information caption “other audit information” definitive proxy statement relating 2020 annual meeting shareholders held may 21 2020 proxy statement filed sec later april 10 2020 part iv item 15item 14principal accountant fees services information required item 14 incorporated reference information caption “other audit information” definitive proxy statement relating 2021 annual meeting shareholders part iv item 15item 14 exhibits financial statement schedules reports form 8k 1 financial statements following consolidated financial statements company incorporated herein reference part report item 8 hereof report independent auditors consolidated statement income years ended december 31 1995 1994 1993 consolidated statement shareholders equity years ended december 31 1995 1994 1993 consolidated balance sheet december 31 1995 1994 consolidated statement cash flows years ended december 31 1995 1994 1993 notes consolidated financial statements 2 financial statement schedule ii valuation qualifying accounts page 52 report schedules omitted applicable required information included consolidated financial statements notes thereto 3 exhibits see index exhibits b reports form 8k december 14 1995 company filed form 8k announcement completion acquisition durametallic november 30 1995 part filing company also submitted certain financial statements covering durametallics financial results nine month period ended september 30 1995 certain pro forma consolidated statements covering combined operations durametallic company period duriron company inc schedule ii valuation qualifying accounts dollars thousands deductions reserve represent accounts written net recoveries b deductions reserve represent inventory written c deductions reserve represent fixed assets written amounts reclassified general restructuring reserve signatures pursuant requirements section 13 15d securities exchange act 1934 duriron company inc duly caused report signed behalf undersigned thereunto duly authorized 9th day february 1996 duriron company inc william jordan william jordan president chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf duriron company inc capacities dates indicated index exhibits 3 articles incorporation bylaws 31 1988 restated certificate incorporation duriron company inc filed exhibit 31 companys annual report form 10k year ended december 31 1988 32 1989 amendment certificate incorporation filed exhibit 32 companys annual report form 10k year ended december 31 1989 33 bylaws duriron company inc restated filed commission exhibit 32 companys annual report form 10k year ended december 31 1987 34 1996 certificate amendment certificate incorporation 35 amendment 1 restated bylaws 4 instruments defining rights security holders including indentures 41 lease agreement indenture mortgage deed trust guarantee agreement executed june 1 1978 connection 918 industrial development revenue bonds series city cookeville tennessee 42 lease agreement indenture trust guaranty agreement executed june 1 1978 connection 738 industrial development revenue bonds series b city cookeville tennessee 43 lease agreement indenture mortgage agreement lessee guaranty agreement letter representation indemnity agreement dated december 1 1983 executed connection industrial development revenue bonds 1983 duriron company inc project erie company new york industrial development agency filed commission exhibit 44 companys report form 10k year ended december 31 1983 44 form rights agreement dated august 1 1986 duriron company inc bank one indianapolis national association rights agent filed exhibit companys form 8a dated august 13 1986 45 loan agreement dated march 19 1987 duriron company inc metropolitan life insurance company including form promissory note delivered connection therewith filed commission exhibit 7 companys current report form 8k dated april 6 1987 46 credit agreement duriron company inc bank one dayton na dated november 30 1989 47 interest rate currency exchange agreement company barclays bank dated november 17 1992 plc amount 25000000 filed exhibit 49 companys report form 10k year ended december 31 1992 48 loan agreement amount 25000000 company metropolitan life insurance company dated november 12 1992 filed exhibit 410 companys annual report form 10k year ended december 31 1992 49 revolving credit agreement company fifth third bank dated november 23 1992 amount 10000000 410 revolving credit agreement company first america bank michigan na amount 20000000 dated august 22 1995 10 material contracts see footnote 101 duriron company inc incentive compensation plan incentive plan senior executives amended restated effective january 1 1994 filed exhibit 101 companys annual report form 10k year ended december 31 1993 102 amendment 1 incentive plan 103 duriron company inc supplemental pension plan salaried employees filed commission exhibit 104 companys annual report form 10k year ended december 31 1987 104 duriron company inc amended restated director deferral plan filed attachment companys definitive 1996 proxy statement filed commission march 10 1996 105 form employment agreement employment agreement duriron company inc current officers filed exhibit 104 companys annual report form 10k year ended december 31 1992 106 form amendment 1 employment agreement 107 duriron company inc first master benefit trust agreement dated october 1 1987 filed exhibit 1024 companys annual report form 10k year ended december 31 1987 108 amendment 1 first master benefit trust agreement dated october 1 1987 filed exhibit 1024 companys annual report form 10k year ended december 31 1993 109 amendment 2 first master benefit trust agreement filed exhibit 1025 companys annual report form 10k year ended december 31 1993 1010 duriron company inc second master benefit trust agreement dated october 1 1987 filed exhibit 1012 companys annual report form 10k year ended december 31 1987 1011 first amendment second master benefit trust agreement filed exhibit 1026 companys annual report form 10k year ended december 31 1993 1012 duriron company inc longterm incentive plan longterm plan amended restated effective november 1 1993 filed exhibit 108 companys annual report form 10k year ended december 31 1993 1013 amendment 1 longterm plan 1014 duriron company inc 1989 stock option plan amended restated april 23 1991 filed exhibit 1011 companys annual report form 10k year ended december 31 1991 1015 duriron company inc 1989 restricted stock plan restricted stock plan amended restated effective april 23 1991 filed exhibit 1012 companys annual report form 10k year ended december 31 1991 1016 amendment 1 restricted stock plan filed exhibit 1020 companys annual report form 10k year ended december 31 1992 1017 amendment 2 restricted stock plan filed exhibit 1027 companys annual report form 10k year ended december 31 1994 1018 amendment 3 restricted stock plan 1019 amendment 4 restricted stock plan 1020 duriron company inc retirement compensation plan directors director retirement plan filed exhibit 1015 companys annual report form 10k year ended december 31 1988 1021 amendment 1 director retirement plan 1022 companys employee protection plan provides severance benefits certain employees change control company filed exhibit 1015 companys annual report form 10k year ended december 31 1989 1023 companys benefit equalization pension plan equalization plan filed exhibit 1016 companys annual report form 10k year ended december 31 1989 1024 amendment 1 dated december 15 1992 equalization plan filed exhibit 1018 companys annual report form 10k year ended december 31 1992 1025 companys equity incentive plan amended restated effective july 21 1995 1026 supplemental pension agreement company william jordan dated january 18 1993 filed exhibit 1015 companys annual report form 10k year ended december 31 1992 1027 1979 stock option plan amended restated april 23 1991 amendment 1 thereto dated december 15 1992 filed exhibit 1017 companys annual report form 10k year ended december 31 1992 1028 deferred compensation plan executives filed exhibit 1019 companys annual report form 10k year ended december 31 1992 1029 executive life insurance plan duriron company inc 1030 executive longterm disability plan duriron company inc 1031 consulting agreement james ware durametallic corporation dated april 21 1991 1032 senior executive death benefit agreement james ware durametallic dated april 12 1991 1033 executive severance agreement james ware durametallic corporation dated january 6 1994 1034 agreement james ware company dated september 11 1995 1035 agreement plan merger among duriron company inc wolverine acquisition corporation durametallic corporation dated september 11 1995 filed annex form s4 registration statement filed company september 11 1995 22 subsidiaries duriron company inc direct indirect subsidiaries beneficially owned controlled ii business name organized iii included consolidated financial statements company 221 subsidiaries company 23 consents experts counsel 231 consent ernst young llp 27 financial data schedule 271 financial data schedule submitted secs information indicates exhibit incorporated reference annual report form 10k previous filing commission companys file number commission 0325 indicates document relates class indebtedness exceed 10 total assets company subsidiaries company furnish copy document commission upon request documents identified item 10 include management contracts compensatory plans arrangements required filed exhibitsitem 14 exhibits financial statement schedules reports form 8k 1 financial statements financial statements together report thereon ernst young llp dated february 20 1998 appearing pages 19 38 1997 annual report shareholders listed accompanying index page incorporated herein reference 2 financial statement schedules required financial statement schedules together report thereon ernst young llp dated february 20 1998 listed accompanying index page filed part form 10k 3 exhibits listed accompanying index exhibits pages 14 19 filed part form 10k b reports form 8k none c see item 14a 3 see item 14a 2 index exhibits exhibit description 21 agreement plan merger dated may 6 1997 among company bruin acquisition corp bwip inc bwip filed annex joint proxy statementprospectus part registration statement form s4 dated june 19 1997 31 1988 restated certificate incorporation duriron company inc filed exhibit 31 companys annual report form 10k year ended december 31 1988 32 1989 amendment certificate incorporation filed exhibit 32 companys annual report form 10k year ended december 31 1989 33 bylaws duriron company inc restated filed commission exhibit 32 companys annual report form 10k year ended december 31 1987 34 1996 certificate amendment certificate incorporation filed exhibit 34 companys annual report form 10k year ended december 31 1995 35 amendment 1 restated bylaws filed exhibit 35 companys annual report form 10k year ended december 31 1995 36 april 1997 certificate amendment certificate incorporation filed part annex vi joint proxy statementprospectus part registration statement form s4 dated june 19 1997 37 july 1997 certificate amendment certificate incorporation filed exhibit 36 companys quarterly report form 10q quarter ended june 30 1997 41 lease agreement indenture mortgage deed trust guarantee agreement executed june 1 1978 connection 918 industrial development revenue bonds series city cookeville tennessee 42 lease agreement indenture trust guaranty agreement executed june 1 1978 connection 738 industrial development revenue bonds series b city cookeville tennessee 43 lease agreement indenture dated january 1 1995 bond purchase agreement dated january 27 1995 connection 8 taxable industrial development revenue bond city albuquerque new mexico 44 rights agreement dated august 1 1986 company bankone na rights agent includes exhibit b thereto form rights certificate filed exhibit 1 companys registration statement form 8a august 13 1986 45 amendment rights agreement dated august 1 1996 filed exhibit 45 companys quarterly report form 10q quarter ended june 30 1996 46 interest rate currency exchange agreement company barclays bank plc dated november 17 1992 amount 25000000 filed exhibit 49 companys annual report form 10k year ended december 31 1992 47 loan agreement amount 25000000 company metropolitan life insurance company dated november 12 1992 filed exhibit 410 companys annual report form 10k year ended december 31 1992 48 revolving credit agreement company first america bank michigan na amount 20000000 dated august 22 1995 filed exhibit 411 companys annual report form 10k year ended december 31 1995 49 credit agreement dated november 26 1997 among flowserve corporation bank america national trust savings association agent letter credit issuing bank financial institutions party thereto filed herewith 410 material subsidiary guarantee dated november 26 1997 bwip international inc favor benefit bank america national trust savings association agent filed herewith 411 rate swap agreement amount 25000000 company national city bank dated november 14 1996 filed exhibit 49 companys annual report form 10k year ended december 31 1996 412 rate swap agreement amount 25000000 company key bank national association dated october 28 1996 filed exhibit 410 companys annual report form 10k year ended december 31 1996 413 guaranty dated august 1 1997 flowserve corporation abnamro bank nv filed exhibit 412 companys quarterly report form 10q quarter ended september 30 1997 414 credit agreement dated september 10 1993 bwip international bv abnamro filed exhibit 10dd bwips annual report form 10k year ended december 31 1993 415 note agreement dated november 15 1996 bwip international inc note purchasers named therein respect 30000000 principal amount 714 senior notes series due november 15 2006 20000000 principal amount 717 senior notes series b due march 31 2007 filed exhibit 41 bwips registration statement form s8 registration 33321637 filed february 12 1997 416 note agreement dated april 15 1992 bwip international inc note purchasers named therein respect 50000000 principal amount 792 senior notes due may 15 1999 filed exhibit 4a bwips quarterly report form 10q quarter ended june 30 1992 101 duriron company inc incentive compensation plan incentive plan senior executives amended restated effective january 1 1994 filed exhibit 101 companys annual report form 10k year ended december 31 1993 102 amendment 1 incentive plan filed exhibit 102 companys annual report form 10k year ended december 31 1995 103 duriron company inc supplemental pension plan salaried employees filed commission exhibit 104 companys annual report form 10k year ended december 31 1987 104 duriron company inc amended restated director deferral plan filed attachment companys definitive 1996 proxy statement filed commission march 10 1996 105 form change control agreement executive officers company filed exhibit 106 companys annual report form 10k year ended december 31 1996 106 duriron company inc first master benefit trust agreement dated october 1 1987 filed exhibit 1024 companys annual report form 10k year ended december 31 1987 107 amendment 1 first master benefit trust agreement dated october 1 1987 filed exhibit 1024 companys annual report form 10k year ended december 31 1993 108 amendment 2 first master benefit trust agreement filed exhibit 1025 companys annual report form 10k year ended december 31 1993 109 duriron company inc second master benefit trust agreement dated october 1 1987 filed exhibit 1012 companys annual report form 10k year ended december 31 1987 1010 first amendment second master benefit trust agreement filed exhibit 1026 companys annual report form 10k year ended december 31 1993 1011 duriron company inc longterm incentive plan longterm plan amended restated effective november 1 1993 filed exhibit 108 companys annual report form 10k year ended december 31 1993 1012 amendment 1 longterm plan filed exhibit 1013 companys annual report form 10k year ended december 31 1995 1013 duriron company inc 1989 stock option plan amended restated effective january 1 1997 filed exhibit 1014 companys annual report form 10k year ended december 31 1996 1014 duriron company inc 1989 restricted stock plan restricted stock plan amended restated effective january 1 1997 filed exhibit 1015 companys annual report form 10k year ended december 31 1996 1015 duriron company inc retirement compensation plan directors director retirement plan filed exhibit 1015 companys annual report form 10k year ended december 31 1988 1016 amendment 1 director retirement plan filed exhibit 1021 companys annual report form 10k year ended december 31 1995 1017 companys benefit equalization pension plan equalization plan filed exhibit 1016 companys annual report form 10k year ended december 31 1989 1018 amendment 1 dated december 15 1992 equalization plan filed exhibit 1018 companys annual report form 10k year ended december 31 1992 1019 companys equity incentive plan amended restated effective july 21 1995 filed exhibit 1025 companys annual report form 10k year ended december 31 1995 1020 supplemental pension agreement company william jordan dated january 18 1993 filed exhibit 1015 companys annual report form 10k year ended december 31 1992 1021 1979 stock option plan amended restated april 23 1991 amendment 1 thereto dated december 15 1992 filed exhibit 1017 companys annual report form 10k year ended december 31 1992 1022 deferred compensation plan executives filed exhibit 1019 companys annual report form 10k year ended december 31 1992 1023 executive life insurance plan duriron company inc filed exhibit 1029 companys annual report form 10k year ended december 31 1995 1024 executive longterm disability plan duriron company inc filed exhibit 1030 companys annual report form 10k year ended december 31 1995 1025 employee protection plan revised effective march 1 1997 provides certain severance benefits employees upon change control company filed exhibit 1032 companys annual report form 10k year ended december 31 1996 1026 1997 stock option plan included exhibit companys 1997 proxy statement filed commission march 17 1997 1027 supplemental executive retirement plan filed exhibit 10rrrr bwips registration statement form s1 registration 3345165 filed february 18 1992 1028 amendment number one supplemental executive retirement plan filed exhibit 10ee bwips annual report form 10k year ended december 31 1993 1029 amendment bwip international inc supplemental executive retirement plan filed exhibit 10nn bwips annual report form 10k year ended december 31 1994 1030 amendment bwip international inc supplemental executive retirement plan filed exhibit 10z bwips annual report form 10k year ended december 31 1995 1031 form employment agreement company certain executive officers filed herewith 1032 amendment 1 amended restated director deferral plan filed herewith 1033 amendment 1 1989 restricted stock plan amended restated filed herewith 1034 bwip international inc 1997 management incentive plan filed exhibit 10kk bwips annual report form 10k year ended december 31 1996 1035 employment agreement effective july 22 1997 company bernard g rethore filed exhibit 1053 companys quarterly report form 10q quarter ended september 30 1997 1036 employment agreement effective july 22 1997 company william jordan filed exhibit 1054 companys quarterly report form 10q quarter ended september 30 1997 131 1997 annual report shareholders filed herewith part report extent incorporated herein reference 211 subsidiaries company filed herewith 231 consent ernst young llp filed herewith 232 consent price waterhouse llp filed herewith 271 financial data schedule submitted sec electronic format filed herewith exhibits company incorporated reference annual report form 10k previous filing commission companys file number commission since july 1997 113179 previous file number 0325 filings bwip incorporated reference annual report form 10k cover periods prior merger indicates document relates class indebtedness exceed 10 total assets company subsidiaries company furnish copy document commission upon request management contracts compensatory plans arrangements required filed exhibits annual report form 10k pursuant item 14c form 10k compensatory plans bwip assumed company accordance agreement plan merger signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 19th day february 1998 flowserve corporation registrant bernard g rethore bernard g rethore chairman chief executive officer pursuant requirements securities exchange act 1934 report signed following persons capacities dates indicated flowserve corporation index financial statements financial statement schedules item 14a1 2 financial statement schedules included annual report form 10k omitted applicable required information shown consolidated financial statements notes thereto report independent accountants opinion consolidated balance sheet related consolidated statements income retained earnings cash flows bwip inc presented separately herein present fairly material respects financial position bwip inc subsidiaries december 31 1996 results operations cash flows two years period ended december 31 1996 conformity generally accepted accounting principles financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits statements accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion expressed price waterhouse llp los angeles california january 28 1997 report independent auditors financial statement schedules board directors shareholders flowserve corporation audited consolidated financial statements flowserve corporation subsidiaries december 31 1997 1996 three years period ending december 31 1997 issued report thereon dated february 20 1998 appearing page 38 1997 annual report consolidated financial statements incorporated reference form 10k audits also included financial statement schedules listed item 14a form 10k schedules responsibility companys management responsibility express opinion based audits audit 1996 1995 financial statements bwip inc wholly owned subsidiary statements reflect total assets constituting 49 related consolidated total december 31 1996 total revenues constituting 45 46 related totals years ended december 31 1996 1995 respectively furnished report auditors respect schedule 14a bwip inc opinion based audits report auditors financial statement schedules referred considered relation basic financial statements taken whole presents fairly material respects information set forth therein ernst young llp dallas texas february 20 1998 flowserve corporation schedule ii valuation qualifying accounts dollars thousands deductions reserve represent accounts written net recoveries b deductions reserve represent inventory written index exhibits exhibit description 21 agreement plan merger dated may 6 1997 among company bruin acquisition corp bwip inc bwip filed annex joint proxy statementprospectus part registration statement form s4 dated june 19 1997 31 1988 restated certificate incorporation duriron company inc filed exhibit 31 companys annual report form 10k year ended december 31 1988 32 1989 amendment certificate incorporation filed exhibit 32 companys annual report form 10k year ended december 31 1989 33 bylaws duriron company inc restated filed commission exhibit 32 companys annual report form 10k year ended december 31 1987 34 1996 certificate amendment certificate incorporation filed exhibit 34 companys annual report form 10k year ended december 31 1995 35 amendment 1 restated bylaws filed exhibit 35 companys annual report form 10k year ended december 31 1995 36 april 1997 certificate amendment certificate incorporation filed part annex vi joint proxy statementprospectus part registration statement form s4 dated june 19 1997 37 july 1997 certificate amendment certificate incorporation filed exhibit 36 companys quarterly report form 10q quarter ended june 30 1997 41 lease agreement indenture mortgage deed trust guarantee agreement executed june 1 1978 connection 918 industrial development revenue bonds series city cookeville tennessee 42 lease agreement indenture trust guaranty agreement executed june 1 1978 connection 738 industrial development revenue bonds series b city cookeville tennessee 43 lease agreement indenture dated january 1 1995 bond purchase agreement dated january 27 1995 connection 8 taxable industrial development revenue bond city albuquerque new mexico 44 rights agreement dated august 1 1986 company bankone na rights agent includes exhibit b thereto form rights certificate filed exhibit 1 companys registration statement form 8a august 13 1986 45 amendment rights agreement dated august 1 1996 filed exhibit 45 companys quarterly report form 10q quarter ended june 30 1996 46 interest rate currency exchange agreement company barclays bank plc dated november 17 1992 amount 25000000 filed exhibit 49 companys annual report form 10k year ended december 31 1992 47 loan agreement amount 25000000 company metropolitan life insurance company dated november 12 1992 filed exhibit 410 companys annual report form 10k year ended december 31 1992 48 revolving credit agreement company first america bank michigan na amount 20000000 dated august 22 1995 filed exhibit 411 companys annual report form 10k year ended december 31 1995 49 credit agreement dated november 26 1997 among flowserve corporation bank america national trust savings association agent letter credit issuing bank financial institutions party hereto filed herewith 410 material subsidiary guarantee dated november 26 1997 bwip international inc favor benefit bank america national trust savings association agent filed herewith 411 rate swap agreement amount 25000000 company national city bank dated november 14 1996 filed exhibit 49 companys annual report form 10k year ended december 31 1996 412 rate swap agreement amount 25000000 company key bank national association dated october 28 1996 filed exhibit 410 companys annual report form 10k year ended december 31 1996 413 guaranty dated august 1 1997 flowserve corporation abnamro bank nv filed exhibit 412 companys quarterly report form 10q quarter ended september 30 1997 414 credit agreement dated september 10 1993 bwip international bv abnamro filed exhibit 10dd bwips annual report form 10k year ended december 31 1993 415 note agreement dated november 15 1996 bwip international inc note purchasers named therein respect 30000000 principal amount 714 senior notes series due november 15 2006 20000000 principal amount 717 senior notes series b due march 31 2007 filed exhibit 41 bwips registration statement form s8 registration 33321637 filed february 12 1997 416 note agreement dated april 15 1992 bwip international inc note purchasers named therein respect 50000000 principal amount 792 senior notes due may 15 1999 filed exhibit 4a bwips quarterly report form 10q quarter ended june 30 1992 101 duriron company inc incentive compensation plan incentive plan senior executives amended restated effective january 1 1994 filed exhibit 101 companys annual report form 10k year ended december 31 1993 102 amendment 1 incentive plan filed exhibit 102 companys annual report form 10k year ended december 31 1995 103 duriron company inc supplemental pension plan salaried employees filed commission exhibit 104 companys annual report form 10k year ended december 31 1987 104 duriron company inc amended restated director deferral plan filed attachment companys definitive 1996 proxy statement filed commission march 10 1996 105 form change control agreement executive officers company filed exhibit 106 companys annual report form 10k year ended december 31 1996 106 duriron company inc first master benefit trust agreement dated october 1 1987 filed exhibit 1024 companys annual report form 10k year ended december 31 1987 107 amendment 1 first master benefit trust agreement dated october 1 1987 filed exhibit 1024 companys annual report form 10k year ended december 31 1993 108 amendment 2 first master benefit trust agreement filed exhibit 1025 companys annual report form 10k year ended december 31 1993 109 duriron company inc second master benefit trust agreement dated october 1 1987 filed exhibit 1012 companys annual report form 10k year ended december 31 1987 1010 first amendment second master benefit trust agreement filed exhibit 1026 companys annual report form 10k year ended december 31 1993 1011 duriron company inc longterm incentive plan longterm plan amended restated effective november 1 1993 filed exhibit 108 companys annual report form 10k year ended december 31 1993 1012 amendment 1 longterm plan filed exhibit 1013 companys annual report form 10k year ended december 31 1995 1013 duriron company inc 1989 stock option plan amended restated effective january 1 1997 filed exhibit 1014 companys annual report form 10k year ended december 31 1996 1014 duriron company inc 1989 restricted stock plan restricted stock plan amended restated effective january 1 1997 filed exhibit 1015 companys annual report form 10k year ended december 31 1996 1015 duriron company inc retirement compensation plan directors director retirement plan filed exhibit 1015 companys annual report form 10k year ended december 31 1988 1016 amendment 1 director retirement plan filed exhibit 1021 companys annual report form 10k year ended december 31 1995 1017 companys benefit equalization pension plan equalization plan filed exhibit 1016 companys annual report form 10k year ended december 31 1989 1018 amendment 1 dated december 15 1992 equalization plan filed exhibit 1018 companys annual report form 10k year ended december 31 1992 1019 companys equity incentive plan amended restated effective july 21 1995 filed exhibit 1025 companys annual report form 10k year ended december 31 1995 1020 supplemental pension agreement company william jordan dated january 18 1993 filed exhibit 1015 companys annual report form 10k year ended december 31 1992 1021 1979 stock option plan amended restated april 23 1991 amendment 1 thereto dated december 15 1992 filed exhibit 1017 companys annual report form 10k year ended december 31 1992 1022 deferred compensation plan executives filed exhibit 1019 companys annual report form 10k year ended december 31 1992 1023 executive life insurance plan duriron company inc filed exhibit 1029 companys annual report form 10k year ended december 31 1995 1024 executive longterm disability plan duriron company inc filed exhibit 1030 companys annual report form 10k year ended december 31 1995 1025 employee protection plan revised effective march 1 1997 provides certain severance benefits employees upon change control company filed exhibit 1032 companys annual report form 10k year ended december 31 1996 1026 1997 stock option plan included exhibit companys 1997 proxy statement filed commission march 17 1997 1027 supplemental executive retirement plan filed exhibit 10rrrr bwips registration statement form s1 registration 3345165 filed february 18 1992 1028 amendment number one supplemental executive retirement plan filed exhibit 10ee bwips annual report form 10k year ended december 31 1993 1029 amendment bwip international inc supplemental executive retirement plan filed exhibit 10nn bwips annual report form 10k year ended december 31 1994 1030 amendment bwip international inc supplemental executive retirement plan filed exhibit 10z bwips annual report form 10k year ended december 31 1995 1031 form employment agreement company certain executive officers filed herewith 1032 amendment 1 amended restated director deferral plan filed herewith 1033 amendment 1 1989 restricted stock plan amended restated filed herewith 1034 bwip international inc 1997 management incentive plan filed exhibit 10kk bwips annual report form 10k year ended december 31 1996 1035 employment agreement effective july 22 1997 company bernard g rethore filed exhibit 1053 companys quarterly report form 10q quarter ended september 30 1997 1036 employment agreement effective july 22 1997 company william jordan filed exhibit 1054 companys quarterly report form 10q quarter ended september 30 1997 131 1997 annual report shareholders filed herewith part report extent incorporated herein reference 211 subsidiaries company filed herewith 231 consent ernst young llp filed herewith 232 consent price waterhouse llp filed herewith 27 financial data schedule submitted sec electronic format filed herewith 271 restated financial data schedule filed herewith exhibits company incorporated reference annual report form 10k previous filing commission companys file number commission since july 1997 113179 previous file number 0325 filings bwip incorporated reference annual report form 10k cover periods prior merger indicates document relates class indebtedness exceed 10 total assets company subsidiaries company furnish copy document commission upon request management contracts compensatory plans arrangements required filed exhibits annual report form 10k pursuant item 14c form 10k compensatory plans bwip assumed company accordance agreement plan mergeritem 14 principal accounting fees services independent registered public accounting firm fee information pricewaterhousecoopers llp “pwc” began serving company’s independent accounting firm 2000 role pwc audits financial statements company table summarizes fees professional services incurred company audits 2005 2004 financial statements fees billed company pwc 2005 2004 general company retains pwc services logically related natural extensions annual audit nonaudit fees aggregate fees excluding value added taxes billed company fiscal years ended december 31 2005 december 31 2004 pwc follows audit committee preapproved audit nonaudit fees described year ended december 31 2004 december 31 2005 accordance preapproval policy discussed increase audit fees 2004 2005 audit affected length time required complete 2004 audit restatement certain prior years company filing annual report form 10k year ended december 31 2004 february 13 2006 annual report form 10k year ended december 31 2005 june 30 2006 audit committee preapproval policy audit committee preapproves services whether audit nonaudit provided pwc related fees itemized annual audit nonaudit services audit committee focuses matters may affect scope audit pwc’s independence end receives certain representations pwc regarding independence permissibility applicable laws regulations nonaudit services provided pwc company audit committee also preapproves internal audit plan company scope timing external audit plan company audit committee may delegate preapproval authority chairman audit committee extent allowed law case delegation chairman must disclose preapproval determinations full audit committee soon possible determinations made part iv item 15item 14 principal accounting fees services information required item 14 incorporated reference definitive proxy statement relating 2012 annual meeting shareholders held may 17 2012 proxy statement filed sec later april 30 2012 part iv item 15item 14 principal accounting fees services information required item 14 incorporated reference definitive proxy statement relating 2014 annual meeting shareholders held may 22 2014 proxy statement filed sec later april 29 2014 part iv item 15 item 7 managements discussion analysis financial condition results operations results operations net sales 1994 3454 million record level third consecutive year reflecting increases 100 3139 million 1993 150 3004 million 1992 strong capital spending north american asian markets recovering european economy major factors 1994s record addition 1994 acquisitions sereg vannes sa control valve manufacturer located thiers france mecair spa manufacturer valve actuators located milan italy 1992 acquisition kammer ventile gmbh control valve manufacturer essen germany contributed record sales levels three year period excluding acquisitions 1994 sales considerably 1993 level however 1993 sales without acquisitions 1992 sales due weakness international marketplace period incoming business 1994 3494 million reached record level third consecutive year 118 previous record 3126 million 1993 122 higher 3115 million 1992 1994 incoming business volume reflected aggressive capital spending worldwide process industries well impact acquisitions record incoming business 979 million fourth quarter 1994 resulted ending backlog 676 million december 31 1994 increase 66 million 108 1993 ending backlog 610 million international subsidiary contributions consolidated net sales historic high 311 1994 compared 243 260 1993 1992 respectively export sales united states 241 million 1994 compared 347 million 210 million 1993 1992 respectively 1993 export sales unusually high due shipment malaysian liquefied natural gas project companys valtek incorporated subsidiary total net sales international customers percentage net sales record 381 1994 compared 354 1993 325 1992 increase sales international customers reflects effects sereg vannes mecair kammer acquisitions strong shipments companys asiapacific operations improved european shipments company expects percent international sales contributions consolidated net sales increase future years management continues strategic emphasis international sales market development asiapacific region business conditions within european market strengthen gross profit margins 371 1994 compared 376 371 1993 1992 respectively 1994 gross profit margin favorably impacted improved burden absorption due higher levels plant utilization companys north american operations well continuing positive effects cost reduction productivity improvement programs throughout company offsetting transition costs associated acquisition sereg vannes negative effects continued competitive pricing pressures particularly valteks automatic control valve business addition 1993 gross profit margin unusually high due positive impact planned reduction inventories favorably impacted lifo inventory pool resulting earnings 11 per share company believes emphasis becoming low total cost producer valteks customer oriented reengineering program implementation cellular manufacturing provides greater operational flexibility shorter lead times reduced inventory levels improved customer service favorable impact gross profit margin future however pricing levels within companys global market expected remain competitive selling administrative expenses percent net sales 247 1994 compared 252 240 1993 1992 respectively leveraging selling administrative expense percent net sales 1994 compared 1993 planned selling administrative expense dollars increased 1994 1993 due consolidation mecair sereg vannes expense excluding 1994 acquisitions selling administrative expenses 1994 relatively flat 1993 administrative expenses flat three year period 1993 selling administrative expenses absolute dollars percent net sales 1992 level due full year kammer expense increase valtek sales commissions company continues invest resources development growth international automation business operations increased selling service costs expense shortterm profits programs consistent companys longerrange goals company expects leverage selling administrative expenses percent net sales 1995 research engineering development expenses including research development expenses reported footnote 15 report percent net sales 28 1994 compared 29 31 1993 1992 respectively spending levels 1994 reflect companys continued investment new products production processes research engineering development percent net sales declined three year period planned reduction expenses manufacturing engineering majority companys transition focused factory cellular programs implemented new products introduced 1994 include maxflo automatic control valve package marathon high cyclelow emission valve chemstar iso standard magnetic drive pump company believes continued investment research engineering development provide important new products processes benefit customers shareholders future years interest expense 1994 43 million compared 39 million 1993 29 million 1992 increase interest expense 1994 1993 1992 reflects interest longterm debt borrowed purchase sereg vannes kammer partially offset reduction expense related planned repayments debt expense net resulted expense 19 million 1994 compared income 3 million 1993 expense 1992 6 million increase expense reflects foreign currency losses 1994 10 million compared gains 4 million 1 million 1993 1992 respectively significant portion losses 1994 occurred foreign currency contracts hedge anticipated business transactions closed third quarter 1994 material currency losses expected recur 1995 addition accrued incentive compensation expense amortization goodwill related acquisitions increased significantly 1994 1993 1992 company initiated restructuring program resulted onetime pretax expense 60 million 38 million tax 20 per share program covered closing writedown certain underutilized assets resulting companys continued cost reduction productivity improvement efforts inventory writeoff product lines discontinued due new product introductions expenses associated reassignment relocation personnel throughout companys global organization company believes restructuring slightly favorable impact 1994 1993 results continue provide positive longterm effects programs covered restructuring essentially complete december 31 1994 minimal changes estimates original accrual compares balance 10 million december 31 1993 1994 company modified postretirement health care benefit pension plans net effect plan changes well lower anticipated health care cost increases effect reducing companys accumulated pension postretirement health care obligations significantly 1994 net decrease benefit obligations reduced 1994 pretax expense approximately 8 million expected reduce expense 1995 approximately amount addition 1993 company reduced rates used discount pension postretirement health care obligations 80 75 order better reflect future obligations reduced expected rate future increases compensation pension obligations 55 50 net effect combined plan changes 1993 increased accumulated pension postretirement health care obligations approximately 51 million 56 fourth quarter 1992 company adopted effective january 1 1992 principles sfas 106 employers accounting postretirement benefits pensions sfas 106 requires companies record liability employees accumulated postretirement benefit costs recognize ongoing expenses accrual basis company recognized 329 million pretax cumulative effect change accounting principle represents accumulated postretirement benefit obligations january 1 1992 effect net earnings shareholders equity net income tax effect 211 million 110 per share adoption sfas 106 also increased annual postretirement benefit pretax expense 1993 1992 approximately 15 million 1994 annual postretirement benefit pretax expense 5 million reduction expense reflects aforementioned net effects health care plan changes impact lower anticipated health care cost increases past two years reduction rate used discount obligation effective january 1 1993 company early adopted principles sfas 112 employers accounting postemployment benefits compliance standard resulted cumulative tax loss 4 million 02 per share represents accumulated postemployment benefit obligation january 1 1993 compliance sfas 112 impact 1994 earnings expected materially impact future earnings effective tax rate 363 1994 compared 375 360 1993 1992 respectively reduction 1994 tax rate reflects favorable impacts fourth quarter liquidation wholly owned foreign entity utilization tax loss carryforwards generated within companys european operations resolution multiyear state tax issue 1994 tax rate includes increase rate related revenue reconciliation act 1993 tax rate materially affected tax increase arising legislation increase statutory rate offset revaluation deferred tax assets balance sheet 1993 company adopted sfas 109 accounting income taxes cumulative effect compliance principles established standard materially impact 1993 annual earnings increase 1993 tax rate 1992 resulted sfas 109 precluded establishment deferred tax benefits unremitted earnings foreign operations 1994 earnings improved quarter throughout year 172 million 90 per share compared 161 million 84 per share 1993 170 million 89 per share 1992 earnings ratio figures referenced discussion exclude cumulative effect compliance sfas 106 restructuring improved burden absorption leveraging selling administrative expenses return profitability within european operations reduction health care costs decrease effective tax rate contributed 1994 earnings growth however negatively impacting earnings transition costs associated acquisition sereg vannes currency losses competitive pricing capital resources liquidity companys capital structure consisting longterm debt deferred items shareholders equity continues enable company finance short longrange business objectives december 31 1994 longterm debt 177 capital structure compared 173 210 december 31 1993 1992 respectively increase longterm debt 1994 1993 percent capital structure absolute dollars resulted acquisition sereg vannes partially offset scheduled debt repayments return average net assets 91 compared 89 1993 99 1992 1994 return average shareholders equity 129 compared 131 1993 138 1992 management focused improving performance areas 1995 capital expenditures 1994 99 million compared 89 million 153 million 1993 1992 respectively 1994 expenditures devoted manufacturing equipment replacement new product introductions improved information systems associated valteks customer oriented reengineering program 1993 capital expenditures unusually low many companys major cellular manufacturing international expansion programs completed 1992 planned 1995 expenditures expected approximately 130 million invested tools process technology enable company progress toward goal highest qualitylowest total cost producer market cash equivalents decreased 163 million compared 226 million 173 million december 31 1993 1992 respectively however companys positive cash flow operations 279 million 1994 compared 305 million 1993 248 million 1992 positive cash position enabled company internally fund portions 1994 acquisitions mecair acquisition funded utilization internal cash sereg vannes funded combination internal cash external borrowings cash excess current requirements invested highgrade shortterm securities company currently 229 million lines credit 122 million available revolving credit agreements believes available cash lines credit arrangements adequate fund operating capital expenditure cash needs coming year companys liquidity position reflected current ratio 28 1 december 31 1994 compares 31 1 27 1 december 31 1993 1992 respectively working capital increased 960 million 1994 compared 937 million 844 million 1993 1992 respectively working capital percent net sales decreased 278 compared 299 281 1993 1992 respectively decrease working capital percentage net sales reflects 1994 acquisitions item 8item 7 managements discussion analysis financial condition results operations results operations net sales record level tenth consecutive year net sales 1996 6055 million 137 5327 million 1995 315 4605 million 1994 increase net sales reflects strong global shipments business units across geographic regions high levels capital spending companys major customers continued addition moderate price increases acquisition pacseal august 1995 companys merger durametallic favorably impacted reported sales growth 1996 sales growth 1995 compared 1994 reflected strong global capital spending strengthening european currencies us dollar moderate price increases acquisitions pacseal sereg vannes incoming business 1996 6166 million record level 111 previous years record 5552 million 1995 322 4664 million 1994 increase incoming business past two years reflected aggressive capital spending worldwide process industries moderate price increases incoming business international markets particularly strong 1996 1995 strong incoming business 1996 resulted ending backlog 1119 million december 31 1996 increase 105 million 1995 ending backlog 1014 million company remains committed program reducing throughput time meeting customer request dates deliveries international subsidiary contributions consolidated net sales record 337 1996 compared 334 305 1995 1994 respectively majority international sales distributed companys international subsidiaries export sales united states increased significantly 1996 498 million compared 271 million 1995 1994 export sales customers asiapacific latin american regions particularly high 1996 total net sales international customers percentage net sales historic high 420 1996 compared 385 1995 364 1994 improvement international sales three years reflects increase export sales strength asiapacific european markets acquisitions sereg vannes mecair company expects percent international sales contributions consolidated net sales increase future years management continues strategic emphasis international sales market gross profit margins 403 1996 compared 404 403 1995 1994 respectively gross profit margin 1996 negatively impacted less favorable product mix fourth quarter 1996 gross profit margin favorably impacted 1996 moderate price increases improvements burden absorption related higher levels plant utilization continuing positive effects cost reduction productivity improvement programs throughout company pricing throughout three year periods competitive expected remain competitive company believes emphasis becoming low total cost producer continued emphasis improving customer service favorable impact gross profit margin future selling administrative expenses percent net sales 243 1996 compared 258 272 1995 1994 respectively planned company continues leverage selling administrative expense percent net sales selling administrative expense dollars three year period increased due continued development growth international markets higher commission payments large project shipments general wage increases company continues invest resources development growth international operations increased selling service costs expense shortterm profits programs consistent companys longerrange goals company expects leverage selling administrative expenses percent net sales 1997 continued emphasis cost containment research engineering development expenses 155 million 1996 compared 150 million 149 million 1995 1994 respectively spending level 1996 reflects companys continued investment new products production processes company believes continued investment research engineering development provide important new products processes benefit customers shareholders future years expense 65 million 1996 compared 28 million 20 million 1995 1994 respectively increase expense includes lower level royalty income 1996 compared unusually high amount income 1995 addition expense 1996 reflects higher levels long short term incentive compensation company achieved record financial results exceeded goals company recognized restructuring charge 58 million income taxes 12 per share second quarter 1996 restructure recently acquired durametallic operations europe australia durametallic operations belgium germany italy france australia combined larger efficient duriron facilities second half 1996 restructuring part plan obtain positive synergies two companies savings associated plan immediate since facilities unprofitable many years fixed operating costs permanently reduced annual savings associated restructuring amount approximately 15 million restructuring plan expected result termination 55 employees cost 32 million addition exit costs associated plant closings estimated 26 million restructuring activities expected funded operating cash flows additional costs fully implement reorganization plan continuing processes recorded period costs categorized cost sales administrative expense latter half 1996 additional costs related moving equipment crosstraining employees support ongoing operations duriron facilities december 31 1996 termination fees 42 employees 21 million exit costs 17 million paid remainder termination fees exit costs accrued 1996 expected incurred first half 1997 minimal changes estimate original accrual merger transaction expenses 50 million pretax recognized 1995 result merger durametallic approximately 33 million expense nontax deductible related financial advisory legal accounting printing related services associated merger remaining expense 17 million tax deductible included severance fees certain durametallic management elected retire executive severance agreements assumed company became effective change control effective tax rate 326 1996 compared 388 368 1995 1994 respectively lower 1996 effective tax rate includes benefits associated restructuring companys european entities significantly higher utilization tax loss carryforwards companys asiapacific european operations prior two years utilization rate higher due improved profitability throughout year particularly fourth quarter international operations tax loss carryforwards merger fiscal entities effective tax rate future years expected include significant benefits associated utilization tax loss carryforwards 1995 tax rate reflected unfavorable impact nontax deductible merger transaction expenses effect increasing tax rate 23 points 1995 rate favorably impacted utilization tax loss carryforwards generated within certain companys foreign operations 1994 rate included favorable impacts fourth quarter liquidation wholly owned foreign entity utilization foreign tax loss carryforwards resolution multiyear state tax issue record net earnings 1996 reflect fourth consecutive year earnings improvement excluding restructuring fees 30 million tax net earnings 1996 improved 509 463 million 189 per share compares 307 million 124 per share 244 million 99 per share 1995 1994 respectively including restructuring expenses record net earnings improved 410 433 million 177 per share increase earnings resulted strong business conditions led improvements global profits leveraging selling administrative expenses lower effective tax rate capital resources liquidity companys capital structure consisting longterm debt deferred items shareholders equity continues enable company finance shortand longrange business objectives december 31 1996 longterm debt 193 capital structure compared 169 158 december 31 1995 1994 respectively increase longterm debt 1996 reflected additional borrowings needed fund share repurchase program see next paragraph information repurchase program borrowings funded 1000 million revolving credit agreement company entered 1996 fund share repurchase program provide future major capital needs allow consolidation existing credit arrangements concurrent signing credit agreement company entered swap agreements fix 500 million debt interest rate 704 period ten years increase longterm debt 1995 1994 resulted acquisition pacseal partially funded external borrowings 1996 1995 increases debt partially offset scheduled debt repayments july 1996 company announced board directors authorized purchase open market negotiated transactions 24 million shares common stock aggregate purchase price exceed 50 million companys intent repurchase shares maximum number shares covered authorization represents almost 10 number outstanding shares share repurchase program company repurchased 11 million shares price 278 million 1996 share repurchase program funded aforementioned new longterm debt return average net assets 143 including restructuring expenses record 152 excluding restructuring expenses compares 115 1995 104 1994 1996 return average shareholders equity record 217 230 excluding restructuring expenses compared 166 1995 145 1994 change returns resulted improvements profitability three year period resulting strong business conditions focus asset management continues focus improving performance areas many companys incentive compensation plans linked return net assets economic value added measurements capital expenditures 1996 169 million compared 133 million 144 million 1995 1994 respectively 1996 expenditures invested new replacement products international market development general manufacturing equipment upgrades capital spending 1997 expected 200 million largely low cost manufacturing facilities india new product development machine replacement upgrades cash equivalents 1996 295 million compared 194 million 196 million december 31 1995 1994 respectively cash flow operations increased 516 1996 1995 result continued improvement profitability emphasis asset management past three years cash flow operations enabled company fully fund capital expenditures debt repayments dividend payments partially fund acquisitions 1995 1994 cash excess current requirements invested highgrade shortterm securities cash amounts available borrowing arrangements adequate fund operating needs capital expenditures coming year companys liquidity position reflected current ratio 26 1 december 31 1996 compares 25 1 26 1 december 31 1995 1994 respectively working capital increased 1540 million 1996 compared 1350 million 1144 million 1995 1994 respectively notes consolidated financial statements dollars presented tables thousands except per share data 1 organization duriron company inc company incorporated laws state new york may 1 1912 company headquartered dayton ohio principally engaged design manufacture marketing fluid handling equipment primarily pumps valves mechanical seals industries utilize difficult handle often corrosive fluids manufacturing processes based upon analysis trade association data market information company considers leading supplier corrosion resistant fluid movement control equipment basic chemical industry company markets products global basis respect majority products companys domestic operations supply companys foreign manufacturing subsidiaries components subassemblies 2 significant accounting policies principles consolidation consolidated financial statements include accounts company wholly majorityowned subsidiaries significant intercompany transactions eliminated investments unconsolidated affiliated companies represent nonmajority ownership interests carried equity basis approximates companys equity underlying net book value business combinations business combinations accounted pooling interests method accounting combine assets liabilities stockholders equity acquired entity companys respective accounts recorded values prior period financial statements restated give effect merger business combinations accounted purchase method accounting include results operations acquired business date acquisition net assets companies acquired recorded fair value company date acquisition cash equivalents cash equivalents represent shortterm investments original maturity three months less purchased highly liquid principal values subject significant risk change due interest rate fluctuations accounts receivable accounts receivable stated net allowance doubtful accounts 1547000 1408000 december 31 1996 1995 respectively inventories stated lowerofcost market cost determined domestic inventories lastin firstout lifo method foreign inventories firstin firstout fifo method financial instruments gains losses hedges existing assets liabilities included carrying amounts assets liabilities ultimately recognized income part carrying amounts gains losses related hedges anticipated transactions recognized income transactions occur carrying amounts companys financial instruments approximate fair value defined statement financial accounting standards sfas 107 disclosures fair value financial instruments fair value estimated reference quoted prices financial institutions well valuation techniques retirement benefit costs defined benefit pension expense postretirement benefit expense based independent actuarial valuations assuming current prior service costs recognized employees expected service periods property plant equipment depreciation property plant equipment stated basis cost depreciation computed straightline method based estimated useful lives depreciable assets cost accelerated methods income tax purposes intangibles assets excess cost fair value net assets acquired goodwill generally amortized straightline basis 1540 years carrying value goodwill reviewed facts circumstances suggest may impaired review indicates goodwill recoverable determined based undiscounted cash flows entity acquired remaining amortization period companys carrying value goodwill reduced estimated shortfall cash flows foreign currency translation assets liabilities companys foreign affiliates located highly inflationary countries translated current exchange rates income expenses translated average rates period entities highly inflationary countries combination current historical rates used determine currency gains losses resulting financial statement translation resulting transactions translation gains losses reported component stockholders equity except associated highly inflationary countries reported directly consolidated statements income stockbased compensation company elected follow accounting principles board opinion 25 accounting stock issued employees apb 25 related interpretations accounting employee stock options alternative fair value accounting provided sfas 123 accounting stockbased compensation required use option valuation models developed use valuing employee stock options apb 25 compensation expense recorded exercise price companys stock options equals market price underlying stock date grant use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect amounts reported financial statements accompanying notes actual results could differ estimates basis comparison certain amounts 1995 1994 financial statements footnotes reclassified permit comparison 1996 presentation 3 mergers acquisitions pooling transaction november 30 1995 durametallic corporation merged subsidiary company durametallic privately held corporation headquartered kalamazo michigan prior merger leading manufacturer mechanical seals sealing systems company exchanged 5344868 shares common stock outstanding shares durametallic additionally 125283 shares companys common stock reserved outstanding stock options issued durametallic assumed company merger accounted pooling interests method accounting accordingly accompanying consolidated financial statements restated periods prior acquisition include financial position results operations cash flows durametallic net sales net earnings individual entities follows connection merger company durametallic merger transaction expenses 4399000 tax 18 per share recognized 1995 purchase transactions august 31 1995 durametallic purchased pacseal two affiliated companies pacseal located burr ridge illinois manufacturer mechanical seals used primarily water pump applications acquisition funded combination internal cash longterm borrowings april 28 1994 company purchased sereg vannes sa automatic control valve company headquartered thiers france acquisition funded combination internal cash longterm borrowings january 5 1994 company purchased valve actuator business mecair spa milan italy associated companies limburg germany alton hampshire england gennevilliers france acquisition funded utilization internal cash aforementioned 1995 1994 purchase transactions material either individually aggregate year therefore pro forma information presented acquisitions 4 restructuring company recognized restructuring charge 5778000 income taxes 12 per share tax second quarter 1996 restructure recently acquired durametallic operations europe australia durametallic operations belgium germany italy france australia combined larger efficient duriron facilities second half 1996 restructuring part plan obtain positive synergies two companies savings associated plan immediate since facilities unprofitable many years fixed operating costs permanently reduced annual savings associated restructuring amount approximately 15 million restructuring plan expected result termination 55 employees cost 32 million addition exit costs associated plant closings estimated 26 million restructuring activities expected funded operating cash flows additional costs fully implement reorganization plan continuing processes recorded period costs categorized cost sales administrative expense latter half 1996 additional costs related moving equipment crosstraining employees support ongoing operations duriron facilities december 31 1996 termination fees 42 employees 21 million exit costs 17 million paid remainder termination fees exit costs accrued 1996 expected incurred first half 1997 minimal changes estimate original accrual 5 inventories december 31 1996 1995 method determining cost follows lifo inventories current cost 38039000 36127000 higher reported december 31 1996 1995 respectively 9 debt dividend restrictions longterm debt including capital lease obligations december 31 1996 1995 follows interest paid amounted 4840000 4957000 4418000 1996 1995 1994 respectively maturities longterm debt including capital lease obligations four years subsequent 1997 follows 1996 company entered 100000000 revolving credit agreement facility used fund stock repurchase program provide future capital needs allow consolidation existing bilateral credit arrangements concurrent signing credit agreement company entered swap agreements totaling 50000000 fix interest rate 704 period 10 years 894 loan us dollar private placement effectively converted deutsche mark obligation currency swap agreement currency swap hedge net investment german subsidiary unrealized gains losses hedge recognized income shown cumulative translation adjustment account included shareholders equity related amounts due counterparty included longterm debt maturity repayment terms swap match precisely maturity repayment term underlying debt longterm debt agreements require company maintain specified levels tangible net worth restrict payment cash dividends approximately 30281000 28543000 consolidated retained earnings unrestricted payment dividends december 31 1996 1995 respectively current covenants dividends limited 27000000 plus common stock issued 50 defined net earnings subsequent september 30 1996 december 31 1996 1995 company short term credit facilities available banks could borrow local market rates 30941000 32830000 respectively facilities company 5784000 3723000 borrowings outstanding december 31 1996 1995 respectively weighted average interest rate borrowings december 31 1996 1995 43 53 respectively years borrowings used primarily support operations foreign subsidiaries additionally december 31 1996 company 64000000 available revolving credit agreement 11 leases rentals assets subject capitalized leases included property plant equipment cost amounted 7056000 1996 7320000 1995 accumulated amortization capitalized leases amounted 5915000 1996 6019000 1995 minimum rental commitments december 31 1996 noncancelable leases follows total rental expense amounted 9499000 8490000 8065000 1996 1995 1994 respectively 12 contingencies company involved potentially responsible partyat five former public waste disposal sites may subject remediation pending government procedures sites various stages evaluation federal state environmental authorities projected cost remediating sites well companys alleged fair share allocation uncertain speculative studies completed parties either negotiated amicable resolution matter judicially resolved site many parties similarly identified identification location additional parties continuing applicable federal state law many parties identified financially strong solvent companies appear able pay share remediation costs based companys preliminary information waste disposal practices sites environmental regulatory process general company believes likely ultimate remediation liability costs site apportioned among liable parties including site owners waste transporters according volumes andor toxicity wastes shown disposed sites company defendant numerous pending lawsuits include many cases multiple claimants seek recover damages alleged personal injury allegedly resulting exposure asbestos containing products formerly manufactured distributed company products used within selfcontained process equipment management believe emission ambient asbestos fiber use equipment company resolved numerous claims average 106 per claim cost fully paid insurance company continues substantial amount available insurance financially solvent carriers cover cost defending resolving claims company also defendant several products liability lawsuits insured subject applicable deductibles certain noninsured lawsuits received ordinary course business company fully accrued estimated loss reserve lawsuit insurance recovery projected insured claims management currently believes resolved within applicable deductibles although none aforementioned gives rise additional liability reasonably estimated possible company could incur additional costs range 250000 1000000 upcoming five years fully resolve matters although company accrued minimum end range precaution management current reason believe additional costs probable quantifiable company continue evaluate contingent loss exposures develop recognize expense soon losses reasonably estimated 13 shareholders equity december 31 1996 1995 company 60000000 shares common stock 125 par value 1000000 shares 100 preferred stock authorized july 1996 company updated extended expiration shareholder rights plan share companys common stock contains preferred stock purchase right rights currently exercisable trade tandem common stock rights general become exercisable trade separately event certain significant changes common stock ownership commencement certain tender offers either case may lead change control company upon becoming exercisable rights provide shareholders opportunity acquire new series company preferred stock automatically issued preestablished price event certain forms acquisition company rights also provide company shareholders opportunity purchase shares acquiring companys common stock acquirer 50 discount current market value rights redeemable 022 per right company time prior becoming exercisable expire august 2006 december 31 1996 approximately 1196000 shares common stock reserved exercise stock options grants restricted stock 14 stock plans company maintains shareholder approved stock option plan provided grant 1125000 options purchase shares companys common stock december 31 1996 approximately 88000 options remain available grant options granted officers employees purchase shares common price less fair market value date grant generally options become exercisable staggered periods may exercised 10 years date grant plan provides option may include stock appreciation right however none granted since 1989 aggregate number shares exercisable 547683 570601 455139 december 31 1996 1995 1994 respectively exercise price options outstanding december 31 1996 ranged 595 2675 weighted average contractual life options outstanding 67 years pro forma information regarding net income earnings per share required sfas 123 also requires information determined company accounted stock options granted subsequent december 31 1994 fair value method statement fair value options estimated date grant using binomial option pricing model modified blackscholes model following weightedaverage assumptions 1995 1996 risk free interest rate 62 dividend yield 21 expected volatility companys common stock 366 weighted average expected life option 675 years 1995 1996 options granted weighted average fair value date grant 1068 1042 respectively option valuation models developed use estimating fair value traded options vesting restrictions freely transferable addition option valuation models require input highly subjective assumptions including expected stock price volatility companys options characteristics significantly different traded options changes subjective input assumptions materially affect fair value estimate managements opinion existing models provide reliable single measure fair value options purposes pro forma disclosure estimated fair value options amortized expense options vesting periods companys pro forma information follows thousands except per share information effects providing pro forma disclosure indicative future amounts new rules applied outstanding nonvested awards restricted stock plan shareholder approved authorized grant 337500 share companys common stock general shares cannot transferred period less one ten years subject forfeiture restriction period fair value shares amortized compensation expense periods restrictions lapse restricted stock grants 29900 4100 2400 shares made 1996 1995 1994 respectively weighted average fair value restricted stock grants date grant 2584 2228 1638 per share respectively total compensation expense recognized income statement stock based awards 584000 193000 177000 1996 1995 1994 respectively significant components provision income taxes attributable continuing operations follows income taxes paid amounted 21413000 19508000 13476000 1996 1995 1994 respectively reasons differences effective tax rate us federal income tax rate follows deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes significant components companys deferred tax assets liabilities december 31 1996 1995 follows company recorded valuation allowances reflect estimated amount deferred tax assets may realized due expiration net operating loss foreign tax credit capital loss carryforwards change valuation allowances year ended december 31 1996 follows undistributed earnings companys foreign subsidiaries amounted approximately 44000000 december 31 1996 earnings considered indefinitely reinvested accordingly additional united states income taxes foreign withholding taxes provided 16 research development research development expense amounted 7912000 7032000 8642000 1996 1995 1994 respectively 17 retirement benefits company sponsors several noncontributory defined benefit pension plans covering approximately 40 domestic employees provide benefits based years service compensation retirement benefits employees provided defined contribution pension plans government sponsored retirement programs defined benefit pension plans funded based independent actuarial valuations provide current service amount sufficient amortize unfunded prior service periods exceed thirty years net defined benefit pension expense income 19961995 1994 included following components following table presents defined benefit pension plan funded status amounts recognized companys consolidated balance sheet december 31 1996 1995 average discount rate assumed rate increase future compensation levels used determining actuarial present value benefit obligations 75 50 respectively expected longterm rate return plan assets 80 plan assets include marketable equity securities corporate government debt securities insurance company contracts real estate company sponsors several defined contribution pension plans covering substantially domestic canadian employees certain foreign employees may contribute plans contributions matched varying amounts company may also make additional contributions eligible employees defined contribution pension expense company 5803000 5966000 4236000 1996 1995 1994 respectively company also sponsors several defined benefit postretirement health care plans covering approximately 65 future retirees current retirees united states medical dental benefits provided insurance companies health maintenance organizations include participant contributions deductibles coinsurance provisions limitations integrated medicare group plans funded insured benefits health maintenance organization premiums incurred net postretirement benefit expense 1996 1995 1994 included following components following table presents postretirement benefit amounts recognized companys consolidated balance sheet december 31 1996 1995 average discount rate used determining accumulated postretirement benefit obligations 75 assumed annual rates increase per capita costs periods prior medicare 9 1996 85 1997 gradual decrease 6 2002 future years periods medicare 7 1996 65 1997 gradual decrease 5 2000 future years increasing assumed rate increase postretirement benefit costs 1 year would increase net postretirement benefit expense approximately 387000 accumulated postretirement benefit obligations 3810000 18 foreign currency translation foreign currency translation equity adjustments consist following 19 operations identified geographic area company operates predominately one business segment fluid movement control equipment pumps valves seals related equipment transfers geographic areas accounted primarily cost plus profit margin operating profit consists revenues less certain costs expenses determining operating profit none following items added deducted unallocated general corporate expense interest expense income taxes identifiable assets company identifiable operations geographic area unallocated general corporate assets principally reflect future tax benefits individual country within listed geographic segments represents 10 consolidated companys revenues sales unafilliated customers identifiable assets geographic segment includes canada latin south america asia pacific export sales united states foreign unaffiliated customers 49842000 27068000 27143000 1996 1995 1994 respectively 1996 1995 1994 foreign currency transaction gainslosses approximately 624000 217000 1150000 respectively included earnings income taxes report independent auditors board directors shareholders duriron company inc audited accompanying consolidated balance sheet duriron company inc december 31 1996 1995 related consolidated statements income shareholders equity cash flows three years period ended december 31 1996 audits also include financial statement schedule listed index item 14a financial statements schedule responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position duriron company inc december 31 1996 1995 consolidated results operations cash flows three years period ended december 31 1996 conformity generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein ernst young llp dayton ohio february 5 1997 report management companys management prepared responsible consolidated financial statements information included annual report financial statements prepared accordance generally accepted accounting principles present fairly companys financial position results operations statements necessarily include amounts based judgments estimates management internal accounting control systems designed implemented years transactions executed accordance managements authorizations internal control systems provide reasonable assurance financial statements information included report properly reflect transactions company also maintains internal auditing function evaluates formally reports adequacy effectiveness internal accounting controls policies procedures board directors auditfinance committee composed five members nonemployee directors company auditfinance committee met total four times 1996 committee regularly meets jointly separately representatives independent auditors internal auditors management companys consolidated financial statements audited ernst young llp expressed opinion respect fairness statements audit included review internal controls testing transactions records consider necessary circumstances william jordan bruce e hines chairman board senior vice president chief administrative officer chief executive officer item 9 applicable part iii item 10 directors executive officers registrant officers general appointed annually respective positions april meeting board directors executive officers company march 1 1997 follows william jordan chairman president chief executive officer director bruce e hines senior vice president chief administrative officer thomas e haan group vice president fluid sealing group george shedlarski group vice president rotating equipment group mark e vernon group vice president industrial products group reid b wayman group vice president flow control group ronald f shuff vice president secretary general counsel cheryl mcneal vice president human resources gregory l smith treasurer kathleen giddings controller william jordan 53 elected president chief executive officer 1993 director 1991 additionally elected chairman board april 25 1996 mr jordan became executive vice president 1990 president 1991 chief operating officer 1990 1993 1984 1991 mr jordan group vice president international operations assistant group vice president international operations 1983 1979 1983 vice president general manager duriron canada inc mr jordan joined company 1972 sales engineer held various sales positions prior 1979 bruce e hines 53 rejoined company 1989 elected senior vice president added position chief administrative officer 1990 previously served president vernay labs manufacturer precision rubber components prior joining vernay labs mr hines served variety financial positions company nineteen years also functions chief financial officer thomas e haan 47 elected group vice president effective january 1 1996 responsible global operations companys mechanical seal sealing system products marketed durametallic trade name 1970 joined durametallic elected following durametallic offices vice president 1985 senior vice president 1990 executive vice president chief operating officer 1993 george shedlarski 53 elected group vice president 1987 responsible companys worldwide pump operations foundry certain foreign operations 1984 becoming group vice president mr shedlarski president filtration systems division 1983 1984 served president general manager duriron canada inc mr shedlarski joined company 1972 filtration product specialist held various sales managerial positions prior 1983 mark e vernon 44 elected group vice president 1993 responsible worldwide operations companys quarter turn valve actuator businesses certain foreign operations president companys valtek inc subsidiary 1991 1993 senior vice president valtek 1988 1990 mr vernon joined valtek incorporated 1978 reid b wayman 44 elected group vice president effective march 1 1997 responsible companys global control valve operations served recently vice president sales european operations companys rotating equipment group vice presidenteuropean operations flow control group joined company 1975 ronald f shuff 44 elected vice president secretary general counsel company 1990 joined company 1988 general counsel assistant secretary mr shuff became general counsel secretary 1989 also responsible corporate development matters cheryl mcneal 46 joined company april 1996 vice president human resources previously served series progressively responsible human resources management positions ncr corporation eighteen years gregory l smith 43 elected treasurer 1987 joined company 1975 1985 assuming present position assistant treasurer prior becoming assistant treasurer manager corporate tax kathleen giddings 34 elected controller 1993 joined company 1985 served company number financial management positions including director financial reporting corporate controller 1993 manager financial accounting 1990 1992 supervisor financial accounting 1989 financial accountant 1985 1989 additional information required item 10 incorporated herein reference proxy statement item 11 executive compensation information required item 11 set forth proxy statement incorporated herein reference item 12 security ownership certain beneficial owners management information required item 12 set forth proxy statement incorporated herein reference item 13 certain relationships related transactions information required item 13 set forth extent applicable proxy statement incorporated herein reference part iv item 14 exhibits financial statement schedules reports form 8k 1 financial statements following consolidated financial statements company incorporated herein reference part report item 8item 7 managements discussion analysis managements discussion analysis appears pages 14 20 1998 annual report shareholders incorporated herein reference item 7aitem 7 managements discussion analysis managements discussion analysis appears pages 24 30 1999 annual report shareholders incorporated herein reference item 7aitem 7 managements discussion analysis managements discussion analysis appears pages 25 32 2000 annual report shareholders incorporated herein reference item 7aitem 7 managements discussion analysis managements discussion analysis appears pages 23 31 2001 annual report shareholders incorporated herein reference item 7aitem 7 managements discussion analysis financial condition results operation managements discussion analysis beginning page 27 2002 annual report shareholders incorporated herein reference item 7aitem 7 managements discussion analysis financial condition results operations following discussion analysis provided increase understanding read conjunction accompanying consolidated financial statements notes corporate profile flowserve corporation flowserve company global industrial company focused flow control products services flowserve formed 1997 merger two publicly traded companies durco international inc durco became successor company bwip inc bwip incorporated state new york headquartered irving texas suburb dallas operations 56 countries 13000 employees around globe one worlds leading providers fluid motion control products services produce engineered industrial pumps seals valves provide range related flow management services fluid motion control products generally used customers regulate movement liquids gases processing systems facilities industries serve include oil gas chemical power generation water also serve companies mining pulp paper food beverage steel heating ventilation air conditioning hvac industries conduct business three business segments represent major product areas flowserve pump division fpd produces sells services engineered industrial pumps either complete units parts business 23 manufacturing facilities 9 located north america 11 europe remaining facilities located south america asia fpd also 32 service operations either free standing colocated manufacturing facility 2003 fpd revenues 12 billion approximately 43 oil gas 19 power 11 water 8 chemical 19 general industry one worlds leading suppliers pumps oil gas chemical power industries based independent industry sources believe global basis third largest industrial pump supplier believe ability offer broadest range pumps petroleum power chemical markets strong customer relationships 100 years experience pumping equipment major sources competitive advantage broad range pump products result durco bwip merger 2000 acquisition ingersoll dresser pump co idp addition fpds reputation providing quality engineering solutions challenging customer application core strength flow solutions division fsd produces sells services precision mechanical seals fsd six manufacturing operations four located north america two europe remaining operations located south america asia fsd operates 47 service locations called quick response centers qrcs generally standalone facilities 22 located north america 11 europe remainder principally located south america asia pacific fsd 2003 revenues 3595 million approximately 32 oil gas 30 chemical 38 general industry unmatched ability turn around engineered seal products within 72 hours customers request design engineering manufacturing testing delivery major source competitive advantage based independent industry sources believe second largest mechanical seal supplier global basis flow control division fcd produces sells services industrial valves manual valves control valves nuclear valves valve actuators valve automation controls fcd 22 manufacturing operations five located us 12 europe remaining operations located south america asia 49 valve service centers generally free standing principally based us fcd 2003 revenues 8881 million approximately 32 chemical 20 power 15 oil gas 3 water 30 general industry result 2002 acquisition flow control division invensys plc ifc one worlds leading suppliers valves related products services chemical industry based independent industry sources believe second largest industrial valve supplier global basis believe comprehensive portfolio valve products services key source competitive advantage focus service severe corrosion erosion applications key competency overview markets dependent profitability liquidity customers customer profitability important usually means good demand products lead expand capacity capital investments enhance efficiency operations maintenance expenditures liquidity important also need access cash resources either cash reserves financing able invest capital equipment pumps valves mechanical seals oil gas market represented 31 business 2003 high price oil 22 24 per barrel generally spurs additional investment upstream petroleum projects typically price oil driven supply demand case 2003 saw increase bookings oil projects particularly asia africa latin america despite high price middle east limited expenditures products market generally due iraq war postwar unrest throughout region however high oil prices often reduce demand products services refiners seek take advantage favorable refining margins operating high levels capacity utilization deferring maintenance absolutely necessary clean fuels regulations particularly us source project business refiners however profitability projects typically much lower maintenance related items despite high natural gas prices 2003 little additional investment maintenance activity gas customers many experienced liquidity constraints result financial difficulties related former energy trading activities results companies improve otherwise recapitalized could see incremental business demand natural gas remains high today number companies discussing potential investments liquefied natural gas would expect benefit portion business oil gas outlook 2004 bookings could grow 15 based forecasts provided european industrial forecasting eif high oil gas prices generally good oil gas customers generally adverse chemical companies since oil natural gas used manufacture many products 2003 price natural gas us increased almost 70 2002 significantly reduced profitability chemical customers faced high feedstock costs weak demand due soft economy response reduced spending capital investments operated facilities lower levels thus reducing demand higher margin parts replacement products services economy improves demand chemicalbased products increases expect see improvement demand products chemical industry industrys improved profitability could spur new investment parts world asia would expect benefit investments well 2003 chemical industry represented 18 business based forecasts provided eif bookings market could grow 24 2004 increased natural gas prices also diminished profitability many power generators recent years made significant investments power plants generate electricity natural gas able recover portion higher costs rate increases liquidity still challenged due investment power facilities however number nuclear power generators planning significant maintenance activities seen increase orders area expect positive contributor 2004 orders sales addition several coalfired power plants planned us actively pursuing opportunities revenue opportunity products coalfired plant typically three times natural gas power plant power industry approximately 17 business 2003 based eif forecasts orders market could increase 30 2004 worldwide demand fresh water treatment continues create demand new facilities upgrades existing systems requiring products especially pumps believe global leader desalination market important source fresh water mediterranean area middle east significant market pumps valve actuation products 2003 water market represented 7 business based eif forecasts estimate demand products water market could increase 29 2004 general industry represents variety different businesses including mining pulp paper food beverage steel hvac none represents 5 total sales general industry comprised 27 business 2003 businesses mining pulp paper steel appear experienced cyclical troughs 2003 industries food beverage relatively stable hvac somewhat weaker due decline commercial real estate market 2004 businesses tied economic recovery mining pulp paper steel expected improve overall based eif forecasts bookings related general industry could increase 25 2004 customers include engineering contractors original equipment manufacturers oems end users distributors sales engineering contractors oems typically project orders project orders generally lead times greater three months project orders provide product customers either directly indirectly new construction projects facility enhancement projects however distributor sales may also projects oem sales may projects quick turnaround business also refer book ship business defined orders received customer booked shipped within approximate threemonth period typically standard products parts services three segments generates type business reporting trends product type customer type business type based upon analytical review individual operational results knowledge respective businesses track revenues categories capital structure could viewed leveraged company noninvestment grade rating result ability borrow additional funds make investment decisions limited terms credit agreement banks agreement must maintain certain minimum maximum financial ratios specified covenants compliance terms agreement fail meet ratios could seek waiver andor amendment covenants would likely require fee lenders may also pay higher rate interest borrowings particularly adverse circumstances could forced divest portion business required issue equity time fail meet ratios believe likely action would seek likely obtain waiver andor amendment consistently paying debt required net debttocapital ratio declined three consecutive years second quarter 2003 successfully obtained amendment covenants provide us relief flexibility certain areas sources operating cash include sale products services reduction working capital particularly accounts receivable inventories goals continue improve working capital utilization improved processes 2004 goal days sales receivables outstanding dso 60 days compared actual dso 68 days end 2003 based 2003 sales achieving goal could provide approximately 100 million cash objective 2004 inventory turns improve approximately one full turn per year 42 turns actual year end 2003 last year inventory turns flat 2002 based 2003 data improvement one turn would yield 130 million cash continue manage investment property plant equipment 2003 capital expenditures 288 million 463 depreciation major investments facilities considered necessary excess capacity addition consolidated facilities acquisition integration last several years upgraded equipment remaining facilities better equipment closing facilities 2004 anticipate capital expenditures excluding acquisition activity approximate 35 million slightly higher 2003 us defined benefit pension plan expected require contributions excess related expense foreseeable future 2003 contributions 27 million compared expense 12 million higher contributions necessary due reduced investment returns plan 2000 2002 relatively high level lump sum payouts plan continued reduce workforce contributions us pension plan 2004 likely range 12 million 17 million plan continue fund pension plan level least 80 current benefit obligation defined us pension rules regulations strategies organic growth number initiatives directed growing business faster pace end markets end user initiative significant based highly successful model used mechanical seals business many years foundations initiative local customer support rapid response customer alliances customer alliances designed create winwin opportunity us customers alliances focus decreased downtime customers facilities high relatively consistent market share us seal business increased market share last several years focus expanding approach pump business done common end user customer sales force management valve business initiative pursued total portfolio management facilitate approach valve sales force organized industry rather brands products process excellence also number initiatives focused process excellence include supply chain continuous improvement process cip flowserve management system fms area supply chain focused leveraging purchases increasing supply lower cost areas cip combines lean manufacturing theory constraints six sigma tools change management date 80 associates trained techniques fms management system developed align employees goals strategies system began late 2001 initially implemented division cases operating unit level 2003 expanded fms training tools associates believe tighter alignment individual goals corporate strategies increase effectiveness initiatives future 2003 estimate cost reductions process improvement initiatives 38 million 2 costs 2004 goal 46 million cost reductions related initiatives globalization believe future success dependent global diversity business important globalization initiative expand presence faster growing markets asia latin america africa adding resources regions better serve customers area supply chain management focused increasing supply lower cost areas india china mexico latin america eastern europe addition projects increase outsourcing centers excellence places india engineering back office functions improve local service customers another strategy expansion presence underrepresented markets asia latin america africa india china mexico eastern europe adding resources regions better serve customers acquisition growth since 1997 expanded number acquisitions industry participate continues fragmented believe third largest pump company share pump industry 40 second largest valve second largest mechanical seal businesses estimated market shares 40 140 respectively estimated market shares based upon total addressable market pumps valves seals broader markets currently served products applications expect continue grow acquisitions 2004 expect limit acquisitions smaller companies 50 million less revenues within flow control industry considered boltons thus require little operational integration make acquisitions broaden product range current customers expand reach faster growing markets add capabilities enable us serve current customers efficiently effectively reduce manufacturing footprint consolidation facilities may also consider divestiture certain smaller parts business limited growth potential considered core competency organizational capability continue grow acknowledge need continuously build enhance human resources number initiatives focused area including performance management diversity career planning training development designed programs expand capabilities meet challenges solutionsoriented business highly competitive global environment approach compensation benefits market competitive underpinned higher rewards higher performers results operations general 2003 2002 consolidated results flow control division results higher corresponding period previous year due impact acquisition ifc took place may 2 2002 results ifc subsequent date included results flow control division ifc acquisition discussed detail liquidity capital resources section managements discussion analysis pro forma results 2002 2001 referenced throughout managements discussion analysis assume acquisition ifc occurred january 1 2001 include estimated purchase accounting financing impacts pro forma information provided solely enhance understanding operating results purport results operations would transactions events occurred dates specified project results operations future period pro forma information considered alternative operating results calculated accordance generally accepted accounting principles sales increased 68 2003 reflects impact 141 million full years inclusion ifc sales compared eight months prior year favorable currency translation benefits 154 million resulting strengthening international currencies particularly euro us dollar pro forma sales 2003 flat would absent currency translation benefit 7 partially offsetting positives lower sales quick turnaround business chemical general industrial sectors attributable us recession lesser extent european recession latter half year sales sectors declined past three years quick turnaround business generally booked shipped within approximate threemonth period believe weakness business due customer deferrals plant maintenance lower level capacity utilization due partial complete plant closures chemical industrial pumps valves mechanical seals related services dependent quick turnaround business sales power water markets also declined 2003 additionally replacement parts services middle east venezuela decreased 2003 due postwar unrest political unrest respectively sales increased 174 2002 reflects impact ifc acquisition pro forma sales including ifc 14 2002 currency translation impacts negligible benefits associated strengthening euro offset devaluation latin american currencies decline 2002 pro forma sales reflects weaker sales power market well lower sales quick turnaround products services chemical general industrial sectors however sales mechanical seals increased 227 million 2002 compared 2001 sales international customers including export sales us approximately 61 sales 2003 compared 56 sales 2002 48 2001 sales europe middle east africa 2003 increased 40 34 prior year predominantly due favorable currency translation increased project business ifcs proportionately higher mix international operations contributed 2002 increase absent currency translation impacts believe sales international customers continue increase percentage total sales highest revenue growth opportunities asia latin america africa bookings backlog bookings incoming orders customer purchase commitments increased 110 2003 improvement reflects impact ifc acquisition 155 million approximate 161 million benefit currency translation pro forma bookings 2003 increased 42 addition currency translation impact improvement 2003 reflects increase upstream petroleum projects particularly within asia west africa cis however bookings 2003 unfavorably impacted reduced demand products services chemical power general industrial customers additionally bookings 2003 middle east venezuela lower due political economic turmoil regions bookings 2002 increased 106 reflecting impact ifc acquisition pro forma bookings 2002 declined 72 decline reflected reduced demand products services chemical power general industrial customers backlog 2003 8182 million increased 115 compared increase 107 2002 backlog represents accumulation uncompleted customer orders end 2004 expect ship 90 backlog 2003 backlog increase resulted currency translation benefits 9 well increased bookings 2003 previously discussed increase backlog 2002 reflects ifc acquisition pro forma basis including ifc backlog decreased 59 2002 due lower pro forma bookings despite favorable currency translation gross profit gross profit margin gross profit 2003 increased 66 reflects full year impact ifc acquisition approximately 43 million 32 million lower incentive compensation currency translation benefits 47 million partially offsetting benefits impacts unfavorable product mix estimated 126 million increase associated lower overhead absorption due estimated lower unit volume pro forma gross profit 2003 decreased 11 pro forma gross profit margin declined 30 basis points despite benefit currency translation decline gross profit gross margin reflects negative impact less profitable product mix well 126 million increased operating variances associated lower overhead absorption due lower unit volumes customer market factors discussed contributed reduced demand products yielded lower unit volumes profitability product mix eroded past three years due higher volumes less profitable project business 2003 increased warranty expense 72 million associated warranty claims additionally product mix contained lower volumes higher margin parts quick turnaround business including lower volumes historically profitable chemical industrial pumps industrial valves service related activities quick turnaround business generally related standard products parts services volumes business decreased due reduced profitability customers chemical general industrial gas pipeline power refining industries customers operating lower volume conditions unfavorable price positions due economy unfavorable cost positions due higher raw material costs currency combination factors 2003 impacts partially offset ifc cost savings synergies estimated 98 million material price inflation relatively flat throughout threeyear period however latter part 2003 costs certain raw materials particularly metal alloys nickel began increase cost increases raw materials represent approximately 1 112 percent total material expenditures believe offset much cost increases price increases products material cost reduction initiatives however assurances potential material price increases impact gross profit future gross profit 2002 increased 123 reflecting impact ifc acquisition despite estimated 17 unfavorable currency impact pro forma gross profit declined 68 prior year pro forma gross profit margin declined 180 basis points 2002 reflects less profitable product mix lower overhead absorption additionally gross profit related margin impacted 2002 negative 52 million purchase accounting adjustment associated required writeup subsequent sale inventory resulting acquisition ifc however partially offset benefit implementing sfas 141 142 improved gross profit 14 million 2002 selling general administrative sga expense 2003 sga expense increased 131 reflects full year effect ifc acquisition 31 million negative currency translation impacts approximately 29 million approximately 30 million increased legal professional consulting associated expenses partially offset improved earnings unconsolidated affiliates lower incentive compensation 36 million impact general cost savings initiatives pro forma sga expense 2003 increased 52 absent currency translation pro forma sga expense decreased 20 2003 reduction pro forma sga expense reflects improved earnings unconsolidated affiliates lower incentive compensation expense 36 million 2003 estimated 52 million synergy benefits associated ifc integration program impact general cost savings initiatives offset part increased legal professional consulting associated expenses approximately 30 million sga expense 2002 increased 161 due ifc acquisition however 2002 pro forma sga expense declined 08 reduction pro forma sga expense 2002 reflects 183 million benefit associated discontinuing amortization goodwill conjunction implementation sfas 141 142 offset higher commissions associated higher sales levels increased maintenance expenses integration restructuring expense integration restructuring expenses 2003 2002 relate integration ifc flow control division largely completed restructuring integration programs related ifc except final severance payments exit activities primarily related european integration activities integration expense 630 million restructuring expense 12 million reversed 2001 relate integration idp flowserve pump division idp integration program expansive ifc program resulting higher costs see page 26 managements discussion analysis discussion integration restructuring expenses operating income operating income decreased 110 2003 pro forma operating income decreased 179 2003 despite currency translation benefits estimated 19 million decline 2003 operating income reflects impact weak market conditions resulted lower demand sales chemical power general industrial market products services profitable businesses addition increase unfavorable absorption variances 126 million higher warranties 72 million approximately 30 million higher legal professional consulting associated expenses increased integration restructuring expenses 22 million negatively impacted operating income impacts partially offset estimated incremental synergy benefits 15 million associated ifc integration program synergy savings associated ifc integration december 31 2003 estimated least 20 million annually operating income 1797 million 2002 improved 378 reflecting ifc acquisition lower integration restructuring expenses 413 million benefit 197 million associated cessation amortization goodwill trademarks associated sfas 142 absent benefit sfas 142 decrease operating income reflects weaker business conditions resulting lower volumes resulting overhead underabsorption interest expense loss repayment debt interest income increased 2003 2002 due higher average cash balances interest expense decreased 117 2003 compared decrease 202 2002 reduction interest expense reflects lower prevailing interest rates reduced debt levels associated optional scheduled debt paydowns since acquisition ifc well lower borrowing spreads associated renegotiation revolving credit facility april 2002 december 31 2003 approximately 51 debt fixed rates including effects 215 million notional interest rate swaps reduction interest expense 2002 also resulted lower debt levels associated repayment onethird outstanding senior subordinated notes fourth quarter 2001 using proceeds sale common shares 2003 incurred losses 13 million debt repayments extinguishment related accelerated writeoff unamortized prepaid financing fees resulting 1631 million optional debt repayments throughout year 2002 incurred 112 million losses resulting debt amendments required pursuant ifc acquisition second quarter optional debt repayments third fourth quarters 2001 incurred losses result early extinguishment 133 million 1225 senior subordinated notes using proceeds sale common shares prior adoption sfas 145 january 1 2003 losses reported extraordinary items statement operations however 2002 2001 amounts reclassified conform 2003 presentation required new standard expect incur additional noncash losses continue prepay debt currently anticipate 2004 interest expense could 2003 level less due continued expected debt prepayments tax expense tax rate reduction 2003 effective rate primarily due us tax refunds received year previously recognized benefit 2002 significant effective tax rate drivers include benefit related extraterritorial income exclusion elimination goodwill amortization resulting implementation sfas 142 relatively low earnings levels 2001 compared 2002 2003 magnified impact unfavorable permanent differences resulting 53 effective tax rate 2001 effective tax rate based upon current earnings estimates future taxable earnings domestic international location estimated impact tax planning strategies changes factors particular ability utilize foreign tax credits could impact tax rate future periods foreign tax credits 15 million fully reserved expire 2004 2007 additionally foreign tax credits 116 million expiring 2005 94 million expiring 2006 partially reserved able realize credits would reverse related valuation allowance would favorable impact effective tax rate able utilize portion credits would lose benefit would negative impact effective tax rate expect effective tax rate 35 37 2004 although dependent upon mix earnings domestic international locations tax planning strategies ability utilize foreign tax credits net earnings per share net earnings increased 163 2003 due lower levels interest expense loss debt repayments integration restructuring expense offset part impact lower sales volume resultant lower gross margin well higher sga earnings per share 2003 negatively impacted 59 higher average diluted share count net earnings 2002 increased 560 million reflects ifc acquisition benefit sfas 141 142 reduced interest integration restructuring expenses implementation sfas 141 142 resulted increase net earnings 143 million 027 per share earnings 2002 earnings per share 2002 negatively impacted 328 higher average diluted share count 2003 increase average diluted shares reflects full year weighted average impact equity offering completed april 2002 finance ifc acquisition increase 2002 reflects full year impact equity offering completed november 2001 proceeds used retire debt comprehensive income comprehensive income improved 2003 reflects strengthening euro improved pension plan asset returns beneficial hedging results 2002 improvement reflected increased net earnings favorable foreign currency translation adjustment resulting strengthening euro partially offset declines value pension plan assets business segments evaluate segment performance based operating income excluding special items believe special items indicative efforts integrate ifc idp business reflect ongoing business results earnings special items recognized measure generally accepted accounting principles gaap viewed alternative gaap measures performance key operating results three business segments flowserve pump division fpd flow solutions division fsd flow control division fcd discussed 1operating income 2001 special items special items 2002 2003 bookings pumps pump parts services flowserve pump division fpd 2003 increased 74 improvement bookings reflects favorable currency translation 7 increase upstream petroleum projects particularly within asia west africa cis addition nuclear power bookings improved 2003 benefits offset lower bookings us quick turnaround business chemical general industrial sectors declined year three year period additionally parts bookings particularly middle east venezuela 2003 79 decline bookings 2002 reflects lower bookings quick turnaround business chemical general industrial power sectors business mentioned sales declined 14 2003 currency translation favorably impacted sales 7 2003 addition project sales oil gas markets increased however benefits offset lower level backlog beginning 2003 102 lower prior year well lower bookings quick turnaround market business discussed sales 2002 29 prior year due higher shipments engineered pump projects particularly petroleum water markets backlog beginning 2002 sales 2002 also adversely impacted weak market conditions power chemical general industrial sectors business fpd segment operating income decreased 253 2003 compared 31 decrease 2002 2003 decline operating income reflects lower sales 85 absent estimated favorable currency effects 71 lower mix historically profitable chemical general industrial product sales services lower market shipments middle east venezuela unfavorable overhead absorption 142 million due primarily lower unit volumes higher warranty costs 51 million segment operating income 2002 benefited 140 million implementation sfas 141 142 declined due aforementioned weak market conditions impacted results past three years addition unfavorable overhead absorption impacted results 2002 35 million due lower production volumes reductions finished goods inventory facilities manufacture pumps chemical power general industrial sectors bookings seals flow solutions division fsd increased 51 2003 reflects currency translation benefit approximately 4 bookings 2002 increased 46 bookings improvement years reflects divisions emphasis end user business success establishing longerterm customer alliance programs including fixed fee alliances despite weakened market conditions fixed fee alliances contractual agreements customers wherein customer pays us fixed amount period usually monthly term agreement return fixed cost customer entitled new seals repairs upgraded equipment replacements maintenance services defined within scope agreement believe emphasis combined heightened levels service reliability innovation contributed increase market share 2003 2002 currently implementing end user strategy divisions sales fsd increased 27 2003 compared 69 increase 2002 improvement 2003 reflects currency translation benefits approximately 4 offset impact lower demand caused weaker market conditions particularly within chemical industry us refineries despite weaker business conditions fsd sales improved 2002 reflecting benefits aforementioned customer focus end user strategy estimated favorable currency effects 43 fsd segment operating income 2003 increased 143 improvement reflects currency translation benefits 5 27 increase sales absence 40 million performance incentive expense due weak consolidated performance compared plan 2003 segment operating income improved 260 2002 improvement 2002 reflected benefit sales increase 69 impact continuous improvement process projects years additionally increases plant efficiencies resulted bringing previously outsourced production inhouse generally variable cost operating income 2002 also benefited 12 million implementation sfas 141 142 bookings valves related products services flow control division fcd increased 191 2003 due full year impact ifc acquisition 155 million estimated 7 currency translation benefit pro forma bookings 2003 flat decline bookings absent currency benefits reflects weakness chemical power general industrial markets 2003 approximately 80 fcd bookings markets declined 2003 2002 additionally 2003 adversely impacted absence unusually large nuclear power order 2002 approximately 28 million bookings increased 616 2002 due predominantly ifc acquisition pro forma bookings 2002 declined 105 reflecting market weakness sales increased 224 2003 compared increase 610 2002 primarily due full year impact ifc 141 million sales 2003 flat pro forma 2002 95 pro forma 2001 currency translation provided estimated 7 benefit 2003 sales years adversely affected reduced customer demand valve products services power chemical general industrial sectors business fcd segment operating income 2003 increased 521 improvement reflects ifc acquisition well currency translation benefits 9 pro forma segment operating income increased 206 addition currency translation improvement reflects estimated incremental synergy benefits 15 million 2003 synergy savings associated integration estimated least 20 million annually largely completed integration ifc see restructuring acquisition related charges managements discussion analysis detailed discussion ifc integration program benefits offset impact lower unit volumes unfavorable mix product sales segment operating income 2002 increased 164 pro forma segment operating income declined 476 operating income 2002 special items benefited 44 million implementation sfas 141 142 decline operating results 2002 pro forma basis reflected 95 decline sales due weak conditions chemical power general industrial markets well lower production throughput due lower sales volume combined reduction finished goods inventories resulted unfavorable manufacturing absorption variances segment operating income evaluate segment performance based segment operating income operating income excluding special items segment operating income provides meaningful measure operating performance since eliminates expenses associated strategic corporate decisions directly associated ongoing segment performance since expenses closely related plans purchase integrate acquisitions special items 2003 2002 associated acquisition ifc flow control division special items 2001 related august 2000 acquisition idp flowserve pump division following summarizes special items excluded calculation segment operating income three year period ended december 31 2003 restructuring acquisition related charges restructuring costsifc conjunction ifc acquisition 2002 initiated restructuring program designed reduce costs eliminate excess capacity closing 18 valve facilities including 10 service facilities reducing sales related support personnel actions approved committed 2002 remaining actions approved committed 2003 expected result gross reduction approximately 889 positions net reduction approximately 662 positions net position eliminations represent gross positions eliminated closed facilities offset positions added receiving facilities required produce products transferred receiving facilities believe achieved least 20 million annual run rate savings result integration program run rate savings reflect quantification cost saving synergies achieved december 31 2003 annualized basis synergy savings reflect benefit lower payroll benefit costs resulting net position eliminations partially offset increased outsourcing costs elimination fixed costs closed facilities including depreciation utilities lease expense insurance taxes fixed costs established restructuring program reserve 110 million upon acquisition ifc increased reserve total 96 million latter half 2002 recognized additional accruals 45 million 2003 program primarily related closure certain valve service facilities related reductions workforce cash expenditures accrual 42 million 2002 116 million 2003 remaining accrual 93 million reflects payments made 2004 beyond severance obligations due terminated personnel europe 57 million well lease contract termination exit costs 36 million cumulative costs 72 million associated closure flowserve facilities december 31 2003 recognized restructuring expense operating results whereas cumulative costs associated closure ifc facilities 179 million including related deferred taxes 62 million became part purchase price allocation transaction effect closure costs increased amount goodwill otherwise recognizable result ifc acquisition following illustrates activity related ifc restructuring reserve integration costsifc 2003 2002 also incurred acquisitionrelated integration expense conjunction ifc summarized acquisitionrelated activities resulted integration costs categorized defined follows personnel related costs include payroll benefits consulting fees retention integration performance bonuses paid employees contractors development management execution integration plan transfer product lines includes costs associated transfer product lines well realignment required receiving facilities asset impairments reflect loss disposal property plant equipment facilities closed disposal inventory discontinued product lines facilities combined category includes costs associated information technology integration legal entity consolidations legal entity name changes signage new product literature none items individually amounted greater 05 million remaining restructuring integration costsifc largely completed restructuring integration programs related ifc except payments certain european activities expect incur additional restructuring integration costs connection program payments restructuring accrual continue 2004 2005 due timing severance obligations europe restructuring costsidp august 2000 conjunction idp acquisition initiated integration program designed reduce costs eliminate excess capacity closing significantly downsizing eight pump manufacturing facilities eight service repair facilities closing idps former headquarters reducing redundant sales administrative related support personnel actions approved committed 2000 resulted gross reduction 1500 positions net reduction 1100 positions net positions reflect gross positions eliminated closed facilities offset positions added receiving facilities required produce products transferred receiving facilities result activities generated approximately 90 million annual synergy savings reflect benefit lower payroll benefit costs resulting net position eliminations partially offset increased outsourcing costs elimination fixed costs closed facilities including depreciation utilities lease expense insurance taxes fixed costs completed idprelated integration restructuring activities 2001 substantially completed expenditures thereunder december 31 2002 recognized 65 million restructuring costs comprised 42 million related idp operations acquired 23 million related flowserve operations 42 million related idp operations reduced deferred tax effects 16 million resulted recognition 26 million incremental goodwill 23 million related flowserve operations recognized restructuring expense consolidated statement operations 2000 2001 following illustrates activity related idp restructuring reserve majority funding restructuring activities completed 2002 revisions accrual recorded 2000 2001 reflect actual results changes estimates including incremental accrual 2000 required based upon updated actuarial information postretirement pension expense relating finalization union negotiations closed facilities final adjustment 29 million 2001 12 million related flowserve facilities reflected negative restructuring expense remaining 17 million related idp facilities recorded reduction goodwill noncash reductions reflect reclassification restructuring accrual postretirement benefits pension liabilities 2000 accrued liabilities 2001 2002 severance costs include costs associated involuntary termination benefits including enhancements certain severed employees longterm retirement benefits 164 million costs related exiting facilities would provide future benefit exit costs 126 million included 51 million payroll consulting costs execute closure program 25 million facility cleanup costs including environmental 21 million relocation costs idp personnel 17 million costs physically dispose patterns equipment 12 million costs including lease termination legal costs integration costsidp 2001 also incurred integration expense follows acquisitionrelated activities resulted integration costs categorized defined follows personnel related costs include payroll benefits consulting fees severances retention integration performance bonuses paid employees contractors development management execution integration plan transfer product lines includes costs associated transfer product lines well realignment required receiving facilities asset impairments reflect loss disposal property plant equipment facilities closed disposal inventory product lines discontinued facilities combined category includes costs associated information technology legal entity consolidations legal entity name changes signage new product literature none items individually amounted greater 05 million liquidity capital resources cash flow analysis cash generated operations borrowings available existing revolving credit facility primary sources shortterm liquidity cash balance december 31 2003 535 million increase 43 million 2002 increased 277 million 2001 decrease cash flows provided operating activities 2003 primarily relates pension contributions income taxes outflows related ifc integration 2003 contributions us pension plans 270 million compared 46 million 2002 04 million 2001 2002 also benefited receipt 232 million us income tax refund compared 49 million received 2003 cash outflows related ifc integration 272 million 2003 compared 193 million 2002 increase operating cash flows 2968 million 2002 2001 primarily relates 584 million reduction outflows integration restructuring 560 million higher net earnings receipt tax refund 232 million 373 million lower interest improvements working capital working capital reductions provided operating cash flow 889 million 2003 915 million 2002 used 1029 million cash flow 2001 reduction working capital 2003 reflects continued emphasis improving accounts receivable collections reducing inventory accounts receivable reductions 2003 generated 308 million cash flow compared 767 million 2002 158 million 2001 improvement accounts receivable primarily reflects improved collections lower sales volume addition incremental factoring certain nonus receivables contributed 105 million 2003 317 million 2002 days sales outstanding improved 68 days 71 days december 31 2002 76 days december 31 2001 inventory reductions contributed 148 million cash flow 2003 compared 295 million prior year majority inventory reduction finished goods offset part increase projectrelated work process inventory required support shipments products backlog 2001 inventory 446 million use cash due increase support backlog future shipments increased finished goods safety stock meet customer deliveries idp integration systems conversion valve plant result inventory reduction inventory turns 42 times december 31 2003 2002 compared 43 times december 31 2001 cash outflows operating activities 2001 high due payments associated idp integration program including restructuring integration payments 795 million interest payments 1252 million december 31 2001 drawn 700 million revolving credit primarily fund integration activities increases working capital cash outflows investing activities 266 million 2003 compared 5572 million 2002 282 million 2001 decrease 2003 results absence acquisitions partially offset lower level receipts disposals increase 2002 results primarily purchase ifc partially offset lower capital expenditures cash outflows financing activities 1658 million 2003 compared inflows 3281 million 2002 595 million 2001 change 2003 results absence equity offerings 2003 compared 2002 2001 increase 2002 results issuance equity increased borrowings associated purchase ifc believe cash flows operating activities combined availability existing revolving credit agreement existing cash balances sufficient enable us meet cash flow needs next 12 months however cash flows operations could adversely affected economic political risks associated sales products operational factors competition fluctuations foreign exchange rates fluctuations interest rates among factors 2002 2001 also generated 169 million 80 million respectively cash flow related exercise employee stock options reflected financing activities consolidated statement cash flows amounts 2003 significant payments acquisitions may 2 2002 completed acquisition ifc contractual purchase price 535 million subject adjustment pursuant terms purchase sale agreement reduction 22 million agreed settled fourth quarter 2003 yielded final contractual purchase price 5328 million reduction related finalization balances date acquisition cash related party activity tax payments addition incurred 61 million costs associated consummation acquisition including investment banking legal actuarial accounting fees total purchase price including costs 5389 million acquiring ifc one worlds foremost manufacturers valves actuators associated flow control products believe worlds second largest manufacturer valves financed acquisition associated transaction costs issuing 92 million shares common stock april 2002 net proceeds approximately 276 million new borrowings senior secured credit facilities purchase price allocated assets acquired liabilities assumed based estimated fair value date acquisition completed purchase price allocation ifc 2003 expect revisions final allocations included 45 million amortized intangibles 25 million indefinite lived intangible assets 309 million recorded goodwill operating results ifc included consolidated statements operations may 2 2002 date acquisition regularly evaluate acquisition opportunities various sizes cost terms financing raised conjunction acquisition including ability raise economical capital critical consideration evaluation capital expenditures capital expenditures funded primarily operating cash flows bank borrowings three years capital expenditures invested new replacement machinery equipment information technology acquisition integration activities including structures equipment required receiving facilities year capital expenditures less depreciation expense due excess capacity upgrading equipment integration processes expect trend low capital expenditures continue next 3 5 years capital expenditures approximately 35 million expected 2004 financing debt including capital lease obligations consisted maturities debt including capital lease obligations next five years beyond senior credit facility december 31 2003 2002 senior credit facility composed revolving credit facility tranche c term loans tranche consists us dollar denominated tranche euro denominated tranche latter term note due 2006 2003 made scheduled debt payments 09 million optional debt prepayments 1631 million including 39 million fourth quarter 2002 also made 338 million mandatory 170 million optional prepayments term loans scheduled tranche principal payments 80 million first quarter 2004 195 million remaining quarters 2004 however result optional prepayments made 2002 2003 scheduled payments tranche c due march 31 2005 07 million due following summarizes repayment obligations senior credit facility 2001 senior subordinated notes senior credit facility collateralized substantially us assets pledge 65 stock certain foreign subsidiaries tranche c loans amended restated connection ifc acquisition final maturities june 2006 june 2009 respectively senior credit facility amended june 2003 among things delay stepdowns maximum leverage ratio stepups minimum interest coverage ratio term loans bear floating interest rates based libor plus borrowing spread prime rate plus borrowing spread option borrowing spread senior credit facility increase decrease based leverage ratio defined facility public debt ratings part senior credit facility 300 million revolving credit facility expires june 2006 revolving credit facility allows us issue 200 million letters credit december 31 2003 2002 amounts outstanding revolving credit facility however issued 427 million letters credit facility reduced borrowing capacity facility 2573 million december 31 2003 compares borrowing capacity 2482 million december 31 2002 required certain circumstances defined credit facility use percentage excess cash generated operations reduce outstanding principal term loans following year based upon annual calculations performed december 31 2003 2002 2001 additional principal payments became due 2004 2003 2002 provision senior subordinated notes december 31 2003 1885 million eur 65 million equivalent 818 million face value senior subordinated notes outstanding senior subordinated notes originally issued 2000 discount yield 125 coupon rate 1225 approximately onethird senior subordinated notes repurchased premium 2001 utilizing proceeds equity offering accordance provisions indenture beginning august 2005 remaining senior subordinated notes outstanding become callable us 106125 face value otherwise due 2010 interest senior subordinated notes payable semiannually february august common stock offerings 2002 financed acquisition ifc associated transaction costs combination bank financing net proceeds approximately 276 million received issuance 92 million shares common stock april 2002 2001 completed offering approximately 69 million shares common stock net proceeds approximately 154 million used •prepay 1015 million us dollar denominated senior subordinated notes •prepay eur 35 million 31 million euro denominated senior subordinated notes •pay associated prepayment premiums direct costs 2001 recorded extraordinary item 179 million net 71 million tax represented sum prepayment premiums direct costs writeoff unamortized prepaid financing fees discount portion notes prepaid due adoption sfas 145 january 1 2003 item totalling 250 million pretax basis reclassified component earnings income taxes debt covenants matters provisions senior credit facility require us meet exceed specified defined financial covenants including leverage ratio interest coverage ratio fixed charge coverage ratio provisions debt agreements generally limit restrict indebtedness liens sale leaseback transactions asset sales payment dividends capital expenditures activities senior credit facility requires us submit audited financial statements lenders within 100 days year end consequence delays stemming restatement financial information nine months ended september 30 2003 full years 2002 2001 2000 unable provide audited financial statements within specified period time accordingly obtained waiver lenders regarding covenant accordingly present scheduled maturities facility due 2005 beyond noncurrent consolidated balance sheet december 31 2003 complied financial covenants debt facilities illustrated •an actual leverage ratio 373 compared permitted maximum 40 •an actual interest coverage ratio 301 compared permitted minimum 275 •an actual fixed charge ratio 19 compared required minimum 11 determined september 30 2001 december 31 2001 march 31 2002 comply 25 basis points less two financial covenants applicable credit agreement longer effect believe could undertaken readily available actions maintain compliance obtained waiver amendment existing credit agreement known situation except periods complied covenants debt facilities believe matter impact existing debt agreements outstanding debt properly classified consolidated balance sheet maximum leverage ratio reduces 375 september 30 2004 minimum interest coverage increased 30 march 31 2004 currently estimate comply interest coverage covenant march 31 2004 small margin estimated earnings change may comply interest coverage covenant may seek waiver amendment senior credit facility order remain compliance believe waiver amendment needed would approved requisite number lenders however assurance waiver amendment would granted presently able ascertain cost andor conditions associated receipt waiver amendment particularly adverse circumstances could forced divest portion business issue equity following summary net debt defined debt less cash capital various dates since 2001 net debt capital ratio decreased due impact common stock offerings repayments debt senior credit facility increases shareholders equity resulting continued earnings favorable foreign currency translation ifc acquisition increased absolute level indebtedness believe ability service debt measured covenant ratios debt ratings net debt capital ratios improved issued shares common stock finance portion ifc acquisition additionally senior credit facility covenant ratios receive credit 100 pro forma ebitda ifc fourquarter period prior acquisition incremental debt used finance acquisition 50 purchase price lenders use ebitda surrogate earnings cash flows senior credit facility contractual obligations commercial commitments following table presents summary contractual obligations december 31 2003 following table presents summary commercial commitments december 31 2003 expect satisfy commitments performance contracts pension postretirement benefits obligations sponsor several defined benefit pension plans postretirement health care plans recorded liability plans 274 million december 31 2003 277 million december 31 2002 determination value pension postretirement benefits liabilities based actuarial valuations inherent valuations key assumptions regarding discount rates life expectancy expected return plan assets assumed rates increase wages health care costs current market conditions including changes rates returns interest rates medical inflation rates considered selecting assumptions changes related pension postretirement benefit costs may occur future due changes assumptions used changes resulting fluctuations number plan participants expect fund contributions plans operating cash flows primarily result stronger market performance pension plan assets 2003 reduced minimum pension liability 77 million whereas 2002 2001 result increase number plan participants poor investment performance increased minimum pension liability 429 million 162 million net tax effects respectively additionally expect contribute 12 million 17 million qualified us pension plan 2004 although could contribute much 67 million many nonus plans unfunded permitted local law range contributions difficult pinpoint nonetheless expect contribute approximately 8 million plans 2004 based prevailing exchange rates december 31 2003 still gathering consolidated information regarding aggregate nonus plans purposes determining impact alternative actuarial assumptions amounts reported consolidated financial statements however following provides sensitivity analysis alternative assumptions us pension postretirement plans represent significant obligations effect discount rate changes constancy assumptions effect changes expected return assets constancy assumptions critical accounting policies estimates managements discussion analysis based consolidated financial statements related footnotes contained within 10k filing critical accounting policies used preparation consolidated financial statements discussed based critical assessment accounting policies underlying judgments uncertainties affecting application policies believe consolidated financial statements provide meaningful fair perspective suggest general risk factors changes worldwide demand changes material costs performance acquired businesses others could adversely impact consolidated financial position results operations cash flows future periods process preparing financial statements conformity accounting principles generally accepted us requires use estimates assumptions determine reported amounts certain assets liabilities revenues expenses disclosure related contingent assets liabilities estimates assumptions based upon best information available time estimates assumptions including historical experience relevant estimates assumptions could change materially conditions change within beyond control accordingly actual results could differ materially estimates significant estimates made management include revenue recognition allowance doubtful accounts reserves excess obsolete inventories deferred tax asset valuation restructuring reserves legal environmental accruals warranty accruals pension postretirement benefits obligations pbo valuation goodwill indefinitelived intangible assets longlived assets significant estimates reviewed quarterly auditfinance committee board directors following discussion critical accounting policies related management estimates assumptions necessary determining value related assets liabilities detailed discussion application accounting policies see note 1 consolidated financial statements revenue recognition revenues products shortterm contracts recognized based shipping terms agreed customer fulfillment inconsequential perfunctory actions required point title transfer unless customer order requires formal acceptance circumstances revenue recognized formal acceptance received revenue service contracts recognized services rendered accepted customer revenue products shortterm projects service contracts require prior recognition persuasive evidence arrangement fixed determinable sales price reasonable assurance collectibility revenue longerterm contracts defined contracts longer ninemonths duration reasonably reliable estimates cost made contract values 750000 progress billings customer recorded percentage completion method calculated costtocost basis utilized percentage completion revenue recognition approximately 510 consolidated revenues method revenue recognition requires us prepare estimates costs complete contracts progress making estimates make judgments evaluate contingencies potential variances scheduled delivery cost materials labor costs productivity impact change orders liability claims contract disputes achievement contractual performance standards changes total estimated contract costs losses recognized period determined certain instances provide guaranteed completion dates andor achievement performance criteria failure meet schedule performance guarantees increases contract costs result unrealized incentive fees nonrecoverable costs could exceed revenues realized project instances might required record reserves cover excesses would adversely affect results operation financial position allowance doubtful accounts establish allowance doubtful accounts based estimates amount uncollectible accounts receivable amount allowance determined based upon aging receivable customer credit history customer disputes outstanding industry market segment information economic trends conditions credit reports customer financial condition consider historical collection history specifically known uncollectible accounts establishing allowance customer credit issues customer bankruptcies general economic conditions matters largely beyond control affect collectibility accounts receivable customers financial conditions worsened customer disputes increased beyond levels currently provided might required incur additional writeoffs would adversely impact results operation cash flows financial position credit risk may mitigated large number customers across many different geographic regions currently credit insurance policy european subsidiaries whereby generally receive funds third party insurer net deductible instances customers covered policy unable pay periodically evaluate creditworthiness credit insurer inventories stated lower cost market determine cost us inventories lastin firstout lifo method inventories firstin firstout fifo method estimate market value inventory based assessment recent sales prices provide excess obsolete inventories determined historical usage estimated future demand related pricing determining excess quantities consider recent sales activity related margins market positioning products estimates generally subject significant volatility due long life cycles product lines except product rationalizations generally associated acquisition integration programs however factors beyond control demand levels technological advances pricing competition could change period factors adverse effect us might required reduce value inventory would adversely affect results operations cash flows financial position deferred tax asset valuation recognize valuation allowances reduce carrying value deferred tax assets amounts expect likely realized valuation allowances primarily relate deferred tax assets established certain tax credit carryforwards net operating capital loss carryforwards us nonus subsidiaries evaluate realizability deferred tax assets assessing valuation allowance adjusting amount allowance necessary assess factors forecast future taxable income available tax planning strategies could implemented realize net deferred tax assets determining sufficiency valuation allowances failure achieve forecasted taxable income applicable tax jurisdictions could affect ultimate realization deferred tax assets could result increase effective tax rate future earnings restructuring reserves restructuring reserves may established conjunction acquisition circumstances intend reorganize company acquired business reserves reflect many estimates including costs pertaining employee separation settlements contractual obligations matters associated exiting facility current accounting rules restructuring costs related facilities employees acquired business generally become component goodwill whereas restructuring costs associated exiting existing flowserve facility recorded restructuring expense statement operations assess reserve requirements restructuring plan quarterly based information gathered due diligence regarding restructured business assets liabilities prior experiences uncertainty exists information gathered restructured business costs necessary restructure integrate operations additional costs prove necessary may required recognize additional expense could adversely impact results operations financial position legal environmental accruals costs relating legal environmental liabilities estimated liabilities recorded probable loss incurred loss estimable formal process assessing facts recording required reserves casebycase basis assessments legal environmental reserves based information obtained independent inhouse experts including recent legal decisions loss experience similar situations recorded legal reserves susceptible changes due new developments regarding facts circumstances matter changes political environments legal venue factors recorded environmental reserves could change based analysis properties technological innovation regulatory environment changes warranty accruals warranty obligations based upon product failure rates materials usage service costs estimate warranty provisions based upon analysis identified expected claims estimate cost resolve claims estimates expected claims generally factor historical claims known product issues changes claim rates differences actual expected warranty costs facility rationalization activities could impact warranty obligation estimates might adverse effects results operations financial position pension postretirement benefits obligations determination value pension postretirement benefits liabilities based actuarial valuations inherent valuations key assumptions assessed annually fourth quarter include •discount rates •expected return plan assets funded plans •life expectancy participants •assumed rate wage increases •assumed rate health care cost increases evaluate conjunction professional advisors prevailing market conditions countries plans maintained including appropriate rates return interest rates medical inflation rates specifically us plan assess market factors changes cash balance interest crediting rate borrowing rates investment grade corporate industrial companies assumptions used fortune 500 companies actual wage increases recent years expected rates return targeted asset class held plans return premiums generated active investment management nonus plans perform similar analyses also factor local laws requirements also compare significant assumptions peers discuss key assumptions prior incorporation actuarial calculations auditfinance committee board directors evaluate funded status retirement plan using current assumptions determine appropriate funding level considering applicable regulatory requirements tax deductibility reporting considerations cash flow requirements factors valuation goodwill indefinitelived intangible assets longlived assets business acquisitions typically generate goodwill intangible assets affect prospective amortization expense possible impairment expense might incur test value goodwill indefinitelived intangible assets impairment annually fourth quarter whenever events circumstances indicate assets may impaired test involves significant judgment estimating projections fair value generated future performance reporting units correlate operating segments calculating fair value reporting units rely number factors including operating results business plans economic projections anticipated future cash flows market data used discounting cash flows inherent uncertainties exist determining applying factors net realizable value longlived assets including property plant equipment reviewed periodically indicators potential impairments present based upon assessment estimated future cash flows related assets utilizing methodologies similar goodwill indefinitelived assets additional considerations related longlived assets include expected maintenance improvements changes expected uses ongoing operating performance utilization due uncertain market conditions potential changes strategy product portfolio possible forecasts used support asset carrying values may change future could result noncash charges would adversely affect results operations financial condition fair values less estimates assets could require change would adversely impact results operations financial position business outlook 2004 remain optimistic markets performance longterm outlook 2004 remains cautious economic forecasts many markets expected improve however rate amount improvement market share mix business impact revenues bookings 2004 additional discussion markets reference overview section page 16 managements discussion analysis result factors revenues expected increase slightly 2003 absent currency fluctuations operating income 2004 benefit number operational improvement programs including procurement continuous process improvement initiatives well operational improvements several facilities however partially offsetting benefits higher wage benefit costs due inflation higher accruals associated performance incentive programs negligible 2003 operating income could impacted changes demand served markets particular increased demand chemical general industrial products generally quick turnaround historically profitable products could improve product mix result improved profitability additionally increased demand middle east notably iraq could improve profitability addition accelerated implementation end user strategy could positively improve demand resultant profitability conversely declines markets could result lower levels profitability able adequately offset material cost increases either material cost savings price increases profitability adversely impacted expect incur integration restructuring expense 2004 amounted 226 million pretax 2003 december 31 2003 49 debt floating rate debt expect evaluate opportunities reduce amount floating interest rate debt 2004 reduce potential volatility rates could negatively impact effective interest rate result interest expense could 2003 level despite additional planned debt reductions expect effective tax rate 35 37 2004 although dependent upon mix earnings domestic international locations tax planning strategies ability utilize foreign tax credits factors occur described expect net earnings per share improve 2004 expect generate sufficient cash operations fund business capital expenditures pension plan contribution obligations pay debt level greater mandatory requirement improved earnings working capital expect improve working capital utilization reduce days sales outstanding increase inventory turns however amount cash generated working capital could dependent level revenues factors working capital requirements change revenue changes despite expected improvement utilization capital expenditures 2004 focused new product development information technology infrastructure cost reduction opportunities 35 million consideration acquisition activity current pension regulations allow us significant latitude amount contributions currently anticipate contributions qualified us defined pension plan 12 million 17 million mandatory debt payments 2004 66 million however anticipate reducing debt approximately 125 million based upon outlook expect comply bank covenants including stepdowns required leverage ratio begin third quarter 2004 stepups interest coverage ratio begin first quarter 2004 information regarding debt covenants presented financing section liquidity capital resources item 7 accounting developments pronouncements implemented august 2001 fasb issued sfas 143 accounting asset retirement obligations sfas 143 addresses financial accounting reporting obligations associated retirement tangible longlived assets associated asset retirement costs generally pronouncement requires companies recognize fair value liabilities retiring facilities point legal obligations associated retirement incurred offsetting increase carrying value facility expense associated retirement becomes component facilitys depreciation recognized useful life adopted sfas 143 january 1 2003 however adoption significant effect consolidated financial position results operations due limited abandonment retirement obligations associated facilities april 2002 fasb issued sfas 145 rescission fasb statements 4 44 64 amendment fasb statement 13 technical corrections significant impact sfas 145 eliminate requirement gains losses debt extinguishment classified extraordinary items unless infrequent unusual nature adopted sfas 145 january 1 2003 reclassified previously reported extraordinary items 2002 2001 relate early extinguishment debt become component earnings income taxes july 2002 fasb issued sfas 146 accounting costs associated exit disposal activities sfas 146 requires liability cost associated exit disposal activity recognized initially fair value liability incurred previous accounting rules costs exit dispose activity generally recognized date exit disposal plan committed communicated adopted sfas 146 january 1 2003 account exit disposal activities arising date see note 6 consolidated financial statements detailed discussion exit disposal activities december 2002 fasb issued sfas 148 accounting stockbased compensation became effective us upon issuance sfas 148 provides three transition options companies account stockbased compensation stock options intrinsicvalue method convert fair value method sfas 148 also revised prominence character disclosures related companies stockbased compensation complying new reporting requirements sfas 148 elected continue using intrinsicvalue method account qualifying stockbased compensation permitted sfas 148 however included disclosures prescribed sfas 148 within consolidated financial statements november 2002 fasb issued fasb interpretation fin 45 guarantors accounting disclosure requirements guarantees including indirect guarantees indebtedness others fin 45 generally requires guarantor recognize liability obligations arising guarantees fin 45 also requires new disclosures guarantees meeting certain criteria outlined pronouncement disclosure requirements fin 45 became effective us december 31 2002 implemented date recognition measurement provisions fin 45 became effective january 1 2003 implemented guarantees issued date april 2003 fasb issued sfas 149 amendment statement 133 derivative instruments hedging activities sfas 149 amends clarifies accounting reporting derivative contracts including hedges amendments clarifications sfas 149 generally serve codify conclusions reached derivatives implementation group incorporate fasb projects financial instruments clarify implementation issues sfas 149 became effective prospectively derivative contracts entered modified june 30 2003 implementation sfas 149 material effect consolidated financial position results operations may 2003 fasb issued sfas 150 accounting certain financial instruments characteristics liabilities equity sfas 150 generally requires recognition liabilities balance sheet obligations financial instruments possessing liability equity characteristics mandatorily redeemable instruments obligations repurchase equity shares transferring assets obligations issue variable number shares sfas 150 became effective us beginning july 1 2003 time instruments governed pronouncement incorporated liabilities thus implementation sfas 150 material effect consolidated financial position results operations december 2003 fasb revised sfas 132 employers disclosures pensions postretirement benefits revised pronouncement requires substantially disclosures pension postretirement benefits including information plan assets estimated prospective contribution levels estimated prospective benefit payment levels items fasb believes provide clarity readers financial statements except information regarding anticipated future benefit payments revision allows deferral made disclosures specified sfas 132 revised pronouncements yet implemented december 2003 fasb issued fin 46 consolidation variable interest entities addresses consolidation variable interest entities vies business enterprises primary beneficiaries vie entity sufficient equity investment risk permit finance activities without additional subordinated financial support whose equity investors lack characteristics controlling financial interest primary beneficiary vie enterprise majority risks rewards associated vie believe interests vies require disclosure consolidation fin 46 therefore expect implementation significant effect results operations financial position december 2003 medicare prescription drug improvement modernization act 2003 act enacted us act generally permits plan sponsors provide retiree prescription drug benefits actuarially equivalent benefits medicare part eligible nontaxable federal subsidy permitted fasb staff position fsp 1061 accounting disclosure requirements related medicare prescription drug improvement modernization act 2003 elected defer accounting effects act december 31 2004 evaluating impact act including emergence specific authoritative guidance regarding accounting treatment afforded provisions act could require us change information previously reported although final pronouncements recently issued adopted expect impact reported financial information disclosures accounting promulgating bodies number pending projects may directly impact us continue evaluate status projects become final provide disclosures regarding likelihood magnitude impact item 7aitem 7 management’s discussion analysis financial condition results operations management’s discussion analysis financial condition results operations set forth item 7 reflects restatement 2003 2002 consolidated financial statements discussed amounts prior periods prior period comparisons reflect balances amounts restated basis addition following discussion analysis reflects certain events occurred subsequent original due date filing annual report including limited completion refinancing third quarter 2005 updates recently issued accounting standards following discussion analysis provided increase understanding read conjunction accompanying consolidated financial statements notes please see “risk factors” “forwardlooking statements” sections discussion risks uncertainties assumptions associated statements unless otherwise noted amounts discussed herein consolidated executive overview established leader fluid motion control business strong portfolio pumping systems valves sealing solutions automation services support power oil gas chemical process markets products mission critical movement control protection fluids customers’ critical processes whether refinery power generation facility transportation pipeline business model heavily influenced capital spending industries placement new products service worldwide installed base products another important source revenue products expected ensure maximum operating time many key industrial processes aftermarket business generally higher margin business key component profitable growth experienced steadily improving conditions 2004 2005 several core markets including oil gas chemical numerous general industries rise continued elevation price crude oil natural gas particular spurred capital investment oil gas market resulting many new projects expansion opportunities although feedstock costs increasing chemical market greater global demand allowing companies pass pricing strengthen global market opportunity increase installed base new products drive recurring aftermarket business future years critical byproduct market conditions six key strategies well communicated throughout business one key strategies globalization business see “our strategies” section management’s discussion analysis discussion six key strategies currently approximately 14000 employees 56 countries continue implement new quick response centers “qrcs” better positioned near customers possible service support means capture important aftermarket business markets improved see corresponding growth business much nontraditional areas world new oil gas reserves discovered customers seeing rapid growth asia china providing source significant project growth strategy place increase presence china capture aftermarket business current installed base well new projects process plant expansions along ensuring local capability sell install service equipment remote regions becomes imperative continuously improve global operations global supply chain capability expanded meet global customer demands ensure quality timely delivery products significant efforts underway reduce supply base drive processes across divisions find areas synergy cost reduction addition improving supply chain management capability insure meet global customer demands continue focus improving ontime delivery quality reducing warranty costs across global operations focused continuous improvement process “cip” initiative goal cip initiative maximize service fulfillment customers ontime delivery reduced cycle time quality highest internal productivity program key factor margin expansion plans recent developments restatement financial statements restated results 2002 2003 first quarter 2004 restatement annual 2002 consolidated financial statements annual interim 2003 consolidated financial statements 2004 first quarter consolidated financial statements collectively referred “2004 restatement” annual report includes consolidated financial statements december 31 2004 year ended restated consolidated financial statements december 31 2003 years ended december 31 2003 2002 file restated condensed consolidated financial statements amendment quarterly report form 10q period ending march 31 2004 later date impact 2004 restatement periods prior january 1 2002 reflected decrease 137 million beginning retained earnings january 1 2002 information “item 6 selected financial data” however presented restated basis periods presented impact 2004 restatement periods prior january 1 2000 reflected decrease 28 million beginning retained earnings january 1 2000 2004 restatement corrects errors made application accounting principles generally accepted united states “gaap” including errors respect inventory valuation longterm contract accounting intercompany accounts pension expense fixed assets intangibles financial derivatives unclaimed property tax matters adjustments unreconciled accounts 2004 restatement fully described note 2 consolidated financial statements included annual report cumulative net reduction net earnings 2004 restatement 359 million includes 137 million reduction beginning retained earnings january 1 2002 total 191 million reduction net earnings 2003 2002 results operations discussed 31 million reduction net earnings first quarter 2004 results operations impact 2004 restatement decreased sales 2003 74 million increased sales 2002 26 million decreased net earnings 2003 2002 84 million 107 million respectively decreased total assets decreased total liabilities increased total shareholders’ equity december 31 2003 1201 million 1218 million 17 million respectively decreases total assets total liabilities due primarily proper netting deferred tax assets liabilities net increase shareholders’ equity december 31 2003 due primarily increase currency translation adjustments net tax included accumulated comprehensive loss partially offset cumulative 328 million decrease net earnings december 31 2003 discussed diluted net earnings per share decreased 016 020 per share 2003 2002 respectively result 2004 restatement new obligations regarding internal control certification section 404 sarbanesoxley act 2002 section 404 unable timely file securities exchange commission “sec” annual report quarterly reports form 10q quarterly periods ended june 30 2004 september 30 2004 march 31 2005 june 30 2005 september 30 2005 continue work toward becoming current quarterly filings sec soon practicable filing annual report however able timely file sec annual report form 10k year ended december 31 2005 quarterly report form 10q quarterly period ended march 31 2006 2004 restatement follows earlier restatement announced february 3 2004 annual results years 2000 2002 quarterly results 2003 refer prior restatement “2003 restatement” 2003 restatement completed april 26 2004 principally related inventory costs sales adjustments resulting primarily reconciliation issues two reporting locations due difficulties associated conversion new computer systems 2003 restatement also included corrective adjustments relating computation income tax provision classification certain balance sheet accounts account reconciliations part assessment internal control financial reporting section 404 2004 restatement performed additional analyses procedures ensure consolidated financial statements included annual report prepared accordance gaap procedures included among things expansion yearend closing procedures dedication significant internal resources external consultants scrutinize account analyses reconciliations detailed level conducted expanded assessments customer shipments certain locations revenue cutoff analyzed certain longterm sales contracts analyzed pending litigation matters analyzed leasehold improvements proper classification amortization analyzed inventory reserves including obsolete slow moving inventory calculations estimates assessed nonus actuarially determined pension obligations related liabilities analyzed liabilities associated unclaimed third party property analyzed equity investments analyzed accounts receivable factoring securitization arrangements analyzed accounting financial derivatives analyzed purchase accounting acquired businesses performed expanded procedures existence depreciation disposals fixed assets performed expanded analyses intercompany income tax foreign currency translation accounts conducted site visits selected locations perform additional account balance examinations result expanded procedures management believes financial statements included annual report present fairly material respects financial position results operations cash flows periods presented conformity gaap incurred significant costs 2005 connection 2004 restatement financial statement audit section 404 assessment internal revenue service “irs” tax audit discussed expect professional fees expensed 2005 external advisors relating 2004 restatement irs audit together fees audit 2004 consolidated financial statements internal controls compliance section 404 approximately 48 million 2004 incurred approximately 22 million professional fees related 2003 restatement 2004 2003 financial statement audits section 404 assessment deferred tax analysis pending sec investigations february 4 2004 received informal inquiry sec requesting voluntary production documents information related 2003 restatement june 2 2004 advised sec issued formal order private investigation issues regarding 2003 restatement issues arise investigation continue cooperate sec matter february 7 2006 received subpoena sec regarding goods services delivered iraq 1996 2003 united nations oilforfood program process reviewing responding subpoena intend cooperate sec believe companies industry well industries received similar subpoenas requests information securities class action derivative lawsuits quarter ended september 30 2003 related putative lawsuits filed federal court northern district texas “court” alleging violated federal securities laws since filing cases consolidated lead plaintiff amended complaint several times action lead plaintiff’s current pleading fifth consolidated amended complaint “complaint” complaint alleges federal securities violations occurred february 6 2001 september 27 2002 names defendants mr c scott greer former chairman president chief executive officer ms renée j hornbaker former vice president chief financial officer pricewaterhousecoopers llp independent registered public accounting firm banc america securities llc credit suisse first boston llc served underwriters two public stock offerings relevant period complaint asserts claims sections 10b 20a securities exchange act 1934 rule 10b5 thereunder sections 11 15 securities act 1933 lead plaintiff seeks unspecified compensatory damages forfeiture mr greer ms hornbaker unspecified incentivebased equitybased compensation profits stock sales recovery costs november 22 2005 court entered order denying defendants’ motions dismiss complaint pleadings entirety case currently set trial march 27 2007 continue believe lawsuit without merit vigorously defending case october 6 2005 shareholder derivative lawsuit filed purportedly behalf company 193rd judicial district dallas county texas lawsuit names defendants mr greer ms hornbaker current board members hugh k coble george haymaker jr william c rusnack michael f johnston charles rampacek kevin e sheehan diane c harris james rollans christopher bartlett named nominal defendant based primarily purported misstatements alleged abovedescribed federal securities case plaintiff asserts claims defendants breach fiduciary duty abuse control gross mismanagement waste corporate assets unjust enrichment plaintiff alleges purported violations state law occurred april 2000 date suit plaintiff seeks behalf company unspecified amount damages injunctive relief andor imposition constructive trust defendants’ assets disgorgement compensation profits benefits received defendants us recovery attorneys’ fees costs strongly believe suit improperly filed motion seeking dismissal case irs audits recently concluded irs audit us federal income tax returns years 1999 2001 based audit work irs issued proposed adjustments increase taxable income 1999 2001 128 million deny foreign tax credits 29 million aggregate tax liability resulting proposed adjustments offset foreign tax credit carryovers refund claims therefore result material future cash payment pending final review joint committee taxation effect adjustments current deferred taxes reflected consolidated financial statements periods covered 2004 restatement 2006 irs commence audit us federal income tax returns years 2002 2004 expect upcoming irs audit similar scope recently completed examination upcoming audit may broader furthermore preliminary results audit 1999 2001 indicative future result audit 2002 2004 audit 2002 2004 may result additional tax payments us amount may material known irs audit finalized course irs audit 1999 2001 identified recordkeeping material internal control weaknesses caused us incur significant expense substantiate tax return items address information document requests made irs expect incur similar expense respect upcoming irs audit years 2002 2004 due recordkeeping issues referred irs issued notice inadequate records years 1999 2001 may issue similar notice years 2002 2004 irs agreed assess penalties inadequacy records respect years 1999 2001 assurances made irs seek assess penalties types penalties respect years 2002 2004 penalties could result material impact consolidated results operations management changes employee matters past two years following resignations several senior executives hired lewis kling chief operating officer subsequently appointed chief executive officer hired mark blinn chief financial officer richard j guiltinan jr controller chief accounting officer deborah k bethune vice president taxes thomas l pajonas president flow control division linda p jojo vice president chief information officer joseph r pinkston vice president human resources appointed mark dailey chief compliance officer paul w fehlman treasurer created staffed new positions responsible accounting policy procedures financial reporting tax compliance internal audit promote continuity senior management march 2005 board directors approved transitional executive security plan provides cash stockbased incentives key management personnel remain employed us near term result plan recorded additional compensation expenses 2005 approximately 3 million see “transitional executive security plan” “item 11 executive compensation” annual report detailed discussion plan 2005 made number modifications stock plans including acceleration certain restricted stock grants outstanding options well extension exercise period associated certain outstanding options modifications resulted severance agreements former executives decision temporarily suspend option exercises result modifications recorded additional compensation expenses 2005 approximately 7 million based upon intrinsic values awards primarily related severance agreements former executives dates modifications made result severance executive search payments related management changes approximately 2 million expenses transitional executive security plan described stock compensation expense resulting modification stock option plans described recorded total incremental compensation expense approximately 12 million 2005 june 1 2005 took action extend december 31 2006 regular term certain options granted employees including executive officers qualified retirees directors scheduled expire 2005 subsequently took action november 4 2005 extend exercise date options expiring 2006 january 1 2009 thereafter concluded however recent regulatory guidance issued section 409a internal revenue code might cause recipients’ extended options become subject unintended adverse tax consequences section 409a accordingly effective december 14 2005 organization compensation committee board directors partially rescinded accordance regulations extensions regular term options provide follows regular term options otherwise expiring 2005 expire 30 days options first become exercisable sec filings become current effective sec form s8 registration statement filed sec ii regular term options otherwise expiring 2006 expire later 1 75 days regular term option originally granted expires 2 december 31 2006 assuming options become exercisable 2006 reasons included extensions subject shareholders approving certain applicable plan amendments next annual shareholder’s meeting tentatively scheduled april 2006 shareholders approve plan amendments currently posed proxy statement extension actions become void plan amendments approved next annual shareholder meeting extensions considered stock modification financial reporting purposes subject recognition noncash compensation charge accordance statement financial accounting standards “sfas” 123r “sharebased payment” actual charge contingent upon many factors including future share price volatility risk free interest rate option maturity strike price share price dividend yield earlier extension actions also extended option exercise period available following separation employment reasons death disability termination cause certain voluntary separations separate extensions partially rescinded december 14 2005 meeting organization compensation committee board directors revised currently effective subject shareholder approval exercise period available following employment separations extended later 30 days options first became exercisable sec filings become current effective sec form s8 registration statement filed sec ii period available exercise following separation employment terms option originally granted extension considered financial reporting purposes stock modification subject recognition noncash compensation change accordance accounting principles board opinion 25 “accounting stock issued employees” approximately 1 million 2005 extension exercise period following separation employment apply option exercise periods governed separate separation contract agreement completion refinancing third quarter 2005 refinanced 1225 senior subordinated notes indebtedness outstanding existing credit facilities proceeds borrowings new credit facilities replaced letter credit agreement guaranteed european investment bank “eib” credit facility letter credit facility issued part new credit facilities new credit facilities comprised term loan 600 million expiring 2012 400 million revolving line credit utilized provide 300 million letters credit expiring 2010 hereinafter collectively referred “new credit facilities” recorded total loss extinguishment approximately 27 million 2005 result refinancing based current interest rate structure amounts borrowed expect reduce interest expense 20 million annual basis additional information new credit facilities see “liquidity capital resources” section management’s discussion analysis note 12 consolidated financial statements included annual report accounts receivable securitization october 2004 one wholly owned subsidiaries entered accounts receivable securitization whereby could obtain 75 million financing securitizing certain usbased receivables third party subordinate interest receivables sold 835 million december 31 2004 october 2005 terminated accounts receivable securitization facility connection termination borrowed approximately 48 million new credit facilities repurchase receivables held third party see “liquidity capital resources” section management’s discussion analysis note 12 consolidated financial statements included annual report discussion securitization arrangement acquisitions divestitures first quarter 2005 made definitive decision sell certain noncore service operations collectively called general services group “gsg” engaged investment banking firm commence marketing result reclassified operation discontinued operations first quarter 2005 sales gsg 116 million 2004 total assets december 31 2004 ascribed gsg approximately 63 million performed impairment analysis longlived assets held used basis concluded impairment warranted december 31 2004 gsg sold december 31 2005 approximately 16 million gross cash proceeds subject final working capital adjustments retaining approximately 12 million net accounts receivable used approximately 11 million net cash proceeds reduce outstanding indebtedness 2005 recorded impairment loss approximately 31 million related gsg november 2004 sold government marine business unit “gmbu” business within flowserve pump division curtisswright electromechanical corporation approximately 28 million generating pretax gain 74 million allocation approximately 8 million goodwill 1 million intangible assets gmbu provided pump technology service us navy submarines aircraft carriers serve core market represented small part total pump business used net proceeds disposition gmbu reduce outstanding indebtedness result sale presented assets liabilities results operations gmbu discontinued operations prior periods included march 2004 acquired remaining 75 interest thompson kelly lewis pty ltd “tkl” approximately 12 million tkl leading australian designer manufacturer supplier centrifugal pumps railway track work products steel castings prior acquisition held 25 interest tkl result acquisition strengthened product offering mining industry broadened manufacturing capacity asia pacific region gained foundry capacity tkl total assets approximately 24 million time acquisition sales approximately 36 million 2003 business overview company believe world leading manufacturer aftermarket service provider comprehensive flow control systems develop manufacture precisionengineered flow control equipment pumps valves seals critical service applications require high reliability use manufacturing platform offer broad array aftermarket equipment services installation advanced diagnostics repair retrofitting conduct operations three business segments • flowserve pump division “fpd” engineered pumps industrial pumps related services • flow control division “fcd” industrial valves manual valves control valves nuclear valves valve actuators controls related services • flow solutions division “fsd” precision mechanical seals related services product portfolio built 50 wellrespected brand names durco idp valtek durametallic believe comprehensive industry sell products services 10000 companies including world’s leading engineering construction firms original equipment manufacturers “oems” distributors end users markets products services used several distinct industries oil gas chemical power generation water treatment several industries collectively refer general industries demand products depends level new capital investment maintenance expenditures customers level capital expenditures customers depends turn general economic conditions industries affect profitability level capital expenditures customers also depends liquidity whether cash flows operations access financing oil gas industry represented approximately 32 sales 2004 high petroleum prices generally spur additional investment upstream petroleum projects high prices 2004 contributed increase bookings projects particularly asia africa south america middle east however iraq war postwar unrest softened level capital investments demand products services notwithstanding historically high crude oil prices contrast effect upstream petroleum projects high crude oil prices often reduce demand products services crude oil refineries natural gas processors seek take advantage favorable refining margins operating high levels capacity utilization deferring maintenance clean fuel regulations particularly us led project business crude oil refiners profitability projects however typically lower maintenance related products services high oil gas prices generally good oil gas customers generally adverse chemical companies since crude oil natural gas critical inputs manufacturing products 2004 price natural gas us increased almost 25 2003 significantly affected chemical customers faced high feed stock costs however greater global demand allowing companies pass pricing strengthen global market economy improves demand chemicalbased products increases expect see improvement demand products chemical industry’s improved profitability could spur new investment parts world asia would expect benefit investments well 2004 chemical industry represented approximately 18 sales increased natural gas prices also diminished profitability many power generators recent years made significant investments power plants generate electricity natural gas able recover portion higher costs rate increases liquidity still challenged due overinvestment power facilities recent years however number nuclear power generators planning significant maintenance activities seen increase orders area positive contributor 2005 orders sales earnings addition several coalfired power plants planned us actively pursuing flow control opportunities projects revenue opportunity products coalfired plant typically three times natural gas power plant power industry represented approximately 16 sales 2004 worldwide demand fresh water treatment continues create demand new facilities upgrades existing systems many require products offer especially pumps believe global leader desalination market important source fresh water mediterranean area middle east significant market pumps valve actuation products 2004 water market represented approximately 6 sales general industries represents variety different businesses including mining pulp paper food beverage steel heating ventilation airconditioning “hvac” none individually represents 5 total sales 2004 general industries represented approximately 28 sales 2004 businesses mining pulp paper steel appear experienced troughs 2004 industries food beverage relatively stable hvac somewhat weaker due decline commercial real estate market 2005 businesses tied economic recovery particularly mining shown improvement customers include engineering contractors oems end users distributors sales engineering contractors oems typically large project orders certain sales distributors project orders generally lead times excess three months project orders provide product customers either directly indirectly new construction projects facility enhancement projects quick turnaround business also refer book ship business defined orders received customer booked shipped within three months receipt typically standard products parts services three segments generates type business use manufacturing platform offer broad array aftermarket equipment services installation advanced diagnostics repair retrofitting timelines delivery quality proximity service centers important considerations aftermarket products services geographic regions positioned provide quick response customers traditionally relied us rather competitors aftermarket products relating highly engineered customized products however aftermarket competition standard products increased price competition tends significant oems aftermarket services generally increasing sale aftermarket products services benefit large installed base pumps valves requires maintenance repair replacement parts reporting trends product type customer type business type based upon analytical review individual operational results knowledge respective businesses formally track revenues categories trends analyzed secondary reporting mechanism derived directly general ledger system strategies overarching objective grow position integrated solutions provider flow control industry sustainable profitable growth driven using six strategies communicated throughout company strategies include organic growth globalization process excellence portfolio management organizational capability technology key elements strategies outlined organic growth organic growth key initiative grow revenues goal grow revenues development new products services customer partnering initiatives maximize capture aftermarket business seek capture additional market share creating “winwin” opportunities us customers sourcing maintenance alliance programs pursuant provide agreed portion customers’ parts servicing needs customer alliances enable us develop longterm professional relationships customers serve effective platform introducing new products services customers generating additional sales additionally seek continue leveraging substantial installed pump seal valve base expand aftermarket services business customers increasingly use thirdparty aftermarket service providers like us reduce fixed costs improve profitability aftermarket services business provides us steady source revenues cash flows higher margins original equipment sales allows us frequent contact customers building knowledge customer needs providing crossselling opportunities installing flow solutions qrc’s globally provide immediate parts service technical support required effectively manage win aftermarket business installed base new product service development driven product management organization working concert engineering operation sales goal increase revenues new products services developed last five years new product development process made significant progress demonstrating pipeline new modified products services expect research development costs increase beginning 2006 support goal increased revenues new products services globalization initiative business several facets include • expanding global presence capture business outside traditional geographic market areas china russia south america africa • utilizing low cost sourcing opportunities remain competitive global economy • attract retain global intellectual capital required support global growth plans new geographical areas believe attractive oem opportunities international markets particularly south america asia pacific intend continue leverage global presence penetrate markets recent successes markets include contracts worth 40 million supply pumps related equipment nanhai petrochemicals project china contracts worth 12 million shenhua coal liquefaction project china aftermarket services business seek strategically add sites customers customer base grow order provide customers rapid response fast delivery onsite field repair focused shifting appropriate certain manufacturing engineering functions increasing supply raw materials components lower cost areas india china mexico south america eastern europe 2004 areas accounted approximately 17 direct material spending compared approximately 5 2001 also focused utilizing supply chain management reduce procurement costs including expanding purchases raw material auctions consolidating standardizing purchasing receive higher quantitybased discounts creating procurement alliances addition expanded china presence additional sales people new management growth plans include acquisition development new capabilities enhance penetration programs china oil gas power projects well provide base export products process excellence process excellence initiative encapsulates ongoing programs include • driving improved customer fulfillment across company metrics ontime delivery cost reduction quality cycle time reduction warranty reduction • continuing develop culture continuous improvement delivers maximum productivity cost efficiencies implements consistent processes across company ensures future success integrated company seek increase operational efficiency cip initiative utilizes tools lean manufacturing six sigma methodology constraint management improve quality processes reduce product cycle times lower costs recognizing employees valuable resource achieving operational excellence goals instituted broad cip training date 800 employees cip certified trained “black belts” “green belts” deployed cip projects throughout company result cip initiatives developed implemented processes shorten engineering manufacturing cycle times improve ontime delivery service response time lower inventory levels otherwise reduce costs also experienced success applying “best practices” achieved one businesses continue look opportunities apply successful practices across businesses seek continue improve working capital utilization particular focus improving management accounts receivable inventory see discussion “liquidity capital resources” section management’s discussion analysis portfolio management continued management portfolio products services critical company’s success continue pursue selective acquisitions rationalize portfolio products services ensure alignment shareholders customers intend continue evaluate acquisition investment opportunities seek broaden product portfolio operational capabilities expedite expansion faster growing asian african south american markets regard additional investment tkl march 2004 strengthened product offering mining industry broadened manufacturing capabilities asia pacific region includes china japan singapore korea india australia new zealand thailand seeking divest operations consider noncore overall business operations serve core customer base provide limited synergies businesses example discussed november 2004 sold gmbu december 2005 sold gsg organizational capability several elements building enhanced organizational capability • development deeper talent pool training crossdivisional functional assignments allows us flexibility grow expand organization fill positions internally career learning development critical building improved global organizational capability future • need capture intellectual capital workforce customers share within company considered competitive advantage • building organization improved compliance mandatory recommended processes procedures implementing information systems ensure compliance backbone culture move forward multiyear agreement lrn company completed 2005 distribute electronic learning packages multiple languages flowserve business code conduct compliance programs globally throughout company expanded include export compliance regulatory compliance us foreign well programs around harassment employee behaviors emphasis ethics compliance significantly strengthened 2005 core organizational capability new chief compliance officer 2005 installed learning management system “lms” allowed development tracking delivery electronic learning systems system allows us track employees’ compliance policy understanding electronic means lms also permits online enrollment customer training means share improve intellectual capital additional initiatives aimed change management evidenced programs standardization teamwork results “star” initiative star aimed developing implementing information systems architecture employed multiyear period upgrade older enterprise resource planning applications enable standardization processes controls technology infusion new product technologies become core requirement look improve development new products services internal goal improve percentage new products function revenue next five years investment technology continue increase 2006 crossdivisional technology council ensure technologies developed available wide use across divisions maximize investments development intelligent pumping system showcases technologies available maximize uptime proactively identify anomalies become major issues sponsor national energy summit 2005 brought together major companies pursuit energy management initiatives technologies available decrease energy usage customers infused new services customers results operations general consolidated results operations fcd segment results operations 2004 2003 higher 2002 due impact acquisition invensys’ flow control division “ifc” completed may 2 2002 results ifc subsequent date included consolidated results flow control division pro forma 2002 results operations reflect results operations ifc acquisition occurred january 1 2002 ifc acquisition discussed detail “restructuring acquisition related charges” section management’s discussion analysis amounts discussed 2003 2002 reflect 2004 restatement discussed note 2 consolidated financial statements included annual report result selling gmbu fpd business november 2004 treated disposition discontinued operation reclassified financial information reported prior periods income discontinued operations net tax decreased 03 million 2004 compared decrease 07 million 2003 sales 2004 increased 1518 million 64 excluding currency benefits approximately 114 million compared 2003 currency benefits result strengthening international currencies particularly euro us dollar increase sales includes new sales 352 million resulting acquisition tkl march 2004 increased activities core markets served including oil gas power chemicals strong growth asia pacific region sales 2003 decreased 96 million 04 excluding currency benefits approximately 154 million compared 2002 currency benefits result strengthening international currencies particularly euro us dollar sales increased approximately 141 million due full year’s inclusion ifc sales offset lower sales quick turnaround business chemical general industrial sectors attributable us economic slowdown lesser extent european recession latter half year additionally sales replacement parts services middle east venezuela decreased 2003 due postwar unrest political unrest sales water market also declined 2003 sales 2003 declined 70 excluding currency benefits approximately 154 million compared pro forma 2002 reflecting weakness chemical power general industrial markets 2003 valve products services sales international customers including export sales us approximately 63 sales 2004 compared 60 sales 2003 55 sales 2002 ifc’s proportionately higher mix international operations contributed 2003 increase sales asia pacific region 13 9 12 2004 2003 2002 respectively sales europe middle east africa “ema” 40 33 2004 2003 2002 respectively excluding currency translation impacts believe sales international customers continue increase percentage total sales believe highest revenue growth opportunities asia south america africa bookings backlog define booking receipt customer order contractually engages us perform activities behalf customer regard manufacture service support bookings 2004 increased 1189 million 49 excluding currency benefits approximately 115 million compared 2003 increased bookings due increases oil gas market one primary served markets spurred increased crude oil prices bookings 2003 increased 784 million 36 excluding currency benefits approximately 161 million compared 2002 increase due impact ifc acquisition increase upstream oil gas projects particularly asia west africa europe bookings 2003 unfavorably impacted reduced demand products services chemical power general industrial customers additionally bookings 2003 middle east venezuela lower due political economic turmoil regions bookings 2003 approximately 27 lower pro forma 2002 excluding currency benefits approximately 161 million backlog represents accumulation uncompleted customer orders shipped approximately 97 backlog december 31 2004 2005 backlog december 31 2004 decreased 145 million 18 excluding currency benefits approximately 33 million compared 2003 decrease due improved customer delivery time backlog december 31 2003 increased 183 million 25 excluding currency benefits approximately 66 million compared 2002 increase primarily reflects ifc acquisition gross profit gross profit margin gross profit margin 295 2004 decreased slightly compared 2003 gross profit margin 2004 positively impacted operational improvements attributable cip initiative resulted cost savings synergies higher mix aftermarket business generally higher margin offset 141 million charge cost sales increase reserve obsolete slow moving inventory flow control division discussed 141 million increase incentive compensation compared 2003 gross profit margin 297 2003 slightly lower 2002 due primarily decreased sales flowserve pump division discussed positive impact full year ifc acquisition addition cost savings synergies resulting acquisition offset less profitable product mix product mix contained lower volumes higher margin parts quick turnaround business including lower volumes historically profitable chemical industrial pumps industrial valves service related activities quick turnaround business generally related standard products parts services volume business decreased due reduced profitability customers chemical general industrial gas pipeline power refining industries selling general administrative expense “sga” sga 2004 increased 610 million 113 excluding currency effects approximately 21 million compared 2003 increase due 299 million increase annual incentive compensation 217 million increase professional consulting fees related primarily 2003 restatement 2004 2003 financial statement audits compliance section 404 sga 2003 increased 334 million 70 excluding currency effects approximately 29 million compared 2002 increase primarily attributable 216 million increase legal fees expenses resulting increased legal accruals anticipated lawsuit settlements integration restructuring expense incur integration restructuring expenses 2004 integration restructuring expenses 2003 2002 relate integration ifc flow control division largely completed restructuring integration programs related ifc 2003 except final severance payments exit activities primarily related european integration activities see “restructuring acquisition related charges” discussion integration restructuring expenses operating income operating income 2004 increased 03 million 02 excluding currency benefits approximately 14 million compared 2003 discussed sga costs increased 2004 result increased incentive compensation increased professional consulting fees increase sga costs offset reduction integration restructuring costs operating income 2003 decreased 440 million 262 excluding currency benefits approximately 18 million compared 2002 decrease primarily attributable sga increased result full year impact ifc acquisition legal expenses discussed operating income 2003 decreased 323 pro forma 2002 excluding currency benefits approximately 18 million primarily due increased legal expenses 2003 interest expense loss repayment debt interest expense decreased 32 million 38 2004 113 million 118 2003 due primarily lower prevailing interest rates reduced debt levels associated optional scheduled debt paydowns since acquisition ifc well lower borrowing interest rate spreads associated renegotiation revolving credit facility april 2002 december 31 2004 approximately 69 debt fixed rates including effects 2100 million notional interest rate swaps interest income decreased 22 million 2004 compared 2003 due lower average cash balances interest income increased 16 million 2003 compared 2002 due higher cash balances 2004 incurred charge 27 million debt repayments extinguishment related accelerated writeoff unamortized prepaid financing fees resulting 3279 million optional mandatory debt prepayments triggered gmbu divestiture issuance eib credit facility receivables securitization 2000 credit facilities described “liquidity capital resources” section management’s discussion analysis required use proceeds asset sales new debt issuance among things pay principal amount outstanding credit facilities addition mandatory repayments paid optional prepayments principal excess cash generated operations 2003 incurred losses 13 million related accelerated writeoff unamortized prepaid financing fees resulting 1631 million optional debt prepayments throughout year expense income net expense net increased 99 million 2004 45 million 2003 due primarily increases unrealized losses forward contracts qualify hedge accounting partially offset foreign currency transaction gains expense net increased 34 million 2003 11 million 2002 due primarily 13 million decrease unrealized gains forward contracts qualify hedge accounting tax expense tax rate 2004 effective tax rate differed federal statutory rate 35 primarily due extraterritorial income “eti” exclusion benefits 49 million 233 million net tax impact foreign operations resulting approximately 85 million foreign earnings repatriation pay us debt increases worldwide tax reserves increased total reserves approximately 11 million primarily nonus exposures related debt equity structures transfer pricing 2003 effective tax rate differed federal statutory rate 35 primarily due eti exclusion benefits 25 million changes valuation allowances 55 million primarily relating foreign tax credits net impact non us operations 22 million 2002 effective tax rate differed federal statutory rate 35 primarily due eti exclusion benefits 47 million higher nonus statutory tax rates operations european asian countries provide various tax incentives 2003 granted indefinite preferential tax rate approximately 10 switzerland certain sales marketing activities 2004 received 5 year 10 tax rate singapore income excess prescribed base amount generated certain regional headquarter activities subject certain employment investment requirements india granted 100 tax exemptions profits derived export sales certain manufacturing operations prescribed areas period 10 years indian tax exemptions expire 2011 2008 respectively october 22 2004 american jobs creation act 2004 “2004 act” signed law creating temporary incentive us multinationals repatriate accumulated income earned outside us effective tax rate 525 versus us federal statutory rate 35 2004 repatriated approximately 46 million part 85 million discussed pursuant dividend reinvestment plan described 2004 act recognized lower tax rate dividends financial statements due uncertainties surrounding interpretation 2004 act extent uncertainty favorably resolved future reporting period benefit associated dividends recognized period 2004 act also provides phase existing eti exclusion foreign export sales viewed inconsistent international trade protocols european union phase provides benefit otherwise qualifying export sales 2005 2006 limited approximately 80 60 respectively replacement loss eti export incentive 2004 act provides deduction income qualified domestic production activities phased 2005 2010 impact manufacturing deduction future tax rate yet quantified guidance financial accounting standards board staff position fas 1091 “application fasb statement 109 tax deduction qualified production activities provided american jobs creation act 2004” tax deduction qualified production activities treated special deduction described sfas 109 “accounting income taxes” special deduction reported period deduction claimed tax return expect effective tax rate significantly lower 2005 compared 2004 due lower levels dividend repatriation low taxed foreign subsidiaries effective tax rate based upon current earnings estimates future taxable earnings domestic international location estimated impact tax planning strategies changes factors including ability utilize foreign tax credits net operating losses results tax audits could impact tax rate future periods december 31 2004 foreign tax credits approximately 10 million expiring 2010 2012 recorded valuation allowances additionally recorded net deferred tax assets foreign net operating losses deferred tax assets approximately 16 million indefinite expiration period able utilize portion credits losses effective tax rate would negatively impacted net earnings per share income continuing operations decreased 229 million 2004 202 million 036 per diluted share addition factors discussed regarding operating income 2004 income continuing operations also impacted increases effective tax rate compared 2003 losses derivative contracts income continuing operations increased 104 million 2003 431 million 078 per diluted share addition factors discussed regarding operating income 2003 income continuing operations also impacted decreased tax expense compared 2002 earnings per share 2003 negatively impacted 59 higher average diluted share count 2004 increase average diluted shares reflected issuance stock awards dilutive effects increase stock price 2003 increase average diluted shares reflects full year weighted average impact equity offering completed april 2002 finance ifc acquisition comprehensive income expense comprehensive income expense declined 151 million 2004 reflects slight decrease pension plan asset returns decline currency translation adjustments compared 2003 comprehensive income expense improved income 683 million 2003 expense 110 million 2002 reflects strengthening euro improved pension plan asset returns improved hedging results business segments conduct business three business segments represent major product areas evaluate segment performance allocate resources based segment’s operating income excluding special items restructuring integration costs related ifc acquisition believe special items indicative efforts integrate ifc business reflect ongoing business results believe investors users financial statements better evaluate analyze historical future business trends special items excluded segment’s operating income operating income special items recognized measure gaap viewed alternative better indicator gaap measures performance effective january 1 2004 realigned certain small sites segments accordingly segment information periods presented herein reported revised organizational structure see note 18 consolidated financial statements included annual report discussion segments key operating results three business segments fpd fcd fsd discussed flowserve pump division segment results fpd design manufacture distribute service engineered industrial pumps pump systems replacement parts related equipment principally industrial markets fpd 27 manufacturing facilities worldwide nine located north america 10 europe eight south america asia fpd also 65 service centers either free standing colocated manufacturing facility 2004 fpd sales 13 billion approximately 43 oil gas 20 power 10 water 8 chemical 19 general industries bookings 2004 increased 740 million 61 excluding currency benefits approximately 58 million compared 2003 increase due additional bookings 405 million resulting acquisition remaining 75 tkl march 2004 increase aftermarket bookings aftermarket bookings represented 463 total fpd bookings 2004 compared 443 2003 primary served markets oil gas chemicals industries experienced growth operated near capacity levels due continued increases crude oil prices bookings 2003 decreased 13 million 01 excluding currency benefits approximately 85 million compared 2002 ema bookings increased approximately 72 offset decline north south america bookings 2003 25 194 respectively due several large nonrecurring projects substantially completed 2002 sales 2004 increased 1058 million 91 excluding currency benefits approximately 59 million compared 2003 sales improved regions active core oil gas markets water projects especially focusing desalination improved chemical markets remained strong despite increasing feedstock prices 91 increase 30 directly attributable increased sales tkl offsetting favorable sales decreased business north american water market sales 145 million lower previous year fpd selective bidding opportunities sales 2003 decreased 954 million 81 excluding currency benefits approximately 79 million compared 2002 sales north south america lower 819 million 126 million respectively north america lower sales 2003 primarily attributable reduction large project business us canada declines large project business mostly offset currency translation benefits approximately 79 million gross profit margin increased 257 2004 compared 243 2003 increase primarily result increased sales favorably impacts absorption fixed costs higher mix historically profitable general industrial products services increased productivity partially offset increase incentive compensation 74 million included cost sales gross profit margin decreased 243 2003 compared 267 2002 primarily result decrease sales unfavorably impacts absorption fixed costs well lower aftermarket shipments middle east venezuela operating income 2004 increased 172 million 200 excluding currency benefits approximately 7 million compared 2003 addition increased sales gross profit margin discussed operating income also increased due 29 million operating income resulting acquisition tkl march 2004 gain 85 million involuntary conversion patterns lost fire one foundries slightly offset increase incentive compensation 74 million included cost sales discussed incremental increase incentive compensation 91 million included sga operating income 2003 decreased 444 million 366 excluding currency benefits approximately 9 million compared 2002 decrease primarily result decrease gross profit margin discussed flow control division segment results fcd design manufacture distribute industrial valves manual valves control valves nuclear valves actuators related equipment provide variety flow controlrelated services manufacture valves actuators five major manufacturing plants us 17 major manufacturing plants outside us 51 valve service centers 34 related gsg generally free standing principally based us fcd 2004 sales 9545 million approximately 26 chemical 15 power 16 oil gas 3 water 40 general industries result 2002 acquisition flow control division invensys plc believe one world’s leading suppliers valves related products services chemical industry based independent industry sources believe second largest industrial valve supplier global basis believe comprehensive portfolio valve products services key source competitive advantage focus service severe corrosion erosion applications key competency bookings 2004 increased 319 million 36 excluding currency benefits approximately 45 million compared 2003 increase result strength chemical oil gas general services segments market bookings 2003 increased 808 million 108 excluding currency benefits approximately 62 million compared 2002 increase primarily due full year impact ifc acquisition 155 million partially offset weaknesses chemical power general industrial markets approximately 70 fcd bookings markets declined 2003 2002 bookings 2003 declined 69 excluding currency benefits approximately 62 million compared pro forma 2002 bookings reflecting weakness chemical power general industrial markets 2003 sales 2004 increased 296 million 34 excluding currency benefits approximately 43 million compared 2003 increase attributable many major valve markets beginning recover several years decline growth particularly strong asia pacific region sales volumes 2004 positively affected increased customer demand valve products services power chemical general industrial sectors business sales 2003 increased 923 million 127 excluding currency benefits approximately 62 million compared 2002 increase primarily due full year impact ifc acquisition approximately 141 million increase partially offset decrease volumes due weakness power chemicals markets sales 2003 declined 73 excluding currency benefits approximately 62 million compared pro forma 2002 sales reflecting reduced customer demand valve products services chemical power general industrial markets 2003 gross profit margin decreased 286 2004 compared 297 2003 resulting primarily 141 million charge cost sales increase reserve obsolete slow moving inventory reserve increased 2004 primarily consequence increases reserves inventory products acquired ifc acquisition product marketing strategies certain acquired ifc product lines produce results originally anticipated resulted recognition additional reserve obsolete slow moving inventory continue monitor inventory levels movements based experience may record changes inventory reserves needed decrease 2004 gross profit margin also due 27 million increase annual incentive compensation included cost sales gross profit margin increased 297 2003 compared 281 2002 due approximately 10 million synergy benefits ifc acquisition reflected cost sales 2003 benefits partially offset impact lower unit volumes unfavorable mix product sales gross profit margin 297 greater pro forma 2002 gross profit margin 290 due realization synergy benefits 2003 ifc acquisition operating income special items 2004 decreased 60 million 98 excluding currency benefits approximately 4 million compared 2003 decrease results primarily 141 million charge income increase provision obsolete slow moving inventory discussed decrease also due 27 million increase incentive compensation included cost sales discussed incremental 76 million increase incentive compensation included sga operating income special items 2003 increased 129 million 306 excluding currency benefits approximately 6 million compared 2002 increase primarily reflects full year effect ifc acquisition improvement 2003 also reflects estimated synergy benefits ifc acquisition approximately 10 million reflected cost sales discussed incremental synergy benefits approximately 5 million reflected sga special items 2003 2002 associated acquisition integration ifc fcd compared pro forma 2002 operating income special items 2003 operating income special items excluding currency benefits approximately 6 million increased 22 flow solutions division segment results fsd design manufacture distribute mechanical seals sealing systems parts provide related services principally industrial markets fsd seven manufacturing operations four located north america two europe one singapore fsd operates 62 qrcs worldwide including 24 sites north america 14 europe remainder located south america asia fsd 2004 sales 394 million approximately 30 oil gas 27 chemical 43 general industries ability turn around engineered seal products within 72 hours customer’s request design engineering manufacturing testing delivery major source competitive advantage based independent industry sources believe second largest mechanical seal supplier global basis bookings 2004 increased 226 million 62 excluding currency benefits approximately 11 million compared 2003 bookings 2003 increased 34 million 10 excluding currency benefits approximately 15 million compared 2002 bookings improvement years reflects fsd’s emphasis end user business success establishing longerterm customer alliance programs including fixed fee alliances despite weakened market conditions fixed fee alliances contractual agreements customers wherein customer pays us fixed amount period usually monthly term agreement return fixed cost customer entitled new seals repairs upgraded equipment replacements maintenance services defined within scope agreement believe emphasis combined heightened levels service reliability innovation contributed increase market share 2004 2003 2002 currently implementing end user strategy divisions sales 2004 increased 252 million 70 excluding currency benefits approximately 11 million compared 2003 discussed continuous focused improvements end user customer business well meeting strategic growth initiatives led fsd increased shipments regions 2004 sales 2003 decreased 49 million 14 excluding currency benefits approximately 14 million compared 2002 decrease due slightly weaker business conditions gross profit margin fsd decreased 432 2004 compared 448 2003 primarily due 41 million increase annual incentive compensation included cost sales increases worldwide metals pricing charge cost sales resulting increase reserve slow moving inventory gross profit margin increased 448 2003 compared 433 2002 primarily result 24 million decrease annual incentive compensation included cost sales improvement 2003 also reflects impact cip initiative projects resulted cost savings increases plant efficiencies resulting bringing previously outsourced production inhouse operating income 2004 decreased 37 million 50 excluding currency benefits approximately 2 million compared 2003 decrease operating income primarily result decrease gross profit margin discussed increase sga resulting increase annual incentive compensation 41 million operating income 2003 increased 59 million 91 excluding currency benefits approximately 3 million compared 2002 improvement 2003 primarily reflects increase gross profit margin discussed operating income percentage sales increased 207 2003 185 2002 due primarily cost sales savings resulting cip initiative restructuring acquisition related charges restructuring costs ifc conjunction ifc acquisition 2002 initiated restructuring program designed reduce costs eliminate excess capacity closing 18 valve facilities including 10 service facilities reducing sales related support personnel actions approved committed 2002 remaining actions approved committed 2003 resulted gross reduction 847 positions net reduction 633 positions net position eliminations represent gross positions eliminated closed facilities offset positions added receiving facilities required produce products transferred receiving facilities established restructuring program reserve 110 million upon acquisition ifc increased reserve total 96 million latter half 2002 recognized additional accruals 45 million 2003 program primarily related closure certain valve service facilities related reductions workforce based upon revised forecasts costs incurred recognized reduction 23 million ifc restructuring reserve 2004 since portion reserve affected estimate created goodwill recognition reduction reserve recorded via decrease goodwill cash expenditures accrual 34 million 2004 116 million 2003 42 million 2002 remaining accrual 36 million reflects payments made 2005 beyond severance obligations due terminated personnel europe 21 million well lease contract termination exit costs 15 million cumulative costs 72 million associated closure facilities december 31 2003 recognized restructuring expense operating results whereas cumulative costs associated closure ifc facilities 179 million including related deferred taxes 62 million became part purchase price allocation transaction effect closure costs increased amount goodwill otherwise recognizable result ifc acquisition following illustrates activity related ifc restructuring reserve integration costs ifc also incurred acquisitionrelated integration expense 2003 2002 conjunction acquisition ifc summarized acquisitionrelated activities resulted integration costs categorized defined follows personnel related costs include payroll benefits consulting fees retention integration performance bonuses paid employees contractors development management execution integration plan transfer product lines includes costs associated transfer product lines well realignment required receiving facilities asset impairments reflect loss disposal property plant equipment ifc facilities closed disposal inventory discontinued product lines remaining facilities combined category includes costs associated information technology integration legal entity consolidations legal entity name changes signage new product literature none integration expense items individually exceeded 05 million remaining restructuring integration costs ifc largely completed restructuring integration programs related ifc except payments certain outstanding european activities expect incur additional restructuring integration costs connection programs payments restructuring accrual continue 2005 beyond due timing severance obligations committed europe liquidity capital resources cash flow analysis cash generated operations borrowings available existing revolving line credit primary sources shortterm liquidity sources operating cash include sale products services reduction working capital particularly accounts receivable inventories cash balance december 31 2004 638 million compared 535 million 2003 490 million 2002 increase cash flows provided operating activities 2004 primarily relates net reduction working capital primarily result increases accounts payable accrued liabilities retirement obligations liabilities decrease cash flows provided operating activities 2003 compared 2002 primarily relates pension contributions income taxes outflows related ifc integration 2003 contributions us pension plans 270 million compared 46 million 2002 increased pension contributions 2003 result increase number employees due acquisition ifc increased funding requirement due underperformance underlying plan assets 2002 contributions us pension plan 153 million 2004 2002 also benefited receipt 232 million us income tax refund compared 49 million received 2003 cash outflows related ifc integration 272 million 2003 compared 193 million 2002 working capital reductions provided operating cash flow 1525 million 2004 compared 701 million 2003 1206 million 2002 reduction working capital 2004 reflects increases 466 million accounts payable due deferred payment invoices yearend 2004 321 million accrued liabilities due primarily increase approximately 44 million bonus accrual 2004 reduction working capital 2004 also reflects continued emphasis improving accounts receivable collections reducing inventory accounts receivable reductions 2004 generated 394 million cash flow compared 238 million cash flow 2003 678 million 2002 improvement accounts receivable primarily reflects improved collections impact accounts receivable securitization 487 million discussed addition incremental factoring certain nonus receivables used 34 million 2004 contributed 155 million 2003 321 million 2002 goal days’ sales receivables outstanding “dso” 60 days fourth quarter 2004 achieved dso 66 days compared 70 days period 2003 including effect securitization dso improved 60 days december 31 2004 reference purposes based 2004 sales improvement one day could provide approximately 8 million cash inventory reductions contributed 255 million cash flow 2004 compared 294 million cash flow 2003 364 million 2002 majority inventory reduction projectrelated work process inventory required support shipments products backlog offset part increase raw materials result inventory reductions inventory turns 52 times december 31 2004 compared 45 times 44 times december 31 2003 2002 respectively reference purposes based 2004 data improvement one turn could yield approximately 65 million cash outflows investing activities 141 million 266 million 2004 2003 respectively due primarily capital expenditures cash outflows 5572 million 2002 primarily represent acquisition ifc 535 million net cash acquired cash outflows financing activities 2506 million 2004 compared 1628 million 2003 inflows 3276 million 2002 change 2004 results primarily increased mandatory repayments longterm debt triggered gmbu divestiture issuance eib credit facility accounts receivables securitization change 2003 results absence equity offerings 2003 compared 2002 cash needs next 12 months expected substantially similar 2004 except decrease debt payments required new credit facilities partially offset increase pension contributions believe cash flows operating activities combined availability revolving line credit existing cash balances sufficient enable us meet cash flow needs next 12 months however cash flows operations could adversely affected economic political risks associated sales products operational factors competition fluctuations foreign exchange rates fluctuations interest rates among factors believe cash flows operating activities expectation continuing availability draw upon revolving credit agreements also sufficient meet cash flow needs periods exceeding next 12 months generated 68 million 169 million cash flow related exercise employee stock options 2004 2002 respectively reflected financing activities consolidated statement cash flows amounts generated exercise employee stock options 2003 significant payments acquisitions may 2 2002 completed acquisition ifc contractual purchase price 535 million subject adjustment pursuant terms purchase sale agreement reduction 22 million agreed settled fourth quarter 2003 yielded final contractual purchase price 5328 million reduction related finalization balances date acquisition cash related party activity tax payments addition incurred 61 million costs associated consummation acquisition including investment banking legal actuarial accounting fees total purchase price including costs 5389 million acquiring ifc one world’s foremost manufacturers valves actuators associated flow control products believe world’s second largest manufacturer valves financed acquisition associated transaction costs issuing 92 million shares common stock april 2002 net proceeds approximately 276 million new borrowings senior secured credit facilities purchase price allocated assets acquired liabilities assumed based estimated fair value date acquisition substantially completed purchase price allocation ifc 2003 expect revisions final allocations included 45 million amortizable intangibles 25 million indefinite lived intangible assets 304 million recorded goodwill operating results ifc included consolidated statements operations may 2 2002 date acquisition regularly evaluate acquisition opportunities various sizes cost terms financing raised conjunction acquisition including ability raise economical capital critical consideration evaluation march 2004 acquired remaining 75 interest tkl approximately 12 million paid acquisition cash generated operations prior acquisition held 25 interest tkl result acquisition strengthened product offering mining industry broadened manufacturing capacity asia pacific region gained foundry capacity capital expenditures capital expenditures funded primarily operating cash flows lesser extent bank borrowings three years capital expenditures invested new replacement machinery equipment information technology acquisition integration activities including structures equipment required receiving facilities year capital expenditures less depreciation expense due excess capacity upgrading equipment integration processes capital expenditures 2004 include approximately 5 million purchase building previously leased manufacture valves 2005 capital expenditures focused new product development information technology infrastructure cost reduction opportunities expected approximately 45 million 50 million certain facilities may face capacity constraints foreseeable future may lead higher capital expenditure levels financing debt including capital lease obligations consisted senior credit facilities 2000 credit facilities august 8 2000 entered senior credit facilities comprised 2750 million tranche term loan 4750 million tranche b term loan 3000 million revolving line credit hereinafter collectively referred “2000 credit facilities” connection acquisition ifc may 2002 amended restated 2000 credit facilities provide 1 incremental 953 million tranche term loan 2 7000 million tranche c term loan proceeds incremental tranche term loan tranche c term loan used finance portion acquisition purchase price repay full tranche b term loan borrowings 2000 credit facilities bore interest rate equal option either 1 base rate based prime rate recently announced administrative agent 2000 credit facilities federal funds rate plus 050 2 london interbank offered rate “libor” plus case tranche term loan loans revolving line credit applicable margin determined reference ratio total debt consolidated ebitda case tranche c term loan applicable margin based longterm debt ratings new credit facilities august 12 2005 entered new credit facilities comprised 6000 million term loan maturing august 10 2012 4000 million revolving line credit utilized provide 3000 million letters credit expiring august 12 2010 used proceeds borrowings new credit facilities refinance 1225 senior subordinated notes indebtedness outstanding 2000 credit facilities replaced letter credit agreement guaranteed eib credit facility described letter credit issued part new credit facilities borrowings new credit facilities bear interest rate equal option either 1 base rate based greater prime rate recently announced administrative agent new credit facilities federal funds rate plus 050 2 libor plus applicable margin determined reference ratio total debt consolidated ebitda september 30 2005 175 libor borrowings eib credit facility april 14 2004 one european subsidiaries flowserve bv entered agreement eib pursuant eib agreed loan us 70 million ability draw funds multiple currencies finance part specified research development projects undertaken us europe borrowings eib credit facility bear interest fixed floating rate interest agreed us eib respect borrowing facility loans eib credit facility subject mandatory prepayment eib’s discretion upon occurrence certain events including change control prepayment certain indebtedness addition eib credit facility contains covenants among things limit ability dispose assets related financed project require us deliver eib audited annual financial statements within 30 days publication august 2004 borrowed 85 million floating interest rate based 3month us libor resets quarterly december 31 2004 interest rate 239 maturity loan june 15 2011 may repaid time without penalty additional discussion 2000 credit facilities new credit facilities eib credit facility included note 12 consolidated financial statements included annual report entered interest rate currency swap agreements hedge exposure cash flows related credit facilities discussed agreements fully described “item 7aitem 7 management’s discussion analysis financial condition results operations following discussion analysis provided increase understanding read conjunction accompanying consolidated financial statements notes please see “risk factors” “forwardlooking statements” sections discussion risks uncertainties assumptions associated statements unless otherwise noted amounts discussed herein consolidated executive overview established leader fluid motion control business strong portfolio pumping systems valves sealing solutions automation services support oil gas chemical power generation water treatment general industrial markets products integral movement control protection fluids customers’ critical processes whether refinery power generation facility transportation pipeline business model heavily influenced capital spending industries placement new products service maintenance existing facilities worldwide installed base products another important source revenue products expected ensure maximum operating time many key industrial processes aftermarket business includes parts service solutions product life cycle solutions value added services generally higher margin business key component profitable growth experienced favorable conditions 2006 several core markets specifically oil gas rise price crude oil natural gas particular spurred capital investment oil gas market resulting many new projects expansion opportunities favorable market conditions resulted corresponding growth much nontraditional areas world new oil gas reserves discovered believe outlook business remains favorable however believe oil gas prices fluctuate future volatility could negative impact business geographical areas conduct business customers seeing rapid growth middle east asia china providing significant source project growth continue execute strategy increase presence regions capture aftermarket business current installed base well new projects process plant expansions opportunity increase installed base new products drive recurring aftermarket business future years critical byproduct favorable market conditions although experienced strong demand products services recent periods face challenges affecting many companies industry andor significant international operations currently employ approximately 14000 employees 55 countries focused six key strategies reach across business see “our strategies” section management’s discussion analysis financial condition results operations “mda” discussion six key strategies continue build geographic breadth implementation additional quick response centers “qrcs” goal positioned near customers possible service support order capture important aftermarket business along ensuring local capability sell install service equipment remote regions becomes equally imperative continuously improve global operations global supply chain capability expanded meet global customer demands ensure quality timely delivery products significant efforts underway reduce supply base drive processes across divisions find areas synergy cost reduction addition improving supply chain management capability ensure meet global customer demands continue focus improving ontime delivery quality reducing warranty costs across global operations focused continuous improvement process “cip” initiative goal cip initiative maximize service fulfillment customers ontime delivery reduced cycle time quality highest internal productivity program key factor margin expansion plans recent developments legal regulatory matters february 7 2006 received subpoena sec seeking documents information relating primarily products two foreign subsidiaries delivered iraq 1996 2003 united nations oilforfood program believe sec’s investigation focused primarily whether inappropriate payments made iraqi officials violation federal securities laws investigation includes periods prior well subsequent acquisition foreign operations involved investigation may subject certain liabilities violations found regardless whether relate periods subsequent acquisition addition two foreign subsidiaries contacted governmental authorities respective countries concerning involvement united nations oilforfood program unable predict foreign governmental authorities pursue either matters future believe sec foreign governmental authorities also investigating companies connection united nations oilforfood program engaged outside counsel february 2006 conduct investigation foreign subsidiaries’ participation united nations oilforfood program audit committee board directors regularly monitoring situation since receipt sec subpoena assumed direct oversight investigation january 2007 currently expect investigation completed second quarter 2007 investigation included among things detailed review contracts iraqi government united nations oilforfood program 1996 2003 forensic review accounting records associated contracts interviews persons knowledge events question investigation found evidence date years 2001 2003 certain nonus personnel two foreign subsidiaries authorized payments connection certain product sales united nations oilforfood program totaling approximately 06 million subsequently deposited third party iraqicontrolled bank accounts payments authorized united nations oilforfood program properly documented subsidiaries’ accounting records expensed paid course investigation certain potential issues involving nonus personnel identified one foreign subsidiaries currently review taken certain disciplinary actions persons engaged wrongful conduct violated ethics policies failed cooperate fully investigation including terminating employment certain nonus senior management personnel one foreign subsidiaries certain nonus senior management personnel facility involved conduct previously separated company reasons continue fully cooperate sec foreign investigations progress point incomplete accordingly sec andor foreign authorities take enforcement action regard investigations may required pay fines disgorge profits consent injunctions future conduct suffer penalties could potentially materially impact business financial condition results operations cash flows march 2006 initiated process determine compliance posture respect us export control laws regulations upon initial investigation appeared product transactions technology transfers necessarily full compliance us export control laws regulations result conjunction outside counsel currently involved systematic process conduct review validation voluntary disclosure certain apparent export violations discovered part review process currently believe process substantially complete first quarter 2008 given complexity export laws current scope investigation violations us export control laws regulations identified disclosed us government may result civil criminal penalties including fines andor penalties review issue ongoing currently unable determine full extent confirmed violations determine nature total amount potential penalties might subject future given resolution matter uncertain time able reasonably estimate maximum amount liability could result final resolution matter cannot currently predict whether ultimate resolution matter material adverse effect business including ability business outside us financial condition matters september 29 2006 board directors authorized program repurchase two million shares outstanding common stock shares may repurchased offset potentially dilutive effects stock options issued equitybased compensation programs commenced program october 2006 repurchased 13 million shares 684 million fourth quarter 2006 subsequent repurchases february 26 2007 totaled 05 million shares 250 million expect conclude program end second quarter 2007 business overview company believe worldleading manufacturer aftermarket service provider comprehensive flow control systems develop manufacture precisionengineered flow control equipment pumps valves seals critical service applications require high reliability use manufacturing platform offer broad array aftermarket equipment services installation advanced diagnostics repair retrofitting operations conducted three business segments referenced throughout document • flowserve pump division “fpd” engineered pumps industrial pumps related services • flow control division “fcd” industrial valves manual valves control valves nuclear valves valve actuators controls related services • flow solutions division “fsd” precision mechanical seals related products services product portfolio built 50 wellrespected brand names worthington idp valtek limitorque durametallic portfolio believed one comprehensive industry products services sold either directly designated channels 10000 companies including world’s leading engineering construction firms original equipment manufacturers “oems” distributors end users markets products services used several distinct industries oil gas chemical power generation water treatment well number industries collectively refer general industries demand products depends level new capital investment planned maintenance expenditures customers level capital expenditures depends turn general economic conditions related phase cycle industries expectations future market behavior levels maintenance spend driven reliability equipment planned downtimes maintenance required capacity utilization process oil gas industry represented approximately 43 35 bookings 2006 2005 respectively high petroleum prices generally drove additional investment upstream exploration production petroleum projects significantly contributed increase bookings many projects asia africa middle east south america reflect opportunities national international major oil companies based current future expectations oil gas price levels compared historical levels oil gas companies encouraged evaluate new resources new technologies explore different options oil sands deepwater heavy oil arctic region downstream segment industry refining transportation high crude oil prices historically reduced demand products services crude oil refineries natural gas processors sought take advantage favorable refining margins operating high levels capacity utilization deferring maintenance current global demand larger amounts oil derivatives stimulated rapid economic growth developing countries general growth rest world available refining capacity currently adequate meet market demand refined products refineries additionally pressured new clean fuel regulations result activities revamps upgrades address environmental concerns situations positive products oil gas companies try address supply market increased capacity right quality products meet tightening regulations output worldwide chemical industry 2006 expanded slightly compared 2005 mirrored increased capacity utilization rates key chemical producing countries united states “us” germany recovered modestly throughout 2006 good growth profitability among major chemical companies legacy underinvestment 2000 2003 encouraged increased global capital expenditure chemical industry 2006 growth us chemical industry however slower 2005 contrast asiapacific particularly china continues major focus investment chemical industry although global chemical industry mature phase cycle output growth predictions provided independent third parties 2007 modestly higher 2006 also seeing increased opportunities alternative energy sources ethanol believe forecasted growth capital expenditures help sustain continuing healthy demand products industry chemical industry represented approximately 15 18 bookings 2006 2005 respectively early 2006 high natural gas prices diminished profitability many power generators recent years made significant investments power plants fueled natural gas profitability power generators improved throughout 2006 natural gas prices trended lower power generators able recover portion higher costs rate increases liquidity still challenged due overinvestment power facilities recent years volatility natural gas prices volatility led renewed interest coal nuclear generation plants number nuclear power generators planning significant maintenance activities seen increase orders industry positive contributor 2006 bookings sales earnings addition several coalfired power plants planned us china actively pursuing flow control opportunities projects revenue opportunity products coalfired plant typically three times natural gas power plant also seeing increased activity alternative energy sources geothermal power industry represented approximately 13 14 bookings 2006 2005 respectively worldwide demand fresh water treatment continues create demand new facilities upgrades existing systems many require products offer especially pumps believe global leader desalination market important source fresh water mediterranean area middle east expect trend desalination expand traditional areas previously mentioned coastal areas around globe significant market pump valve actuation products 2006 2005 water market represented approximately 6 7 respectively bookings general industries comprises variety different businesses including mining ore processing pulp paper food beverage smaller applications none individually represents 5 total bookings 2006 2005 general industries represented approximately 23 26 bookings 2006 2005 respectively saw improvement businesses 2006 notably mining ore processing expect stable growth 2007 customers include engineering contractors oems end users distributors sales engineering contractors oems typically large project orders certain sales distributors project orders generally lead times excess three months project orders typically procured customers either directly us indirectly contractors new construction projects facility enhancement projects quick turnaround business also refer “book ship” business defined orders received customer booked shipped within three months receipt orders typically standard products parts services three business segments generates certain levels type business use manufacturing platform offer broad array aftermarket equipment services installation advanced diagnostics repair retrofitting timelines delivery quality proximity service centers important considerations aftermarket products services geographic regions positioned provide quick response believe customers traditionally relied us rather competitors aftermarket products due highly engineered customized products however aftermarket standard products competitive price competition generally increasing price competition tends less significant oems aftermarket services oem prices generally increasing due decreased levels supply availability sale aftermarket products services benefit large installed base pumps seals valves require maintenance repair replacement parts reporting trends product type customer type business type based upon analytical review individual operational results knowledge respective businesses formally track revenues categories trends analyzed secondary reporting mechanism derived directly general ledger system strategies overarching objective grow position product integrated solutions provider flow control industry objective includes continuing sell products building existing sales relationships marketing power portfolio products services also includes delivering specific end user solutions help customers attain business goals ensuring maximum reliability decreased cost ownership sustainable profitable growth driven using six strategies well communicated throughout company strategies include organic growth globalization process excellence portfolio management organizational capability technologyinnovation key elements strategies outlined organic growth organic growth important initiative focused growing revenues existing portfolio products services well development new customerdriven products services overarching goal focus opportunities maximize organic growth existing customers evaluate potential new customerpartnering initiatives maximize capture product’s total life cycle one pump valve seal companies offer customers differentiated option products services well offer additional option includes combination products solution support packages across broad portfolio combined pump seal enduser teams historically particularly successful delivering new solution programs increasing organic aftermarket growth seek capture additional market share creating mutually beneficial opportunities us customers sourcing maintenance alliance programs pursuant provide agreed portion customers’ parts servicing needs customer alliances enable us develop longterm professional relationships customers serve effective platform introducing new products services customers generating additional sales also seek continue review substantial installed pump seal valve base means expand aftermarket services business customers increasingly using thirdparty aftermarket service providers reduce fixed costs improve profitability date aftermarket services business provided us steady source revenues cash flows higher margins original equipment sales allows us frequent contact customers building knowledge customer needs providing crossselling opportunities building established presence extensive qrc global network provide immediate parts service technical support required effectively manage win aftermarket business installed base new product service development driven product management organization working concert engineering operations sales goal increase revenues new products services developed last five years new product development process made significant progress demonstrating pipeline new modified products services expect research development costs increase 2007 support goal increased revenues new products services globalization business initiative several facets include • expanding global presence capture business outside traditional geographic market areas china russia south america middle east africa • utilizing lowcost sourcing opportunities remain competitive global economy • attracting retaining global intellectual capital required support global growth plans new geographical areas believe attractive oem opportunities international markets particularly south america middle east asiapacific intend continue utilize global presence penetrate markets 2006 signed agreement joint venture saudi arabia al rushaid group develop full service repair facility training school support region manufacturing facility lease signed joint pump seal valve facility suzhou china construction initiated new pump facility coimbatore india former pump facility bangalore used valve division expand local footprint work force engineering center chennai india expanded well facilities china aftermarket services business seek strategically add sites customers customer base grows order provide rapid response fast delivery onsite field repair number new qrc’s added 2006 focused shifting appropriate certain manufacturing engineering functions increasing supply materials components lower cost areas india china mexico south america eastern europe 2006 areas accounted approximately 20 direct material spending compared approximately 5 2001 focused utilizing supply chain management reduce procurement costs including expanding purchases reverse auctions consolidating procurement goods better value addition expanded china presence additional sales supply chain professionals new management growth plans growth plans include acquisition development new capabilities enhance penetration products china oil gas power projects well provide base export products process excellence process excellence initiative encapsulates ongoing programs drive increased customer fulfillment lowest cost internal productivity initiative includes • driving improved customer fulfillment across company metrics ontime delivery cost reduction quality cycle time reduction warranty cost reduction • continuing develop culture continuous improvement delivers maximum productivity cost efficiencies across company • implementing consistent processes across company ensure future success integrated company seek increase operational efficiency cip initiative utilizes tools six sigma methodology lean manufacturing constraint management improve quality processes reduce product cycle times lower costs recognizing employees valuable resource achieving operational excellence goals instituted broad cip training date 1000 employees ciptrained certified “green belts” “black belts” deployed cip projects throughout company operations front office business result cip initiatives developed implemented processes reduce engineering manufacturing process cycle time improve ontime delivery service response time lower inventory levels otherwise reduce costs also experienced success sharing applying best practices achieved one business segments deploying ideas segments business actively working standardize processes simplify information technology platform date standard processes designed agreed manufacturing supply chain sales service finance departments creating standard blueprint company implementation processes using common enterprise resource planning “erp” software platform completed two sites four sites currently last stages preparation implementation several additional sites planning stages seek continue improve working capital utilization particular focus improving management accounts receivable inventory see discussion “liquidity capital resources” section mda portfolio management continued management portfolio products services critical success continue pursue selective acquisitions focused smaller niche additions portfolio rationalizing current portfolio products services ensure alignment customers intend continue evaluate acquisition joint ventures investment opportunities seek broaden product portfolio operational capabilities expedite expansion faster growing asian african south american markets past year took advantage smaller niche opportunities helped round presence filled small gaps portfolio smaller acquisitions included current noncurrent assets intellectual property product management teams also continue work streamline portfolio rationalizing products competed internally superseded new products able reach internal rates return organizational capability believe several elements building enhanced organizational capability including • developing deeper internal talent pool training crossdivisional functional assignments allow company flexibility grow expand organization • capturing intellectual capital current workforce well customers able share within company customers competitive advantage • developing talent acquisition programs address critical talent needs support global growth • building organization strengthened compliance mandatory recommended processes procedures implementing information systems ensure compliance continue focus training distribution electronic learning packages multiple languages code business conduct workplace harassment facility safety export compliance regulatory compliance programs throughout company addition 2006 launched new rotating equipment specialist program aimed capturing internal intellectual capital improving capabilities internal workforce effort provide better service customers comprehensive program continue 2007 2008 goal educating 2000 front line employees across globe technologyinnovation infusion new product technologies become core requirement evaluate development new products services objective improve percentage new products function revenue next five years investment technology critical part success 2006 number opportunities pursued technology smart equipment energy efficiency products use radio frequency identification advanced technology monitoring wear subsea geothermal technologies well developing new products meet demands customers investment technology continue increase 2007 crossdivisional technology team place ensure technologies developed available wide use across divisions maximize return investments primary application advanced technology adding selfdiagnostic capabilities products includes intelligence required provide customers advanced warning required maintenance allowing operations reach optimal productivity results operations effective december 31 2006 changed method accounting us inventories lastin firstout method firstin firstout “fifo” method accordance statement financial accounting standards “sfas” 154 “accounting changes error corrections” retrospectively adjusted prior interim annual periods reflect results balances would reported applied fifo method accounting inventories periods presented mda consolidated financial statements included annual report form 10k year ended december 31 2006 “annual report” impact change accounting principle increased net earnings years ended december 31 2006 2005 2004 60 million 52 million 29 million respectively 010 009 006 per diluted share respectively increased total assets total shareholders’ equity december 31 2005 216 million see additional detail note 6 consolidated financial statements included annual report result selling certain noncore service operations collectively called general services group “gsg” previously included fcd december 2005 government marine business unit “gmbu” fpd business november 2004 treated dispositions discontinued operations years ended december 31 2005 2004 gain 10 million discontinued operations 2006 represents reduction loss sale gsg result resolution contingent sales price loss discontinued operations net tax increased 327 million 2005 compared loss 17 million 2004 increase due primarily impairment certain assets owned gsg fully discussed note 2 consolidated financial statements included annual report bookings backlog define booking receipt customer order contractually engages us perform activities behalf customer regard manufacture service support bookings continuing operations 2006 increased 6851 million 234 compared period 2005 total bookings 2006 increased 5947 million 197 compared 2005 increase includes currency benefits approximately 24 million total bookings 2005 include 904 million bookings gsg discontinued operation sold effective december 31 2005 increased bookings primarily attributable strength oil gas industry positively impacted divisions particularly north america middle east power chemical water treatment industries also contributed improvement bookings continuing operations 2005 increased 4071 million 161 compared 2004 total bookings 2005 increased 3649 million 137 compared 2004 increase includes currency benefits approximately 10 million total bookings 2005 2004 include 904 million 1161 million respectively bookings gsg total bookings 2004 also includes 166 million bookings gmbu discontinued operation sold effective november 2004 bookings thompsons kelly lewis pty ltd “tkl” acquired march 2004 increased 288 million 2005 compared 2004 increased bookings also attributable improved bookings europe middle east africa “ema” fpd improved bookings asia pacific fpd fcd establishment customer alliances resulted increased bookings fsd described bookings also positively impacted continued strength oil gas industry recovery major valve markets backlog represents accumulation uncompleted customer orders amounts presented include backlog related discontinued operations 0 112 million 2006 2005 2004 respectively backlog 16 billion december 31 2006 increased 6359 million 640 compared 2005 currency effects provided increase approximately 101 million increase resulted primarily increased bookings discussed increase total bookings reflects increase orders engineered products naturally longer lead times well expanded lead times request certain customers end 2007 expect ship 85 backlog 9941 million december 31 2005 increased 1577 million 189 compared 2004 currency effects provided decrease approximately 67 million increase backlog primarily attributable strong bookings performance 2005 well increase large oil gas project orders ema fpd sales 2006 increased 3658 million 136 compared 2005 increase includes currency benefits approximately 39 million increase sales primarily attributable continued strength oil gas industry particularly north america middle east significantly impacted fpd fcd also positively impacted strength process valve industry particularly asia additional capacity enabled fsd increase aftermarket sales 2005 increased 1728 million 69 compared 2004 increase includes currency benefits approximately 8 million increase sales attributable three segments primarily due continued growth oil gas industry positively impacted fpd fsd continued recovery strengthening major valve markets sales international customers including export sales us approximately 67 sales 2006 compared 65 sales 2005 68 sales 2004 sales ema approximately 42 39 43 2006 2005 2004 respectively sales asia pacific region approximately 15 14 2006 2005 2004 respectively believe sales international customers continue increase percentage total sales believe highest revenue growth opportunities asia middle east south america gross profit gross profit margin gross profit margin 2006 329 increased 323 2005 gross profit margin 2006 positively impacted various cip supply chain initiatives cip initiative driving increased throughput existing capacity reduced cycle time lean manufacturing reduced warranty costs supply chain initiatives focus materials costs savings low cost supply sources longterm supply agreements product outsourcing gross profit margin 2006 also positively impacted pricing increases fcd fsd well increased sales divisions positively impacts absorption fixed costs partially offset increase original equipment sales primarily fpd generally carries lower margin gross profit margin 2005 323 increased 303 2004 gross profit margin 2005 positively impacted operational improvements attributable cip initiative resulted cost savings higher mix aftermarket business generally higher margin increased sales favorably impacts absorption fixed costs additionally charge cost sales increase reserve obsolete slow moving inventory significantly lower 2005 charge recorded 2004 favorable impact gross profit margin selling general administrative expense “sga” sga impacted growth underlying business various initiatives improve organizational capability compliance systems infrastructure improvements three years presented least 55 sga consisted employeerelated costs includes payroll benefits incentive payments sga 2006 increased 982 million 144 compared 2005 currency effects provided increase approximately 6 million increase primarily attributable increase employeerelated costs 540 million follows increased marketing engineering personnel support increased sales development inhouse capabilities tax sarbanesoxley compliance internal audit financial planning analysis increased equity incentive arising higher share price 65 million primarily related restricted stock adoption sfas 123r “sharebased payment” 69 million related stock options costs associated expansion asia severance charges related outsourcing initiative 13 million increase also due increase travel expenses 121 million due increased global selling marketing activity support overall business growth increased compliance initiatives 80 million increase information technology expenses related infrastructure erp application upgrades 114 million increase legal fees expenses partially offset 126 million decrease financerelated professional fees due development inhouse capabilities discussed additionally incurred charges 116 million associated relocation product lines different facilities severance redundant personnel europe accounts 40 basis points sga percentage sales sga 2005 increased 792 million 131 compared 2004 currency effects provided increase approximately 3 million increase sga due primarily following employeerelated costs 385 million including sales commissions incentive compensation equity incentive programs arising improved performance higher share price 111 million severance transition expenses 81 million modification stock options expiration terms former executives current retired employees board directors 72 million see discussion stock modifications note 7 consolidated financial statements included annual report increase sga also attributable increases professional fees resulting restatement 2002 2003 first quarter 2004 includes 241 million increase audit fees 138 million increase professional fees related tax consulting accounting internal audit assistance increases professional fees partially offset 155 million decrease legal fees expenses 68 million decrease costs incurred related sarbanesoxley compliance operating income operating income 2006 increased 408 million 205 compared 2005 increase includes currency benefits approximately 6 million increase primarily result 1367 million increase gross profit partially offset 982 million increase sga discussed operating income 2005 increased 327 million 197 compared 2004 currency negligible impact operating income period increase primarily result 1074 million increase gross profit partially offset 790 million increase sga discussed interest expense loss repayment debt interest expense 2006 decreased 84 million compared 2005 primarily result refinancing 1225 senior subordinated notes august 2005 proceeds borrowings credit facilities interest expense decreased 63 million 2005 compared 2004 also result 2005 refinancing see discussion refinancing “liquidity capital resources” section mda note 11 consolidated financial statements included annual report december 31 2006 approximately 77 debt fixed rates including effects 4350 million notional interest rate swaps interest income 2006 increased 42 million compared 2005 due primarily higher interest rates higher average cash balance receipt interest longoverdue receivable collected 2006 interest income 2005 increased 15 million compared 2004 due significantly higher average cash balances 2006 incurred charges 07 million debt repayments extinguishment primarily result repayments amounts outstanding european investment bank “eib” credit facility 2005 incurred charge 277 million result debt repayments extinguishment related 2005 refinancing expenses incurred result refinancing fully described “liquidity capital resources” section mda 2004 incurred charge 27 million debt repayments extinguishment related accelerated writeoff deferred loan costs resulting 1600 million optional debt prepayments 1679 million mandatory debt prepayments triggered gmbu divestiture 229 million issuance eib credit facility 850 million receivables securitization 600 million income expense net income expense net 2006 increased 148 million income 64 million compared 2005 primarily due 142 million increase unrealized gains forward exchange contracts income expense net 2005 decreased 57 million expense 84 million compared 2004 primarily due 26 million decrease unrealized losses derivative contracts well foreign currency transaction losses tax expense tax rate 2006 effective tax rate differed federal statutory rate 35 primarily due net impact foreign operations certain us nondeductible expenses 2005 effective tax rate differed federal statutory rate 35 primarily due extraterritorial income “eti” exclusion benefits 19 million state income tax benefits 27 million resulting primarily net reductions valuation allowances 127 million net tax impact foreign operations 2004 effective tax rate differed federal statutory rate 35 primarily due eti exclusion benefits 49 million 220 million net tax impact foreign operations resulting approximately 85 million foreign earnings repatriation pay us debt operations european asian countries provide various tax incentives 2003 granted preferential tax rate approximately 10 switzerland certain sales marketing activities incentive likely provide benefit 2006 2004 received 5year 10 tax rate singapore income excess prescribed base amount generated certain regional headquarter activities subject certain employment investment requirements india granted 100 tax exemptions profits derived export sales certain manufacturing operations prescribed areas period 10 years indian tax exemptions expire 2011 2007 respectively october 22 2004 american jobs creation act 2004 “2004 act” signed law creating temporary incentive us multinationals repatriate accumulated income earned outside us effective tax rate 525 versus us federal statutory rate 35 2004 repatriated approximately 46 million part 85 million discussed pursuant dividend reinvestment plan described 2004 act recognized lower tax rate dividends financial statements due uncertainties surrounding interpretation 2004 act extent uncertainty favorably resolved future reporting period benefit associated dividends recognized period 2004 act also provides phase existing eti exclusion foreign export sales viewed inconsistent international trade protocols set european union phase provides benefit otherwise qualifying export sales 2005 2006 limited approximately 80 60 respectively replacement loss eti export incentive 2004 act provides deduction income qualified domestic production activities phased 2005 2010 manufacturing deduction impact 2006 2005 tax rates impact future tax rate yet quantified guidance financial accounting standards board staff position fas 1091 “application fasb statement 109 tax deduction qualified production activities provided american jobs creation act 2004” tax deduction qualified production activities treated special deduction described statement financial accounting standards “sfas” 109 “accounting income taxes” special deduction reported period deduction claimed tax return may 17 2006 tax increase prevention reconciliation act 2005 signed law creating exclusion us taxable income certain types foreign related party payments dividends interest rents royalties prior 2006 subject us taxation exclusion effective years 2006 2008 applies certain related party payments july 2006 financial accounting standards board issued financial interpretation “fin” 48 “accounting uncertainty income taxes interpretation fasb statement 109” fin 48 clarifies accounting uncertainty income taxes recognized enterprise’s financial statements accordance sfas 109 “accounting income taxes” fin 48 also prescribes recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return well guidance derecognition classification interest penalties accounting interim periods disclosure transition still evaluating impact fin 48 consolidated financial condition 2007 effective tax rate effective tax rate based upon current earnings estimates future taxable earnings domestic international location changes factors including ability utilize foreign tax credits net operating losses results tax audits could impact tax rate future periods december 31 2006 foreign tax credits 214 million expiring 2010 2016 recorded 05 million valuation allowances additionally recorded us net deferred tax assets 865 million relate net operating losses tax credits deductible temporary differences available reduce taxable income future periods definite expiration able utilize portion credits losses effective tax rate would negatively impacted net earnings per share income continuing operations 2006 increased 626 million 1140 million 200 per diluted share compared 2005 increase primarily attributable 408 million increase operating income 270 million decrease loss debt repayment extinguishment partially offset 326 million increase tax expense discussed income continuing operations 2005 increased 226 million 514 million 091 per diluted share increase primarily attributable 327 million increase operating income 63 million decrease interest expense 57 million decrease income expense net partially offset 250 million increase loss debt repayment extinguishment discussed net earnings 2005 declined compared 2004 primarily result impairment charges 301 million related gsg included discontinued operations fully discussed note 2 consolidated financial statements included annual report comprehensive income expense comprehensive income expense 2006 increased 1272 million income 635 million compared 2005 increase due weakening us dollar exchange rate versus euro british pound 2006 pension postretirement gain 239 million 2006 increased expense 319 million 2005 primarily result increased discount rate comprehensive income 2005 decreased 788 million expense 637 million compared 2004 decline primarily result decrease 563 million currency translation adjustments compared 2004 decrease due primarily strengthening us dollar exchange rate versus euro british pound 2005 pension postretirement expense 319 million 2005 increased compared expense 82 million 2004 primarily result decreased discount rate business segments conduct business three business segments represent major product areas evaluate segment performance allocate resources based segment’s operating income see note 17 consolidated financial statements included annual report discussion segments key operating results three business segments fpd fcd fsd discussed flowserve pump division segment results fpd design manufacture distribute highly engineered pumps industrial pumps pump systems collectively referred “original equipment” fpd also manufactures replacement parts related equipment provides full array support services collectively referred “aftermarket” fpd 27 manufacturing facilities worldwide nine located north america 11 europe five south america two asia fpd also 30 service centers either free standing colocated manufacturing facility total bookings 2006 increased 5352 million 340 compared 2005 increase includes currency benefits approximately 15 million increase primarily due 3601 million increase ema attributable strength oil gas power water industries 1311 million increase north america primarily attributable oil gas industry increase bookings includes 46 increase original equipment bookings attributable regions 18 increase aftermarket bookings particularly ema 21 billion total bookings 2006 approximately 54 oil gas 16 power 9 water 6 chemical 15 general industries bookings continuing operations 2005 increased 2532 million 192 compared 2004 total bookings 2005 increased 2366 million 177 compared 2004 increase includes currency benefits approximately 3 million total bookings 2004 includes 166 million bookings gmbu discontinued operation increase bookings primarily due increases regions ema bookings increased 1313 million north south america bookings increased 459 million 242 million respectively due primarily large engineered projects asia pacific increased 363 million due primarily tkl acquired march 2004 increase also attributable continued growth oil gas industry 16 billion total bookings 2005 approximately 46 oil gas 17 power 11 water 7 chemical 19 general industries sales 2006 increased 2193 million 157 compared 2005 increase includes currency benefits approximately 24 million increase primarily attributable ema increased 1411 million north america increased 597 million oil gas sales middle east region contributed significant growth ema domestic oil gas sales contributed significant growth north america original equipment increased approximately 56 sales 2006 compared approximately 53 sales 2005 sales 2005 increased 686 million 52 compared 2004 increase includes currency benefits approximately 4 million sales north south america increased 242 million 194 million respectively north america higher sales primarily attributable improvement general industrial products well parts service asia pacific increased 188 million due primarily tkl gross profit margin 2006 283 change compared 2005 2006 gross profit margin positively impacted higher sales favorably impacts absorption fixed costs well cip supply chain initiatives however offset 23 increase sales original equipment carries lower margin aftermarket sales increased 8 gross profit margin 2005 283 increased 259 2004 primarily result increase sales favorably impacts absorption fixed costs higher mix historically profitable general industrial nuclear products services increased productivity operating income 2006 increased 229 million 153 compared 2005 increase includes currency benefits approximately 4 million increase primarily result 616 million improvement gross profit partially offset increased commission expenses travel support increased bookings sales expenses related stock options increased information technology project costs also 2006 includes 50 million severance costs associated termination redundant personnel europe accounts 30 basis points sga percentage sales operating income 2005 increased 362 million 319 compared 2004 increase includes negative currency effects approximately 1 million increase primarily result 510 million increase gross profit partially offset increases marketing expenses support increased bookings sales increased information technology costs backlog 13 billion 2006 increased 5598 million 796 compared 2005 currency provided increase approximately 82 million increase backlog primarily attributable growth bookings discussed backlog 7035 million 2005 increased 1277 million 222 currency provided decrease approximately 52 million increase backlog primarily attributable strong bookings performance 2005 across regions well increase large oil gas project orders ema flow control division segment results second largest business segment fcd designs manufactures distributes broad portfolio industrial valve products including modulating finite valves actuators controls fcd leverages experience application knowhow offering complete menu engineered services complement expansive product portfolio fcd manufacturing service facilities 19 countries around world five 20 manufacturing operations located us bookings continuing operations 2006 increased 1249 million 133 compared 2005 total bookings 2006 increased 345 million 34 compared 2005 increase includes currency benefits approximately 6 million total bookings 2005 includes 904 million bookings gsg discontinued operation increase primarily attributable continued strengthening several key endmarkets increased bookings process valve market resulted growth china chemical coal gasification industries well across board strength north american middle eastern oil gas markets growth russian district heating market increased project business us western european steam recovery systems improved project business european chemical market improvements asian pulp paper industries also contributed increase 11 billion total bookings 2006 approximately 40 general industry 29 chemical 19 oil gas 12 power bookings continuing operations 2005 increased 843 million 99 compared 2004 total bookings 2005 increased 586 million 61 compared 2004 increase includes currency benefits approximately 3 million total bookings 2005 2004 include 904 million 1161 million respectively bookings gsg increase bookings primarily attributable increases order volume particularly asia pacific coupled believe sustainable price increases core endmarkets including oil gas power chemical industries 10 billion total bookings 2005 approximately 42 general industry 30 chemical 14 oil gas 14 power sales 2006 increased 1005 million 112 compared 2005 increase includes currency benefits approximately 10 million increase primarily attributable notable improvements process valve industry specifically middle eastern petroleum german chemical markets well north american oil gas industry also contributing growth process valves business strong sales asia’s chemical market specifically acetic acid coal gasification projects china successful completion several projects north american power industry also helped drive improvement well improvements asian oil gas european fine chemicals markets 2007 fcd expects institute modest price increases based upon increased metals cost manufacturing lead times achieved benefit dependent ability customer base absorb price increases capital spending plans sales 2005 increased 556 million 66 compared 2004 increase includes currency benefits approximately 2 million recovery major valve markets began 2004 strengthened 2005 progressed drove sales increases process power valve customers sales 2005 reflects increase sales volume improvement worldwide power markets us chemical markets sales 2005 also reflect improvement asian russian markets gross profit margin 2006 340 increased 322 2005 increase due increase sales favorably impacts absorption fixed costs strong focus realizing margin improvements aftermarket sales installed base improved sharing materials pricing risk customers successful implementation various cip supply chain initiatives implementation broadbased price increases latterhalf 2005 also contributed improvement gross profit margin 2005 322 increased 302 2004 increase due efforts continuously monitor inventory levels coupled successful management aged inventory resulted charge cost sales increase reserve obsolete slow moving inventory 37 million 2005 significantly lower compared 141 million charge recorded 2004 aforementioned volume sales price increases favorable mix aftermarket sales typically higher margin positively impacted gross profit margin operating income 2006 increased 238 million 258 compared 2005 increase includes currency benefits approximately 1 million increase primarily attributable 506 million improvement gross profit partially offset higher sga driven primarily increased headcount contributed additional 85 million compensation costs 17 million increase information technology project costs 23 million increase travel costs 15 million increase equitybased incentive compensation higher external commission expense resulting increased sales 2006 recognized 12 million bad debt expense related bankruptcy single customer also 2006 includes 66 million costs associated relocation product lines different facilities accounts 70 basis points sga percentage sales operating income 2005 increased 265 million 404 compared 2004 increase includes currency benefits less 1 million increase driven primarily 347 million increase gross profit partially offset higher sales commissions incurred generate sales increase higher costs associated sarbanesoxley compliance costs incurred expanding footprint asia backlog 3143 million december 31 2006 increased 737 million 306 compared 2005 currency effects provided increase approximately 16 million increase backlog primarily attributable increased bookings discussed yield increased sales 2007 backlog 2406 million december 31 2005 increased 241 million 111 compared 2004 currency effects provided decrease approximately 12 million increase backlog primarily attributable strong bookings performance 2005 flow solutions division segment results fsd engineer manufacture sell mechanical seals auxiliary systems parts provide related services principally process industries general industrial markets similar products sold internally support fpd fsd added global operations nine manufacturing operations four located us fsd operates 67 qrcs worldwide including 24 sites north america 16 europe remainder south america asia ability rapidly deliver mechanical sealing technology global engineering tools locally sited qrcs onsite engineers represents significant competitive advantage business model enabled fsd establish large number alliances multinational customers based independent industry sources believe second largest mechanical seal supplier world bookings 2006 increased 416 million 90 compared 2005 increase includes currency benefits approximately 4 million increase due 287 million increase customer bookings primarily attributable ema south america well 129 million increase interdivision bookings eliminated included consolidated bookings disclosed increase attributable growth projects including oems end user markets majority increase coming regions outside north america success end user market continues strength based fsd business model places premium servicing customers locally increasing network qrcs period added rebuilt upgraded relocated 15 qrcs improve ability service customers locale bookings improvement continues reflect fsd’s ability establish longterm customer alliance programs including fixed fee contracts strategy signing special fixed fee alliances conjunction higher levels local service comes strategically located qrcs led market share gains 2006 2005 5050 million bookings 2006 approximately 48 oil gas 27 chemical 25 general industries bookings 2005 increased 684 million 173 compared 2004 increase includes currency benefits approximately 4 million increase bookings reflects increased business projects includes oems aftermarket experienced strong growth compressor pump seals project business continued success end users due focus servicing customers locally increasing network qrcs addition bookings improvement reflects fsd’s success establishing longerterm customer alliance programs including fixed fee alliances fixed fee alliances contractual agreements customers wherein customer pays us fixed amount period usually monthly term agreement return fixed cost customer entitled new seals repairs upgraded equipment replacements maintenance services defined within scope agreement believe fixed fee strategy coupled higher levels customer service reliability drive repair business equipment upgrades replacements maintenance services led increases market share 2005 2004 4634 million bookings 2005 approximately 46 oil gas 29 chemical 25 general industries sales 2006 increased 530 million 119 compared 2005 increase includes currency benefits approximately 5 million increase attributable 444 million increase customer sales primarily north america ema two largest markets well 86 million increase interdivision sales eliminated included consolidated sales disclosed increase customer sales primarily attributable aftermarket sales fsd expanded capacity enable meet customer demand fast turnaround additionally sales growth occurred project business original equipment aftermarket original equipment sales growth occurred oil gas chemical mineral ore processing industries sales 2005 increased 496 million 126 compared 2004 increase includes currency benefits approximately 3 million increase due strength oil gas industry led oil prices high demand share growth mineral ore processing industry due strong demand increased sales gas compressor business due growth natural gas industry gross profit margin 2006 441 increased slightly 439 2005 primarily result various supply chain initiatives ability pass along price increases gross profit margin 2005 439 increased 434 2004 primarily result ability pass along price increases improved product mix aftermarket typically higher margin operating income 2006 increased 110 million 126 compared 2005 increase includes currency benefits less 1 million improvement 2006 reflects 241 million increase gross profit partially offset increase sga attributable increases global engineering sales functions support sales growth maintain level service support response gives us competitive advantage operating income 2005 increased 145 million 199 compared 2004 increase includes currency benefits less 1 million improvement 2005 reflects 241 million increase gross profit greater control sga backlog 744 million december 31 2006 increased 132 million 216 compared 2005 currency provided increase approximately 3 million backlog december 31 2006 includes 147 million interdivision backlog eliminated included consolidated backlog disclosed increase backlog primarily attributable increased bookings discussed capacity expansions south america asiapacific ema 2006 helped significantly increase shipments helping limit increase backlog 612 million 2005 increased 175 million 401 compared 2004 currency provided decrease approximately 2 million increase backlog primarily attributable strong bookings performance 2005 liquidity capital resources cash flow analysis cash generated operations borrowings available existing revolving line credit primary sources shortterm liquidity sources operating cash generally include sale products services reduction working capital particularly accounts receivable inventories total cash balance december 31 2006 670 million compared 929 million 2005 638 million 2004 cash flows provided operating activities 2006 compared 2005 primarily reflect 980 million increase net income offset 326 million decrease cash flows working capital particularly due higher inventory 984 million especially projectrelated work process inventory required support future shipments products backlog operating cash flows 2006 reflect decrease 85 million funding us pension plans compared 2005 increase net deferred taxes 45 million increase equity compensation 113 million due expensing stock options sfas 123r also positive impacts cash flows operating activities decrease cash flows provided operating activities 2005 compared 2004 primarily reflect 1256 decrease cash flows provided working capital particularly higher accounts receivable 372 million impact termination accounts receivable securitization agreement 487 million operating cash flows 2005 reflect lower anticipated return pension assets increased funding us pension plans approximately 294 million compared 2004 negative cash flow impact increases net deferred taxes 276 million offset positive cash flow impacts related following nonrecurring events noncash expense related debt refinancing 277 million impairment assets related discontinued operations 301 million increase equity compensation also provided positive cash flow impact 120 million addition incremental factoring certain nonus receivables contributed 234 million 2006 contributed 07 million 2005 used 34 million 2004 goal days’ sales receivables outstanding “dso” 60 days fourth quarter 2006 achieved dso 56 days compared 58 days period 2005 reference purposes based 2006 sales improvement one day could provide approximately 10 million cash increases inventory used 984 million cash flow 2006 compared uses 206 million cash flow 2005 contributions 210 million 2004 inventory turns 44 times december 31 2006 compared 48 times 47 times december 31 2005 2004 respectively reflecting substantial increase sales partially offset large increase inventory reference purposes based 2006 data improvement one turn could yield approximately 102 million cash outflows investing activities 777 million 393 million 141 million 2006 2005 2004 respectively due primarily capital expenditures capital expenditures 2006 735 million increase 243 million compared 2005 reflects increased spending support capacity expansion enterprise resource planning application upgrades information technology infrastructure cash outflows financing activities 1145 million 2006 compared 533 million 2005 2506 million 2004 change 2006 results primarily debt paydown repurchase common shares partially offset proceeds stock option activity change 2005 primarily result debt paydown cash needs next 12 months expected substantially similar 2006 except decreases payments longterm debt repurchases common shares see discussion partially offset increase capital expenditures related information technology infrastructure capacity expansion well prospective dividend payments pension contributions currently expected less 2007 compared 2006 reevaluated later 2007 believe cash flows operating activities combined availability revolving line credit existing cash balances sufficient enable us meet cash flow needs next 12 months however cash flows operations could adversely affected economic political risks associated sales products operational factors competition regulatory actions fluctuations foreign exchange rates fluctuations interest rates among factors believe cash flows operating activities expectation continuing availability draw upon revolving credit agreements also sufficient meet cash flow needs periods exceeding next 12 months substantial number outstanding stock options granted past years employees directors stock option plans previously unexercisable due noncurrent status filings sec september 29 2006 became current filings sec reopened stock option exercise program december 31 2006 optionees exercised 19 million outstanding options provided cash proceeds 407 million 2006 approximately 08 million outstanding options remain exercisable december 31 2006 september 29 2006 board directors authorized program repurchase two million shares outstanding common stock shares may repurchased offset potentially dilutive effects stock options issued equitybased compensation programs commenced program october 2006 repurchased 13 million shares 684 million fourth quarter 2006 subsequent repurchases february 26 2007 totaled 05 million shares 250 million expect conclude program end second quarter 2007 payments acquisitions regularly evaluate acquisition opportunities various sizes cost terms financing raised conjunction acquisition including ability raise economical capital critical consideration evaluation 2006 completed four small asset acquisitions aggregate purchase price 80 million assets acquired primarily include inventory fixed assets intangible assets march 2004 acquired remaining 75 interest tkl approximately 12 million paid acquisition cash generated operations prior acquisition held 25 interest tkl result acquisition strengthened product offering mining industry broadened manufacturing capacity asia pacific region gained foundry capacity capital expenditures capital expenditures funded primarily operating cash flows lesser extent bank borrowings 2006 capital expenditures focused capacity expansion erp application upgrades information technology infrastructure cost reduction opportunities 2005 capital expenditures focused new product development information technology infrastructure cost reduction opportunities capital expenditures 2004 include approximately 5 million purchase building previously leased manufacture valves previous years capital expenditures less depreciation expense due excess capacity upgrading equipment integration processes 2007 expect capital expenditures focus capacity expansion erp application upgrades information technology infrastructure cost reduction opportunities expected approximately 85 million 90 million certain facilities may face capacity constraints foreseeable future may lead higher capital expenditure levels financing debt including capital lease obligations consisted credit facilities august 12 2005 entered credit facilities comprised 6000 million term loan maturing august 10 2012 4000 million revolving line credit utilized provide 3000 million letters credit expiring august 12 2010 refer credit facilities collectively credit facilities used proceeds borrowings credit facilities refinance 1225 senior subordinated notes indebtedness outstanding previous credit facilities replaced letter credit agreement guaranteed eib credit facility described letter credit issued part credit facilities borrowings credit facilities bear interest rate equal option either 1 base rate based greater prime rate recently announced administrative agent credit facilities federal funds rate plus 050 2 london interbank offered rate “libor” plus applicable margin determined reference ratio total debt consolidated earnings interest taxes depreciation amortization “ebitda” december 31 2006 15 libor borrowings eib credit facility april 14 2004 one european subsidiaries flowserve bv entered agreement eib pursuant eib agreed loan us 700 million ability draw funds multiple currencies finance part specified research development projects undertaken us europe august 2004 borrowed 850 million floating interest rate based 3month us libor reset quarterly repaid outstanding principal balance terminated facility december 15 2006 using cash generated operations result repayment incurred expenses 05 million related writeoff unamortized deferred financing costs additional discussion credit facilities debt instruments longer effect december 31 2006 included note 11 consolidated financial statements included annual report entered interest rate currency swap agreements hedge exposure cash flows related credit facilities discussed agreements fully described “item 7aitem 7 management’s discussion analysis financial condition results operations following discussion analysis provided increase understanding read conjunction accompanying consolidated financial statements notes please see “risk factors” “forwardlooking statements” sections discussion risks uncertainties assumptions associated statements unless otherwise noted amounts discussed herein consolidated executive overview established industry leader strong product portfolio pumps valves seals automation aftermarket services support global infrastructure industries including oil gas chemical power generation water management well general industrial markets products add value products integral movement control protection flow materials customers’ critical processes business model influenced capital spending industries placement new products service aftermarket services existing operations worldwide installed base products important source aftermarket revenue products expected ensure maximum operating time many key industrial processes aftermarket business includes parts service solutions product life cycle solutions value added services generally higher margin business key component profitable growth experienced favorable conditions 2007 focus industries especially oil gas market pricing crude oil natural gas particular supported increased capital investment oil gas market resulting many new projects expansion opportunities favorable market conditions resulted corresponding growth much developing areas world new oil gas reserves development seen particular increase investment complex recovery reserves tar sands deepwater heavy oil products well positioned believe outlook business remains favorable however believe oil gas prices fluctuate future volatility could negative impact business geographical areas conduct business continue execute strategy increase presence regions global market capture aftermarket business current installed base well secure new capital projects process plant expansions opportunity increase installed base new products drive recurring aftermarket business future years critical byproduct favorable market conditions seen although experienced strong demand products services recent periods face challenges affecting many companies industry significant multinational presence economic political risks currently employ approximately 15000 employees 55 countries focused key strategies reach across business see “our strategies” section management’s discussion analysis financial condition results operations “mda” discussion key strategies continue build geographic breadth implementation additional quick response centers “qrcs” goal positioned near customers possible service support order capture important aftermarket business along ensuring local capability sell install service equipment remote regions becomes equally imperative continuously improve global operations global supply chain capability expanded meet global customer demands ensure quality timely delivery products significant efforts underway reduce supply base drive processes across divisions find areas synergy cost reduction addition improving supply chain management capability ensure meet global customer demands continue focus improving ontime delivery quality reducing warranty costs percentage sales across global operations focused continuous improvement process “cip” initiative goal cip lean manufacturing initiatives maximize service fulfillment customers ontime delivery reduced cycle time quality highest internal productivity program key factor margin expansion plans recent developments discussed note 13 consolidated financial statements included annual report form 10k year ended december 31 2007 “annual report” number putative class action lawsuits filed us certain former officers independent auditors lead underwriters recent public stock offerings alleging securities laws violations orders dated november 13 2007 january 4 2008 trial court granted summary judgment favor us defendants plaintiffs’ claims trial court also denied plaintiffs’ request class certification strongly believe appeal effort plaintiffs overturn trial court’s denial class certification entry judgment would without merit intend oppose effort vigorously additionally january 2 2008 court entered order granting motion dismiss claims related shareholder derivative lawsuit originally filed march 14 2006 allowed plaintiffs opportunity replead notice entry dismissal order served plaintiffs january 15 2008 resolved investigations securities exchange commission “sec” department justice “doj” relating products two foreign subsidiaries delivered iraq 1996 2003 united nations oilforfood program negotiated settlement sec without admitting denying sec’s allegations agreed stipulated judgment enjoining us future violations internal control recordkeeping provisions federal securities laws ii pay disgorgement 2720861 plus prejudgment interest 853364 iii pay civil money penalty 3 million separately negotiated resolution doj resolution results deferred prosecution agreement pay monetary penalty 4000000 business overview company believe worldleading manufacturer aftermarket service provider comprehensive flow control systems develop manufacture precisionengineered flow control equipment pumps valves seals critical service applications require high reliability use manufacturing platform offer broad array aftermarket equipment services installation advanced diagnostics repair retrofitting operations conducted three business segments referenced throughout mda • flowserve pump division “fpd” engineered industrial pumps pump systems submersible motors related services • flow control division “fcd” engineered industrial valves control valves actuators controls related services • flow solutions division “fsd” mechanical seals auxiliary systems parts related services product portfolio built 50 wellrespected brand names worthington idp valtek limitorque durametallic portfolio believed one comprehensive industry products services sold either directly designated channels 10000 companies including world’s leading engineering construction firms original equipment manufacturers distributors end users markets products services used several distinct industries oil gas chemical power generation water management well number industries collectively refer “general industries” demand products depends level new capital investment planned maintenance expenditures customers level capital expenditures depends turn capital infrastructure projects driven need oil gas power water well general economic conditions related phase cycle industries expectations future market behavior levels maintenance spend driven reliability equipment planned downtime maintenance required capacity utilization process oil gas industry represented approximately 41 43 bookings 2007 2006 respectively high petroleum prices generally drove additional investment upstream exploration production petroleum projects significantly contributed increase bookings many projects asia africa middle east latin america reflect opportunities national international major oil companies based current future expectations oil gas price levels compared historical levels oil gas companies encouraged evaluate new resources technologies explore different options oil sands deepwater heavy oil arctic region downstream segment industry refining transportation experienced increased investment 2007 due greater global demand larger amounts refined products stimulated rapid economic growth developing countries general demand growth rest world available refining capacity adequate meet current demand growth forecasts developing markets like china india refineries additionally pressured new clean fuel regulations result activities revamps upgrades address environmental concerns situations positive products oil gas companies try address supply market increased capacity right quality products meet tightening regulations outlook segment oil gas industry heavily dependent demand growth developing geographies chemical industry represented approximately 17 15 bookings 2007 2006 respectively even increase oil feedstock industry able pass along price increases products allowing profitability among major chemical companies maintain levels supportive capital investment north american market weakness dollar provided platform global competitiveness domestically based chemical companies demand driven increased capital investments upgrade facilities expand output capacity investment new manufacturing facilities china also contributed growth industry although global chemical industry mature phase cycle output growth predictions provided independent third parties 2008 modestly higher 2007 emerging field biotechnologies seeing increased investments pilot operations research bring alternative products market currently working key customers area development products serve future industry outlook chemical industry remains favorable global scale however regional economic slowdowns exchange rate changes could adverse impact industry respective markets power industry represented approximately 12 13 bookings 2007 2006 respectively industry continued see capital investment growth due increased power demands developing countries china india capacity increases mature markets including united states “us” many projects 2007 designed coalfired power plants due increasing costs natural gas long lead time cleancoal nuclear revenue opportunity sales products coalfired plant typically three times natural gas power plant planned investments nuclear power generators increased past year significant increase proposed power plant projects us 30 submittals nuclear regulatory commission expected new nuclear power plants china projected develop projects bring line many two nuclear plants per year next 20 years according government sources product offerings maintained “nstamp” certification required nuclear applications slowdown nuclear power plant construction allowing us continue support aftermarket business existing facilities positions us well pending growth investment nuclear globally seeing increased activity alternative energy sources geothermal coal gasification working key customers development products serve portion power industry outlook power industry favorable due increasing power demand developing countries infrastructure improvements needed mature markets however economic slowdowns recessions could delay demand additional power pushing major capital projects future worldwide demand fresh water treatment continues create requirements new facilities upgrades existing systems many require products offer especially pumps believe global leader desalination market important source fresh water mediterranean area middle east expect trend desalination expand traditional areas previously mentioned coastal areas around globe significant market pump valve actuation products 2007 2006 water market represented approximately 6 bookings general industries comprises variety different businesses including mining ore processing pulp paper food beverage smaller applications none individually represents 5 total bookings 2007 2006 general industries also includes sales distributors whose end customers operate industries primarily serve general industries represented approximately 24 23 bookings 2007 2006 respectively 2007 saw favorable growth businesses mining ore processing industry showing increased investment portion business tends stable performance due diversity industries respective different business cycles customers include engineering contractors original equipment manufacturers end users distributors sales engineering contractors original equipment manufacturers typically large project orders critical applications certain sales distributors project orders typically procured customers either directly us indirectly contractors new construction projects facility enhancement projects quick turnaround business also refer “book ship” business defined orders received customer booked shipped within three months receipt orders typically standard products parts services three business segments generates certain levels type business sale aftermarket products services benefit large installed base pumps seals valves require maintenance repair replacement parts use manufacturing platform offer broad array aftermarket equipment services installation advanced diagnostics repair retrofitting geographic regions positioned provide quick response believe customers traditionally relied us rather competitors aftermarket products due highly engineered customized products however aftermarket standard products competitive common standards providing easier replacement installed products proximity service centers timeliness delivery quality important considerations aftermarket products services therefore continue expand global qrc network improve ability capture important aftermarket business reporting trends product type customer type business type based upon analytical review individual operational results knowledge respective businesses formally track revenues categories trends analyzed secondary reporting mechanism derived directly general ledger system strategies overarching objective grow position product integrated solutions provider flow control industry objective includes continuing sell products building existing sales relationships marketing power portfolio products services also includes delivering specific enduser solutions help customers attain business goals ensuring maximum reliability decreased cost ownership sustainable profitable growth driven using strategies well communicated throughout company strategies include organic growth globalization process excellence portfolio management strategic acquisitions organizational capability technologyinnovation key elements strategies outlined organic growth organic growth important initiative focused growing revenues existing portfolio products services well development new customerdriven products services overarching goal focus opportunities maximize organic growth existing customers evaluate potential new customerpartnering initiatives maximize capture product’s total life cycle one pump valve seal companies offer customers differentiated option products services well offer additional option includes combination products solution support packages across broad portfolio combined pump seal enduser teams historically successful delivering new solution programs increasing organic aftermarket growth seek capture additional market share creating mutually beneficial opportunities us customers sourcing maintenance alliance programs pursuant provide agreed portion customers’ parts servicing needs customer alliances enable us develop longterm professional relationships customers serve effective platform introducing new products services customers generating additional sales also seek continue review substantial installed pump seal valve base means expand aftermarket services business customers increasingly using thirdparty aftermarket service providers reduce fixed costs improve profitability date aftermarket services business provided us steady source revenues cash flows higher margins original equipment sales allows us frequent contact customers building knowledge customer needs providing crossselling opportunities building established presence extensive qrc global network provide immediate parts service technical support required effectively manage win aftermarket business created installed base new product service development driven product management organization working concert engineering operations sales goal increase revenues new products services developed last five years new product development process made significant progress demonstrating pipeline new modified products services globalization business initiative several facets include • expanding global presence capture business developing geographic market areas china russia latin america middle east africa • utilizing lowcost sourcing opportunities remain competitive global economy • attracting retaining global intellectual capital required support global growth plans new geographical areas believe attractive opportunities international markets particularly latin america middle east asiapacific intend continue utilize global presence penetrate markets 2007 signed joint venture agreement changsha pump works china focus growing power water industries china aftermarket services business seek strategically add qrcs sites order provide rapid response fast delivery onsite field repair global scale customers 2007 added four qrcs expanding ability effectively deliver aftermarket support globally particular note broke ground new qrc campus dubai located jebel ali free trade zone facility support aftermarket requirements three product divisions middle east region focused shifting appropriate certain manufacturing engineering functions increasing supply materials components lower cost areas india china mexico latin america eastern europe 2007 areas accounted approximately 15 direct materials spending compared approximately 5 2001 focused utilizing supply chain management reduce procurement costs including expanding purchases utilizing ecommerce consolidating procurement goods better value addition expanded china presence additional sales supply chain professionals growth plans growth plans include acquisition development new capabilities enhance penetration products china oil gas power projects well provide base export products process excellence process excellence initiative encapsulates ongoing programs drive increased customer fulfillment yield internal productivity initiative includes • driving improved customer fulfillment metrics ontime delivery cost reduction quality cycle time reduction warranty cost reduction percentage sales • continuing develop culture continuous improvement delivers maximum productivity cost efficiencies • implementing global functional competencies drive standardized processes seek increase operational efficiency cip initiative utilizes tools six sigma methodology lean manufacturing capacity management improve quality processes reduce product cycle times lower costs recognizing employees valuable resource achieving operational excellence goals instituted broad cip training date 1300 employees ciptrained certified “green belts” “black belts” deployed cip projects throughout company operations front office business result cip initiatives developed implemented processes reduce engineering manufacturing process cycle time improve ontime delivery service response time lower inventory levels reduce costs also experienced success sharing applying best practices achieved one business segment deploying ideas segments business continue make progress standardizing processes simplifying information technology platform standard processes designed agreed manufacturing supply chain sales service finance departments creating standard blueprint company continue implement processes using common enterprise resource planning “erp” software platform since 2004 successfully reduced overall erp footprint 59 platforms 37 platforms excluding impact platform reductions resulting dispositions seek continue improve working capital utilization particular focus improving management accounts receivable inventory see discussion “liquidity capital resources” section mda portfolio management strategic acquisitions continued management portfolio products services critical success continue rationalize portfolio products services ensure alignment market requirements continue make necessary research development “rd” investments expand scope product offerings deployment advanced technologies also continue evaluate acquisitions joint ventures strategic investment opportunities broaden product portfolio service capabilities geographic presence operational capabilities meet growing needs customers 2007 sold noncore assets related rail business whollyowned australian subsidiary thompsons kelly lewis pty ltd “tkl” tkl rail assets part larger australian pump business tkl pump business retained remains core part business organizational capability believe several elements strategic efforts continuously enhance organizational capability including • building succession planning along competency performance management capabilities focus key positions critical talent pools • utilizing capabilities drive training programs facilitate crossdivisional functional development assignments • developing talent acquisition programs address critical talent needs support global growth • capturing intellectual capital current workforce sharing within company customers competitive advantage • creating total compensation program provides associates equitable opportunities competitive linked performance • building diversified organization strong ethical compliance culture based transparency trust continue focus training distribution electronic learning packages multiple languages code business conduct workplace harassment facility safety antibribery foreign corrupt practices act export compliance regulatory compliance programs addition 2006 launched new rotating equipment specialist program aimed capturing internal intellectual capital improving capabilities internal workforce effort provide better service customers comprehensive program continue 2007 2008 goal educating 2000 front line employees across globe technologyinnovation infusion advanced technologies new product services development become core requirement evaluate rd investments objective improve percentage new products function revenue utilizing technological innovation improve overall product lifecycle management total cost ownership customers crossdivisional technology council place explore new technologies potential applications industry team also objective ensuring technologies developed available wide use across company maximize return investments one major focus applying advanced technology adding selfdiagnostic capabilities products includes intelligence required provide customers advanced warning required maintenance allowing operations reach optimal productivity teaming universities experts appropriate research fields accelerate required learning shorten development time leveraging value applied technologies products services intent market leader application advanced technology improve product performance return investment customers results operations bookings backlog 1 bookings discontinued operations 2005 represent certain noncore service operations collectively called general services group “gsg” previously included fcd gsg sold effective december 31 2005 treated disposition discontinued operations year ended define booking receipt customer order contractually engages us perform activities behalf customer regard manufacture service support total bookings 2007 increased 7017 million 194 compared 2006 increase includes currency benefits approximately 208 million increased bookings primarily attributable strength oil gas chemical markets divisions additionally power industry continues strong fpd fcd water mining industries contributing growth fpd bookings continuing operations 2006 increased 6851 million 234 compared 2005 total bookings 2006 increased 5947 million 197 compared 2005 increase includes currency benefits approximately 24 million total bookings 2005 include 904 million bookings gsg discontinued operation sold effective december 31 2005 increased bookings primarily attributable strength oil gas industry positively impacted divisions particularly north america middle east power chemical water industries also contributed improvement backlog represents accumulation uncompleted customer orders backlog 23 billion december 31 2007 increased 6466 million 397 compared 2006 currency effects provided increase approximately 140 million increase total bookings reflects increase project work orders engineered products naturally longer lead times well expanded lead times request certain customers end 2008 expect ship 88 backlog 16 billion december 31 2006 increased 6359 million 640 compared 2005 currency effects provided increase approximately 101 million increase resulted primarily increased bookings discussed sales 2007 increased 7016 million 229 compared 2006 increase includes currency benefits approximately 178 million increase primarily attributable continued strength oil gas markets positively impacted original equipment aftermarket sales fpd additionally fcd experiencing strong project sales across valve markets fsd experiencing increased aftermarket project sales europe middle east africa “ema” north america respectively 2007 original equipment aftermarket sales increased 27 18 respectively compared 2006 sales 2006 increased 3658 million 136 compared 2005 increase includes currency benefits approximately 39 million increase sales primarily attributable continued strength oil gas industry particularly north america middle east significantly impacted fpd fcd also positively impacted strength process valve industry particularly asia additional capacity enabled fsd increase aftermarket sales international customers including export sales us approximately 66 sales 2007 compared 67 sales 2006 65 sales 2005 sales ema approximately 38 42 39 2007 2006 2005 respectively sales asia pacific region approximately 16 15 14 2007 2006 2005 respectively believe sales international customers increase percentage total sales believe highest revenue growth opportunities asia middle east latin america gross profit gross profit margin gross profit 2007 increased 2404 million 239 compared 2006 gross profit margin 2007 332 increased 329 2006 gross profit margin 2007 positively impacted higher sales favorably impacts absorption fixed manufacturing costs well various cip supply chain initiatives cip initiative driving increased throughput existing capacity reduced cycle time lean manufacturing reduced warranty costs percentage sales supply chain initiatives focus materials costs savings low cost supply sources longterm supply agreements product outsourcing original equipment aftermarket sales increased rate growth original equipment sales exceeded aftermarket sales result original equipment sales increased 63 total sales 2007 compared 62 2006 aftermarket business consistently provides favorable gross profit margins original equipment sales gross profit 2006 increased 1367 million 157 compared 2005 gross profit margin 2006 329 increased 323 2005 gross profit margin 2006 positively impacted various cip supply chain initiatives gross profit margin 2006 also positively impacted pricing increases fcd fsd well increased sales divisions positively impacts absorption fixed costs partially offset increase original equipment sales primarily fpd generally carries lower margin selling general administrative expense “sga” sga impacted growth underlying business various initiatives improve organizational capability compliance systems infrastructure improvements three years presented least 53 sga consisted employeerelated costs includes payroll benefits incentive payments sga 2007 increased 740 million 95 compared 2006 currency effects provided increase approximately 29 million increase sga primarily attributable increase employeerelated costs 628 million due continued investment sales engineering personnel inhouse capabilities drive longterm growth well annual merit increases equity compensation arising improved performance higher stock price annual longterm incentive compensation plans well 73 million increase third party commissions support increased bookings sales partially offset 59 million pretax gain recorded fpd sale tkl rail assets decrease 121 million audit fees partially offset increase 52 million professional fees related rd legal fees accrued resolution costs governmental authorities related foreign subsidiaries’ involvement united nations oilforfood program approximately 11 million partially offset net gains certain legal matters additional discussion legal matters see “recent developments” section mda note 13 consolidated financial statements included annual report sga percentage sales 2007 improved 280 basis points compared period 2006 decrease primarily attributable leverage higher sales gain sale tkl rail assets well ongoing efforts contain costs stock modification realignment charges recorded 2006 recur sga 2006 increased 982 million 144 compared 2005 currency effects provided increase approximately 6 million increase primarily attributable increase employeerelated costs 540 million follows development inhouse capabilities tax sarbanesoxley compliance internal audit financial planning analysis increased marketing engineering personnel support increased sales increased equity incentive arising higher share price 65 million primarily related restricted stock adoption statement financial accounting standards “sfas” 123r “sharebased payment” 69 million related stock options costs associated expansion asia severance charges related outsourcing initiative 13 million increase also due increase travel expenses 121 million due increased global selling marketing activity support overall business growth increased compliance initiatives 80 million increase information technology expenses related infrastructure erp application upgrades 114 million increase legal fees expenses partially offset 126 million decrease financerelated professional fees due development inhouse capabilities discussed additionally incurred charges 116 million associated relocation product lines different facilities severance redundant personnel europe accounts 40 basis points sga percentage sales net earnings affiliates net earnings affiliates represents joint venture interests asia middle east net earnings affiliates 2007 increased 39 million compared 2006 improvement earnings primarily attributable fcd joint venture india fpd joint venture japan net earnings affiliates 2006 increased 23 million compared 2005 improvement earnings primarily attributable fsd joint venture korea fpd joint venture japan operating income operating income 2007 increased 1703 million 711 compared 2006 increase includes currency benefits approximately 32 million increase primarily result 2404 million increase gross profit partially offset 740 million increase sga discussed operating income 2006 increased 408 million 205 compared 2005 increase includes currency benefits approximately 6 million increase primarily result 1367 million increase gross profit partially offset 982 million increase sga discussed interest expense interest income loss early extinguishment debt interest expense 2007 decreased 56 million compared 2006 primarily result lower average outstanding debt interest expense decreased 84 million 2006 compared 2005 result refinancing 1225 senior subordinated notes august 2005 proceeds borrowings credit facilities see discussion refinancing note 11 consolidated financial statements included annual report december 31 2007 approximately 71 debt fixed rates including effects 3950 million notional interest rate swaps interest income 2007 decreased 33 million compared 2006 due primarily lower average cash balance interest income 2006 increased 42 million compared 2005 due significantly higher average cash balances 2007 incurred charges 04 million result amendment credit facilities august 2007 improved terms revolving line credit see discussion amendment “liquidity capital resources” section mda note 11 consolidated financial statements included annual report 2006 incurred charges 07 million debt repayments extinguishment primarily result repayments amounts outstanding european investment bank “eib” credit facility 2005 incurred charge 277 million result debt repayments extinguishment related 2005 refinancing income expense net income expense net 2007 change compared 2006 2007 us dollar exchange rate weakened versus euro income expense net 2006 increased 148 million income 64 million compared 2005 primarily due 142 million increase unrealized gains forward exchange contracts due part 33 million gain settlement derivative contract related eib credit facility tax expense tax rate 2007 effective tax rate differed federal statutory rate 35 primarily due net impact foreign operations includes impacts lower foreign tax rates net favorable results various tax audits changes valuation allowance estimates improvements partially offset additional reserves established uncertain tax positions pursuant adoption financial accounting standards board “fasb” financial interpretation “fin” 48 “accounting uncertainty income taxes interpretation fasb statement 109” see additional discussion uncertain tax positions note 11 consolidated financial statements included annual report 2006 effective tax rate differed federal statutory rate 35 primarily due net impact foreign operations certain us nondeductible expenses 2005 effective tax rate differed federal statutory rate 35 primarily due extraterritorial income “eti” exclusion benefits 19 million state income tax benefits 17 million resulting primarily net reductions valuation allowances 115 million net tax impact foreign operations european asian countries provide various tax incentives 2003 granted preferential tax rate approximately 10 switzerland certain sales marketing activities incentive provide benefit 2006 2004 received 5year 10 tax rate singapore income excess prescribed base amount generated certain regional headquarter activities subject certain employment investment requirements india granted 100 tax exemptions profits derived export sales certain manufacturing operations prescribed areas period 10 years indian tax exemptions expire 2011 2007 respectively may 17 2006 tax increase prevention reconciliation act 2005 signed law creating exclusion us taxable income certain types foreign related party payments dividends interest rents royalties prior 2006 subject us taxation exclusion effective years 2006 2008 applies certain related party payments effective tax rate based upon current earnings estimates future taxable earnings domestic international location changes factors including ability utilize foreign tax credits net operating losses results tax audits could impact tax rate future periods december 31 2007 foreign tax credits 166 million expiring 2010 2016 recorded 03 million valuation allowances additionally recorded us net deferred tax assets 618 million relate net operating losses tax credits deductible temporary differences available reduce taxable income future periods definite expiration able utilize portion credits losses effective tax rate would negatively impacted reasonably possible within next 12 months effective tax rate impacted resolution matters audited various taxing authorities estimate could record reduction tax expense approximately 17 million 32 million within next 12 months net earnings per share 1 net earnings 2006 includes gain 10 million discontinued operations representing reduction loss sale gsg result resolution contingent sales price net earnings 2005 includes 318 million loss discontinued operations net tax due primarily impairment certain assets owned gsg fully discussed note 2 consolidated financial statements included annual report income continuing operations 2007 increased 1418 million 2558 million 446 per diluted share compared 2006 increase primarily attributable 1703 million increase operating income partially offset 311 million increase tax expense discussed income continuing operations 2006 increased 626 million 1140 million 200 per diluted share compared 2005 increase primarily attributable 408 million increase operating income 270 million decrease loss debt repayment extinguishment partially offset 326 million increase tax expense discussed comprehensive income expense comprehensive income expense 2007 increased 55 million income 690 million compared 2006 primarily due continued weakening us dollar exchange rate versus euro 2007 increase pension postretirement income due primarily increased discount rate mostly offset decline results interest rate hedging activity comprehensive income expense 2006 increased 1272 million income 635 million compared 2005 increase due primarily weakening us dollar exchange rate versus euro british pound 2006 pension postretirement income 239 million 2006 increased expense 319 million 2005 primarily result increased discount rate business segments conduct business three business segments represent major product areas evaluate segment performance allocate resources based segment’s operating income see note 17 consolidated financial statements included annual report discussion segments key operating results three business segments fpd fcd fsd discussed flowserve pump division segment results fpd design manufacture distribute service engineered industrial pumps pump systems submersible motors collectively referred “original equipment” “oe” fpd also manufactures replacement parts related equipment provides full array support services collectively referred “aftermarket” fpd 28 manufacturing facilities worldwide eight located north america 11 europe four latin america five asia fpd also 76 service centers including colocated manufacturing facility 24 countries believe largest pump manufacturer serving oil gas chemical power generation industries third largest pump manufacturer overall bookings 2007 increased 4405 million 209 compared 2006 increase includes currency benefits approximately 133 million increase attributable ema north america latin america increased 2622 million including currency benefits approximately 111 million 1067 million 596 million including currency benefits approximately 5 million respectively highest rates growth occurred ema latin america original equipment aftermarket bookings continue strong increasing 25 14 respectively compared 2006 increased bookings led continued strength oil gas chemical water general industry markets 26 billion total bookings 2007 approximately 51 oil gas 15 power 10 water 8 chemical 16 general industries bookings 2006 increased 5352 million 340 compared 2005 increase includes currency benefits approximately 15 million increase primarily due increase ema 3601 million including currency benefits approximately 13 million attributable strength oil gas power water industries increase 1311 million north america primarily attributable oil gas industry increase bookings includes 46 increase original equipment bookings attributable regions 18 increase aftermarket bookings particularly ema 21 billion total bookings 2006 approximately 54 oil gas 16 power 9 water 6 chemical 15 general industries sales 2007 increased 4777 million 295 compared 2006 increase includes currency benefits approximately 108 million increase primarily attributable ema north america latin america increased 3007 million including currency benefits approximately 88 million 1295 million 513 million including currency benefits approximately 5 million respectively highest rate growth occurred latin america original equipment aftermarket sales show continued strength increasing 38 21 respectively compared period 2006 increases ema north america due strength oil gas industry sales 2006 increased 2193 million 157 compared 2005 increase includes currency benefits approximately 24 million increase primarily attributable ema north america increased 1411 million including currency benefits approximately 20 million 597 million respectively oil gas sales middle east region contributed significant growth ema domestic oil gas sales contributed significant growth north america original equipment increased approximately 56 sales 2006 compared approximately 53 sales 2005 gross profit 2007 increased 1392 million 304 compared 2006 gross profit margin 2007 285 increased 283 2006 increase primarily attributable increased sales favorably increases absorption fixed manufacturing costs ability implement modest price increases late 2006 allowed us mitigate impact increased metals supply chain costs partially offset significant growth original equipment sales 2007 original equipment aftermarket sales increased original equipment sales growth exceeded growth aftermarket period result original equipment sales increased 60 total sales compared 57 total sales period 2006 aftermarket business consistently provides favorable gross margins original equipment sales gross profit 2006 increased 616 million 156 compared 2005 gross profit margin 2006 283 comparable 2005 2006 gross profit margin positively impacted higher sales favorably impacts absorption fixed costs well cip supply chain initiatives however offset 23 increase sales original equipment carries lower margin aftermarket sales increased 8 operating income 2007 increased 1015 million 588 compared 2006 increase includes currency benefits approximately 18 million increase due primarily increased gross profit 1392 million partially offset 405 million increase sga increase sga primarily attributable 225 million higher selling costs driven increase sales engineering personnel support global growth business increased commissions resulting increased sales levels additional total rd costs 49 million improvements erp systems additional compensation expense related annual longterm incentive plans partially offset 59 million pretax gain sale tkl rail assets included sga percentage sales 2007 improved 220 basis points compared 2006 improvement sga attributable leverage higher sales well ongoing efforts contain costs gain sale tkl rail assets severance charges recorded 2006 recur operating income 2006 increased 229 million 153 compared 2005 increase includes currency benefits approximately 4 million increase primarily result 616 million improvement gross profit partially offset increased commission expenses travel support increased bookings sales expenses related stock options increased information technology project costs also 2006 includes 50 million severance costs associated termination redundant personnel europe accounts 30 basis points sga percentage sales backlog 18 billion 2007 increased 5120 million 405 compared 2006 currency provided increase approximately 114 million increase backlog reflects increase orders engineered products naturally longer lead times well expanded lead times request certain customers backlog 13 billion 2006 increased 5598 million 796 compared 2005 currency provided increase approximately 82 million increase backlog primarily attributable growth bookings discussed flow control division segment results second largest business segment fcd designs manufactures distributes broad portfolio engineered industrial valves control valves actuators controls related services fcd leverages experience application knowhow offering complete menu engineered services complement expansive product portfolio fcd total 40 manufacturing service facilities 19 countries around world five 20 manufacturing operations located us based independent industry sources believe third largest industrial valve supplier global basis total bookings 2007 increased 1848 million 174 compared 2006 increase includes currency benefits approximately 56 million growth bookings primarily attributable sustained strength key endmarkets increased project activity global oil gas market specifically middle east china growth pulp paper market latin american asia drove improved control valve bookings power valve bookings benefited elevated maintenance repair operations “mro” business nuclear fossil fuel power generation markets bookings improvement process valve market resulted strength chinese coal gasification purification industries growth china contributed bookings improvement across aspects valve portfolio 12 billion total bookings 2007 approximately 33 chemical 35 general industry 20 oil gas 12 power bookings continuing operations 2006 increased 1249 million 133 compared 2005 total bookings 2006 increased 345 million 34 compared 2005 increase includes currency benefits approximately 6 million total bookings 2005 includes 904 million bookings gsg discontinued operation increase primarily attributable continued strengthening several key endmarkets increased bookings process valve market resulted growth china chemical coal gasification industries well across board strength north american middle eastern oil gas markets growth russian district heating market increased project business us western european steam recovery systems improved project business european chemical market improvements asian pulp paper industries also contributed increase 11 billion total bookings 2006 approximately 40 general industry 29 chemical 19 oil gas 12 power sales 2007 increased 1684 million 169 compared 2006 increase includes currency benefits approximately 52 million increase principally result strength project mro business across significant areas valve portfolio continued growth asia particularly coal gasification petrochemical acetic acid markets drove improvement process valve sales strong project sales oil gas industry specifically north america middle east china also contributed improvement sales control valves increased due satisfaction large orders australian mining asian pulp paper markets increased capacity enabled fulfillment significant russian district heating orders placed later half 2006 contributing growth power valve sales 2006 increased 1005 million 112 compared 2005 increase includes currency benefits approximately 10 million increase primarily attributable notable improvements process valve industry specifically middle eastern petroleum german chemical markets well north american oil gas industry also contributing growth process valves business strong sales asia’s chemical market specifically acetic acid coal gasification projects china successful completion several projects north american power industry also helped drive improvement well improvements asian oil gas european fine chemicals markets gross profit 2007 increased 675 million 200 compared 2006 gross profit margin 2007 349 increased 340 2006 increase reflects aforementioned higher sales levels favorably impacts leverage fixed manufacturing costs increased efficiency result successful relocation several product lines 2006 strong focus successful implementation various cip lean manufacturing supply chain management initiatives gross profit margin also positively impacted ability implement modest price increases first half 2007 enabled us mitigate impact increased metals supply chain costs gross profit 2006 increased 506 million 176 compared 2005 gross profit margin 2006 340 increased 322 2005 increase due increase sales favorably impacts absorption fixed costs strong focus realizing margin improvements aftermarket sales installed base improved sharing materials pricing risk customers successful implementation various cip supply chain initiatives implementation broadbased price increases latterhalf 2005 also contributed improvement operating income 2007 increased 478 million 412 compared 2006 increase includes currency benefits approximately 9 million increase primarily attributable aforementioned 675 million improvement gross profit offset part higher sga costs increased 217 million including negative currency effects approximately 10 million compared period 2006 increase principally attributable 148 million increased selling costs primarily related increased salary higher external commission expense resulting increased sales bookings levels well additional compensation expense related annual longterm incentive plans also contributing increase 48 million increased total rd costs well increased legal fees expenses related compliance matters partially offsetting increases 66 million realignment costs recognized 2006 recur sga percentage sales 2007 improved 140 basis points compared 2006 improvement attributable leverage higher sales well ongoing efforts contain costs realignment charges recorded 2006 recur operating income 2006 increased 238 million 258 compared 2005 increase includes currency benefits approximately 1 million increase primarily attributable 506 million improvement gross profit partially offset higher sga driven primarily increased headcount contributed additional 85 million compensation costs 17 million increase information technology project costs 23 million increase travel costs 15 million increase equitybased incentive compensation higher external commission expense resulting increased sales 2006 recognized 12 million bad debt expense related bankruptcy single customer also 2006 includes 66 million costs associated relocation product lines different facilities accounts 70 basis points sga percentage sales backlog 4148 million december 31 2007 increased 1005 million 320 compared 2006 currency effects provided increase approximately 21 million increase backlog primarily attributable increased volume increase number project orders longer lead times significant oil gas projects backlog 3143 million december 31 2006 increased 737 million 306 compared 2005 currency effects provided increase approximately 16 million increase backlog primarily attributable increased bookings discussed flow solutions division segment results fsd engineer manufacture sell mechanical seals auxiliary systems parts provide related services principally process industries general industrial markets similar products sold internally support fpd fsd added global operations nine manufacturing operations four located us fsd operates 70 qrcs worldwide including 5 colocated manufacturing facility including 24 sites north america 18 europe remainder latin america asia ability rapidly deliver mechanical sealing technology global engineering tools locally sited qrcs onsite engineers represents significant competitive advantage business model enabled fsd establish large number alliances multinational customers based independent industry sources believe second largest mechanical seal supplier world bookings 2007 increased 875 million 173 compared 2006 increase includes currency benefits approximately 19 million 772 million increase customer bookings due primarily increases 453 million 319 million project aftermarket bookings respectively 103 million increase interdivision bookings eliminated included consolidated bookings disclosed also contributed increase regions exhibited growth project type customer bookings strongest rates growth occurring oil gas mining markets north america latin america asia chemical market asia general industry markets regions increases aftermarket customer bookings occurred primarily ema asia 5925 million bookings 2007 approximately 45 oil gas 23 chemical 32 general industries bookings 2006 increased 416 million 90 compared 2005 increase includes currency benefits approximately 4 million increase due 287 million increase customer bookings primarily attributable ema latin america well 129 million increase interdivision bookings increase attributable growth projects including oe end user markets majority increase coming regions outside north america success end user market continues strength based fsd business model places premium servicing customers locally increasing network qrcs period added rebuilt upgraded relocated 15 qrcs improve ability service customers locale bookings improvement continues reflect fsd’s ability establish longterm customer alliance programs including fixed fee contracts strategy signing special fixed fee alliances conjunction higher levels local service comes strategically located qrcs led market share gains 2006 2005 5050 million bookings 2006 approximately 48 oil gas 27 chemical 25 general industries sales 2007 increased 679 million 137 compared 2006 increase includes currency benefits approximately 18 million increase primarily attributable increase aftermarket customer sales ema increased customer project sales north america 138 million increased project customer sales latin america increased overall customer sales asia well 123 million increase interdivision sales eliminated included consolidated sales disclosed contributed increase sales 2006 increased 530 million 119 compared 2005 increase includes currency benefits approximately 5 million increase attributable 444 million increase customer sales primarily north america ema two largest markets well 86 million increase interdivision sales increase customer sales primarily attributable aftermarket sales fsd expanded capacity enable meet customer demand fast turnaround additionally sales growth occurred project business original equipment aftermarket original equipment sales growth occurred oil gas chemical mineral ore processing industries gross profit 2007 increased 336 million 153 compared 2006 gross profit margin 2007 447 increased 441 2006 improvements due slight product shift towards higher margin aftermarket business ema combined price increase earlier 2007 improved absorption fixed manufacturing costs resulting higher sales offset downward margin pressures related materials costs shift north american sales towards lower margin project business gross profit 2006 increased 241 million 124 compared 2005 gross profit margin 2006 441 increased slightly 439 2005 primarily result various supply chain initiatives ability pass along price increases operating income 2007 increased 130 million 132 compared 2006 increase includes currency benefits 5 million improvement 2007 reflects 336 million increase gross profit discussed partially offset 204 increase sga attributable 115 million increase related sales engineering personnel related expenses support global growth business additional compensation related annual longterm incentive plans increase legal fees expenses related compliance matters sga percentage sales 2007 increased 60 basis points compared 2006 increase primarily attributable compliance matters increased depreciation information technology upgrades partially offset increased sales operating income 2006 increased 110 million 126 compared 2005 increase includes currency benefits less 1 million improvement 2006 reflects 241 million increase gross profit partially offset increase sga attributable increases global engineering sales functions support sales growth maintain level service support response gives us competitive advantage backlog 1094 million december 31 2007 increased 350 million 470 compared 2006 currency provided increase approximately 6 million backlog december 31 2007 includes 181 million interdivision backlog eliminated included consolidated backlog disclosed increase backlog primarily result growth project bookings significantly longer lead times backlog 744 million december 31 2006 increased 132 million 216 compared 2005 currency provided increase approximately 3 million backlog december 31 2006 includes 147 million interdivision backlog eliminated included consolidated backlog disclosed increase backlog primarily attributable increased bookings discussed capacity expansions latin america asiapacific ema 2006 helped significantly increase shipments helping limit increase backlog liquidity capital resources cash flow analysis cash generated operations borrowings available existing revolving line credit primary sources shortterm liquidity sources operating cash generally include sale products services conversion working capital particularly accounts receivable inventories total cash balance december 31 2007 3706 million compared 670 million 2006 929 million 2005 cash flows provided operating activities 2007 compared 2006 primarily reflect 1407 million increase net income 1053 million increase cash flows working capital particularly due increased accrued liabilities reflecting increases advanced cash received customers partially offset investment inventory especially projectrelated work process inventory required support future shipments products backlog operating cash flows 2007 reflect decrease 202 million contributions us pension plans compared 2006 cash flows provided operating activities 2006 primarily reflect 980 million increase net income offset 326 million decrease cash flows working capital particularly due higher inventory 984 million especially projectrelated work process inventory required support future shipments products backlog operating cash flows 2006 reflect decrease 85 million funding us pension plans compared 2005 increase equity compensation 113 million due expensing stock options sfas 123r also positive impacts cash flows operating activities goal days’ sales receivables outstanding “dso” 60 days fourth quarter 2007 achieved dso 54 days compared 56 days period 2006 reference purposes based 2007 sales improvement one day could provide approximately 12 million cash increases inventory used 1018 million cash flow 2007 compared uses 984 million 206 million 2006 2005 respectively inventory turns 44 times december 31 2007 compared 44 times 48 times december 31 2006 2005 respectively reflecting substantial increase sales partially offset large increase inventory reference purposes based 2007 data improvement one turn could yield approximately 127 million cash outflows investing activities 771 million 777 million 393 million 2007 2006 2005 respectively due primarily capital expenditures capital expenditures 2007 890 million increase 154 million compared 2006 reflects increased spending support capacity expansion erp application upgrades information technology infrastructure cost reduction opportunities cash outflows 2007 partially offset 134 million proceeds disposals assets cash outflows financing activities 498 million 2007 compared 1145 million 2006 533 million 2005 decrease outflows 2007 results primarily reduced payments longterm debt partially offset payment cash dividends outflow 2006 primarily result debt paydown repurchase common shares cash needs next 12 months expected increase following • increased capital expenditures increased capital expenditures 2008 support information technology infrastructure geographic capacity expansion • share repurchase program february 26 2008 board directors authorized new program repurchase 3000 million outstanding common stock unspecified period program expected commence second quarter 2008 september 29 2006 board directors authorized program repurchase 20 million shares outstanding common stock two million shares repurchased including 07 million shares repurchased 2007 program concluded second quarter 2007 • increased quarterly cash dividends february 26 2008 board directors authorized increase quarterly cash dividend 025 per share payable quarterly beginning april 9 2008 quarterly cash dividends 015 per share declared quarter 2007 currently intend pay regular quarterly dividends foreseeable future dividends reviewed individually declared board directors discretion dependent assessment financial condition business outlook applicable time • accounts receivable factoring fourth quarter 2007 gave notice intent terminate major factoring facilities 2008 plan terminate factoring agreements end 2008 • increased pension contributions pension contributions currently expected higher 2008 compared 2007 reevaluated later 2008 believe cash flows operating activities combined availability revolving line credit existing cash balances sufficient enable us meet cash flow needs next 12 months however cash flows operations could adversely affected economic political risks associated sales products operational factors competition regulatory actions fluctuations foreign exchange rates fluctuations interest rates among factors payments acquisitions regularly evaluate acquisition opportunities various sizes cost terms financing raised conjunction acquisition including ability raise economical capital critical consideration evaluation 2007 completed one small acquisition 23 million 2006 completed four small asset acquisitions aggregate purchase price 80 million assets acquired primarily include inventory fixed assets intangible assets capital expenditures capital expenditures funded primarily operating cash flows lesser extent bank borrowings 2007 capital expenditures focused increased spending support capacity expansion erp application upgrades information technology infrastructure cost reduction opportunities 2006 capital expenditures focused similar uses 2005 capital expenditures focused new product development information technology infrastructure cost reduction opportunities previous years capital expenditures less depreciation expense due excess capacity upgrading equipment integration processes 2008 expect capital expenditures focus geographic capacity expansion erp application upgrades information technology infrastructure cost reduction opportunities expected approximately 115 million 125 million certain facilities may face capacity constraints foreseeable future may lead higher capital expenditure levels financing debt including capital lease obligations consisted credit facilities described note 11 consolidated financial statements included annual report august 12 2005 entered credit facilities comprised 6000 million term loan maturing august 10 2012 4000 million revolving line credit utilized provide 3000 million letters credit expiring august 12 2010 refer credit facilities collectively credit facilities used proceeds borrowings credit facilities refinance 1225 senior subordinated notes indebtedness outstanding previous credit facilities replaced letter credit agreement guaranteed eib credit facility letter credit issued part credit facilities august 6 2007 amended credit facilities among things reduce applicable margin applied borrowings revolving line credit well extend maturity date revolving line credit two years august 12 2012 amendment also eliminates mandatory debt repayment requirements restriction capital expenditures amendment replaces dollar limitation acquisitions certain restricted payments limitation based pro forma compliance required leverage ratio cases borrowings credit facilities bear interest rate equal option either 1 base rate based greater prime rate recently announced administrative agent credit facilities federal funds rate plus 050 2 london interbank offered rate “libor” plus applicable margin determined reference ratio total debt consolidated earnings interest taxes depreciation amortization “ebitda” december 31 2007 100 150 borrowings revolving line credit term loan respectively december 31 2007 2006 amounts outstanding revolving line credit outstanding letters credit 1151 million 839 million december 31 2007 2006 respectively reduced borrowing capacity 2849 million 3161 million respectively connection credit facilities entered 3950 million notional amount interest rate swaps december 31 2007 hedge exposure floating interest rates european letter credit facility september 14 2007 entered unsecured european letter credit facility “european loc” issue letters credit aggregate face amount exceed 1500 million time initial commitment 800 million aggregate commitment european loc may increased 1500 million may agreed among parties may decreased us option without premium fee penalty european loc used contingent obligations solely respect surety performance bonds bank guarantees similar obligations outstanding letters credit drawn european loc 350 million december 31 2007 pay certain fees letters credit written european loc based upon ratio total debt consolidated ebitda december 31 2007 annual fees equaled 05 plus fronting fee 01 debt prepayments repayments made scheduled repayments 28 million 0 15 million 2007 2006 2005 respectively made mandatory repayments 0 153 million 0 2007 2006 2005 respectively mandatory repayments 2006 consisted 144 million using net cash proceeds sale gsg 09 million using excess cash flows defined credit facilities made optional prepayments 2007 2006 made optional prepayments 50 million credit facilities terminated eib credit facility repaid outstanding principle balance 850 million 2005 made optional prepayments 200 million credit facilities optional payments 184 million financing arrangements may prepay loans credit facilities whole part without premium penalty accounts receivable factoring european subsidiaries engage nonrecourse factoring certain accounts receivable various agreements different terms including options renewal mutual termination clauses credit facilities fully described note 11 consolidated financial statements included annual report limit factoring volume 750 million given point time defined credit facilities fourth quarter 2007 gave notice intent terminate major factoring facilities 2008 plan terminate factoring agreements end 2008 debt covenants matters credit facilities contain leverage interest coverage financial covenants leverage covenant maximum permitted leverage ratio stepped fourth quarter 2006 august 7 2007 credit facilities amended among things permit maximum leverage ratio 325 times debt ebitda reductions interest coverage covenant minimum required interest coverage ratio stepped fourth quarter 2006 stepup beginning fourth quarter 2007 compliance financial covenants credit facilities tested quarterly credit facilities include events default usual types credit facilities including nonpayment principal interest violation covenants incorrectness representations warranties cross defaults cross acceleration bankruptcy material judgments employee retirement income security act 1974 amended “erisa” events actual asserted invalidity guarantees security documents certain changes control company occurrence event default could result acceleration guarantors’ obligations credit facilities complied covenants december 31 2007 european loc contains covenants restricting ability certain foreign subsidiaries issue debt incur liens sell assets merge consolidate make certain investments pay dividends enter agreements negative pledge clauses engage business activity existing business european loc also incorporates reference covenants contained credit facilities european loc includes events default usual types letter credit facilities including nonpayment fee obligation violation covenants incorrectness representations warranties cross defaults cross acceleration bankruptcy material judgments erisa events actual asserted invalidity guarantees certain changes control company occurrence event default could result termination commitments acceleration obligations european loc complied covenants december 31 2007 contractual obligations commercial commitments following table presents summary contractual obligations december 31 2007 1 fixed interest payments include payments receipts synthetically fixed rate debt 2 variable interest payments credit facilities estimated using base rate threemonth libor december 31 2007 3 purchase obligations presented face value purchase order excluding effects early termination provisions actual payments could less amounts presented herein 4 retirement postretirement benefits represent estimated benefit payments us nonus defined benefit plans postretirement medical plan fully described note 12 consolidated financial statements included annual report december 31 2007 gross liability uncertain tax positions fin 48 approximately 145 million expect material payment related obligations made within next twelve months unable provide reasonably reliable estimate timing future payments relating noncurrent fin 48 obligations following table presents summary commercial commitments december 31 2007 expect satisfy commitments performance contracts pension postretirement benefits obligations pension plans postretirement benefit plans accounted using actuarial valuations required sfas 87 “employers’ accounting pensions” sfas 106 “employers’ accounting postretirement benefits pensions” consider accounting retirement plans critical management required make significant subjective judgments number actuarial assumptions including discount rates salary growth longterm return plan assets retirement turnover health care cost trend rates mortality rates depending assumptions estimates used pension postretirement benefit expense could vary within range outcomes material effect reported earnings addition assumptions materially affect accumulated benefit obligations future cash funding plan description certain subsidiaries defined benefit pension plans defined contribution plans regular fulltime parttime employees defined benefit pension plan us flowserve corporation pension plan defined contribution plan us flowserve corporation retirement savings plan approximately 66 total defined benefit pension plan assets 54 benefit obligations related us plan december 31 2007 assets us plan held single trust common asset allocation unless specified otherwise references section total plans ie us plan together international plans benefits defined benefit pension plans based primarily years credited service participants’ compensation assets defined benefit pension plans consist primarily equity fixedincome securities december 31 2007 estimated fair market value plan assets defined benefit plans increased 3823 million 3651 million december 31 2006 assets allocated follows projected benefit obligation defined benefit pension plans 5550 million 5445 million december 31 2007 2006 respectively estimated prior service benefit defined benefit pension plans amortized accumulated comprehensive loss pension expense 2008 13 million estimated net loss defined benefit pension plans amortized accumulated comprehensive loss pension expense 2008 47 million none common stock directly held plans sponsor defined benefit postretirement health care plan covering current retirees limited number future retirees us plan provides medical dental benefits administered insurance companies fund plan benefits paid plans hold assets period presented accordingly investment strategy targeted allocations plan assets benefits plan available new employees existing employees accumulated postretirement benefit obligation defined benefit postretirement health care plan 623 million 714 million december 31 2007 2006 respectively accrual accounting significant assumptions consistent requirements sfas 87 account pension benefits using accrual method recognizing pension expense payment benefits retirees accrual method accounting pension benefits necessarily requires actuarial assumptions concerning future events determine amount timing benefit payments key assumptions used calculating cost pension benefits discount rate compensation increase expected longterm rate return plan assets consultation actuaries evaluate key actuarial assumptions used calculating cost pension benefits discount rate expected return plan assets funded plans life expectancy participants assumed rate wage increases determine assumptions december 31 year calculate liability information date pension expense following year depending assumptions used pension expense could vary within range outcomes material effect reported earnings addition assumptions materially affect accumulated benefit obligations future cash funding actual results given year may differ estimated economic factors assumed discount rate used determining future pension obligations based indices aarated corporate bonds except one foreign location uses government bonds assumed rate compensation increase used determining future pension obligations reflects estimate change actual future compensation levels due general price levels productivity seniority factors expected longterm rate return assets determined assessing rates return targeted asset class return premiums generated active portfolio management 2007 net pension expense defined benefit pension plans included income continuing operations 321 million compared 337 million 2006 286 million 2005 postretirement benefit gain expense postretirement health care plan 01 million 2007 compared 07 million 2006 08 million 2005 following assumptions related defined benefit pension plans year ended december 31 2007 following provides sensitivity analysis alternative assumptions us qualified aggregate nonus pension plans us postretirement plans effect discount rate changes constancy assumptions effect changes expected return assets constancy assumptions discussed accounting principles generally accepted us “gaap” provides differences expected actual returns recognized average future service employees december 31 2007 increased assumed discount rate us plan 575 625 consistent increased 10year bond yields average rate nonus plans 478 561 maintained average assumed rate compensation increase 45 us plan increased expected rate return us plan assets 75 2006 775 2007 primarily reflect expected longterm equity returns expect net pension expense defined benefit pension plans included earnings income taxes 02 million lower 2008 321 million 2007 reflecting among things increase assumed discount rate expect 2008 expense postretirement health care plan 14 million used assumed discount rates 575 550 december 31 2007 2006 respectively calculating cost pension benefits cost postretirement benefits us plans assumed ranges annual rates increase per capita health care costs 88 2007 90 2006 80 2005 gradual decrease 50 2012 future years actual costs higher assumed likely put modest upward pressure expense retiree health care plan funding policy defined benefit plans contribute least amounts required applicable laws local customs contributed 301 million 457 million 531 million defined benefit plans 2007 2006 2005 respectively 2008 expect contribute approximately 30 million qualified us pension plan expect contribute approximately 13 million nonus pension plans august 17 2006 president bush signed law pension protection act 2006 “ppa” among things ppa established minimum funding standards defined benefit plans plan years beginning 2007 provided accelerated vesting employer contributions defined contribution plans beginning 2007 discussions retirement benefits see note 12 consolidated financial statements included annual report critical accounting estimates process preparing financial statements conformity gaap requires use estimates assumptions determine reported amounts certain assets liabilities revenues expenses disclosure related contingent assets liabilities estimates assumptions based upon information available time estimates assumptions including historical experience relevant significant estimates made management include timing amount revenue recognition deferred taxes tax valuation allowances tax reserves contingent losses retirement postretirement benefits valuation goodwill indefinitelived intangible assets longlived assets significant estimates reviewed quarterly management oversight disclosure control committee internal committee comprised members senior management disclosure control committee presents views audit committee board directors uncertainty factors surrounding estimates assumptions judgments used preparation financial statements actual results may differ estimates difference may material critical accounting policies important financial condition results operations require difficult subjective complex judgments part management application often result need make estimates effect matters inherently uncertain believe following represent critical accounting policies summary significant accounting policies see note 1 consolidated financial statements included annual report management external auditors discussed critical accounting policies audit committee board directors revenue recognition revenues product sales recognized risks rewards ownership transferred customers based contractual delivery terms agreed customer fulfillment inconsequential perfunctory actions addition policy requires persuasive evidence arrangement fixed determinable sales price reasonable assurance collectibility contracts containing multiple elements determinable fair value recognize revenue amount equal element’s pro rata share contract’s fair value accordance contractual delivery terms element freight charges billed customers included sales related shipping costs included cost sales consolidated statements income revenues longterm contracts include contracts exceed certain internal thresholds regarding size duration project provide receipt progress billings customer recorded percentage completion method progress measured costtocost basis percentage completion revenue represents less 14 consolidated sales 2007 revenue service repair contracts recognized services agreed customer rendered revenues generated fixed fee service repair contracts recognized ratable basis term contract contracts range duration generally extend five years fixed fee service contracts represent less 1 consolidated sales 2007 certain instances provide guaranteed completion dates terms contracts failure meet contractual delivery dates result late delivery penalties nonrecoverable costs instances payment costs deemed probable perform project profitability analysis accounting costs reduction realizable revenues could potentially cause estimated total project costs exceed projected total revenues realized project instances would record reserves cover excesses period determined would adversely affect results operations financial position circumstances total projected reduced revenues still exceed total projected costs incurrence unrealized incentive fees nonrecoverable costs generally reduces profitability project time subsequent revenue recognition reported results would change different estimates used contract costs different estimates used contractual contingencies deferred taxes tax valuation allowances tax reserves recognize valuation allowances reduce carrying value deferred tax assets amounts expect likely realized valuation allowances primarily relate deferred tax assets established certain tax credit carryforwards net operating loss carryforwards us nonus subsidiaries evaluate realizability deferred tax assets assessing related valuation allowance adjusting amount allowances necessary assess factors forecast future taxable income available tax planning strategies could implemented realize net deferred tax assets determining sufficiency valuation allowances failure achieve forecasted taxable income applicable tax jurisdictions could affect ultimate realization deferred tax assets could result increase effective tax rate future earnings implementation different tax structures certain jurisdictions could successful result future reductions certain valuation allowances amount income taxes pay subject ongoing audits federal state foreign tax authorities often result proposed assessments significant judgment required determining income tax provisions evaluating tax positions establish reserves open tax years uncertain tax positions may subject challenge various tax authorities consolidated tax provision related accruals include impact reasonably estimable losses related interest penalties deemed appropriate january 1 2007 adopted fin 48 addresses determination whether tax benefits claimed expected claimed tax return recorded financial statements fin 48 may recognize tax benefit uncertain tax position likely tax position sustained examination taxing authorities determination based technical merits position presumes uncertain tax position examined relevant taxing authority full knowledge relevant information tax benefits recognized financial statements position measured based largest benefit greater fifty percent likelihood realized upon ultimate settlement fin 48 also provides guidance derecognition classification interest penalties income taxes accounting interim periods requires increased disclosures believe adequately provided reasonably foreseeable outcome related matters future results may include favorable unfavorable adjustments estimated tax liabilities extent expected tax outcome matters changes estimate impact income tax provision period determination made reserves contingent loss liabilities recorded various contingencies arising normal course business probable loss incurred loss estimable assessments reserves based information obtained independent inhouse experts including recent legal decisions loss experience similar situations recorded legal reserves susceptible changes due new developments regarding facts circumstances matter changes political environments legal venue factors recorded environmental reserves could change based analysis properties technological innovation regulatory environment changes retirement postretirement benefits determination value retirement postretirement benefits liabilities based actuarial valuations inherent valuations key assumptions assessed annually fourth quarter include • discount rates • expected return plan assets funded plans • life expectancy participants • assumed rate wage increases • assumed rate health care cost increases evaluate conjunction professional advisors prevailing market conditions countries plans maintained including appropriate rates return interest rates medical inflation rates specifically us plan assess market factors changes cash balance interest crediting rate borrowing rates investment grade corporate industrial companies assumptions used fortune 500 companies actual wage increases recent years expected rates return targeted asset class held plans return premiums generated active investment management nonus plans perform similar analyses also factor local laws requirements also compare significant assumptions peers discuss key assumptions prior incorporation actuarial calculations finance committee board directors evaluate funded status retirement plan using current assumptions determine appropriate funding level considering applicable regulatory requirements tax deductibility reporting considerations cash flow requirements factors valuation goodwill indefinitelived intangible assets longlived assets record assets liabilities acquired purchase acquisitions including goodwill indefinitelived intangibles fair value required sfas 141 “business combinations” initial recording goodwill intangibles requires subjective judgments concerning estimates fair value acquired assets goodwill indefinitelived intangible assets amortized subject annual impairment tests test value goodwill indefinitelived intangible assets impairment december 31 year whenever events circumstances indicate assets may impaired test goodwill impairment involves significant judgment estimating projections fair value generated future performance reporting units correlate operating segments test indefinitelived intangibles involves significant judgment estimating projections future sales levels impairment losses goodwill recognized whenever implied fair value goodwill less carrying value impairment losses intangibles recognized whenever estimated fair value less carrying value calculating fair value reporting units using present value estimated future cash flows rely number factors including operating results business plans economic projections anticipated future cash flows market data used discounting cash flows inherent uncertainties exist determining applying factors discount rate used projection fair value represents internally estimated weighted average cost capital 93 net realizable value longlived assets including property plant equipment reviewed periodically indicators potential impairments present based upon assessment estimated future cash flows related assets utilizing methodologies similar goodwill indefinitelived assets additional considerations related longlived assets include expected maintenance improvements changes expected uses ongoing operating performance utilization due uncertain market conditions potential changes strategy product portfolio possible forecasts used support asset carrying values may change future could result noncash charges would adversely affect results operations financial condition accounting developments presented information accounting pronouncements yet implemented note 1 consolidated financial statements included annual report outlook 2008 future results operations forwardlooking statements contained annual report including mda involve number risks uncertainties particular statements regarding goals strategies new product introductions plans cultivate new businesses future economic conditions revenue pricing gross margin costs capital spending depreciation amortization rd expenses potential impairment investments tax rate pending tax legal proceedings future results operations may also affected amount type valuation sharebased awards granted well amount awards forfeited due employee turnover addition various important factors discussed number factors could cause actual results differ materially expectations see risks described ”risk factors” part item 1a included annual report experienced continued strengthening markets 2007 remain optimistic markets performance 2008 considering economic opportunities many geographic core industrial markets continue strong result factors revenues expected increase 2007 excluding currency fluctuations additional discussion markets see “business overview markets” section mda bookings increased 194 2007 compared 2006 translate increased revenue 2008 however booking represents contract modified canceled guarantee increase bookings result increase revenues additionally lead times extended timing conversion booking revenue extending accordingly expect operating income increase 2008 compared 2007 although numbers factors could significant impact operating income 2008 operating income continue benefit increased sales favorably impacts absorption fixed manufacturing costs well number operational improvement programs increased utilization facilities addition continuation end user strategy selective contract bidding implemented price increases also positively contribute operating income 2008 however number significant costs certain expenses negatively impact operating income 2008 include selected investments technology infrastructure consolidate erp systems professional fees incurred implementation tax strategies increase rd spending higher wage benefit costs due inflation sharebased compensation additionally large proportion original equipment business booked 2007 fpd may reduce gross profit margin products shipped 2008 beyond august 7 2007 amended credit facilities among things reduce applicable margin applied borrowings revolving line credit well extend maturity date revolving line credit two years august 12 2012 borrowings credit facilities carry floating rate interest december 31 2007 3950 million derivative contracts convert portion floating interest rates fixed interest rates reduce exposure interest rate volatility result reducing volatility interest expense reducing applicable margin applied borrowings expect interest expense 2008 comparable 2007 however portion debt carries floating rate interest debt subject volatility rates could negatively impact interest expense results operations may also impacted unfavorable foreign currency exchange rate movements see “item 7aitem 7 management’s discussion analysis financial condition results operations following discussion analysis provided increase understanding read conjunction accompanying consolidated financial statements notes please see “risk factors” “forwardlooking statements” sections discussion risks uncertainties assumptions associated statements unless otherwise noted amounts discussed herein consolidated executive overview established industry leader strong product portfolio pumps valves seals automation aftermarket services support global infrastructure industries including oil gas chemical power generation water management well general industrial markets products add value products integral movement control protection flow materials customers’ critical processes business model influenced capital spending industries placement new products service aftermarket services existing operations worldwide installed base products important source aftermarket revenue products expected ensure maximum operating time many key industrial processes past several years significantly invested aftermarket strategy provide local support maximize customers’ investment offerings well provide business stability various economic periods aftermarket business served 150 quick response centers “qrcs” located around globe provides variety service offerings customers including spare parts service solutions product life cycle solutions value added services generally higher margin business key component profitable growth experienced favorable conditions 2008 key industries demand growth developing markets optimization refurbishment needs mature markets increased investments oil gas power water infrastructure growth industrialization developing markets increased demand primary chemicals drove investment growth chemical manufacturing facilities particularly asia middle east oil gas industry advancements recovery processing technologies created opportunities heavy oil processing deep water production natural gas liquefaction regasification products well positioned power industry provide products services forms power generation one limited number manufacturers existing “nstamp” certifications required support nuclear power generation industry global demand growth past several years provided us opportunity increase installed base new products drive recurring aftermarket business continue execute strategy increase presence regions global market capture aftermarket business opportunity well secure new capital projects process plant expansions although experienced strong demand products services recent periods face challenges affecting many companies industry significant multinational presence economic political risks currently employ 15000 employees 55 countries focused key strategies reach across business see “our strategies” section management’s discussion analysis financial condition results operations “mda” discussion key strategies continue build geographic breadth qrc network goal positioned near customers possible service support order capture important aftermarket business along ensuring local capability sell install service equipment remote regions equally imperative continuously improve global operations continue expand global supply chain capability meet global customer demands ensure quality timely delivery products significant efforts underway improve supply chain processes across divisions find areas synergy cost reduction addition improving supply chain management capability ensure meet global customer demands continue focus improving ontime delivery quality reducing warranty costs percentage sales across global operations assistance focused continuous improvement process “cip” initiative goal cip initiative includes lean manufacturing six sigma business management strategy value engineering maximize service fulfillment customers ontime delivery reduced cycle time quality highest internal productivity program key factor margin expansion plans recent disruptions global financial markets banking systems making credit capital markets difficult companies access generally driving costs newly raised debt continue assess implications factors current business state global economy believe financial market disruptions directly disproportionate impact financial position results operations liquidity december 31 2008 continuing volatility credit capital markets could potentially impair customers’ ability access markets increase associated costs assurance materially adversely affected financial market disruptions global economic recession economic events circumstances continue evolve 1 term loan due mature 2009 2010 effects 3850 million notional interest rate swaps approximately 70 term debt fixed rates december 31 2008 revolving line credit european letter credit facility committed held diversified group financial institutions increased cash balance 1012 million 4718 million december 31 2008 compared december 31 2007 significant cash uses 2008 including 1650 million share repurchases 1269 million capital expenditures 515 million dividend payments 508 million contributions us pension plans funding increased working capital requirements monitor depository institutions hold cash equivalents regular basis believe placed deposits creditworthy financial institutions see “liquidity capital resources” section mda discussion business overview company believe worldleading manufacturer aftermarket service provider comprehensive flow control systems develop manufacture precisionengineered flow control equipment pumps valves seals critical service applications require high reliability use manufacturing platform offer broad array aftermarket equipment services installation advanced diagnostics repair retrofitting operations conducted three business segments referenced throughout mda • flowserve pump division “fpd” engineered industrial pumps pump systems submersible motors related services • flow control division “fcd” engineered industrial valves control valves actuators controls related services • flow solutions division “fsd” mechanical seals auxiliary systems parts related services product portfolio built 50 wellrespected brand names worthington idp valtek limitorque durametallic believe one comprehensive industry products services sold either directly designated channels 10000 companies including world’s leading engineering construction firms original equipment manufacturers distributors end users markets products services used several distinct industries oil gas chemical power generation water management number industries collectively referred “general industries” demand products depends level new capital investment planned unplanned maintenance expenditures customers level capital expenditures depends turn capital infrastructure projects driven need oil gas power water well general economic conditions demands related phase cycle respective industries expectations future market behavior levels maintenance expenditures driven reliability equipment planned unplanned downtime maintenance required capacity utilization process customers include engineering contractors original equipment manufacturers end users distributors sales engineering contractors original equipment manufacturers typically large project orders critical applications certain sales distributors project orders typically procured customers either directly us indirectly contractors new construction projects facility enhancement projects quick turnaround business also refer “book ship” business defined orders received customer booked shipped within three months receipt orders typically standard products parts services three business segments generates certain levels type business sale aftermarket products services benefit large installed base pumps valves seals require maintenance repair replacement parts use manufacturing platform offer broad array aftermarket equipment services installation advanced diagnostics repair retrofitting geographic regions positioned provide quick response believe customers traditionally relied us rather competitors aftermarket products due highly engineered customized products however aftermarket standard products competitive existence common standards allows easier replacement installed products proximity service centers timeliness delivery quality important considerations aftermarket products services therefore continue expand global qrc network improve ability capture important aftermarket business oil gas oil gas industry represented approximately 39 41 bookings 2008 2007 respectively investment upstream exploration production petroleum projects driven aggressive demand growth projections 2008 contributed increase bookings many projects asia africa middle east latin america reflect opportunities national international major oil companies based current future expectations oil gas price levels compared historical levels oil gas companies currently reevaluating capital investment plans several major project delays announced recent weeks downstream segment refining transportation industry experienced increased investment 2008 due projected greater global demand refined products stimulated rapid economic growth developing countries general demand growth rest world demand growth projections reduced recent months due current projected impact global economic conditions moderation growth projections influencing timing major refinery projects several regions around globe project investments forecasted continue large developing market areas china india markets continue build indigenous capability meet local demand additionally existing refiners located mature markets continue see pressure related new clean fuel regulations aging infrastructure result activities overhauls upgrades address concerns believe situations continue provide project opportunities products solutions services well suited applications outlook oil gas industry heavily dependent demand growth crude refined products mature markets developing geographies believe oil gas companies continue moderate level upstream downstream investment current economic market conditions prolonged decline demand could cause oil gas companies reduce overall level activity capital spending could decrease demand products services however believe longterm fundamentals industry remain solid based current supply projected depletion rates existing fields forecasted longterm demand growth chemical industry represented approximately 17 bookings 2008 2007 chemical industry continued growth investment behavior much 2008 advent troubles financial markets consumption end products chemical industry began decline fourth quarter 2008 began impact capital spending plans many major chemical companies recently announced downsizing plans several major global chemical companies also bringing measured reductions shortterm capital investment plans north america chemical processing industry forecasted focus maintenance upgrades facilities ensure competitiveness operations current recessionary period believe qrc structure aftermarket capabilities well positioned serve demands certain developing regions china middle east capital investment still forecasted consistent indigenous growth strategies build production capabilities meet current future local demands outlook chemical industry dependent global economy growth behavior industry wellaligned gross domestic product behavior region noted many products produced industry depend consumer demand drive growth significant decrease price oil feedstock opportunity improve profitability continuing operations consumer commodity prices hold acceptable level believe chemical industry continue invest maintenance upgrades optimization existing assets certain developing regions globe continue investing capital infrastructure support current future local needs also believe specialty product offerings aftermarket service capabilities position us gain market share current economic downturn power industry represented approximately 15 12 bookings 2008 2007 respectively industry continued see capital investment growth due increased power demands developing countries china india capacity increases mature markets including united states “us” projects 2008 spanned versions power generation including coalfired gasfired hydro nuclear concerted industry effort review methodologies provide clean power generation increased investments carbon capture storage well alternative energy sources leveraged research development investments strong customer relationships ensure properly engaged matters relative power generation seeing increased activity alternative energy sources geothermal coal gasification working key customers development products serve portion power industry planned investments nuclear power generators continued grow 2008 significant increase proposed projects according data world nuclear association end 2008 43 reactors construction 372 reactors planned currently proposed 2008 china announced plans develop incremental 60 gigawatts nuclear power generation 2020 china national nuclear corporation announced received funding commitments approximately 51 billion support ambition new project plans also announced india latin america middle east product offerings maintained “nstamp” certification required nuclear applications slowdown past nuclear power plant construction allowed us continue support aftermarket business existing facilities believe positions us well planned growth investment nuclear power generation globally believe outlook power industry remains favorable current global economic recession however duration depth recession could delay demand additional power could delay major capital projects future believe longterm fundamentals industry remain solid based projected global population growth advancements industrialization growth urbanization developing markets around globe water 2008 2007 water market represented approximately 6 bookings worldwide demand fresh water treatment continues create requirements new facilities upgrades existing systems many require products offer especially pumps believe persistent demand fresh water economic cycles supports continuing investments even current economic downturn forecasts indicate potential funding challenges municipal government projects due reduced tax revenues projected potentially influence scope work planned currently foresee cancellation critical projects necessary availability fresh water industry facing future supplydemand challenge relative forecasted global population growth coupled advancement industrialization urbanization due limitations usable fresh water around globe continues increased investment desalination investment forecasted significantly increase next couple decades believe global leader desalination market already important source fresh water mediterranean region middle east expect trend desalination expand traditional areas coastal areas around globe believe presents significant market opportunity pumps valves actuation products general industries general industries comprises variety different businesses including mining ore processing pharmaceuticals pulp paper food beverage smaller applications none individually represented 5 total bookings 2008 2007 general industries also include sales distributors whose end customers operate industries primarily serve general industries represented aggregate approximately 23 24 bookings 2008 2007 respectively 2008 saw favorable growth businesses first three quarters year advent disruptions global financial markets several industries experienced reduced consumption requirements respective end products pulp paper along mining ore processing two areas experienced measured adverse impacts current market conditions industries segment experiencing softening market conditions lesser extent believe outlook group industries dependent upon length severity current global economic recession also believe specialty product offerings aftermarket service capabilities provide sound business opportunities industries slower periods global economy reporting trends product type customer type business type based upon analytical review individual operational results knowledge respective businesses formally track revenues categories trends analyzed secondary reporting mechanism derived directly general ledger system strategies overarching objective grow position product integrated solutions provider flow control industry objective includes continuing sell products building existing sales relationships marketing power portfolio products services also includes delivering specific end user solutions help customers attain business goals ensuring maximum reliability decreased cost ownership seek drive sustainable profitable growth using strategies well communicated throughout company strategies include organic growth globalization process excellence portfolio management strategic acquisitions organizational capability technologyinnovation key elements strategies outlined organic growth organic growth important initiative focused growing revenues existing portfolio products services well development new customerdriven products services overarching goal focus opportunities maximize organic growth existing customers evaluate potential new customerpartnering initiatives maximize capture product’s total life cycle one pump valve seal companies offer customers differentiated option products services well offer additional options include combination products solution support packages across broad portfolio combined pump seal end user teams historically successful delivering new solution programs increasing organic aftermarket growth seek capture additional market share creating mutually beneficial opportunities us customers sourcing maintenance alliance programs pursuant provide agreed portion customers’ parts servicing needs customer alliances enable us develop longterm professional relationships customers serve effective platform introducing new products services customers generating additional sales also seek continue review substantial installed pump seal valve base means expand aftermarket services business customers increasingly using thirdparty aftermarket service providers reduce fixed costs improve profitability date aftermarket services business provided us steady source revenues cash flows higher margins original equipment sales allows us frequent contact customers building knowledge customer needs providing crossselling opportunities building established presence extensive global qrc network provide immediate parts service technical support required effectively manage win aftermarket business created installed base globalization business initiative several facets include • expanding global presence capture business developing geographic market areas • utilizing lowcost sourcing opportunities remain competitive global economy • attracting retaining global intellectual capital required support global growth plans new geographical areas believe attractive opportunities international markets particularly latin america middle east asiapacific intend continue utilize global presence strategically invest penetrate markets aftermarket services business seek strategically add qrc sites order provide rapid response fast delivery onsite field repair global scale customers 2008 added 10 qrcs expanding ability effectively deliver aftermarket support globally believe future success supported investments made establish indigenous operations effectively serve local market taking advantage low cost manufacturing competent engineering strategic sourcing practical believe positions us well support global customers project conception commissioning life operations focused shifting appropriate certain manufacturing engineering functions increasing supply materials components lower cost areas india china mexico latin america eastern europe 2008 low cost regions supplied three divisions direct materials ranging 13 28 divisional spending also focused utilizing supply chain management reduce procurement costs including expanding purchases utilizing ecommerce consolidating procurement goods better value addition expanded china presence additional sales supply chain professionals growth plans growth plans include acquisition development new capabilities enhance penetration products china oil gas power projects well provide base export products process excellence process excellence initiative encapsulates ongoing programs work drive increased customer fulfillment yield internal productivity initiative includes • driving improved customer fulfillment metrics ontime delivery cost reduction quality cycle time reduction warranty cost reduction percentage sales • continuing develop culture continuous improvement delivers maximum productivity cost efficiencies • implementing global functional competencies drive standardized processes seek increase operational efficiency cip initiative utilizes tools six sigma methodology lean manufacturing capacity management improve quality processes reduce product cycle times lower costs recognizing employees valuable resource achieving operational excellence goals instituted broad cip training date 1400 employees ciptrained certified “green belts” “black belts” “master black belts” deployed cip projects throughout company operations front office business result cip initiatives developed implemented processes reduce engineering manufacturing process cycle time improve ontime delivery service response time lower inventory levels reduce costs also experienced success sharing applying best practices achieved one business segment deploying ideas segments business continue rationalize existing enterprise resource planning “erp” systems onto six strategic erp systems going forward six strategic erp systems maintained core systems standard tool sets enhanced needed meet growing needs business areas ecommerce back office optimization export compliance investment nonstrategic erp systems limited compliance matters conversion strategic erp systems also seek improve working capital utilization particular focus improving management accounts receivable inventory see discussion “liquidity capital resources” section mda portfolio management drive new product service development product management organization working concert engineering operations sales goal increase revenues new products services developed last five years new product development process made significant progress demonstrating pipeline new modified products services continued management portfolio products services critical success continue rationalize portfolio products services ensure alignment market requirements continue make research development “rd” investments expand scope product offerings deployment advanced technologies strategic acquisitions continually evaluate acquisitions joint ventures strategic investment opportunities broaden product portfolio service capabilities geographic presence operational capabilities meet growing needs customers evaluate investment opportunities decision filtering process try ensure good strategic financial cultural fit 2008 acquisition activities focused addition complimentary products services key components existing portfolio activities included purchase full ownership niigata worthington company ltd “niigata” japan previously 5050 joint venture pump division niigata also completed joint venture arrangement linde group development ionic compression technology provide global business area clean fuel refueling technologies neither foregoing transactions considered involved significant amount assets agreement upon substantially dependent organizational capability focus several elements strategic efforts continuously enhance organizational capability including • institutionalizing succession planning along leadership competencies performance management capabilities focus key positions critical talent pools • utilizing capabilities drive employee engagement training programs facilitate crossdivisional functional development assignments • developing talent acquisition programs engineering recruitment program address critical talent needs support emerging markets global growth • capturing intellectual capital current workforce disseminating throughout company sharing customers competitive advantage • creating total compensation program provides associates equitable opportunities competitive linked business individual performance • building diversified organization strong ethical compliance culture based transparency trust continue focus training distribution electronic learning packages multiple languages code business conduct workplace harassment facility safety antibribery export compliance regulatory compliance programs addition 2006 launched rotating equipment specialist development program aimed capturing internal intellectual capital improving capabilities internal workforce effort provide better service customers comprehensive program continue 2009 goal educating 2000 front line employees across globe also formalized skilled machinist apprenticeship training program 2008 provide trained machinist support growth technologyinnovation infusion advanced technologies new products services become core goal continue grow evolve product portfolio objective improve percentage revenue derived new products function overall sales utilizing technological innovation improve overall product lifecycles total cost ownership customers crossdivisional technology council place explore new technologies potential applications industry team also objective ensuring technologies developed available wide use across company maximize return investments actively involved exploring commercializing new technologies five major areas materials science fluid dynamics mechanical design mechatronics electronics software example one major focus electronics software team integrating selfdiagnostic capabilities products designed enable proactive conditionbased maintenance strategies includes series innovations together able collect inservice data intelligently analyze data realtime detect emerging patterns behavior may indicate potential problem communicate proactive advice end user actions taken keep unit service longer avoid unplanned downtime many research areas teaming universities experts appropriate scientific fields accelerate required learning shorten development time leveraging value applied technologies products services intent market leader application advanced technology improve product performance return investment customers results operations discussed note 3 consolidated financial statements included annual report form 10k year ended december 31 2008 “annual report” fpd acquired remaining 50 interest niigata japanese manufacturer pumps rotating equipment effective march 1 2008 24 million cash incremental interest acquired accounted step acquisition niigata’s results operations consolidated since date acquisition prior transaction 50 interest niigata recorded using equity method accounting pro forma information provided due immateriality following discussion read conjunction “outlook 2009” section included mda bookings backlog define booking receipt customer order contractually engages us perform activities behalf customer regard manufacture service support bookings 2008 increased 7870 million 182 compared 2007 increase includes currency benefits approximately 181 million currency effects bookings calculated using change average exchange rates applicable periods increase attributable strength oil gas general industries especially fpd primarily europe middle east africa “ema” well continued strength chemical industry especially fcd power industry fpd fcd 685 million bookings provided niigata historically fourth quarter strong bookings quarter us however bookings fourth quarter 2008 lower bookings first second third quarters 2008 reflecting customers’ responses concerns regarding recent disruptions credit capital markets global economic conditions recent declines oil gas prices total bookings 2007 increased 7017 million 194 compared 2006 increase included currency benefits approximately 208 million increased bookings primarily attributable strength oil gas chemical markets divisions additionally power industry continued strong fpd fcd water mining industries contributed growth fpd backlog represents accumulation uncompleted customer orders backlog 28 billion december 31 2008 increased 5485 million 241 compared 2007 currency effects provided decrease approximately 185 million currency effects backlog calculated using change period end exchange rates net increase reflects growth orders large engineered products longer lead times 959 million attributable acquisition niigata fourth quarter 2008 cancellations 322 million approximately 25 million related single booking recorded fpd third quarter 2008 end 2009 expect ship 87 december 31 2008 backlog 23 billion december 31 2007 increased 6466 million 397 compared 2006 currency effects provided increase approximately 140 million increase resulted primarily increased bookings discussed sales 2008 increased 7108 million 189 compared 2007 increase includes currency benefits approximately 113 million increase attributable strength oil gas power markets fpd primarily ema asia pacific growth markets fcd primarily ema asia pacific well 870 million sales provided niigata 2008 original equipment aftermarket sales increased approximately 22 13 respectively compared 2007 sales 2007 increased 7016 million 229 compared 2006 increase included currency benefits approximately 178 million increase primarily attributable continued strength oil gas markets positively impacted original equipment aftermarket sales fpd additionally fcd experienced strong project sales across valve markets fsd experienced increased aftermarket project sales ema north america respectively 2007 original equipment aftermarket sales increased 27 18 respectively compared 2006 sales international customers including export sales us approximately 69 sales 2008 compared 66 sales 2007 67 sales 2006 sales ema approximately 39 38 42 2008 2007 2006 respectively sales asia pacific region approximately 18 16 15 2008 2007 2006 respectively gross profit gross profit margin gross profit 2008 increased 3326 million 267 compared 2007 gross profit margin 2008 353 increased 332 2007 increase primarily attributable fpd whose gross profit margin increased due primarily improved original equipment pricing implemented 2007 increased throughput increased sales favorably impact absorption fixed manufacturing costs reduced warranty costs percentage sales well impact cip initiatives additionally gross profit margin favorably impacted specialty pumps higher margin partially offsetting improvements significant growth original equipment sales original equipment aftermarket sales increased original equipment sales growth exceeded aftermarket sales growth 2008 result original equipment sales increased approximately 65 total sales compared approximately 63 2007 original equipment generally carries lower margin aftermarket gross profit 2007 increased 2404 million 239 compared 2006 gross profit margin 2007 332 increased 329 2006 gross profit margin 2007 positively impacted higher sales favorably impacted absorption fixed manufacturing costs well various cip supply chain initiatives cip initiative drove increased throughput existing capacity reduced cycle time lean manufacturing reduced warranty costs percentage sales supply chain initiatives focus materials costs savings low cost supply sources longterm supply agreements product outsourcing original equipment aftermarket sales increased rate growth original equipment sales exceeded aftermarket sales result original equipment sales increased 63 total sales 2007 compared approximately 62 total sales 2006 aftermarket business generally provides favorable gross profit margins original equipment selling general administrative expense “sga” sga impacted growth underlying business various initiatives improve organizational capability compliance systems infrastructure improvements sga 2008 increased 1279 million 149 compared 2007 currency effects provided increase approximately 21 million increase sga primarily attributable 615 million increase selling marketingrelated expenses support increased bookings sales overall business growth increase also attributable 470 million increase employees’ costs due annual longterm incentive compensation plans including equity compensation arising improved performance higher stock price date grant annual merit increases 98 million sga incurred niigata 111 million increase bad debt expense primarily fcd partially offset 103 million decrease legal fees expenses due legal matters incurred 2007 recur sga percentage sales 2008 improved 80 basis points compared period 2007 primarily result leverage increased sales sga 2007 increased 740 million 95 compared 2006 currency effects provided increase approximately 29 million increase sga primarily attributable increase employeerelated costs 628 million due continued investment sales engineering personnel inhouse capabilities drive longterm growth well annual merit increases equity compensation arising improved performance higher stock price annual longterm incentive compensation plans well 73 million increase third party commissions support increased bookings sales partially offset 59 million pretax gain recorded fpd sale noncore assets related rail business whollyowned australian subsidiary thompsons kelly lewis pty ltd “tkl” decrease 121 million audit fees partially offset increase 52 million professional fees related rd legal fees accrued resolution costs governmental authorities related foreign subsidiaries’ involvement united nations oilforfood program approximately 11 million offset revisions prior estimates based favorable developments well recoveries certain legal matters additional discussion legal matters see note 14 consolidated financial statements included annual report sga percentage sales 2007 improved 280 basis points compared period 2006 improvement primarily attributable leverage higher sales gain sale tkl rail assets well ongoing efforts contain costs stock modification realignment charges recorded 2006 recur net earnings affiliates net earnings affiliates represents joint venture interests asia middle east net earnings affiliates 2008 decreased 17 million compared 2007 decrease earnings primarily attributable impact consolidation niigata first quarter 2008 purchased remaining 50 interest net earnings affiliates 2007 increased 39 million compared 2006 improvement earnings primarily attributable fcd joint venture india fpd joint venture japan operating income operating income 2008 increased 2030 million 495 compared 2007 increase includes currency benefits approximately 20 million increase primarily result 3326 million increase gross profit partially offset 1279 million increase sga discussed operating income 2007 increased 1703 million 711 compared 2006 increase included currency benefits approximately 32 million increase primarily result 2404 million increase gross profit partially offset 740 million increase sga discussed interest expense interest income interest expense 2008 decreased 88 million compared 2007 primarily result lower average outstanding debt decreased interest rates interest expense decreased 56 million 2007 compared 2006 primarily result lower average outstanding debt december 31 2008 approximately 70 debt fixed rates including effects 3850 million notional interest rate swaps interest income 2008 increased 41 million compared 2007 due primarily higher average cash balance interest income 2007 decreased 33 million compared 2006 due primarily lower average cash balance income net income net 2008 increased 143 million compared 2007 increase primarily due 92 million increase net gains forward exchange contracts net gains transactions denominated currencies functional currencies well 28 million gain bargain purchase remaining 50 interest niigata discussed note 3 consolidated financial statements included annual report well individually immaterial items income net 2007 comparable 2006 tax expense tax rate 2008 effective tax rate differed federal statutory rate 35 primarily due net impact foreign operations includes impacts lower foreign tax rates changes reserves established uncertain tax positions pursuant financial accounting standards board “fasb” financial interpretation “fin” 48 “accounting uncertainty income taxes interpretation fasb statement 109” benefits arising permanent reinvestment foreign subsidiaries changes valuation allowance estimates favorable tax ruling luxembourg net impact discrete items included discussion approximately 22 million 2007 effective tax rate differed federal statutory rate 35 primarily due net impact foreign operations changes valuation allowance estimates well changes tax law net favorable results various tax audits partially offset additional reserves established uncertain tax positions pursuant adoption fin 48 see additional discussion uncertain tax positions note 17 consolidated financial statements included annual report 2006 effective tax rate differed federal statutory rate 35 primarily due net impact foreign operations certain us nondeductible expenses operations european asian countries provide various tax incentives 2003 granted preferential tax rate approximately 10 switzerland certain sales marketing activities incentive provide benefit 2006 2004 received 5year 10 tax rate singapore income excess prescribed base amount generated certain regional headquarter activities subject certain employment investment requirements 2008 10 tax rate singapore extended 2011 india granted 100 tax exemptions profits derived export sales certain manufacturing operations prescribed areas period 10 years exemption profits derived export sales expire 2011 manufacturing operations exemption expired 2007 may 17 2006 tax increase prevention reconciliation act 2005 signed law creating exclusion us taxable income certain types foreign related party payments dividends interest rents royalties prior 2006 subject us taxation exclusion effective years 2006 2008 applies certain related party payments effective tax rate based upon current earnings estimates future taxable earnings domestic international location changes factors including ability utilize foreign tax credits net operating losses results tax audits could impact tax rate future periods december 31 2008 foreign tax credits 21 million expiring 2015 2018 recorded 21 million valuation allowances additionally recorded us net deferred tax assets 1141 million relate net operating losses tax credits deductible temporary differences available reduce taxable income future periods definite expiration able utilize portion credits losses effective tax rate would negatively impacted net earnings per share 1 net earnings 2006 includes gain 10 million discontinued operations representing reduction loss sale certain noncore service operations collectively called general services group “gsg” result resolution contingent sales price income continuing operations 2008 increased 1866 million 4424 million 774 per diluted share compared 2007 increase primarily attributable 2030 million increase operating income partially offset 434 million increase tax expense discussed income continuing operations 2007 increased 1418 million 2558 million 446 per diluted share compared 2006 increase primarily attributable 1703 million increase operating income partially offset 311 million increase tax expense discussed comprehensive expense income comprehensive expense income 2008 decreased 2589 million expense 1899 million compared 2007 primarily due strengthening us dollar exchange rate versus euro british pound december 31 2008 compared december 31 2007 well decrease pension postretirement income primarily reflects actuarial net losses resulting returns plan assets lower anticipated comprehensive expense income 2007 increased 55 million income 690 million compared 2006 increase due primarily weakening us dollar exchange rate versus euro 2007 increase pension postretirement income due primarily increased discount rate mostly offset decline results interest rate hedging activity business segments conduct business three business segments represent major product areas evaluate segment performance allocate resources based segment’s operating income see note 18 consolidated financial statements included annual report discussion segments key operating results three business segments fpd fcd fsd discussed flowserve pump division segment results fpd design manufacture distribute service engineered industrial pumps pump systems submersible motors collectively referred “original equipment” fpd also manufactures replacement parts related equipment provides full array support services collectively referred “aftermarket” fpd 30 manufacturing facilities worldwide eight located north america 12 europe four latin america six asia fpd also 79 service centers including colocated manufacturing facility 28 countries operate primarily oil gas chemical power generation industries discussed note 3 consolidated financial statements included annual report fpd acquired remaining 50 interest niigata japanese manufacturer pumps rotating equipment effective march 1 2008 24 million cash incremental interest acquired accounted step acquisition niigata’s results operations consolidated since date acquisition prior transaction 50 interest niigata recorded using equity method accounting bookings 2008 increased 4889 million 192 compared 2007 increase includes currency benefits approximately 115 million increase attributable ema north america asia pacific increased 2511 million including currency benefits approximately 106 million 1093 million 1092 million including currency benefits approximately 14 million respectively bookings original equipment aftermarket increased approximately 20 16 respectively original equipment bookings driven oil gas power water general industries niigata provided increase 685 million total bookings represented approximately 14 total bookings increase bookings increase also includes project approximately 85 million supply variety pumps build abu dhabi crude oil pipeline pumps largely supplied european operations scheduled ship 2010 30 billion total bookings 2008 approximately 49 oil gas 16 power 9 water 8 chemical 18 general industries bookings 2007 increased 4405 million 209 compared 2006 increase included currency benefits approximately 133 million increase attributable ema north america latin america increased 2622 million including currency benefits approximately 111 million 1067 million 596 million including currency benefits approximately 5 million respectively highest rates growth occurred ema latin america original equipment aftermarket bookings continued strong increasing 25 14 respectively compared 2006 increased bookings led continued strength oil gas chemical water general industry markets 26 billion total bookings 2007 approximately 51 oil gas 15 power 10 water 8 chemical 16 general industries sales 2008 increased 4194 million 200 compared 2007 increase includes currency benefits approximately 67 million increase primarily attributable ema asia pacific latin america increased 2129 million including currency benefits approximately 51 million 919 million including currency benefits approximately 15 million 286 million currency negligible impact respectively original equipment sales increased approximately 22 aftermarket sales grew approximately 17 compared 2007 noted strong growth served markets past two years predominantly oil gas power key drivers increases sales 2008 increase sales also attributable increased throughput resulting capacity expansion price increases initiated 2007 sales 870 million provided niigata sales 2007 increased 4777 million 295 compared 2006 increase included currency benefits approximately 108 million increase primarily attributable ema north america latin america increased 3007 million including currency benefits approximately 88 million 1295 million 513 million including currency benefits approximately 5 million respectively highest rate growth occurred latin america original equipment aftermarket sales showed continued strength increasing 38 21 respectively compared period 2006 increases ema north america due strength oil gas industry gross profit 2008 increased 1894 million 317 compared 2007 includes gross profit attributable niigata 209 million gross profit margin 2008 313 increased 285 2007 increase primarily due improved original equipment pricing implemented 2007 increased throughput increased sales favorably impact absorption fixed manufacturing costs reduced warranty costs percentage sales well impact cip initiatives additionally gross profit margin favorably impacted specialty pumps higher margin partially offsetting improvements significant growth original equipment sales original equipment aftermarket sales increased original equipment growth exceeded aftermarket growth 2008 result original equipment sales increased approximately 61 total sales compared approximately 60 total sales 2007 original equipment generally carries lower margin aftermarket gross profit 2007 increased 1392 million 304 compared 2006 gross profit margin 2007 285 increased 283 2006 increase primarily attributable increased sales favorably increases absorption fixed manufacturing costs ability implement modest price increases late 2006 allowed us mitigate impact increased metals supply chain costs partially offset significant growth original equipment sales 2007 original equipment aftermarket sales increased original equipment sales growth exceeded growth aftermarket period result original equipment sales increased 60 total sales compared 57 total sales period 2006 aftermarket business generally provides favorable gross margins original equipment sales operating income 2008 increased 1168 million 426 compared 2007 increase includes currency benefits approximately 11 million increase due primarily increased gross profit 1894 million partially offset 695 million increase sga including negative currency effects approximately 10 million primarily related 249 increase selling marketingrelated expense support increased bookings sales overall business growth increase also attributable 189 million increase employees’ costs due annual longterm incentive compensation plans including equity compensation arising improved performance higher stock price date grant annual merit increases 98 million sga incurred niigata operating margin improved 240 basis points compared 2007 due primarily increase gross profit margin 280 basis points operating income 2007 increased 1015 million 588 compared 2006 increase included currency benefits approximately 18 million increase due primarily increased gross profit 1392 million partially offset 405 million increase sga increase sga primarily attributable 225 million higher selling costs driven increase sales engineering personnel support global growth business increased commissions resulting increased sales levels additional total rd costs 49 million improvements erp systems additional compensation expense related annual longterm incentive plans partially offset 59 million pretax gain sale tkl rail assets included sga percentage sales 2007 improved 220 basis points compared 2006 improvement sga attributable leverage higher sales well ongoing efforts contain costs gain sale tkl rail assets severance charges recorded 2006 recur backlog 23 billion december 31 2008 increased 4778 million 269 compared 2007 currency effects provided decrease approximately 149 million backlog growth result extended period bookings growth primarily original equipment combined longer supplier customer lead times growth size projects 959 million related acquisition niigata fourth quarter 2008 fpd cancellations 320 million approximately 25 million related single booking recorded third quarter 2008 backlog 18 billion 2007 increased 5120 million 405 compared 2006 currency effects provided increase approximately 114 million flow control division segment results second largest business segment fcd designs manufactures distributes broad portfolio engineered industrial valves control valves actuators controls related services fcd leverages experience application knowhow offering complete menu engineered services complement expansive product portfolio fcd total 48 manufacturing facilities qrcs 23 countries around world five 19 manufacturing operations located us based independent industry sources believe third largest industrial valve supplier global basis bookings 2008 increased 2407 million 193 compared 2007 increase includes currency benefits approximately 51 million growth bookings primarily attributable strength ema asia pacific increased approximately 98 million 89 million respectively regions continue focus growth opportunities north america latin america combined increased approximately 54 million key growth areas include chemicals nuclear power generation 15 billion bookings 2008 approximately 34 chemical 31 general industries 18 oil gas 17 power bookings 2007 increased 1848 million 174 compared 2006 increase included currency benefits approximately 56 million growth bookings primarily attributable sustained strength key endmarkets increased project activity global oil gas market specifically middle east china growth pulp paper market latin american asia drove improved control valve bookings power valve bookings benefited elevated maintenance repair operations “mro” business nuclear fossil fuel power generation markets bookings improvement process valve market resulted strength chinese coal gasification purification industries growth china contributed bookings improvement across aspects valve portfolio 12 billion bookings 2007 approximately 33 chemical 35 general industries 20 oil gas 12 power sales 2008 increased 2185 million 188 compared 2007 increase includes currency benefits approximately 34 million asia pacific increased approximately 64 million continue show substantial sales growth chemical market especially china sales across markets ema demonstrated solid growth approximately 79 million north american sales also produced solid growth approximately 42 million oil gas market sales reflect steady increases regions especially ema latin america sales increased approximately 34 million due primarily growth pulp paper market expected continue near term sales 2007 increased 1684 million 169 compared 2006 increase included currency benefits approximately 52 million increase principally result strength project mro business across significant areas valve portfolio continued growth asia particularly coal gasification petrochemical acetic acid markets drove improvement process valve sales strong project sales oil gas industry specifically north america middle east china also contributed improvement sales control valves increased due satisfaction large orders australian mining asian pulp paper markets increased capacity enabled fulfillment significant russian district heating orders placed later half 2006 contributing growth power valve sales gross profit 2008 increased 919 million 226 compared 2007 gross profit margin 2008 360 increased 349 2007 increase reflects higher sales levels favorably impacts absorption fixed manufacturing costs price increases cip materials saving initiatives investment new products increased absorption continue drive margin improvement offset inflationary impact raw materials impact metal price increases transportation fuel surcharges minimized supply chain initiatives continue invest projects initiatives designed improve gross profit margin gross profit 2007 increased 675 million 200 compared 2006 gross profit margin 2007 349 increased 340 2006 increase reflects aforementioned higher sales levels favorably impacts leverage fixed manufacturing costs increased efficiency result successful relocation several product lines 2006 strong focus successful implementation various cip lean manufacturing supply chain management initiatives gross profit margin also positively impacted ability implement modest price increases first half 2007 enabled us mitigate impact increased metals supply chain costs operating income 2008 increased 547 million 334 compared 2007 increase includes currency benefits approximately 6 million increase primarily attributable 919 million improvement gross profit offset part higher sga increased 384 million including negative currency effects approximately 7 million increased sga primarily due 173 million higher selling marketing costs 49 million increased rd costs well 73 million bad debt expense related two customers partially offsetting cost increases reversal net 23 million accrual due contract settlement 12 million increase net earnings affiliates generated joint venture india driven growth oil gas markets middle east sga percentage sales improved 60 basis points primarily attributable leverage increased sales operating income 2007 increased 478 million 412 compared 2006 increase included currency benefits approximately 9 million increase primarily attributable aforementioned 675 million improvement gross profit offset part higher sga costs increased 217 million including negative currency effects approximately 10 million compared period 2006 increase principally attributable 148 million increased selling costs primarily related increased salary higher external commission expense resulting increased sales bookings levels well additional compensation expense related annual longterm incentive plans also contributing increase 48 million increased total rd costs well increased legal fees expenses related compliance matters partially offsetting increases 66 million realignment costs recognized 2006 recur sga percentage sales 2007 improved 140 basis points compared 2006 improvement attributable leverage higher sales well ongoing efforts contain costs realignment charges recorded 2006 recur backlog 4829 million december 31 2008 increased 681 million 164 compared 2007 currency effects provided decrease approximately 21 million increase backlog primarily attributable bookings growth power chemical markets large project business longer lead times backlog 4148 million december 31 2007 increased 1005 million 320 compared 2006 currency effects provided increase approximately 21 million increase backlog primarily attributable increased bookings discussed flow solutions division segment results fsd engineer manufacture sell mechanical seals auxiliary systems parts provide related services principally process industries general industrial markets similar products sold internally support fpd fsd added global operations ten manufacturing operations four located us fsd operates 74 qrcs worldwide including six colocated manufacturing facility including 24 sites north america 19 ema remainder latin america asia ability rapidly deliver mechanical sealing technology global engineering tools locally sited qrcs onsite engineers represents significant competitive advantage business model enabled fsd establish large number alliances multinational customers based independent industry sources believe second largest mechanical seal supplier world bookings 2008 increased 763 million 129 compared 2007 increase includes currency benefits approximately 15 million 654 million increase customer bookings due primarily increased original equipment bookings ema north america latin america well increased aftermarket bookings latin america north america asia pacific 109 million increase interdivision bookings eliminated included consolidated bookings disclosed also contributed increase 5958 million customer bookings 2008 approximately 45 oil gas 24 chemical 31 general industries bookings 2007 increased 875 million 173 compared 2006 increase included currency benefits approximately 19 million 772 million increase customer bookings due primarily increases 453 million 319 million project aftermarket bookings respectively 103 million increase interdivision bookings eliminated included consolidated bookings disclosed also contributed increase regions exhibited growth project type customer bookings strongest rates growth occurring oil gas mining markets north america latin america asia chemical market asia general industry markets regions increases aftermarket customer bookings occurred primarily ema asia 5303 million customer bookings 2007 approximately 45 oil gas 23 chemical 32 general industries sales 2008 increased 892 million 158 compared 2007 increase includes currency benefits approximately 12 million 740 million increase customer sales primarily attributable increased original equipment sales ema north america latin america well increased aftermarket sales north america latin america asia pacific 152 million increase interdivision sales eliminated included consolidated sales disclosed also contributed increase sales 2007 increased 679 million 137 compared 2006 increase includes currency benefits approximately 18 million increase primarily attributable increase aftermarket customer sales ema increased customer project sales north america 138 million increased project customer sales latin america increased overall customer sales asia well 123 million increase interdivision sales eliminated included consolidated sales disclosed contributed increase gross profit 2008 increased 465 million 184 compared 2007 gross profit margin 2008 458 increased 447 2007 improvements reflect increase sales favorably impacts absorption fixed manufacturing costs well impact cost savings initiatives throughout year improvements partially offset sales mix shift original equipment business north america ema increases materials costs largely offset supply chain management efforts price increases mid2007 early 2008 gross profit 2007 increased 336 million 153 compared 2006 gross profit margin 2007 447 increased 441 2006 improvements due slight product shift towards higher margin aftermarket business ema combined price increase earlier 2007 improved absorption fixed manufacturing costs resulting higher sales offset downward margin pressures related materials costs shift north american sales towards lower margin project business operating income 2008 increased 158 million 142 compared 2007 increase includes currency benefits approximately 3 million improvement 2008 reflects 465 million increase gross profit discussed partially offset 304 million increase sga including negative currency effects approximately 4 million due primarily 155 million increase related sales engineering related expenses approximately 1 million realignment costs well increased infrastructure costs support global growth business sga percentage sales 2008 increased 100 basis points compared 2007 resulting investment global selling footprint engineering support anticipation future sales operating income 2007 increased 130 million 132 compared 2006 increase includes currency benefits 5 million improvement 2007 reflects 336 million increase gross profit discussed partially offset 204 million increase sga attributable 115 million increase related sales engineering personnel related expenses support global growth business additional compensation related annual longterm incentive plans increase legal fees expenses related compliance matters sga percentage sales 2007 increased 60 basis points compared 2006 increase primarily attributable compliance matters increased depreciation information technology upgrades partially offset increased sales backlog 1182 million december 31 2008 increased 88 million 80 compared 2007 currency effects provided decrease approximately 5 million backlog december 31 2008 includes 186 million interdivision backlog eliminated included consolidated backlog disclosed increase backlog primarily result increased original equipment bookings discussed tend longer lead times capacity expansions latin america asia pacific ema 2007 2008 supported significant increases shipments helping limit increase backlog 1094 million december 31 2007 increased 350 million 470 compared 2006 currency provided increase approximately 6 million backlog december 31 2007 includes 181 million interdivision backlog eliminated included consolidated backlog disclosed liquidity capital resources cash flow analysis cash generated operations borrowings available existing revolving line credit primary sources shortterm liquidity sources operating cash generally include sale products services conversion working capital particularly accounts receivable inventories total cash balance december 31 2008 4718 million compared 3706 million 2007 670 million 2006 cash flows provided operating activities 2008 compared 2007 primarily reflect 1866 million increase net income 1786 million decrease cash flows working capital primarily due investment inventory 1955 million especially projectrelated inventory required support future shipments products backlog higher accounts receivable 1951 million resulting primarily increased sales 639 million reduction factored receivables increases partially offset higher accrued liabilities reflecting increases advanced cash received customers well increase accounts payable operating cash flows 2008 reflect increase 347 million contributions us pension plans compared 2007 cash flows provided operating activities 2007 compared 2006 primarily reflected 1407 million increase net income 1053 million increase cash flows working capital particularly due increased accrued liabilities reflecting increases advanced cash received customers partially offset investment inventory especially projectrelated work process inventory required support future shipments products backlog operating cash flows 2007 reflected decrease 202 million contributions us pension plans compared 2006 goal days’ sales receivables outstanding “dso” 60 days fourth quarter 2008 achieved dso 62 days compared 54 days period 2007 increase dso attributable termination major factoring agreements discussed “accounts receivable factoring” note 5 consolidated financial statements included annual report factoring provided decrease dso six days december 31 2007 reference purposes based 2008 sales dso improvement one day could provide approximately 13 million cash increases inventory used 1955 million cash flow 2008 compared 1018 million 984 million 2007 2006 respectively inventory turns 36 times december 31 2008 compared 44 times december 31 2007 2006 reflecting large increase inventory partially offset increase sales reference purposes based 2008 data improvement one turn could yield approximately 180 million cash outflows investing activities 1172 million 771 million 777 million 2008 2007 2006 respectively due primarily capital expenditures capital expenditures 2008 1269 million increase 380 million compared 2007 2008 2007 capital expenditures focused increased spending support increased throughput erp application upgrades information technology infrastructure cost reduction opportunities cash outflows 2008 partially offset 73 million proceeds disposals assets cash outflows financing activities 1827 million 2008 compared 498 million 2007 1145 million 2006 increase outflows 2008 results primarily repurchase common shares 1650 million decrease outflows 2007 resulted primarily reduced payments longterm debt partially offset repurchase common shares payment cash dividends february 26 2008 board directors authorized increase payment quarterly dividends common stock 015 per share 025 per share payable quarterly beginning april 9 2008 february 23 2009 board directors authorized increase payment quarterly dividends common stock 025 per share 027 per share payable quarterly beginning april 8 2009 generally dividend dateofrecord last month quarter dividend paid following month subsequent dividends reviewed board directors quarterly basis declared discretion dependent assessment financial situation business outlook applicable time february 26 2008 board directors approved program repurchase 3000 million outstanding common stock commenced second quarter 2008 share repurchase program expiration date reserve right limit terminate repurchase program time without notice since adoption program repurchased 17 million shares common stock 1650 million cash needs next 12 months expected slightly lower compared 2008 resulting fewer capital expenditures repurchases common shares partially offset certain realignment costs discussed “outlook 2009” increases cash dividends pension contributions smaller volume advanced payments received customers believe cash flows operating activities combined availability revolving line credit existing cash balances sufficient enable us meet cash flow needs next 12 months however cash flows operations could adversely affected current credit crisis risk global recession well economic political risks associated sales products operational factors competition regulatory actions fluctuations foreign currency exchange rates fluctuations interest rates among factors believe cash flows operating activities expectation continuing availability draw upon revolving credit agreements also sufficient meet cash flow needs periods beyond next 12 months payments acquisitions regularly evaluate acquisition opportunities various sizes cost terms financing raised conjunction acquisition including ability raise economical capital critical consideration evaluation discussed note 3 consolidated financial statements included annual report acquired remaining 50 interest niigata effective march 1 2008 24 million cash 2007 completed one small acquisition 23 million 2006 completed four small asset acquisitions aggregate purchase price 80 million assets acquired primarily include inventory fixed assets intangible assets financing debt including capital lease obligations consisted credit facilities credit facilities amended comprised 6000 million term loan maturing august 10 2012 4000 million revolving line credit utilized provide 3000 million letters credit expiring august 10 2012 hereinafter refer credit facilities collectively “credit facilities” december 31 2008 2007 amounts outstanding revolving line credit outstanding letters credit 1042 million 1151 million december 31 2008 2007 respectively reduced borrowing capacity 2958 million 2849 million respectively borrowings credit facilities bear interest rate equal option either 1 base rate based greater prime rate recently announced administrative agent credit facilities federal funds rate plus 050 2 london interbank offered rate “libor” plus applicable margin determined reference ratio total debt consolidated earnings interest taxes depreciation amortization “ebitda” december 31 2008 0875 150 borrowings revolving line credit term loan respectively connection credit facilities entered 3850 million notional amount interest rate swaps december 31 2008 hedge exposure floating interest rates see note 12 consolidated financial statements included annual report additional information credit facilities european letter credit facility september 14 2007 entered unsecured european letter credit facility “european loc facility” renewable annually issue letters credit aggregate face amount exceed 1500 million time initial commitment 800 million increased 1100 million effective september 12 2008 aggregate commitment european loc facility may increased 1500 million may agreed among parties may decreased us option without premium fee penalty european loc facility used contingent obligations solely respect surety performance bonds bank guarantees similar obligations outstanding letters credit drawn european loc facility 1040 million 1452 million 350 million 511 million december 31 2008 2007 respectively pay certain fees letters credit written european loc facility based upon ratio total debt consolidated ebitda december 31 2008 annual fees equaled 0875 plus fronting fee 01 debt prepayments repayments made scheduled repayments credit facilities 57 million 28 million 0 2008 2007 2006 respectively made mandatory repayments 2008 2007 mandatory repayments 2006 consisted 144 million using net cash proceeds sale gsg 09 million using excess cash flows defined credit facilities made optional prepayments 2008 2007 2006 made optional prepayments 50 million credit facilities terminated european investment bank credit facility repaid outstanding principle balance 850 million may prepay loans credit facilities whole part without premium penalty time accounts receivable factoring european subsidiaries engaged nonrecourse factoring certain accounts receivable various agreements different terms including options renewal mutual termination clauses credit facilities fully described note 12 consolidated financial statements included annual report limited factoring volume 750 million given point time defined credit facilities fourth quarter 2007 gave notice intent terminate major factoring facilities 2008 factoring agreements terminated third quarter 2008 see note 5 consolidated financial statements included annual report additional information accounts receivable factoring debt covenants matters credit facilities contain among things covenants restricting subsidiaries’ ability dispose assets merge pay dividends repurchase redeem capital stock indebtedness incur indebtedness guarantees create liens enter agreements negative pledge clauses make certain investments acquisitions enter sale leaseback transactions enter transactions affiliates make capital expenditures engage business activity existing business credit facilities also contain covenants requiring us deliver lenders audited annual unaudited quarterly financial statements leverage interest coverage financial covenant certificates compliance maximum permitted leverage ratio 325 times total debt consolidated ebitda minimum interest coverage 325 times consolidated ebitda total interest expense compliance financial covenants credit facilities tested quarterly credit facilities include events default customary types credit facilities including nonpayment principal interest violation covenants incorrectness representations warranties cross defaults cross acceleration bankruptcy material judgments employee retirement income security act 1974 amended “erisa” events actual asserted invalidity guarantees security documents certain changes control company occurrence event default could result acceleration guarantors’ obligations credit facilities complied covenants credit facilities december 31 2008 european loc facility contains covenants restricting ability certain foreign subsidiaries issue debt incur liens sell assets merge consolidate make certain investments pay dividends enter agreements negative pledge clauses engage business activity existing business european loc facility also incorporates reference covenants contained credit facilities european loc facility includes events default usual types letter credit facilities including nonpayment fee obligation violation covenants incorrectness representations warranties cross defaults cross acceleration bankruptcy material judgments erisa events actual asserted invalidity guarantees certain changes control company occurrence event default could result termination commitments acceleration obligations european loc facility complied covenants european loc facility december 31 2008 liquidity analysis recent disruptions global financial markets banking systems making credit capital markets difficult companies access generally driving costs newly raised debt continue assess implications factors current business state global economy believe financial market disruptions directly disproportionate impact financial position results operations liquidity continuing volatility credit capital markets could potentially impair customers’ ability access markets increase associated costs well customers’ ability pay full andor timely basis assurance materially adversely affected financial market disruptions global economic recession economic events circumstances continue evolve 1 term loan due mature 2009 2010 noted term loan revolving line credit mature august 2012 effects 3850 million notional interest rate swaps approximately 70 term debt fixed rates december 31 2008 december 31 2008 borrowing capacity 2958 million 4000 million revolving line credit september 2008 renewed unsecured european loc facility increased initial commitment 800 million commitment 1100 million outstanding letters credit drawn european loc facility 1040 million december 31 2008 revolving line credit european loc facility committed held diversified group financial institutions increased cash balance 1012 million 4718 million december 31 2008 compared december 31 2007 significant cash uses 2008 including 1650 million share repurchases 1269 million capital expenditures 515 million dividend payments 508 million contributions us pension plans funding increased working capital requirements monitor depository institutions hold cash equivalents regular basis believe placed deposits creditworthy financial institutions utilize variety insurance carriers wide range insurance coverage continuously monitor creditworthiness based current credit ratings industry rating experts currently believe carriers ability pay claims experienced significant declines values us pension plan assets resulting primarily recent declines global equity markets currently anticipate contribution us pension plan 2009 55 million 75 million decline us pension plan asset values 2008 approximately 86 million 30 recognized earnings remaining service period also experienced declines approximately 15 million 11 nonus pension plan asset values continue maintain asset allocation consistent strategy maximize total return reducing portfolio risks asset class diversification contractual obligations commercial commitments following table presents summary contractual obligations december 31 2008 1 fixed interest payments represent net incremental payments interest rate swap agreements 2 variable interest payments credit facilities estimated using base rate threemonth libor december 31 2008 3 purchase obligations presented face value purchase order excluding effects early termination provisions actual payments could less amounts presented herein 4 retirement postretirement benefits represent estimated benefit payments us nonus defined benefit plans postretirement medical plan fully described note 13 consolidated financial statements included annual report december 31 2008 gross liability uncertain tax positions fin 48 approximately 1308 million expect material payment related obligations made within next twelve months unable provide reasonably reliable estimate timing future payments relating noncurrent fin 48 obligations following table presents summary commercial commitments december 31 2008 expect satisfy commitments performance contracts pension postretirement benefits obligations pension plans postretirement benefit plans accounted using actuarial valuations required sfas 87 “employers’ accounting pensions” sfas 106 “employers’ accounting postretirement benefits pensions” consider accounting retirement plans critical management required make significant subjective judgments number actuarial assumptions including discount rates salary growth longterm rates return plan assets retirement rates turnover health care cost trend rates mortality rates depending assumptions estimates used pension postretirement benefit expense could vary within range outcomes material effect reported earnings addition assumptions materially affect benefit obligations future cash funding plan descriptions certain subsidiaries defined benefit pension plans defined contribution plans regular fulltime parttime employees approximately 68 total defined benefit pension plan assets 57 defined benefit pension obligations related us plan december 31 2008 assets us plan held single trust common asset allocation unless specified otherwise references section total plans ie us plan together international plans benefits defined benefit pension plans based primarily years credited service participants’ compensation assets defined benefit pension plans consist primarily equity fixedincome securities december 31 2008 estimated fair market value plan assets defined benefit pension plans decreased 2890 million 3823 million december 31 2007 assets allocated follows projected benefit obligation “benefit obligation” defined benefit pension plans 5324 million 5550 million december 31 2008 2007 respectively estimated prior service benefit defined benefit pension plans amortized accumulated comprehensive loss net pension expense 2009 13 million estimated actuarial net loss defined benefit pension plans amortized accumulated comprehensive loss net pension expense 2009 89 million amortize estimated prior service costs estimated net loss remaining expected service period none common stock directly held plans sponsor defined benefit postretirement health care plans covering certain current retirees limited number future retirees us plans provide medical dental benefits administered insurance companies fund plans benefits paid plans hold assets period presented accordingly investment strategy targeted allocations plan assets benefits plans available new employees existing employees postretirement benefit obligation defined benefit postretirement health care plan 431 million 623 million december 31 2008 2007 respectively accrual accounting significant assumptions consistent requirements sfas 87 account pension benefits using accrual method recognizing pension expense payment benefits retirees accrual method accounting pension benefits necessarily requires actuarial assumptions concerning future events determine amount timing benefit payments key assumptions used calculating cost pension benefits discount rate compensation increase expected longterm rate return plan assets consultation actuaries evaluate key actuarial assumptions used calculating cost pension postretirement benefits discount rate expected return plan assets funded plans mortality rates retirement rates assumed rate compensation increases determine assumptions december 31 year calculate liability information date pension postretirement expense following year depending assumptions used pension postretirement expense could vary within range outcomes material effect reported earnings addition assumptions materially affect benefit obligations future cash funding actual results given year may differ estimated economic factors see discussion assumptions related pension postretirement benefits “our critical accounting estimates” section mda 2008 net pension expense defined benefit pension plans included income continuing operations 295 million compared 321 million 2007 337 million 2006 postretirement benefit expense gain postretirement health care plan 11 million 2008 compared 01 million 2007 07 million 2006 following assumptions related defined benefit pension plans december 31 2008 following provides sensitivity analysis alternative assumptions us qualified aggregate nonus pension plans us postretirement plans effect discount rate changes constancy assumptions effect changes expected return assets constancy assumptions discussed accounting principles generally accepted us “gaap” provide differences expected actual returns recognized average future service employees december 31 2008 compared december 31 2007 increased discount rate us plan 625 675 based analysis publiclytraded investment grade us corporate bonds higher yield due current market conditions decreased average rate nonus plans 561 547 based primarily lower yields investment grade corporate bonds united kingdom increased average assumed rate compensation increase 45 48 us plan increased expected rate return us plan assets 775 800 primarily based target allocations expected longterm asset returns decreased average rate return nonus plan assets 591 december 31 2007 435 december 31 2008 expected rate return plan assets longterm nature shortterm market changes significantly impact rates expect net pension expense defined benefit pension plans included earnings income taxes 35 million higher 2009 295 million 2008 reflecting among things amortization increased actuarial net loss expect 2009 benefit postretirement health care plan 18 million primarily reflecting amortization increased actuarial net gain used discount rates 675 650 december 31 2008 calculating estimated 2009 cost pension benefits cost postretirement benefits us plans respectively assumed ranges annual rates increase health care costs 78 2008 88 2007 90 2006 gradual decrease 50 2012 future years actual costs higher assumed likely put modest upward pressure expense retiree health care plan funding policy defined benefit plans contribute least amounts required applicable laws local customs contributed 710 million 301 million 457 million defined benefit plans 2008 2007 2006 respectively 2009 expect contribute 55 million 75 million qualified us pension plan expect contribute approximately 13 million nonus pension plans discussions pension postretirement benefits see note 13 consolidated financial statements included annual report critical accounting estimates process preparing financial statements conformity gaap requires use estimates assumptions determine reported amounts certain assets liabilities revenues expenses disclosure related contingent assets liabilities estimates assumptions based upon information available time estimates assumptions including historical experience relevant significant estimates made management include timing amount revenue recognition deferred taxes tax valuation allowances tax reserves contingent losses retirement postretirement benefits valuation goodwill indefinitelived intangible assets longlived assets significant estimates reviewed quarterly management presents views audit committee board directors uncertainty factors surrounding estimates assumptions judgments used preparation financial statements actual results may differ estimates difference may material critical accounting policies important financial condition results operations require difficult subjective complex judgments part management application often result need make estimates effect matters inherently uncertain believe following represent critical accounting policies summary significant accounting policies see note 1 consolidated financial statements included annual report management external auditors discussed critical accounting policies audit committee board directors revenue recognition revenues product sales recognized risks rewards ownership transferred customers based contractual delivery terms agreed customer fulfillment inconsequential perfunctory actions addition policy requires persuasive evidence arrangement fixed determinable sales price reasonable assurance collectability contracts containing multiple elements determinable fair value recognize revenue amount equal element’s pro rata share contract’s fair value accordance contractual delivery terms element freight charges billed customers included sales related shipping costs included cost sales consolidated statements income revenues longterm contracts include contracts exceed certain internal thresholds regarding size duration project provide receipt progress billings customer recorded percentage completion method progress measured costtocost basis percentage completion revenue represents less 10 consolidated sales 2008 revenue service repair contracts recognized services agreed customer rendered revenues generated fixed fee service repair contracts recognized ratable basis term contract contracts range duration generally extend five years fixed fee service contracts represent less 1 consolidated sales 2008 certain instances provide guaranteed completion dates terms contracts failure meet contractual delivery dates result late delivery penalties nonrecoverable costs instances payment costs deemed probable perform project profitability analysis accounting costs reduction realizable revenues could potentially cause estimated total project costs exceed projected total revenues realized project instances would record reserves cover excesses period determined would adversely affect results operations financial position circumstances total projected reduced revenues still exceed total projected costs incurrence unrealized incentive fees nonrecoverable costs generally reduces profitability project time subsequent revenue recognition reported results would change different estimates used contract costs different estimates used contractual contingencies deferred taxes tax valuation allowances tax reserves recognize valuation allowances reduce carrying value deferred tax assets amounts expect likely realized valuation allowances primarily relate deferred tax assets established certain tax credit carryforwards net operating loss carryforwards us nonus subsidiaries evaluate realizability deferred tax assets assessing related valuation allowance adjusting amount allowances necessary assess factors forecast future taxable income available tax planning strategies could implemented realize net deferred tax assets determining sufficiency valuation allowances failure achieve forecasted taxable income applicable tax jurisdictions could affect ultimate realization deferred tax assets could result increase effective tax rate future earnings implementation different tax structures certain jurisdictions could successful result future reductions certain valuation allowances amount income taxes pay subject ongoing audits federal state foreign tax authorities often result proposed assessments significant judgment required determining income tax provisions evaluating tax positions establish reserves open tax years uncertain tax positions may subject challenge various tax authorities consolidated tax provision related accruals include impact reasonably estimable losses related interest penalties deemed appropriate january 1 2007 adopted fin 48 addresses determination whether tax benefits claimed expected claimed tax return recorded financial statements fin 48 may recognize tax benefit uncertain tax position likely tax position sustained examination taxing authorities determination based technical merits position presumes uncertain tax position examined relevant taxing authority full knowledge relevant information tax benefits recognized financial statements position measured based largest benefit greater fifty percent likelihood realized upon ultimate settlement fin 48 also provides guidance derecognition classification interest penalties income taxes accounting interim periods requires increased disclosures believe adequately provided reasonably foreseeable outcome related matters future results may include favorable unfavorable adjustments estimated tax liabilities extent expected tax outcome matters changes estimate impact income tax provision period determination made reserves contingent loss liabilities recorded various contingencies arising normal course business probable loss incurred loss estimable assessments reserves based information obtained independent inhouse experts including recent legal decisions loss experience similar situations recorded legal reserves susceptible changes due new developments regarding facts circumstances matter changes political environments legal venue factors recorded environmental reserves could change based analysis properties technological innovation regulatory environment changes estimates liabilities unsettled asbestosrelated claims based known claims experience preceding two years claims filed settled dismissed included retirement obligations liabilities consolidated balance sheets substantial majority asbestosrelated claims covered insurance indemnities estimated receivables insurance carriers unsettled claims receivables settlements legal fees paid us asbestosrelated claims estimated using historical experience insurance recovery rates estimates future recoveries include estimates coverage financial viability insurance carriers estimated receivables included assets net consolidated balance sheets changes claims filed settled dismissed differences actual estimated settlement costs insurance indemnity recoveries could impact future expense pension postretirement benefits provide pension postretirement benefits certain employees former employees beneficiaries assets liabilities expenses recognize disclosures make plan actuarial financial information dependent assumptions used calculating amounts primary assumptions include factors discount rates health care cost trend rates inflation expected rates return plan assets retirement rates mortality rates compensation increases factors assumption rates utilized compute expense benefit obligations shown note 13 consolidated financial statements included annual report assumptions assessed annually december 31 adjustments made needed review evaluate prevailing market conditions local laws requirements countries plans maintained including appropriate rates return interest rates medical inflation rates also compare significant assumptions peers methodology set assumptions • discount rates estimated using high quality debt securities based corporate government bond yields duration matching expected benefit payments us united kingdom discount rates obtained analysis publiclytraded investmentgrade corporate bonds establish weighted average discount rate plan plans euro zone use applicable iboxx euro corporate aa bond indices countries regions without corporate aa bond market government bond rates used discount rate assumptions impacted changes general economic market conditions affect interest rates longterm highquality debt securities well duration plans’ liabilities • health care cost trend rates developed based upon historical retiree cost trend data longterm health care outlook industry benchmarks • inflation assumptions based upon specific trends nationally expected trends • expected rates return plan assets derived reviews asset allocation strategies expected longterm performance asset classes risks factors adjusted specific investment strategy rates impacted changes general market conditions longterm nature shortterm market changes significantly impact rates changes target asset allocation also impact rates • retirement rates based upon actual projected plan experience • mortality rates based published actuarial tables relevant countries plans • expected rates compensation increase reflect estimates change future compensation levels due general price levels seniority age factors evaluate funded status retirement plan using current assumptions determine appropriate funding level considering applicable regulatory requirements tax deductibility reporting considerations cash flow requirements factors discuss funding assumptions finance committee board directors valuation goodwill indefinitelived intangible assets longlived assets initial recording goodwill intangibles requires subjective judgments concerning estimates fair value acquired assets test value goodwill indefinitelived intangible assets impairment december 31 year whenever events circumstances indicate assets may impaired test goodwill impairment involves significant judgment estimating projections fair value generated future performance reporting units correlate operating segments test indefinitelived intangibles involves significant judgment estimating projections future sales levels impairment losses goodwill recognized whenever implied fair value goodwill less carrying value estimate fair value reporting units based income approach whereby calculate fair value reporting unit based present value estimated future cash flows discounted cash flow analysis requires us make various judgmental assumptions sales operating margins growth rates discount rates based budgets business plans economic projections anticipated future cash flows marketplace data assumptions also made varying perpetual growth rates periods beyond longterm business plan period record impairment goodwill 2008 2007 2006 also consider market capitalization evaluation fair value goodwill although market capitalization declined 2008 conjunction overall equity market decline level indicated potential impairment goodwill december 31 2008 impairment losses intangible assets recognized whenever estimated fair value less carrying value fair values calculated trademarks using “relief royalty” method estimates fair value trademarks determining present value royalty payments avoided result owning trademark method includes judgmental assumptions sales growth discount rates consistent assumptions used determine fair value reporting units discussed record impairment trademarks 2008 2007 2006 net realizable value longlived assets including property plant equipment reviewed periodically indicators potential impairments present based upon assessment estimated future cash flows related assets utilizing methodology similar goodwill additional considerations related longlived assets include expected maintenance improvements changes expected uses ongoing operating performance utilization due uncertain market conditions potential changes strategy product portfolio possible forecasts used support asset carrying values may change future could result noncash charges would adversely affect financial condition results operations accounting developments presented information accounting pronouncements yet implemented note 1 consolidated financial statements included annual report outlook 2009 future results operations forwardlooking statements contained annual report including mda involve number risks uncertainties particular statements regarding goals strategies new product introductions plans cultivate new businesses future economic conditions revenue pricing gross profit margin costs capital spending depreciation amortization research development expenses potential impairment investments tax rate pending tax legal proceedings future results operations may also affected amount type valuation sharebased awards granted well amount awards forfeited due employee turnover addition various important factors discussed number factors could cause actual results differ materially expectations see risks described “item 1a risk factors” included annual report bookings increased 182 2008 compared 2007 translate increased revenue 2009 excluding currency fluctuations however booking represents contract modified canceled guarantee increase bookings result comparable increase revenues otherwise indicative future results first 45 days 2009 cancellations 46 million related orders booked 2008 historically fourth quarter strong bookings quarter us however bookings fourth quarter 2008 lower bookings first second third quarters 2008 reflecting customers’ responses concerns regarding recent disruptions credit capital markets global economic conditions recent declines oil gas prices also response global economic conditions customers requested delayed shipments could delay timing recognition revenue anticipated come backlog delayed project proposals could negatively impact level bookings 2009 although seen material deterioration markets believe primary markets continue provide opportunities remain cautious outlook 2009 given activity levels fourth quarter 2008 current uncertainty global economic conditions additional discussion markets opportunities therein see “business overview markets” section mda expect operating income 2009 benefit operational improvement programs continuation end user strategy selective contract bidding previously implemented price increases number significant expense certain items could negatively impact operating income 2009 include realignment costs selected investments technology infrastructure consolidate erp systems higher wage benefit costs due inflation sharebased compensation although implemented price increases 2008 2007 believe pricing could become influential competitive factor 2009 compared recent years additionally large proportion original equipment business booked 2008 fpd may reduce gross profit margin products shipped 2009 beyond part continuing operational optimization strategy currently evaluating opportunities reduce optimize certain nonstrategic manufacturing facilities overall cost structure could incur 40 million realignment costs 2009 result activities borrowings credit facilities carry floating rate interest december 31 2008 3850 million derivative contracts convert portion floating interest rates fixed interest rates reduce exposure interest rate volatility result reducing volatility may fully benefit decrease interest rates expect interest expense 2009 slightly favorable compared 2008 given lower overall interest rate environment however portion debt carries floating rate interest debt subject volatility rates could negatively impact interest expense results operations may also impacted unfavorable foreign currency exchange rate movements see “item 7aitem 7 management’s discussion analysis financial condition results operations following discussion analysis provided increase understanding read conjunction accompanying consolidated financial statements notes please see “risk factors” “forwardlooking statements” sections discussion risks uncertainties assumptions associated statements unless otherwise noted amounts discussed herein consolidated executive overview company believe worldleading manufacturer aftermarket service provider comprehensive flow control systems develop manufacture precisionengineered flow control equipment integral movement control protection flow materials customers’ critical processes product portfolio pumps valves seals automation aftermarket services supports global infrastructure industries including oil gas chemical power generation water management well general industrial markets products services add value manufacturing platform global network quick response centers “qrcs” offer broad array aftermarket equipment services installation advanced diagnostics repair retrofitting currently employ approximately 15000 employees 50 countries business model significantly influenced capital spending global infrastructure industries placement new products service aftermarket services existing operations worldwide installed base products important source aftermarket revenue products expected ensure maximum operating time many key industrial processes past several years significantly invested aftermarket strategy provide local support maximize customers’ investment offerings well provide business stability various economic periods aftermarket business served 150 qrcs located around globe provides variety service offerings customers including spare parts service solutions product life cycle solutions value added services generally higher margin business key component profitable growth december 31 2009 operations conducted three business segments referenced throughout management’s discussion analysis financial condition results operations “mda” • flowserve pump division “fpd” engineered industrial pumps pump systems submersible motors related services • flow control division “fcd” engineered industrial valves control valves actuators controls related services • flow solutions division “fsd” mechanical seals auxiliary systems parts related services product portfolio built 50 wellrespected brand names worthington idp valtek limitorque durametallic believe one comprehensive industry products services sold either directly designated channels 10000 companies including world’s leading engineering construction firms original equipment manufacturers distributors end users continue build geographic breadth qrc network goal positioned near customers possible service support order capture important aftermarket business along ensuring local capability sell install service equipment remote regions equally imperative continuously improve global operations continue expand global supply chain capability meet global customer demands ensure quality timely delivery products significant efforts underway improve supply chain processes across divisions find areas synergy cost reduction improve supply chain management capability ensure meet global customer demands continue focus improving ontime delivery quality managing warranty costs percentage sales across global operations assistance focused cip initiative goal cip initiative includes lean manufacturing six sigma business management strategy value engineering maximize service fulfillment customers ontime delivery reduced cycle time quality highest internal productivity experienced reduced demand original equipment 2009 compared 2008 result impact global financial crisis economic recession many oil gas customers postponed major capital decisions original initiation dates order reevaluate viability project take advantage cost reduction commodities steel better align start operations revised demand growth forecasts chemical market capital spending reduced due adverse effects industry experienced significant drop consumer demand gross domestic product “gdp” decline many economic regions power generation water management markets showed resiliency capital spending due government stimulus investments management existing operations necessity build infrastructure developing markets capital spending directed improving optimizing existing operations provided growth opportunities across industries 2009 developing regions world continued capital investments despite challenging global economy 2009 experienced stable conditions global aftermarket business demand growth past years provided us opportunity increase installed base new products drive recurring aftermarket sales past several years significantly invested aftermarket strategy provide local support maximize customers’ investment offerings well provide business stability various economic periods 2009 continued execute strategy increase presence regions global market capture aftermarket opportunities believe customer relationships global presence highly regarded technical capabilities continue opportunities core industries however face challenges affecting many companies industry significant multinational presence economic political currency risks markets following discussion read conjunction “outlook 2010” section included mda products services used several distinct industries oil gas chemical power generation water management number industries collectively referred “general industries” demand products depends level new capital investment planned unplanned maintenance expenditures customers level new capital investment depends turn capital infrastructure projects driven need oil gas power water well general economic conditions drivers generally related phase business cycle respective industries expectations future market behavior levels maintenance expenditures additionally driven reliability equipment planned unplanned downtime maintenance required capacity utilization process customers include engineering contractors original equipment manufacturers end users distributors sales engineering contractors original equipment manufacturers typically large project orders critical applications certain sales distributors project orders typically procured customers either directly us indirectly contractors new construction projects facility enhancement projects quick turnaround business also refer “book ship” defined orders received customer booked shipped within three months receipt orders typically standardized general purpose products parts services three business segments generates certain levels type business sale aftermarket products services benefit large installed base pumps valves seals require maintenance repair replacement parts use manufacturing platform global network qrcs offer broad array aftermarket equipment services installation advanced diagnostics repair retrofitting geographic regions positioned provide quick response believe customers traditionally relied us rather competitors aftermarket products due highly engineered customized products however aftermarket standard products competitive existence common standards allows easier replacement installed products proximity service centers timeliness delivery quality important considerations aftermarket products services continue expand global qrc network improve ability capture important aftermarket business oil gas oil gas industry represented approximately 36 39 bookings 2009 2008 respectively experienced measurable decline new orders placed 2009 many clients postponed major projects due global financial crisis recession followed delay projects driven desire take advantage lower commodity costs steel need reevaluate return investment project simply better align planned increased capacity revised timing forecasted demand growth global demand forecasts revised downward later part 2008 first half 2009 midyear forecasts turned positive recovery supported economic investment developing regions china india middle east regions along latin america africa parts asia continue plan investments grow operating capacity driven intent become selfsufficient move profitable products derived refined oil natural gas market experienced reduction spending upstream production side industry slowdown influenced primarily drop overall demand investments continue liquefied natural gas expansion need prepare new gas field production shipment consumer markets supported need complete projects outlook oil gas industry heavily dependent demand growth mature markets developing geographies believe oil gas companies continue upstream downstream investment plans line projections future demand growth production declines existing operations projected decline demand could cause oil gas companies reduce overall level spending could decrease demand products services however believe longterm fundamentals industry remain solid based current supply projected depletion rates existing fields forecasted longterm demand growth chemical industry represented approximately 18 17 bookings 2009 2008 respectively industry experienced adverse effects global financial crisis recession consumer spending fell significantly gdp many countries experienced declines first time several years many major chemical companies faced restructuring operations align current market conditions 2009 industry experienced closure shut large number facilities around globe particularly mature markets developing regions investments continued moderated pace compared previous years new plant investments forecasted developing regions build capacity meet indigenous demand growth companies industry generally increased forecasts maintenance upgrades continuing operations ensure global competitiveness outlook chemical industry remains heavily dependent global economic conditions consumer spending industrial manufacturing gain momentum chemical industry recover well stabilizing price oil feedstock opportunity promote investment companies effectively project potential financial return believe chemical industry nearterm continue invest maintenance upgrades optimization existing assets developing regions continue investing capital infrastructure meet current future indigenous demand believe global presence localized aftermarket capabilities well positioned serve potential growth opportunities industry power generation power generation industry represented approximately 20 15 bookings 2009 2008 respectively industry continued see capital investment growth due increased demands electricity developing countries china india capacity increases mature markets including united states “us” due need increased power generating capacity concerns environment industry see significant increase area renewable power plans nuclear power generation expanded measurably year countries china india raising planned capacity next decade expansion solar power created opportunities concentrated solar power applications products proved ability tolerate high temperatures abrasive flow mediums drive cleaner environment also increased investments development carbon capture storage methodologies products services applicable believe outlook power generation industry remains favorable however protracted economic recovery period could delay demand additional power may affect timing major capital project spending current legislative efforts limit emissions carbon dioxide may adverse effect investment plans depending potential requirements imposed timing compliance country important note proposed methods limiting carbon dioxide emissions offer business opportunities products services believe longterm fundamentals power generation industry remain solid based projected increases demand electricity driven global population growth advancements industrialization growth urbanization developing markets also believe longstanding reputation power generation industry portfolio offerings various generating methods advancements serving renewables market carbon capture methodologies along global service support structure position us well future opportunities important industry water management water management industry represented approximately 7 6 bookings 2009 2008 respectively worldwide demand fresh water treatment continues create requirements new facilities upgrades existing systems many require products offer particularly pumps believe persistent demand fresh water economic cycles supports continuing investments even current economic environment industry forecasts indicate potential funding challenges municipal government projects due reduced tax revenues however several government stimulus programs targeted maintenance development fresh water resources stimulus projects generate demand provide opportunities pumps valves seals actuation products water management industry facing future supplydemand challenge relative forecasted global population growth coupled advancement industrialization urbanization due limitations usable fresh water around globe continues increased investment desalination investment forecasted significantly increase next couple decades believe global leader desalination market already important source fresh water mediterranean region middle east expect trend desalination expand traditional areas coastal areas around globe believe presents significant market opportunity pumps valves actuation products energy recovery devices general industries general industries comprises variety different businesses including mining ore processing pharmaceuticals pulp paper food beverage smaller applications none individually represented 5 total bookings 2009 2008 general industries also include sales distributors whose end customers operate industries primarily serve general industries represented aggregate approximately 19 23 bookings 2009 2008 respectively 2009 saw general decline businesses pulp paper along mining ore processing two areas experienced measured declines business activity investment due drop demand products drop demand directly related significant decrease rate general global economic growth industries segment also experienced tougher market conditions compared previous years outlook group industries dependent upon rate economic recovery believe specialty product offerings designed industries aftermarket service capabilities provide business opportunities industries today global economy recovers reporting trends product type customer type business type based upon analytical review individual operational results knowledge respective businesses formally track revenues categories trends analyzed secondary reporting mechanism derived directly general ledger system results operations throughout discussion results operations discuss impact fluctuations foreign currency exchange rates calculated currency effects translating current year results monthly basis prior year exchange rates periods discussed note 3 consolidated financial statements included “item 8 financial statements supplementary data” “item 8” annual report form 10k year ended december 31 2009 “annual report” fpd acquired calder ag swiss supplier energy recovery technology effective april 21 2009 calder ag’s results operations consolidated since date acquisition additionally fpd acquired remaining 50 interest niigata worthington company ltd “niigata” japanese manufacturer pumps rotating equipment effective march 1 2008 incremental interest acquired accounted step acquisition niigata’s results operations consolidated since date acquisition prior transaction 50 interest niigata recorded using equity method accounting pro forma information provided either acquisition due immateriality discussed note 8 consolidated financial statements included item 8 annual report february 2009 announced intent incur 40 million realignment costs “initial realignment program” reduce optimize certain nonstrategic manufacturing facilities overall cost structure improving operating efficiency reducing redundancies maximizing global consistency driving improved financial performance initial realignment program substantially complete december 31 2009 october 2009 announced intent incur additional realignment costs “subsequent realignment program” expand efforts optimize assets reduce overall cost structure respond reduced orders drive enhanced customerfacing organization initial realignment program subsequent realignment program collectively referred “realignment programs” january 2010 announced expectation 20 million charges related realignment programs would incurred 2010 combined 681 million charges incurred 2009 disclosed table brings total expected realignment charges approximately 88 million unless otherwise stated information realignment programs included mda presented total individual impacts program please see note 8 consolidated financial statements included item 8 annual report realignment programs consist restructuring nonrestructuring costs restructuring charges represent costs associated relocation certain business activities outsourcing business activities facility closures nonrestructuring charges costs incurred improve operating efficiency reduce redundancies includes reduction headcount expenses reported cost sales “cos” selling general administrative expense “sga” applicable consolidated statement income following summary charges included operating income 2009 related realignment programs following summary charges related identified initiatives realignment programs expected incurred 2010 1 execution subsequent realignment program early stages actual charges incurred could vary total charges expected incurred represent management’s best estimate based initiatives identified date amounts disclosed include 12 million anticipated incurred initiatives currently consideration actual amount could differ materially estimate based actions initial realignment program realized savings approximately 33 million year ended december 31 2009 upon completion initial realignment program expect annual cost savings approximately 70 million approximately twothirds savings realized cos remainder sga upon completion currently identified initiatives subsequent realignment program expect additional annual cost savings approximately 40 million approximately half savings expected realized cos remainder sga execution subsequent realignment program early stages actual savings realized could vary expected savings represent management’s best estimate date generally charges presented paid cash except asset writedowns noncash charges asset writedown charges including accelerated depreciation fixed assets accelerated amortization intangible assets inventory writedowns 64 million recorded year ended december 31 2009 approximately 10 million cash payments related initial realignment program cash payments related subsequent realignment program incurred 2010 following discussion read conjunction “outlook 2010” section included mda bookings backlog define booking receipt customer order contractually engages us perform activities behalf customer regard manufacture service support bookings recorded subsequently canceled within yeartodate period excluded yeartodate bookings 2009 decreased 12204 million 239 compared 2008 decrease includes negative currency effects approximately 216 million decreases primarily attributable declines oil gas general industries reflect lower demand customerdriven project delays due significant decrease rate general global economic growth compared 2008 decrease consists declines original equipment bookings fpd including impacts 1109 million thruster orders impact 85 million abu dhabi crude oil pipeline order recorded period 2008 recur well declines original equipment bookings fsd decrease also attributable declines chemical industry orders distributors fcd partially offset orders 45 million fcd supply valves four westinghouse electric co nuclear power units north america bookings 2008 increased 7870 million 182 compared 2007 increase included currency benefits approximately 181 million increase attributable strength oil gas general industries especially fpd primarily europe middle east africa “ema” well continued strength chemical industry especially fcd power generation industry fpd fcd 685 million bookings provided niigata historically fourth quarter strong bookings quarter us however bookings fourth quarter 2008 lower bookings first second third quarters 2008 reflecting customers’ responses concerns regarding recent disruptions credit capital markets global economic conditions recent declines oil gas prices backlog represents accumulation uncompleted customer orders backlog 24 billion december 31 2009 decreased 4539 million 161 compared december 31 2008 currency effects provided increase approximately 87 million currency effects backlog calculated using change period end exchange rates overall net decrease includes impact cancellations 412 million end 2010 expect ship 90 december 31 2009 backlog 28 billion december 31 2008 increased 5485 million 241 compared december 31 2007 currency effects provided decrease approximately 185 million fourth quarter 2008 cancellations 322 million approximately 25 million related single booking recorded fpd third quarter 2008 sales 2009 decreased 1082 million 24 compared 2008 decrease includes negative currency effects approximately 208 million overall net decrease attributable decreased chemical general industries sales distributors fcd decreased original equipment aftermarket sales fsd decreases mostly offset increased sales fpd primarily oil gas general industries driven shipments large original equipment project orders booked 2008 2009 original equipment sales decreased approximately 4 compared 2008 aftermarket sales comparable 2008 sales 2008 increased 7108 million 189 compared 2007 increase includes currency benefits approximately 113 million increase attributable strength oil gas power generation markets fpd primarily ema asia pacific growth markets fcd primarily ema asia pacific well 870 million sales provided niigata 2008 original equipment aftermarket sales increased approximately 22 13 respectively compared 2007 sales international customers including export sales us approximately 73 sales 2009 compared 69 sales 2008 66 sales 2007 sales ema approximately 40 39 38 total sales 2009 2008 2007 respectively sales asia pacific region approximately 20 18 16 total sales 2009 2008 2007 respectively sales latin america approximately 9 8 7 total sales 2009 2008 2007 respectively gross profit gross profit margin gross profit 2009 decreased 322 million 20 compared 2008 decrease includes effect 415 million charges resulting realignment programs 2009 gross profit margin 2009 355 comparable 2008 improved pricing original equipment orders booked fpd fcd 2008 shipped 2009 increased utilization low cost regions fcd fsd various cip initiatives savings realized initial realignment program offset sales mix shift toward lower margin original equipment fpd original equipment generally carries lower margin aftermarket sale specialty pumps carry higher margin contributed higher gross profit margins 2009 2008 gross profit 2008 increased 3326 million 267 compared 2007 gross profit margin 2008 353 increased 332 2007 increase primarily attributable fpd whose gross profit margin increased due primarily improved original equipment pricing implemented 2007 increased throughput increased sales favorably impacted absorption fixed manufacturing costs reduced warranty costs percentage sales well impact cip initiatives additionally gross profit margin favorably impacted specialty pumps higher margin partially offsetting improvements significant growth original equipment sales original equipment aftermarket sales increased original equipment sales growth exceeded aftermarket sales growth 2008 result original equipment sales increased approximately 65 total sales compared approximately 63 2007 original equipment generally carries lower margin aftermarket selling general administrative expense “sga” sga impacted growth underlying business various initiatives improve organizational capability compliance systems infrastructure improvements sga 2009 decreased 471 million 48 compared 2008 sga includes effect 266 million charges resulting realignment programs 2009 currency effects provided decrease approximately 32 million decrease primarily attributable 426 million decrease selling marketingrelated expenses consistent decreased bookings sales cash recoveries bad debts 50 million reserved 2008 44 million benefit adjustment contingent consideration related acquisition calder ag see note 3 consolidated financial statements included item 8 annual report strict cost control actions savings realized initial realignment program partially offset increase legal fees accrued resolution costs related shareholder litigation see note 14 consolidated financial statements included item 8 annual report charges resulting realignment programs sga percentage sales 2009 improved 50 basis points compared 2008 primarily result decreased selling marketingrelated expenses sga 2008 increased 1271 million 149 compared 2007 currency effects provided increase approximately 21 million increase sga primarily attributable 615 million increase selling marketingrelated expenses support increased bookings sales overall business growth increase also attributable 470 million increase employees’ costs due annual longterm incentive compensation plans including equity compensation arising improved performance higher stock price date grant annual merit increases 98 million sga incurred niigata 111 million increase bad debt expense primarily fcd partially offset 103 million decrease legal fees expenses due legal matters incurred 2007 recur sga percentage sales 2008 improved 80 basis points compared period 2007 primarily result leverage increased sales net earnings affiliates net earnings affiliates represents net income investments seven joint ventures one located china japan south korea saudi arabia united arab emirates two located india accounted using equity method accounting net earnings affiliates 2009 decreased 12 million compared 2008 primarily attributable fcd joint venture india impact consolidation niigata first quarter 2008 purchased remaining 50 interest net earnings affiliates 2008 decreased 17 million compared 2007 primarily attributable impact consolidation niigata first quarter 2008 purchased remaining 50 interest operating income operating income 2009 increased 138 million 22 compared 2008 increase includes effect approximately 681 million charges realignment programs 2009 mostly offset savings realized initial realignment program increase includes negative currency effects approximately 48 million overall net increase primarily result 471 million decrease sga partially offset 322 million decrease gross profit discussed operating income 2008 increased 2038 million 495 compared 2007 increase included currency benefits approximately 20 million increase primarily result 3326 million increase gross profit partially offset 1271 million increase sga discussed interest expense interest income interest expense decreased 113 million 2009 compared 2008 primarily result decreased interest rates interest expense 2008 decreased 88 million compared 2007 primarily result lower average outstanding debt decreased interest rates december 31 2009 approximately 71 debt fixed rates including effects 3850 million notional interest rate swaps interest income 2009 decreased 52 million compared 2008 due decreased interest rates interest income 2008 increased 41 million compared 2007 due primarily higher average cash balance expense income net expense income net 2009 decreased net expense 80 million compared net income 202 million 2008 primarily due 135 million increase net losses arising transactions currencies sites’ functional currencies 110 million decrease net gains forward exchange contracts primarily euro british pound 28 million gain 2008 bargain purchase remaining 50 interest niigata discussed note 3 consolidated financial statements included item 8 annual report recur expense income net 2008 increased 143 million net income 202 million compared 2007 increase primarily due 92 million increase net gains forward exchange contracts 11 million increase net gains transactions denominated currencies functional currencies well 28 million gain bargain purchase remaining 50 interest niigata discussed note 3 consolidated financial statements included item 8 annual report well individually immaterial items tax expense tax rate 2009 effective tax rate differed federal statutory rate 35 primarily due net impact foreign operations includes impacts lower foreign tax rates changes reserves established uncertain tax positions 2008 effective tax rate differed federal statutory rate 35 primarily due net impact foreign operations includes impacts lower foreign tax rates changes reserves established uncertain tax positions benefits arising permanent reinvestment foreign subsidiaries changes valuation allowance estimates favorable tax ruling luxembourg net impact discrete items included discussion approximately 22 million lowered effective tax rate approximately 37 2007 effective tax rate differed federal statutory rate 35 primarily due net impact foreign operations changes valuation allowance estimates well changes tax law net favorable results various tax audits partially offset additional reserves established uncertain tax positions pursuant adoption accounting standards codification “asc” 740 “income taxes” see additional discussion uncertain tax positions note 17 consolidated financial statements included item 8 annual report operations asian countries provide various tax incentives 2004 received 5year 10 tax rate singapore income excess prescribed base amount generated certain regional headquarter activities subject certain employment investment requirements 2008 10 tax rate singapore extended 2011 india granted 100 tax exemptions profits derived export sales certain manufacturing operations prescribed areas period 10 years exemption profits derived export sales expire 2011 manufacturing operations exemption expired 2007 may 17 2006 tax increase prevention reconciliation act 2005 signed law creating exclusion us taxable income certain types foreign related party payments dividends interest rents royalties prior 2006 subject us taxation exclusion effective years 2006 2009 applied certain related party payments effective tax rate based upon current earnings estimates future taxable earnings domestic international location changes factors including ability utilize foreign tax credits net operating losses results tax audits could impact tax rate future periods december 31 2009 foreign tax credits 98 million expiring 2018 2019 recorded 04 million valuation allowances additionally recorded us net deferred tax assets 977 million relate net operating losses tax credits deductible temporary differences available reduce taxable income future periods definite expiration able utilize portion credits losses effective tax rate would negatively impacted net earnings per share net earnings 2009 decreased 145 million 4279 million 759 per diluted share compared 2008 decrease primarily attributable 282 million increase expense 88 million increase tax expense partially offset 138 million increase operating income 113 million decrease interest expense discussed net earnings 2008 increased 1866 million 4424 million 771 per diluted share compared 2007 increase primarily attributable 2038 million increase operating income partially offset 434 million increase tax expense discussed comprehensive income expense comprehensive income expense 2009 increased 2538 million income 630 million compared 2008 increase due primarily weakening us dollar exchange rate versus euro december 31 2009 compared december 31 2008 well decrease pension postretirement expense due primarily events 2008 recur increase results interest rate hedging activity comprehensive expense income 2008 decreased 2612 million expense 1908 million compared 2007 primarily due strengthening us dollar exchange rate versus euro british pound december 31 2008 compared december 31 2007 well decrease pension postretirement income primarily reflects actuarial net losses resulting returns plan assets lower anticipated business segments december 31 2009 conducted business three business segments represent major product areas evaluate segment performance allocate resources based segment’s operating income see note 18 consolidated financial statements included item 8 annual report discussion segments key operating results three business segments fpd fcd fsd discussed flowserve pump division segment results fpd design manufacture distribute service engineered industrial pumps pump systems submersible motors collectively referred “original equipment” fpd also manufactures replacement parts related equipment provides full array support services collectively referred “aftermarket” fpd 30 manufacturing facilities worldwide 13 located europe seven north america six asia four latin america fpd also 78 service centers including colocated manufacturing facility 30 countries operate primarily oil gas chemical power generation industries bookings 2009 decreased 8327 million 274 compared 2008 decrease includes negative currency effects approximately 142 million decrease bookings reflects lower demand customerdriven large project delays due significant decrease rate general global economic growth compared 2008 decrease consists declines original equipment bookings major projects driven declines oil gas general water management chemical industries includes impacts 1109 million thruster orders 85 million order supply variety pumps build abu dhabi crude oil pipeline booked 2008 recur bookings ema north america latin america decreased 5164 million including negative currency effects approximately 89 million 2830 million 1224 million including negative currency effects approximately 35 million respectively 22 billion bookings 2009 approximately 43 oil gas 23 power generation 10 water management 8 chemical 16 general industries bookings 2008 increased 4889 million 192 compared 2007 increase included currency benefits approximately 115 million increase attributable ema north america asia pacific increased 2511 million including currency benefits approximately 106 million 1093 million 1092 million including currency benefits approximately 14 million respectively bookings original equipment aftermarket increased approximately 20 16 respectively original equipment bookings driven oil gas power generation water management general industries niigata provided increase 685 million total bookings represented approximately 14 total bookings increase bookings increase also includes order approximately 85 million supply variety pumps build abu dhabi crude oil pipeline pumps largely supplied european operations scheduled ship 2010 30 billion total bookings 2008 approximately 49 oil gas 16 power generation 9 water management 8 chemical 18 general industries sales 2009 increased 1348 million 54 compared 2008 increase includes negative currency effects approximately 127 million increase driven shipments original equipment large project orders booked 2008 oil gas power generation industries stronger prices favorable contributed increase approximately 10 original equipment sales 2009 compared 2008 ema asia pacific latin america increased 1190 million including negative currency effects approximately 87 million 395 million including negative currency effects approximately 4 million 230 million including negative currency effects approximately 33 million respectively increases partially offset decrease north america 408 million attributable decline aftermarket sales primarily chemical general industries sales 2008 increased 4194 million 200 compared 2007 increase included currency benefits approximately 67 million increase primarily attributable ema asia pacific latin america increased 2129 million including currency benefits approximately 51 million 919 million including currency benefits approximately 15 million 286 million currency negligible impact respectively original equipment sales increased approximately 22 aftermarket sales grew approximately 17 compared 2007 noted strong growth served markets past two years predominantly oil gas power generation key drivers increases sales 2008 increase sales also attributable increased throughput resulting capacity expansion price increases initiated 2007 sales 870 million provided niigata gross profit 2009 increased 546 million 69 compared 2008 increase includes effect 237 million charges resulting realignment programs 2009 gross profit margin 2009 317 increased 313 2008 increases provided improved pricing original equipment orders shipped 2009 booked late 2007 early 2008 supply chain initiatives operating efficiency improvements savings realized initial realignment program partially offset sales mix shift toward original equipment original equipment generally carries lower margin aftermarket result sales mix shift original equipment sales increased approximately 64 total sales compared approximately 61 total sales 2008 gross profit margin also favorably impacted increase sales 2009 specialty pumps higher margin compared 2008 gross profit 2008 increased 1894 million 317 compared 2007 includes gross profit attributable niigata 209 million gross profit margin 2008 313 increased 285 2007 increase primarily due improved original equipment pricing implemented 2007 increased throughput increased sales favorably impact absorption fixed manufacturing costs reduced warranty costs percentage sales well impact cip initiatives additionally gross profit margin favorably impacted specialty pumps higher margin partially offsetting improvements significant growth original equipment sales original equipment aftermarket sales increased original equipment growth exceeded aftermarket growth 2008 result original equipment sales increased approximately 61 total sales compared approximately 60 total sales 2007 original equipment generally carries lower margin aftermarket operating income 2009 increased 500 million 128 compared 2008 operating income includes effect 330 million charges resulting realignment programs 2009 increase includes negative currency effects approximately 31 million increase due primarily increased gross profit 546 million includes effect savings realized initial realignment program discussed partially offset increase sga increase sga attributable charges resulting realignment programs partially offset strict cost control actions 44 million benefit adjustment contingent consideration related acquisition calder ag see note 3 consolidated financial statements included item 8 annual report savings realized initial realignment program operating income 2008 increased 1168 million 425 compared 2007 increase included currency benefits approximately 11 million increase due primarily increased gross profit 1894 million partially offset 695 million increase sga including negative currency effects approximately 10 million primarily related 249 million increase selling marketingrelated expense support increased bookings sales overall business growth increase also attributable 189 million increase employees’ costs due annual longterm incentive compensation plans including equity compensation arising improved performance higher stock price date grant annual merit increases 98 million sga incurred niigata operating margin improved 250 basis points compared 2007 due primarily increase gross profit margin 280 basis points backlog 18 billion december 31 2009 decreased 4296 million 191 compared december 31 2008 currency effects provided increase approximately 74 million overall net decrease includes impact cancellations 390 million orders booked prior year acquisition calder ag resulted 62 million increase backlog 23 billion december 31 2008 increased 4778 million 269 compared december 31 2007 currency effects provided decrease approximately 149 million flow control division segment results second largest business segment fcd designs manufactures distributes broad portfolio engineeredtoorder configuretoorder isolation valves control valves valve automation products boiler controls related services fcd leverages experience application knowhow offering complete menu engineered services complement expansive product portfolio fcd total 47 manufacturing facilities qrcs 22 countries around world five 19 manufacturing operations located us based independent industry sources believe third largest industrial valve supplier global basis bookings 2009 decreased 2881 million 194 compared 2008 decrease includes negative currency effects approximately 53 million decrease bookings primarily attributable europe north america decreased approximately 135 million 70 million respectively driven overall decrease orders distributors chemical industry well customerdriven delays large projects oil gas market decline orders distributors europe driven decrease general industries due uncertainty surrounding global economic conditions decline orders distributors north america due inventory destocking recently exhibited evidence stabilization chemical industry represents largest global market decline especially europe north america oil gas bookings declined due customerdriven large project delays bookings asia pacific decreased approximately 40 million attributable customerdriven delays large projects chemical industry bookings latin america decreased approximately 26 million due large pulp paper projects first quarter 2008 recur decreases partially offset increase nuclear power orders included orders recorded third quarter 2009 45 million supply valves four westinghouse electric co nuclear power units north america new project bookings emerging solar market reflecting future growth opportunities growth middle east expansion qrc joint venture activities increased aftermarket repair replacement orders 12 billion bookings 2009 approximately 29 chemical 28 general industries 23 power generation 20 oil gas bookings 2008 increased 2407 million 193 compared 2007 increase included currency benefits approximately 51 million growth bookings primarily attributable strength europe asia pacific increased approximately 79 million 89 million respectively regions continued focus growth opportunities north america latin america combined increased approximately 54 million key growth areas included chemicals nuclear power generation 15 billion bookings 2008 approximately 34 chemical 31 general industries 18 oil gas 17 power generation sales 2009 decreased 1785 million 129 compared 2008 decrease includes negative currency effects approximately 56 million sales europe north america decreased approximately 91 million 56 million respectively driven overall decline sales distributors chemical industry well customerdriven delays large projects oil gas industry due short leadtime products drivers decline sales consistent drivers decline bookings discussed sales 2008 increased 2185 million 188 compared 2007 increase included currency benefits approximately 34 million asia pacific increased approximately 64 million continued show substantial sales growth chemical market especially china sales across markets europe demonstrated growth approximately 48 million north american sales also produced growth approximately 42 million oil gas market sales reflected steady increases regions especially europe middle east latin america sales increased approximately 34 million due primarily growth pulp paper market expected continue near term gross profit 2009 decreased 525 million 105 compared 2008 decrease includes effect 75 million charges resulting realignment programs 2009 gross profit margin 2009 370 increased 360 2008 increase gross profit margin attributable improved pricing large projects booked 2008 shipped 2009 increased aftermarket repair replacement business materials cost savings various cip initiatives improved utilization low cost regions volumerelated cost control actions savings realized initial realignment program improvements partially offset pricing pressure negative impact decreased sales absorption fixed manufacturing costs gross profit 2008 increased 919 million 226 compared 2007 gross profit margin 2008 360 increased 349 2007 increase reflected higher sales levels favorably impacted absorption fixed manufacturing costs price increases cip materials saving initiatives investment new products increased absorption continued drive margin improvement offset inflationary impact raw materials impact metal price increases transportation fuel surcharges minimized supply chain initiatives operating income 2009 decreased 146 million 67 compared 2008 decrease includes effect 115 million charges resulting realignment programs 2009 decrease includes negative currency effects approximately 10 million decrease attributable 525 million decrease gross profit includes effect savings realized initial realignment program partially offset 412 million decrease sga reduced sga attributable decreased selling marketingrelated expenses strict cost control actions 50 million cash recoveries bad debts reserved 2008 savings realized initial realignment program 2009 operating income 2008 increased 549 million 335 compared 2007 increase included currency benefits approximately 6 million increase primarily attributable 919 million improvement gross profit offset part higher sga increased 383 million including negative currency effects approximately 7 million increased sga primarily due 173 million higher selling marketing costs 49 million increased rd costs well 73 million bad debt expense related two customers partially offsetting cost increases reversal net 23 million accrual due contract settlement 12 million increase net earnings affiliates generated joint venture india driven growth oil gas markets middle east sga percentage sales improved 60 basis points primarily attributable leverage increased sales backlog 4853 million december 31 2009 comparable december 31 2008 currency effects provided increase approximately 9 million backlog 4829 million december 31 2008 increased 681 million 164 compared december 31 2007 currency effects provided decrease approximately 21 million flow solutions division segment results fsd engineer manufacture sell mechanical seals auxiliary systems parts provide related services principally process industries general industrial markets similar products sold internally support fpd fsd added global operations ten manufacturing operations four located us fsd operates 80 qrcs worldwide including six colocated manufacturing facility including 24 sites north america 20 ema 19 latin america 17 asia ability rapidly deliver mechanical sealing technology global engineering tools locally sited qrcs onsite engineers represents significant competitive advantage business model enabled fsd establish large number alliances multinational customers based independent industry sources believe second largest mechanical seal supplier world bookings 2009 decreased 1149 million 172 compared 2008 decrease includes negative currency effects approximately 21 million decrease bookings reflects lower demand customerdriven project delays due significant decrease rate general global economic growth compared 2008 1060 million decrease customer bookings due primarily decreases project aftermarket bookings 89 million decrease interdivision bookings eliminated included consolidated bookings disclosed also contributed decrease customer bookings original equipment aftermarket primarily attributable north america driven oil gas chemical general industries well decreases oil gas general industries across regions 4893 million customer bookings 2009 approximately 42 oil gas 31 chemical 27 general industries bookings 2008 increased 763 million 129 compared 2007 increase included currency benefits approximately 15 million 654 million increase customer bookings due primarily increased original equipment bookings ema north america latin america well increased aftermarket bookings latin america north america asia pacific 109 million increase interdivision bookings eliminated included consolidated bookings disclosed also contributed increase 5958 million customer bookings 2008 approximately 45 oil gas 24 chemical 31 general industries sales 2009 decreased 745 million 114 compared 2008 decrease includes negative currency effects approximately 24 million decrease sales reflects lower demand project delays due significant decrease rate general global economic growth compared 2008 decrease driven declines customer sales original equipment aftermarket regions well 120 million decrease interdivision sales eliminated included consolidated sales disclosed decrease customer sales original equipment aftermarket primarily attributable north america driven oil gas chemical general industries well decreases oil gas general industries across regions sales 2008 increased 892 million 158 compared 2007 increase included currency benefits approximately 12 million 740 million increase customer sales primarily attributable increased original equipment sales ema north america latin america well increased aftermarket sales north america latin america asia pacific 152 million increase interdivision sales eliminated included consolidated sales disclosed also contributed increase gross profit 2009 decreased 343 million 115 compared 2008 decrease includes effect 95 million charges resulting realignment programs 2009 gross profit margin 2009 457 comparable 2008 sales mix shift toward profitable aftermarket sales savings realized initial realignment program strict cost control actions increased utilization low cost regions offset impact decreased sales negatively impacts absorption fixed manufacturing costs gross profit 2008 increased 465 million 184 compared 2007 gross profit margin 2008 458 increased 447 2007 improvements reflected increase sales favorably impacted absorption fixed manufacturing costs well impact cost savings initiatives throughout year improvements partially offset sales mix shift original equipment business north america ema increases materials costs largely offset supply chain management efforts price increases mid2007 early 2008 operating income 2009 decreased 265 million 205 compared 2008 decrease includes effect 206 million charges resulting realignment programs decrease includes negative currency effects approximately 8 million decrease due 343 million decrease gross profit discussed partially offset 73 million decrease sga decrease sga due strict cost control actions 2009 savings realized initial realignment program 2009 operating income 2008 increased 165 million 146 compared 2007 increase included currency benefits approximately 3 million improvement 2008 reflected 465 million increase gross profit discussed partially offset 298 million increase sga including negative currency effects approximately 4 million due primarily 155 million increase related sales engineering related expenses approximately 1 million realignment costs well increased infrastructure costs support global growth business sga percentage sales 2008 increased 110 basis points compared 2007 resulting investment global selling footprint engineering support anticipation future sales backlog 964 million december 31 2009 decreased 218 million 184 compared december 31 2008 currency provided increase approximately 4 million backlog december 31 2009 includes 228 million interdivision backlog eliminated included consolidated backlog disclosed backlog 1182 million december 31 2008 increased 88 million 80 compared 2007 currency effects provided decrease approximately 5 million backlog december 31 2008 included 186 million interdivision backlog eliminated included consolidated backlog disclosed liquidity capital resources cash flow analysis existing cash generated operations borrowings available existing revolving line credit primary sources shortterm liquidity sources operating cash generally include sale products services conversion working capital particularly accounts receivable inventories total cash balance december 31 2009 6543 million compared 4721 million december 31 2008 3732 million december 31 2007 working capital increased 2009 due primarily lower accrued liabilities 1068 million resulting primarily reductions accruals longterm broadbased annual incentive program payments reductions advanced cash received customers lower accounts payable 1047 million decreases partially offset lower inventory 747 million lower accounts receivable 507 million 2009 contributed 831 million us pension plan working capital increased 2008 due primarily higher inventory 1955 million especially projectrelated inventory required support future shipments products backlog higher accounts receivable 1951 million resulting primarily higher sales 639 million reduction factored receivables resulting discontinuation factoring program early 2008 contributed 508 million us pension plan goal days’ sales receivables outstanding “dso” 60 days fourth quarter 2009 achieved dso 59 days compared 62 days period 2008 reference purposes based 2009 sales dso improvement one day could provide approximately 13 million cash decreases inventory provided 747 million cash flow 2009 compared use cash 1955 million 1018 million 2008 2007 respectively inventory turns 40 times december 31 2009 compared 36 times december 31 2008 44 times december 31 2007 reference purposes based 2009 data improvement one turn could yield approximately 160 million cash outflows investing activities 1386 million 1196 million 779 million 2009 2008 2007 respectively due primarily capital expenditures cash outflows 2009 also include 308 million acquisition calder ag discussed “acquisitions dispositions” capital expenditures 2009 1084 million decrease 185 million compared 2008 capital expenditures focused capacity expansion including expansion qrc network nuclear capabilities lowcost sourcing enterprise resource planning application upgrades information technology infrastructure cost reduction opportunities cash outflows financing activities 1071 million 2009 compared 1855 million 2008 501 million 2007 cash outflows 2009 resulted primarily payment 592 million dividends 409 million repurchase common shares cash outflows 2008 resulted primarily repurchase common shares 1650 million payment 515 million dividends february 23 2009 board directors authorized increase payment quarterly dividends common stock 025 per share 027 per share payable quarterly beginning april 8 2009 february 22 2010 board directors authorized increase payment quarterly dividends common stock 027 per share 029 per share payable quarterly beginning april 7 2010 generally dividend dateofrecord last month quarter dividend paid following month subsequent dividends reviewed board directors quarterly basis declared discretion dependent assessment financial situation business outlook applicable time february 26 2008 board directors approved program repurchase 3000 million outstanding common stock program commenced second quarter 2008 share repurchase program expiration date reserve right limit terminate repurchase program time without notice repurchased 544500 1741100 shares 409 million 1650 million 2009 2008 respectively date repurchased total 2285600 shares 2059 million program cash needs next 12 months expected slightly lower compared 2009 resulting decreases pension contributions incentive compensation payments partially offset small anticipated increase capital expenditures increase cash dividends believe cash flows operating activities combined availability revolving line credit existing cash balances sufficient enable us meet cash flow needs next 12 months however cash flows operations could adversely affected decrease rate general global economic growth well economic political risks associated sales products operational factors competition regulatory actions fluctuations foreign currency exchange rates fluctuations interest rates among factors believe cash flows operating activities expectation continuing availability draw upon revolving credit agreements also sufficient meet cash flow needs periods beyond next 12 months payments acquisitions regularly evaluate acquisition opportunities various sizes cost terms financing raised conjunction acquisition including ability raise economical capital critical consideration evaluation discussed note 3 consolidated financial statements included item 8 annual report effective april 21 2009 fpd acquired calder ag private swiss company supplier energy recovery technology use global desalination market 441 million net cash acquired total purchase price 284 million paid closing 24 million paid working capital valuation completed early july 2009 2008 acquired remaining 50 interest niigata effective march 1 2008 24 million cash 2007 completed one small acquisition 23 million financing debt including capital lease obligations consisted credit facilities credit facilities amended comprised 6000 million secured term loan maturing august 10 2012 4000 million revolving line credit utilized provide 3000 million letters credit expiring august 10 2012 refer credit facilities collectively “credit facilities” december 31 2009 2008 amounts outstanding revolving line credit outstanding letters credit 1231 million 1042 million december 31 2009 2008 respectively reduced borrowing capacity 2769 million 2958 million respectively borrowings credit facilities bear interest rate equal option either 1 base rate based greater prime rate recently announced administrative agent credit facilities federal funds rate plus 050 2 london interbank offered rate “libor” plus applicable margin determined reference ratio total debt consolidated earnings interest taxes depreciation amortization “ebitda” december 31 2009 0875 150 borrowings revolving line credit term loan respectively connection credit facilities entered 3850 million notional amount interest rate swaps december 31 2009 hedge exposure floating interest rates see note 12 consolidated financial statements included item 8 annual report additional information credit facilities european letter credit facilities ability issue additional letters credit previous european letter credit facility “old european loc facility” commitment 1100 million expired november 9 2009 paid annual fronting fees 0875 010 respectively letters credit written old european loc facility outstanding letters credit written old european loc facility 779 million 1115 million 1040 million 1452 million december 31 2009 2008 respectively october 30 2009 entered new 364day unsecured european letter credit facility “new european loc facility” initial commitment 1250 million new european loc facility renewable annually consistent old european loc facility used contingent obligations respect surety performance bonds bank guarantees similar obligations maturities five years pay fees 135 040 utilized unutilized capacity respectively new european loc facility outstanding letters credit drawn new european loc facility 28 million 40 million december 31 2009 certain banks parties facilities managing exposures aggregated basis commitment new european loc facility reduced face amount existing letters credit written old european loc facility prior expiration existing letters credit remain outstanding accordingly offset 1250 million capacity new european loc facility maturity december 31 2009 approximately two years majority outstanding existing letters credit consideration outstanding letters credit facilities available capacity new european loc facility 691 million december 31 2009 debt prepayments repayments made scheduled repayments credit facilities 57 million 57 million 28 million 2009 2008 2007 respectively made mandatory repayments optional prepayments 2009 2008 2007 may prepay loans credit facilities whole part without premium penalty time debt covenants matters credit facilities contain among things covenants restricting subsidiaries’ ability dispose assets merge pay dividends repurchase redeem capital stock indebtedness incur indebtedness guarantees create liens enter agreements negative pledge clauses make certain investments acquisitions enter sale leaseback transactions enter transactions affiliates make capital expenditures engage business activity existing business credit facilities also contain covenants requiring us deliver lenders audited annual unaudited quarterly financial statements leverage interest coverage financial covenant certificates compliance maximum permitted leverage ratio 325 times total debt consolidated ebitda minimum interest coverage 325 times consolidated ebitda total interest expense compliance financial covenants credit facilities tested quarterly credit facilities include events default customary types credit facilities including nonpayment principal interest violation covenants incorrectness representations warranties cross defaults cross acceleration bankruptcy material judgments employee retirement income security act 1974 amended “erisa” events actual asserted invalidity guarantees security documents certain changes control company occurrence event default could result acceleration guarantors’ obligations credit facilities complied covenants credit facilities december 31 2009 european letter credit facilities contain covenants restricting ability certain foreign subsidiaries issue debt incur liens sell assets merge consolidate make certain investments pay dividends enter agreements negative pledge clauses engage business activity existing business european letter credit facilities also incorporate reference covenants contained credit facilities european letter credit facilities include events default usual types letter credit facilities including nonpayment fee obligation violation covenants incorrectness representations warranties cross defaults cross acceleration bankruptcy material judgments erisa events actual asserted invalidity guarantees certain changes control company occurrence event default could result termination commitments acceleration obligations european letter credit facilities complied covenants european letter credit facilities december 31 2009 liquidity analysis cash balance increased 1823 million 6543 million december 31 2009 compared december 31 2008 increase cash due primarily strong cash flow operations including working capital changes primarily related collections receivables partially offset significant cash uses including approximately 115 million longterm broadbased annual incentive program payments related prior period performance 1084 million capital expenditures 592 million dividend payments 831 million contributions us pension plan 409 million share repurchases funding increased working capital requirements well 308 million acquisition calder ag monitor depository institutions hold cash equivalents regular basis believe placed deposits creditworthy financial institutions approximately 1 term loan due mature 2010 approximately 25 2011 noted term loan revolving line credit mature august 2012 effects 3850 million notional interest rate swaps approximately 71 term debt fixed rates december 31 2009 december 31 2009 borrowing capacity 2769 million 4000 million revolving line credit available capacity new european loc facility 691 million revolving line credit european letter credit facilities committed held diversified group financial institutions contributed 831 million us pension plan 2009 maintain pension funding fullyfunded threshold prescribed erisa amended experienced significant declines values us pension plan assets 2008 resulting primarily declines global equity markets decline recognized earnings remaining service period 2009 experienced increases values us pension plan assets consideration impact contributions 2009 partial recovery 2009 asset value declines 2008 intent remain fullyfunded currently anticipate contribution us pension plan 2010 30 million 40 million excluding direct benefits paid continue maintain asset allocation consistent strategy maximize total return reducing portfolio risks asset class diversification disruptions financial markets banking systems experienced 2008 continue create difficulties accessing credit capital markets costs newly raised debt generally increased continuing disruptions functioning credit capital markets sluggish global economic recovery extended slowing global economic activity could potentially materially impair customers’ ability access markets increase associated costs well customers’ ability pay full andor timely basis assurance materially adversely affected factors continue monitor evaluate implications factors current business customers suppliers state global economy outlook 2010 future results operations forwardlooking statements contained annual report including mda involve number risks uncertainties particular statements regarding goals strategies new product introductions plans cultivate new businesses future economic conditions revenue pricing gross profit margin costs capital spending depreciation amortization research development expenses potential impairment investments tax rate pending tax legal proceedings future results operations may also affected amount type valuation sharebased awards granted well amount awards forfeited due employee turnover addition various important factors discussed number factors could cause actual results differ materially expectations see risks described “item 1a risk factors” annual report bookings decreased 239 2009 compared 2008 backlog december 31 2009 decreased 161 compared december 31 2008 may drive reduced revenue 2010 compared 2009 excluding currency fluctuations booking represents contract modified canceled include varying lengths time booking time revenue recognition guarantee decrease bookings result comparable decrease revenues otherwise indicative future results historically fourth quarter strong bookings quarter us bookings fourth quarter 2009 slightly lower bookings first second third quarters 2009 reflecting continued customer delays booking large project orders management discipline surrounding pricing although believe primary markets continue provide opportunities remain cautious outlook 2010 given booking levels fourth quarter 2009 backlog december 31 2009 continuing uncertainty global economic conditions additional discussion markets opportunities therein see “business overview markets” section mda could experience increased external pressures gross profit margin 2010 compared 2009 2008 due price competition associated current global economic conditions additionally shift sales mix away higher margin specialty pumps could negatively impact margins 2010 compared 2009 2008 expect gross profit margin pressures partially offset operational improvements continuation end user strategy strength aftermarket business selective contract bidding savings achieved realignment programs part previously communicated realignment programs plan incur 20 million realignment costs 2010 result activities borrowings credit facilities carry floating rate interest december 31 2009 3850 million derivative contracts convert portion floating interest rates fixed interest rates reduce exposure interest rate volatility result reducing volatility may fully benefit decrease interest rates expect interest expense 2010 comparable 2009 however portion debt carries floating rate interest debt subject volatility rates could negatively impact interest expense results operations may also impacted unfavorable foreign currency exchange rate movements see “item 7aitem 7 management’s discussion analysis financial condition results operations following discussion analysis provided increase understanding read conjunction accompanying consolidated financial statements notes see “item 1a risk factors” “forwardlooking statements” section therein discussion risks uncertainties assumptions associated statements unless otherwise noted amounts discussed herein consolidated executive overview company believe worldleading manufacturer aftermarket service provider comprehensive flow control systems develop manufacture precisionengineered flow control equipment integral movement control protection flow materials customers’ critical processes product portfolio pumps valves seals automation aftermarket services supports global infrastructure industries including oil gas chemical power generation water management well general industrial markets products services add value manufacturing platform global network quick response centers “qrcs” offer broad array aftermarket equipment services installation advanced diagnostics repair retrofitting currently employ approximately 15000 employees 50 countries business model significantly influenced capital spending global infrastructure industries placement new products service aftermarket services existing operations worldwide installed base products important source aftermarket revenue products expected ensure maximum operating time many key industrial processes past several years significantly invested aftermarket strategy provide local support maximize customers’ investment offerings well provide business stability various economic periods aftermarket business served 150 qrcs located around globe provides variety service offerings customers including spare parts service solutions product life cycle solutions valueadded services generally higher margin business key component profitable growth previously disclosed 2009 annual report form 10k 2010 quarterly reports form 10q reorganized divisional operations combining former flowserve pump division former flow solutions division flow solutions group “fsg” effective january 1 2010 fsg divided two reportable segments based type product manage business fsg engineered product division “epd” fsg industrial product division “ipd” flow control division “fcd” affected retrospectively adjusted prior period financial information reflect current reporting structure operations conducted three business segments referenced throughout management’s discussion analysis financial condition results operations “mda” • epd long leadtime engineered pumps pump systems mechanical seals auxiliary systems replacement parts related services • ipd preconfigured pumps pump systems related products services • fcd engineered industrial valves control valves actuators controls related services reputation product portfolio built 50 wellrespected brand names worthington idp valtek limitorque durametallic believe one comprehensive industry products services sold either directly designated channels 10000 companies including world’s leading engineering procurement construction firms original equipment manufacturers distributors end users continue build geographic breadth qrc network goal positioned near customers possible service support order capture important aftermarket business along ensuring local capability sell install service equipment remote regions equally imperative continuously improve global operations continue expand global supply chain capability meet global customer demands ensure quality timely delivery products continue devote resources improving supply chain processes across divisions find areas synergy cost reduction improve supply chain management capability ensure meet global customer demands continue focus improving ontime delivery quality managing warranty costs percentage sales across global operations assistance focused continuous improvement process “cip” initiative goal cip initiative includes lean manufacturing six sigma business management strategy value engineering maximize service fulfillment customers ontime delivery reduced cycle time quality highest internal productivity experienced improved demand original equipment 2010 compared 2009 effects global recession began diminish several demand forecasts improved promoted increased capital investment spending planning oil gas industry saw improved conditions developing regions’ economic growth plans rekindled projections demand growth oil natural gas pipeline refining investments driven infrastructure expansion plans growing regions developing regions also experienced improved conditions investment chemical processing power generation mature regions three industries experienced moderate level investment area power generation uncertainty environmental regulations challenged spending levels overcapacity oil refining affected capital investments water management industry displayed stability spending levels investments market persist varying economic conditions 2010 experienced improved demand global aftermarket business compared 2009 driven customers’ need maintain continuing operations across several industries expansion aftermarket capabilities provided new integrated solutions offerings customers’ desire gain operational efficiencies increase throughput existing facilities provided opportunities leverage engineering knowledge technological capabilities design solutions produce desired business result critical component growth strategy remains investment expanding aftermarket capabilities provide local support maximize customers’ investment offerings well provide business stability various economic periods 2010 continued execute strategy increase presence regions global market capture aftermarket opportunities believe customer relationships global presence highly regarded technical capabilities continue opportunities core industries however face challenges affecting many companies industry significant multinational presence economic political currency risks markets following discussion read conjunction “outlook 2011” section included mda products services used several distinct industries oil gas chemical power generation water management number industries collectively referred “general industries” demand products depends level new capital investment planned unplanned maintenance expenditures customers level new capital investment depends turn capital infrastructure projects driven need oil gas power water management well general economic conditions drivers generally related phase business cycle respective industries expectations future market behavior levels maintenance expenditures additionally driven reliability equipment planned unplanned downtime maintenance required capacity utilization process customers include engineering procurement construction firms original equipment manufacturers end users distributors sales engineering procurement construction firms original equipment manufacturers typically large project orders critical applications certain sales distributors project orders typically procured customers either directly us indirectly contractors new construction projects facility enhancement projects quick turnaround business also refer “book ship” defined orders received customer booked shipped within three months receipt orders typically standardized general purpose products parts services three business segments generates certain levels type business sale aftermarket products services benefit large installed base original equipment requires maintenance repair replacement parts use manufacturing platform global network qrcs offer broad array aftermarket equipment services installation advanced diagnostics repair retrofitting geographic regions positioned provide quick response believe customers traditionally relied us rather competitors aftermarket products due highly engineered customized products however aftermarket standard products competitive existence common standards allows easier replacement installed products proximity service centers timeliness delivery quality important considerations aftermarket products services continue expand global qrc network improve ability capture important aftermarket business oil gas oil gas industry represented approximately 42 36 bookings 2010 2009 respectively experienced increased capital spending activity compared previous year due improved demand outlook need start infrastructure build order bring future capacity line time majority investment major oil companies focused upstream production activities however improved levels spending midstream pipeline downstream refining operations particularly developing markets refining overcapacity remained concern throughout year mature regions overall demand oil fell regions aftermarket opportunities industry remained stable throughout year opportunities presented integrated solutions offering helped offset reduction service related business many refineries performed work personnel outlook oil gas industry heavily dependent demand growth mature markets developing geographies believe oil gas companies continue upstream downstream investment plans line projections future demand growth production declines existing operations projected decline demand could cause oil gas companies reduce overall level spending could decrease demand products services however believe longterm fundamentals industry remain solid based current supply projected depletion rates existing fields forecasted longterm demand growth long standing reputation providing successful solutions upstream midstream downstream applications along advancements portfolio offerings believe continue well positioned pursue opportunities industry around globe chemical industry represented approximately 16 18 bookings 2010 2009 respectively industry continued experience challenges relative capital investment due persistent uncertainty around global economies lingering recessionary effects mature regions projected demand growth economic growth plans within developing regions supported capital investment capacity expansion improvements although level spending remained low compared previous years agriculture leading driver global chemical investment population developing economies required greater food supply increasing longterm need fertilizer based products aftermarket opportunities remained stable majority year signs improvement latter part year outlook chemical industry remains heavily dependent global economic conditions global economies stabilize unemployment conditions improve rise consumer spending follow increase spending drive greater demand chemical based products supporting improved levels capital investment believe chemical industry nearterm continue invest maintenance upgrades optimization existing assets developing regions continue investing capital infrastructure meet current future indigenous demand believe global presence localized aftermarket capabilities well positioned serve potential growth opportunities industry power generation power generation industry represented approximately 17 20 bookings 2010 2009 respectively power industry continued experience softness capital spending mature regions driven uncertainty related environmental regulations developing regions capital investment remained place driven increased demand forecasts electricity countries china india global concerns environment continue support increase desired future capacity renewable nuclear power majority active planned construction throughout year continued utilize designs based fossil fuels natural gas increased percentage utilization driven market prices gas remaining low relatively stable potential unconventional sources gas shale gas power industry forecasting increased use form fuel generating plants believe outlook power generation industry remains favorable current legislative efforts limit emissions carbon dioxide may adverse effect investment plans depending potential requirements imposed timing compliance country important note proposed methods limiting carbon dioxide emissions offer business opportunities products services believe longterm fundamentals power generation industry remain solid based projected increases demand electricity driven global population growth advancements industrialization growth urbanization developing markets also believe longstanding reputation power generation industry portfolio offerings various generating methods advancements serving renewables market carbon capture methodologies along global service support structure position us well future opportunities important industry water management water management industry represented approximately 5 7 bookings 2010 2009 respectively worldwide demand fresh water treatment continues create requirements new facilities upgrades existing systems many require products offer particularly pumps believe persistent demand fresh water economic cycles supports continuing investments water management industry facing future supplydemand challenge relative forecasted global population growth coupled advancement industrialization urbanization due limitations usable fresh water around globe continues increased investment desalination investment forecasted significantly increase next couple decades believe global leader desalination market already important source fresh water mediterranean region middle east expect trend desalination expand traditional areas coastal areas around globe believe presents significant market opportunity pumps valves actuation products energy recovery devices general industries general industries comprises variety different businesses including mining ore processing pharmaceuticals pulp paper food beverage smaller applications none individually represented 5 total bookings 2010 2009 general industries also include sales distributors whose end customers operate industries primarily serve general industries represented aggregate approximately 20 19 bookings 2010 2009 respectively 2010 saw improving conditions majority businesses pulp paper mining ore processing well food beverage saw improved conditions compared 2009 generally supported improving economic conditions several parts world also experienced increased business levels distribution network business conditions improved inventory levels required replenishment outlook group industries heavily dependent upon condition global economies level consumer confidence longterm fundamentals many industries remain sound many products produced industries common staples industrialized urbanized economies believe specialty product offerings designed industries aftermarket service capabilities provide future business opportunities results operations throughout discussion results operations discuss impact fluctuations foreign currency exchange rates calculated currency effects translating current year results monthly basis prior year exchange rates periods discussed note 2 consolidated financial statements included item 8 annual report form 10k year ended december 31 2010 “annual report” acquired inclusion fcd valbart srl “valbart” privatelyowned italian valve manufacturer effective july 16 2010 valbart’s results operations consolidated since date acquisition acquired inclusion epd calder ag “calder” swiss supplier energy recovery technology effective april 21 2009 calder’s results operations consolidated since date acquisition pro forma information provided either acquisition due immateriality discussed note 7 consolidated financial statements included item 8 annual report beginning 2009 initiated realignment programs reduce optimize certain nonstrategic manufacturing facilities overall cost structure improving operating efficiency reducing redundancies maximizing global consistency driving improved financial performance well expanding efforts optimize assets responding reduced orders driving enhanced customerfacing organization “realignment programs” date incurred charges related realignment programs 864 million including 183 million 2010 681 million 2009 expect incur approximately 5 million additional charges total expected realignment programs charges approximately 91 million approved plans realignment programs consist restructuring nonrestructuring costs restructuring charges represent costs associated relocation certain business activities outsourcing business activities facility closures nonrestructuring charges costs incurred improve operating efficiency reduce redundancies includes reduction headcount expenses reported cost sales “cos” selling general administrative expense “sga” applicable consolidated statements income charges presented net adjustments relating changes estimates previously recorded amounts net adjustments recorded 2010 58 million following summary charges net adjustments included operating income 2010 related realignment programs following summary charges net adjustments included operating income 2009 related realignment programs following summary total charges net adjustments related identified initiatives realignment programs expected incurred 1 total expected realignment charges represent management’s best estimate date approved plans execution certain initiatives still process amount nature actual realignment charges incurred could vary total expected charges based actions realignment programs realized savings approximately 93 million year ended december 31 2010 upon completion realignment programs expect run rate cost savings approximately 115 million approximately twothirds savings realignment programs realized cos remainder sga actual savings realized could vary expected savings represent management’s best estimate date generally charges presented paid cash except asset writedowns noncash charges asset writedown charges including accelerated depreciation fixed assets accelerated amortization intangible assets inventory writedowns 64 million 61 million recorded years ended december 31 2010 2009 respectively following discussion read conjunction “outlook 2011” section included mda bookings backlog define booking receipt customer order contractually engages us perform activities behalf customer regard manufacture service support bookings recorded subsequently canceled within yeartodate period excluded yeartodate bookings 2010 increased 3436 million 88 compared 2009 increase included negative currency effects approximately 12 million overall net increase primarily attributable increased original equipment aftermarket bookings epd principally oil gas industry including impact order excess 80 million crude oil pumps seals related support services received second quarter 2010 increase also attributed higher bookings fcd driven oil gas general industries increases partially offset impact orders 45 million supply valves four westinghouse electric co nuclear power units booked 2009 recur decreased original equipment bookings ipd bookings 2009 decreased 12204 million 239 compared 2008 decrease included negative currency effects approximately 216 million decreases primarily attributable declines oil gas general industries reflect lower demand customerdriven project delays due significant decrease rate general global economic growth compared 2008 decrease consisted declines original equipment bookings epd ipd including impacts 85 million abu dhabi crude oil pipeline order 1109 million thruster orders respectively recorded 2008 recur decrease also attributable declines chemical industry orders distributors fcd partially offset orders 45 million fcd supply valves four westinghouse electric co nuclear power units north america backlog represents accumulation uncompleted customer orders backlog 26 billion december 31 2010 increased 2235 million 94 compared december 31 2009 currency effects provided decrease approximately 51 million currency effects backlog calculated using change period end exchange rates overall net increase included impact cancellations 181 million orders booked prior years end 2011 expect ship 82 december 31 2010 backlog 24 billion december 31 2009 decreased 4539 million 161 compared december 31 2008 currency effects provided increase approximately 87 million overall net decrease included impact cancellations 2009 412 million orders booked prior years sales 2010 decreased 3333 million 76 compared 2009 decrease included negative currency effects approximately 32 million decrease primarily attributable decreased original equipment orders across divisions primarily driven lower beginning backlog oil gas general industries 2010 compared 2009 reflecting lower demand customerdriven project delays due significant decrease rate general global economic growth 2009 decreases slightly offset increased aftermarket sales epd driven latin america asia pacific fcd sales provided valbart 383 million aftermarket sales increased approximately 39 total sales 2010 compared 36 2009 sales 2009 decreased 1082 million 24 compared 2008 decrease included negative currency effects approximately 208 million overall net decrease attributable decreased chemical general industries sales decreased sales distributors fcd decreased aftermarket sales epd decreases mostly offset increased original equipment sales epd primarily oil gas general industries driven shipments large original equipment project orders booked 2008 2009 original equipment sales decreased approximately 4 compared 2008 aftermarket sales comparable 2008 sales international customers including export sales united states “us” approximately 73 sales 2010 compared 73 sales 2009 69 sales 2008 sales europe middle east africa “ema” approximately 40 39 total sales 2010 2009 2008 respectively sales asia pacific region approximately 18 20 18 total sales 2010 2009 2008 respectively sales latin america approximately 10 9 8 total sales 2010 2009 2008 respectively gross profit gross profit margin gross profit 2010 decreased 1384 million 89 compared 2009 decrease included effect approximately 37 million increased savings realized decrease 270 million charges resulting realignment programs compared 2009 gross profit margin 2010 350 decreased 355 2009 decrease primarily attributable less favorable pricing beginning year backlog epd ipd compared 2009 negative impact decreased sales absorption fixed manufacturing costs effects partially offset sales mix shift toward higher margin aftermarket sales epd ipd increased utilization lowcost regions fcd positive impacts realignment programs various cip initiatives aftermarket sales generally carry higher margin original equipment sales aftermarket sales increased approximately 39 total sales 2010 compared approximately 36 total sales 2009 gross profit 2009 decreased 322 million 20 compared 2008 decrease included effect 415 million charges resulting realignment programs 2009 gross profit margin 2009 355 comparable 2008 improved pricing original equipment orders booked epd fcd 2008 shipped 2009 increased utilization lowcost regions fcd epd various cip initiatives savings realized realignment programs offset sales mix shift toward lower margin original equipment epd ipd original equipment generally carries lower margin aftermarket sales specialty pumps carry higher margin epd contributed higher gross profit margins 2009 selling general administrative expense “sga” sga 2010 decreased 895 million 96 compared 2009 currency effects yielded decrease approximately 2 million decrease included effect approximately 23 million increased savings realized decrease 228 million charges resulting realignment programs compared 2009 decrease primarily attributable positive impacts realignment programs decreased selling marketingrelated expenses strict cost control actions 2010 legal fees accrued resolution costs 2009 related shareholder class action litigation resolved second quarter 2010 recur partially offset cash recoveries bad debt adjustment contingent consideration 2009 noted recur sga percentage sales 2010 improved 40 basis points compared 2009 sga 2009 decreased 471 million 48 compared 2008 sga included effect 266 million charges resulting realignment programs 2009 currency effects provided decrease approximately 32 million decrease primarily attributable 426 million decrease selling marketingrelated expenses consistent decreased bookings sales cash recoveries bad debts 50 million reserved 2008 44 million benefit adjustment contingent consideration related acquisition calder see note 2 consolidated financial statements included item 8 annual report strict cost control actions savings realized realignment programs partially offset increase legal fees accrued resolution costs related nowresolved shareholder class action litigation charges resulting realignment programs sga percentage sales 2009 improved 50 basis points compared 2008 primarily result decreased selling marketingrelated expenses net earnings affiliates net earnings affiliates represents net income investments seven joint ventures one located china japan saudi arabia south korea united arab emirates two located india accounted using equity method accounting net earnings affiliates 2010 increased 08 million 51 compared 2009 primarily due increased earnings epd joint ventures south korea india partially offset decreased earnings fcd joint venture india epd joint venture japan net earnings affiliates 2009 decreased 12 million compared 2008 primarily attributable fcd joint venture india impact consolidation niigata worthington company ltd “niigata” first quarter 2008 purchased remaining 50 interest operating income operating income 2010 decreased 481 million 76 compared 2009 operating income included effect approximately 60 million increased savings realized decrease 498 million charges resulting realignment programs compared 2009 included negative currency effects approximately 4 million overall net decrease primarily result 1384 million decrease gross profit partially offset 895 million decrease sga discussed operating income 2009 increased 138 million 22 compared 2008 increase included effect 681 million charges realignment programs 2009 mostly offset savings realized realignment programs increase included negative currency effects approximately 48 million overall net increase primarily result 471 million decrease sga partially offset 322 million decrease gross profit discussed interest expense interest income interest expense 2010 decreased 57 million compared 2009 primarily result decreased interest rates interest expense decreased 113 million 2009 compared 2008 primarily result decreased interest rates december 31 2010 approximately 68 debt fixed rates including effects 3500 million notional interest rate swaps interest income 2010 decreased 16 million compared 2009 due primarily decreased interest rates interest income 2009 decreased 52 million compared 2008 due decreased interest rates expense income net expense income net 2010 increased 103 million 1288 expense 183 million compared 2009 primarily due 139 million increase losses forward exchange contracts 48 million increase losses arising transactions currencies sites’ functional currencies abovementioned changes primarily reflected strengthening us dollar exchange rate versus euro also included increase losses arising transactions currencies site’s functional currencies impact 124 million loss first quarter 2010 result venezuela’s devaluation bolivar partially offset realized foreign currency exchange gains 48 million related settlement us dollar denominated liabilities favorable essential items rate 260 bolivars us dollar see note 1 consolidated financial statements included item 8 annual report additional details impact venezuela’s currency devaluation addition expensed 16 million loan costs associated refinancing credit facilities fourth quarter 2010 losses partially offset miscellaneous gains income largest 31 million gain sale investment joint venture 2010 accounted cost method expense income net 2009 decreased net expense 80 million compared net income 202 million 2008 primarily due 135 million increase net losses arising transactions currencies sites’ functional currencies 110 million decrease net gains forward exchange contracts primarily euro british pound 28 million gain 2008 bargain purchase remaining 50 interest niigata discussed note 2 consolidated financial statements included item 8 annual report recur tax expense tax rate 2010 2009 effective tax rates differed federal statutory rate 35 primarily due net impact foreign operations included impacts lower foreign tax rates changes reserves established uncertain tax positions 2008 effective tax rate differed federal statutory rate 35 primarily due net impact foreign operations included impacts lower foreign tax rates changes reserves established uncertain tax positions benefits arising permanent reinvestment foreign subsidiaries changes valuation allowance estimates favorable tax ruling luxembourg net impact discrete items included discussion approximately 22 million lowered effective tax rate approximately 37 operations certain asian countries provide various tax incentives 2004 received 5year 10 tax rate singapore income excess prescribed base amount generated certain regional headquarter activities subject certain employment investment requirements 2008 10 tax rate singapore extended 2011 india granted 100 tax exemptions profits derived export sales certain manufacturing operations prescribed areas period 10 years exemption profits derived export sales expire 2011 manufacturing operations exemption expired 2007 may 17 2006 tax increase prevention reconciliation act 2005 signed law creating exclusion us taxable income certain types foreign related party payments dividends interest rents royalties prior 2006 subject us taxation exclusion effective years 2006 2011 applies certain related party payments effective tax rate based upon current earnings estimates future taxable earnings domestic international location changes factors including ability utilize foreign tax credits net operating losses results tax audits could impact tax rate future periods december 31 2010 foreign tax credits 295 million expiring 2018 2020 recorded valuation allowances additionally recorded us net deferred tax assets 479 million relate net operating losses tax credits deductible temporary differences available reduce taxable income future periods definite expiration able utilize portion credits losses effective tax rate would increase net earnings per share net earnings 2010 decreased 396 million 3883 million 688 per diluted share compared 2009 decrease primarily attributable 481 million decrease operating income 103 million increase expense income net partially offset 57 million decrease interest expense discussed 149 million decrease tax expense net earnings 2009 decreased 145 million 4279 million 759 per diluted share compared 2008 decrease primarily attributable 282 million increase expense income net 88 million increase tax expense partially offset 138 million increase operating income 113 million decrease interest expense discussed comprehensive expense income comprehensive expense income 2010 decreased 644 million expense 14 million primarily reflecting strengthening us dollar exchange rate versus euro december 31 2010 compared december 31 2009 partially offset decrease pension postretirement expense 2010 comprehensive expense income 2009 increased 2538 million income 630 million compared 2008 increase due primarily weakening us dollar exchange rate versus euro december 31 2009 compared december 31 2008 well decrease pension postretirement expense due primarily events 2008 recur increase interest rate hedging activity business segments conduct operations three business segments based type product manage business evaluate segment performance allocate resources based segment’s operating income see note 17 consolidated financial statements included item 8 annual report discussion segments key operating results three business segments epd ipd fcd discussed fsg engineered product division segment results largest business segment epd design manufacture distribute service engineered pumps pump systems mechanical seals auxiliary systems provide related services collectively referred “original equipment” epd includes longer leadtime highly engineered pump products mechanical seals epd also manufactures replacement parts related equipment provides full array replacement parts repair support services collectively referred “aftermarket” epd primarily operates oil gas petrochemical power generation industries epd operates 39 countries 26 manufacturing facilities worldwide nine located europe nine north america four asia four latin america 117 service centers including colocated manufacturing facilities bookings 2010 increased 2660 million 135 compared 2009 increase included currency benefits approximately 13 million increase bookings reflects higher demand products oil gas general industries across regions including impact order excess 80 million crude oil pumps seals related support services received second quarter 2010 customer bookings increased 1149 million including currency benefits approximately 13 million latin america 782 million north america including currency benefits approximately 8 million 634 million including negative currency effects approximately 26 million ema 238 million including currency benefits approximately 18 million asia pacific increases attributable original equipment aftermarket bookings major projects oil gas general mining power generation chemical industries partially offset decreased bookings water management industry decreased aftermarket bookings ema 22 billion bookings 2010 approximately 54 oil gas 19 power generation 12 chemical 1 water management 14 general industries interdivision bookings eliminated included consolidated bookings disclosed increased 124 million bookings 2009 decreased 6475 million 247 compared 2008 decrease included negative currency effects approximately 113 million decrease bookings reflects lower demand customerdriven large project delays due significant decrease rate general global economic growth compared 2008 decrease consisted declines original equipment bookings major projects driven declines oil gas general mining water management industries included impact 85 million order supply variety pumps build abu dhabi crude oil pipeline booked 2008 recur customer bookings decreased 2820 million including negative currency effects approximately 61 million ema 2490 million north america 1274 million including negative currency effects approximately 41 million latin america interdivision bookings eliminated included consolidated bookings disclosed increased 254 million 20 billion bookings 2009 approximately 49 oil gas 22 power generation 13 chemical 4 water management 12 general industries sales 2010 decreased 1636 million 71 compared 2009 decrease included negative currency effects approximately 4 million customer sales decreased ema 1313 million including negative currency effects approximately 43 million north america 798 million including currency benefits approximately 8 million primarily driven original equipment sales decreases partially offset increases customer sales latin america 325 million including currency benefits 14 million asia pacific 102 million including currency benefits approximately 17 million primarily driven increased aftermarket sales interdivision sales eliminated included consolidated sales disclosed decreased 14 million sales 2009 increased 641 million 29 compared 2008 increase included negative currency effects approximately 102 million increase driven shipments original equipment large project orders booked 2008 oil gas power generation industries stronger prices favorable contributed increase original equipment sales 2009 compared 2008 customer sales increased 828 million including negative currency effects approximately 58 million ema 284 million including negative currency effects approximately 2 million asia pacific 37 million including negative currency effects approximately 39 million latin america increases partially offset decrease north america 533 million attributable decline aftermarket customer sales primarily chemical general industries interdivision sales eliminated included consolidated sales disclosed decreased 03 million gross profit 2010 decreased 606 million 72 compared 2009 gross profit margin 2010 364 comparable period 2009 gross profit margin negatively impacted less favorable pricing beginning year backlog compared 2009 negative impact decreased sales absorption fixed manufacturing costs decrease gross profit margin mostly offset sales mix shift towards higher margin aftermarket sales increased savings realized decreased charges resulting realignment programs compared 2009 well operational efficiencies savings realized supply chain initiatives gross profit 2009 increased 317 million 39 compared 2008 increase included effect 243 million charges resulting realignment programs 2009 gross profit margin 2009 364 increased 360 2008 increases provided improved pricing original equipment orders shipped 2009 booked late 2007 early 2008 supply chain initiatives operating efficiency improvements savings realized realignment programs partially offset sales mix shift toward original equipment original equipment generally carries lower margin aftermarket gross profit margin also favorably impacted increase sales 2009 specialty pumps higher margin compared 2008 operating income 2010 decreased 222 million 51 compared 2009 decrease included negative currency effects less 1 million overall net decrease due primarily reduced gross profit 606 million discussed partially offset decreased sga 360 million due increased savings realized decrease charges resulting realignment programs compared 2009 decreased selling marketingrelated expenses strict cost control actions 2010 additionally 44 million benefit adjustment contingent consideration 2009 related acquisition calder discussed recur operating income 2009 increased 330 million 82 compared 2008 operating income included effect 424 million charges resulting realignment programs 2009 overall net increase included negative currency effects approximately 31 million increase due primarily increased gross profit 317 million included effect savings realized realignment programs discussed partially offset increase sga increase sga attributable charges resulting realignment programs partially offset strict cost control actions 44 million benefit adjustment contingent consideration related acquisition calder see note 2 consolidated financial statements included item 8 annual report savings realized realignment programs backlog 14 billion december 31 2010 increased 534 million 39 compared december 31 2009 currency effects provided decrease approximately 14 million overall net increase included impact cancellations 98 million orders booked prior years backlog 14 billion december 31 2010 included 255 million interdivision backlog eliminated included consolidated backlog disclosed backlog 14 billion december 31 2009 decreased 3437 million 199 compared december 31 2008 currency effects provided increase approximately 48 million backlog december 31 2009 includes 299 million interdivision backlog eliminated included consolidated backlog disclosed overall net decrease included impact cancellations 364 million orders booked prior years acquisition calder april 2009 resulted 62 million increase backlog fsg industrial product division segment results ipd design manufacture distribute service preconfigured pumps pump systems including submersible motors collectively referred “original equipment” additionally ipd manufactures replacement parts related equipment provides full array support services collectively referred “aftermarket” ipd includes standardized general purpose pump products primarily operates oil gas chemical water management power generation general industries ipd operates 13 manufacturing facilities three located us six europe operates 21 qrcs worldwide including 11 sites europe four us including colocated manufacturing facilities bookings 2010 increased 44 million 05 compared 2009 increase includes negative currency effects approximately 11 million overall net increase primarily driven increase customer bookings 571 million americas increase interdivision bookings eliminated included consolidated bookings disclosed 202 million mostly offset decreased customer bookings 743 million ema australia overall net decrease customer bookings primarily driven decreased orders original equipment power generation mining chemical industries partially offset increased customer bookings oil gas markets primarily europe 8275 million bookings 2010 approximately 31 oil gas 21 water management 10 chemical 9 power generation 29 general industries bookings 2009 decreased 3178 million 279 compared 2008 decrease included negative currency effects approximately 50 million decrease bookings reflects lower demand due significant decrease rate general global economic growth compared 2008 3107 million decrease customer bookings due decreases original equipment aftermarket customer bookings driven oil gas chemical water management general industries included impact 1109 million thruster orders recorded period 2008 recur decrease driven declines customer bookings 2366 million ema australia 771 million americas decrease interdivision bookings eliminated included consolidated bookings disclosed accounted remaining decrease 71 million 8231 million customer bookings 2009 approximately 29 oil gas 20 water management 14 power generation 11 chemical 26 general industries sales 2010 decreased 1708 million 176 compared 2009 decrease included negative currency effects approximately 9 million decreases customer sales primarily attributable decline sales 1330 million ema australia 305 million americas declines primarily power generation mining chemical industries attributable lower backlog compared 2009 included impact thruster sales orders booked 2008 recur 2010 interdivision sales eliminated included consolidated sales disclosed decreased 63 million sales 2009 increased 143 million 15 compared 2008 increase included negative currency effects approximately 48 million overall net increase driven increase customer sales original equipment ema australia increase 83 million interdivision sales eliminated included consolidated sales disclosed decreases partially offset decreased original equipment aftermarket customer sales americas gross profit 2010 decreased 578 million 220 compared 2009 gross profit margin 2010 256 decreased 270 2009 decrease primarily attributable negative impact decreased sales absorption fixed manufacturing costs less favorable pricing backlog compared 2009 partially offset sales mix shift toward profitable aftermarket sales increased savings realized lower charges resulting realignment programs compared period 2009 gross profit 2009 decreased 125 million 46 compared 2008 decrease included effect 90 million charges resulting realignment programs 2009 gross profit margin 2009 270 decreased 287 2008 charges related realignment programs sales mix shift toward less profitable original equipment sales partially offset savings realized realignment programs strict cost control actions increased utilization lowcost regions operating income 2010 decreased 394 million 365 compared 2009 decrease included negative currency effects approximately 3 million decrease due 578 million decrease gross profit discussed partially offset 184 million decrease sga decrease sga due decreased sellingrelated expenses strict cost control actions 2010 increased savings realized lower charges resulting realignment programs compared 2009 operating income 2009 decreased 92 million 79 compared 2008 decrease included effect 113 million charges resulting realignment programs decrease included negative currency effects approximately 7 million decrease due 125 million decrease gross profit discussed partially offset 33 million decrease sga decrease sga due strict cost control actions 2009 savings realized realignment programs 2009 backlog 5680 million december 31 2010 increased 124 million 22 compared december 31 2009 currency effects provided decrease approximately 24 million backlog december 31 2010 included 385 million interdivision backlog eliminated included consolidated backlog disclosed backlog 5556 million december 31 2009 decreased 1237 million 182 compared december 31 2008 currency effects provided increase approximately 30 million backlog december 31 2009 included 198 million interdivision backlog eliminated included consolidated backlog disclosed flow control division segment results second largest business segment fcd designs manufactures distributes broad portfolio engineeredtoorder configuredtoorder isolation valves control valves valve automation products boiler controls related services fcd leverages experience application knowhow offering complete menu engineered services complement expansive product portfolio fcd total 54 manufacturing facilities qrcs 23 countries around world five 25 manufacturing operations located us based independent industry sources believe fourth largest industrial valve supplier global basis discussed note 2 consolidated financial statements included item 8 annual report acquired inclusion fcd valbart privatelyowned italian valve manufacturer effective july 16 2010 valbart’s results operations consolidated since date acquisition included fcd’s segment results operations pro forma information provided acquisition due immateriality impact acquisition valbart fcd’s results operations year ended december 31 2010 includes bookings 546 million sales 383 million gross profit loss 09 million operating loss 124 million including acquisitionrelated costs 27 million period end backlog 948 million gross profit loss margin 23 operating loss primarily resulted negative impact low margins acquired backlog acquisitionrelated costs certain integration costs amortization assets acquired fair value “purchase accounting adjustments” expect losses continue work fully integrate valbart’s operations bookings 2010 increased 1083 million 90 compared 2009 increase included negative currency effects approximately 14 million overall net increase bookings attributable bookings provided valbart 546 million strength oil gas industry primarily ema north america increased bookings general industries driven growth district heating market russia growing aftermarket repair replacement orders inventory restocking orders distributors key driver north american market recovery increased bookings partially offset decreases power generation industry driven orders 45 million supply valves four westinghouse electric co nuclear power units booked period 2009 recur customerdriven large project delays chemical oil gas industries 13 billion bookings 2010 approximately 27 oil gas 27 chemical 26 general industries 18 power generation 2 water management bookings 2009 decreased 2881 million 194 compared 2008 decrease included negative currency effects approximately 53 million decrease bookings primarily attributable europe north america decreased approximately 135 million 70 million respectively driven overall decrease orders distributors chemical industry well customerdriven delays large projects oil gas market decline orders distributors europe driven decrease general industries due uncertainty surrounding global economic conditions decline orders distributors north america due inventory destocking chemical industry represented largest global market decline especially europe north america oil gas bookings declined due customerdriven large project delays bookings asia pacific decreased approximately 40 million attributable customerdriven delays large projects chemical industry bookings latin america decreased approximately 26 million due large pulp paper projects first quarter 2008 recur decreases partially offset increase nuclear power orders included orders recorded third quarter 2009 45 million supply valves four westinghouse electric co nuclear power units north america new project bookings emerging solar market reflecting future growth opportunities growth middle east expansion qrc joint venture activities increased aftermarket repair replacement orders 12 billion bookings 2009 approximately 29 chemical 28 general industries 23 power generation 20 oil gas sales 2010 decreased 57 million 05 compared 2009 decrease included negative currency effects approximately 19 million decrease sales ema approximately 27 million included impact sales provided valbart 383 million primarily driven decline sales chemical industry well customerdriven delays large projects oil gas industry decrease partially offset increase sales approximately 17 million asia pacific primarily driven nuclear fossil power markets china sales 2009 decreased 1785 million 129 compared 2008 decrease included negative currency effects approximately 56 million sales europe north america decreased approximately 91 million 56 million respectively driven overall decline sales distributors chemical industry well customerdriven delays large projects oil gas industry 2009 drivers decline sales consistent drivers decline bookings discussed gross profit 2010 decreased 229 million 51 compared 2009 gross profit margin 2010 353 decreased 370 period 2009 decrease primarily attributable negative impact low margins acquired valbart backlog well decreased sales absorption fixed manufacturing costs partially offset favorable product mix increased savings realized decreased charges resulting realignment programs compared 2009 well various cip initiatives improved utilization lowcost regions gross profit 2009 decreased 525 million 105 compared 2008 decrease included effect 75 million charges resulting realignment programs 2009 gross profit margin 2009 370 increased 360 2008 increase gross profit margin attributable improved pricing large projects booked 2008 shipped 2009 increased aftermarket repair replacement business materials cost savings various cip initiatives improved utilization lowcost regions volumerelated cost control actions savings realized realignment programs improvements partially offset pricing pressure negative impact decreased sales absorption fixed manufacturing costs operating income 2010 decreased 237 million 116 compared 2009 decrease included negative currency effects approximately 1 million decrease principally attributable 229 million decrease gross profit discussed partially offset 08 million decrease sga decreased sga attributable decreased selling marketingrelated expenses increased savings realized decreased charges resulting realignment programs compared 2009 partially offset 50 million bad debt recoveries period 2009 recur 27 million valbart acquisitionrelated costs valbart provided net operating loss 124 million including impact acquisitionrelated costs operating income 2009 decreased 146 million 67 compared 2008 decrease included effect 115 million charges resulting realignment programs 2009 decrease included negative currency effects approximately 10 million decrease attributable 525 million decrease gross profit included effect savings realized realignment program partially offset 412 million decrease sga reduced sga attributable decreased selling marketingrelated expenses strict cost control actions 50 million cash recoveries bad debts reserved 2008 savings realized realignment programs 2009 backlog 6585 million december 31 2010 increased 1732 million 357 compared december 31 2009 currency effects provided decrease approximately 13 million overall net increase included backlog related acquisition valbart 948 million backlog 4853 million december 31 2009 comparable december 31 2008 currency effects provided increase approximately 9 million liquidity capital resources cash flow analysis existing cash generated operations borrowings available existing revolving line credit primary sources shortterm liquidity sources operating cash generally include sale products services conversion working capital particularly accounts receivable inventories total cash balance december 31 2010 5576 million compared 6543 million december 31 2009 4721 million december 31 2008 working capital increased 2010 due primarily lower accrued liabilities 1256 million resulting primarily reductions accruals longterm broadbased annual incentive program payments higher inventory 529 million higher accounts receivable 520 million partially offset higher accounts payable 707 million 2010 contributed 334 million us pension plan working capital increased 2009 due primarily lower accrued liabilities 1068 million resulting primarily reductions accruals longterm broadbased annual incentive program payments reductions advanced cash received customers lower accounts payable 1047 million decreases partially offset lower inventory 747 million lower accounts receivable 507 million 2009 contributed 831 million us pension plan goal days’ sales receivables outstanding “dso” 60 days fourth quarter 2010 dso 66 days compared 59 days 62 days periods 2009 2008 respectively reference purposes based 2010 sales dso improvement one day could provide approximately 13 million cash increase inventory used 529 million cash flow 2010 compared providing cash 747 million 2009 using cash 1955 million 2008 inventory turns 34 times december 31 2010 compared 40 times december 31 2009 36 times december 31 2008 reference purposes based 2010 data improvement one turn could yield approximately 201 million cash outflows investing activities 2867 million 1386 million 1196 million 2010 2009 2008 respectively due primarily capital expenditures cash paid acquisitions cash outflows 2010 also included 1994 million acquisition valbart discussed “payments acquisitions” capital expenditures 2010 1020 million decrease 64 million compared 2009 capital expenditures focused capacity expansion including expansion qrc network nuclear capabilities lowcost sourcing enterprise resource planning application upgrades information technology infrastructure cost reduction opportunities cash outflows financing activities 1429 million 2010 compared 1071 million 2009 1855 million 2008 cash outflows 2010 resulted primarily payment 636 million dividends 460 million repurchase common shares approximately 40 million liquidate debt completing new credit agreement december 2010 discussed “credit facilities” cash outflows 2009 resulted primarily payment 592 million dividends 409 million repurchase common shares february 22 2010 board directors authorized increase payment quarterly dividends common stock 027 per share 029 per share payable quarterly beginning april 7 2010 february 21 2011 board directors authorized increase payment quarterly dividends common stock 029 per share 032 per share payable quarterly beginning april 14 2011 generally dividend dateofrecord last month quarter dividend paid following month subsequent dividends reviewed board directors quarterly basis declared discretion dependent assessment financial situation business outlook applicable time february 26 2008 board directors approved program repurchase 3000 million outstanding common stock program commenced second quarter 2008 share repurchase program expiration date reserve right limit terminate repurchase program time without notice repurchased 450000 544500 1741100 shares 460 million 409 million 1650 million 2010 2009 2008 respectively date repurchased total 2735600 shares 2519 million program cash needs next 12 months expected line 2010 resulting expected decrease pension contributions small decrease incentive compensation payments along small anticipated increase capital expenditures increase cash dividends believe cash flows operating activities combined availability revolving line credit existing cash balances sufficient enable us meet cash flow needs next 12 months however cash flows operations could adversely affected decrease rate general global economic growth well economic political risks associated sales products operational factors competition regulatory actions fluctuations foreign currency exchange rates fluctuations interest rates among factors believe cash flows operating activities expectation continuing availability draw upon credit agreements also sufficient meet cash flow needs periods beyond next 12 months payments acquisitions regularly evaluate acquisition opportunities various sizes cost terms financing raised conjunction acquisition including ability raise economical capital critical consideration evaluation discussed note 2 consolidated financial statements included item 8 annual report effective july 16 2010 acquired inclusion fcd 100 valbart privatelyowned italian valve manufacturer share purchase cash 1994 million included 338 million existing valbart net debt defined valbart’s third party debt less cash hand repaid closing valbart manufactures trunnionmounted ball valves used primarily upstream midstream oil gas applications enables us offer complete valve product portfolio oil gas project customers acquisition included valbart’s portion joint venture us entered december 2009 operational 2010 terms purchase agreement deposited 58 million escrow held applied breach representations warranties indemnities 30 months expiration escrow period residual amounts released sellers satisfaction purchase price effective april 21 2009 acquired inclusion epd calder private swiss company supplier energy recovery technology use global desalination market 308 million net cash acquired total purchase price 284 million paid closing 24 million paid working capital valuation completed early july 2009 2008 acquired inclusion epd remaining 50 interest niigata effective march 1 2008 24 million cash financing debt including capital lease obligations consisted credit facilities december 14 2010 “closing date” entered new credit agreement “credit agreement” bank america na swingline lender letter credit issuer administrative agent lenders party thereto together “lenders” term debt “new term loan” revolving credit facility “new revolving credit facility” credit agreement provides aggregate commitment 10 billion including 5000 million new term loan facility maturity date december 14 2015 5000 million new revolving credit facility maturity date december 14 2015 collectively referred “new credit facilities” new revolving credit facility includes 3000 million sublimit issuance letters credit subject certain conditions right increase amount new revolving credit facility aggregate amount exceed 2000 million used proceeds advanced new term loan along approximately 40 million cash hand repay outstanding indebtedness thenexisting credit agreement dated august 12 2005 amended included 6000 million term loan “old term loan” 4000 million revolving line credit collectively referred “old credit agreement” connection repayment outstanding letters credit old credit agreement transferred new revolving credit facility terminated old credit agreement closing date proceeds credit agreement used fund capital expenditures working capital needs future draws new revolving credit facility subject various conditions including existence default credit agreement incurred 116 million fees related credit agreement prior refinancing 27 million unamortized deferred loan costs related old credit agreement based upon syndicate financial institutions credit agreement expensed 15 million unamortized deferred loan costs 01 million fees related credit agreement expense income net 2010 remaining 115 million fees related credit agreement capitalized along remaining 12 million previously unamortized deferred loan costs total 127 million deferred loan costs included assets net costs amortized term credit agreement recorded interest expense december 31 2010 2009 amounts outstanding new revolving credit facility revolving line credit old credit agreement applicable outstanding letters credit 1339 million 1231 million december 31 2010 2009 respectively reduced borrowing capacity 3661 million 2769 million respectively borrowings new credit facilities respect swingline loans bear interest rate equal option either 1 london interbank offered rate “libor” plus 175 250 applicable depending consolidated leverage ratio 2 base rate based greater prime rate recently announced administrative agent new credit facilities federal funds rate plus 050 3 daily rate equal one month libor plus 10 plus applicable margin 075 150 determined reference ratio total debt consolidated earnings interest taxes depreciation amortization “ebitda” applicable interest rate december 31 2010 23 borrowings new credit facilities connection new credit facilities entered 3500 million notional amount interest rate swaps december 31 2010 hedge exposure floating interest rates pay lenders new credit facilities commitment fee equal percentage ranging 030 050 determined reference ratio total debt consolidated ebitda unutilized portion new revolving credit facility letter credit fees respect standby letter credit outstanding new credit facilities equal percentage based applicable margin effect libor borrowings new revolving credit facility fees financial performance standby letters credit 20 10 respectively obligations credit agreement unconditionally guaranteed jointly severally substantially existing subsequently acquired organized domestic subsidiaries 65 capital stock certain foreign subsidiaries subject certain controlled company materiality exceptions lenders agreed release collateral achieve investment grade rating defined credit agreement moody’s investors service inc standard poor’s ratings services senior unsecured noncreditenhanced longterm debt case outlook stable better understanding identical collateral required pledged lenders anytime following release collateral investment grade rating maintained addition prior obtaining maintaining investment grade credit ratings guarantors’ obligations credit agreement collateralized substantially guarantors’ assets achieved ratings december 31 2010 european letter credit facilities october 30 2009 entered new 364day unsecured european letter credit facility “new european loc facility” initial commitment 1250 million new european loc facility renewable annually consistent old european loc facility used contingent obligations respect surety performance bonds bank guarantees similar obligations maturities five years renewed new european loc facility october 2010 consistent terms additional 364day period pay fees 135 040 utilized unutilized capacity respectively new european loc facility outstanding letters credit drawn new european loc facility 557 million 745 million 28 million 40 million december 31 2010 2009 respectively ability issue additional letters credit previous european letter credit facility “old european loc facility” commitment 1100 million expired november 9 2009 paid annual fronting fees 0875 010 respectively letters credit written old european loc facility outstanding letters credit written old european loc facility 333 million 445 million 779 million 1115 million december 31 2010 2009 respectively certain banks parties facilities managing exposures aggregated basis commitment new european loc facility reduced face amount existing letters credit written old european loc facility prior expiration existing letters credit remain outstanding accordingly offset 1250 million capacity new european loc facility maturity december 31 2010 approximately two years majority outstanding existing letters credit consideration outstanding commitments facilities available capacity new european loc facility 1023 million december 31 2010 557 million drawn debt prepayments repayments made scheduled repayments old credit agreement 43 million 57 million 57 million 2010 2009 2008 respectively made mandatory repayments optional prepayments 2010 2009 2008 exception proceeds advanced new term loan facility along approximately 40 million cash hand repay outstanding indebtedness old credit agreement may prepay loans new credit facilities whole part without premium penalty time debt covenants matters new credit facilities contain among things covenants restricting subsidiaries’ ability dispose assets merge pay dividends repurchase redeem capital stock indebtedness incur indebtedness guarantees create liens enter agreements negative pledge clauses make certain investments acquisitions enter sale leaseback transactions enter transactions affiliates make capital expenditures engage business activity existing business new credit facilities also contain covenants requiring us deliver lenders audited annual unaudited quarterly financial statements leverage interest coverage financial covenant certificates compliance maximum permitted leverage ratio 325 times total debt consolidated ebitda minimum interest coverage 325 times consolidated ebitda total interest expense compliance financial covenants new credit facilities tested quarterly new credit facilities include events default customary types credit facilities including nonpayment principal interest violation covenants incorrectness representations warranties cross defaults cross acceleration bankruptcy material judgments employee retirement income security act 1974 amended “erisa” events actual asserted invalidity guarantees security documents certain changes control company occurrence event default could result acceleration guarantors’ obligations new credit facilities complied covenants new credit facilities december 31 2010 european letter credit facilities contain covenants restricting ability certain foreign subsidiaries issue debt incur liens sell assets merge consolidate make certain investments pay dividends enter agreements negative pledge clauses engage business activity existing business european letter credit facilities also incorporate reference covenants contained new credit facilities european letter credit facilities include events default usual types letter credit facilities including nonpayment fee obligation violation covenants incorrectness representations warranties cross defaults cross acceleration bankruptcy material judgments erisa events actual asserted invalidity guarantees certain changes control company occurrence event default could result termination commitments acceleration obligations european letter credit facilities complied covenants european letter credit facilities december 31 2010 liquidity analysis cash balance decreased 967 million 5576 million december 31 2010 compared december 31 2009 cash draw primarily due acquisition valbart 1994 million cash third quarter 2010 planned significant cash uses 2010 including broadbased annual employee incentive compensation program payments related prior period performance 1020 million capital expenditures 636 million dividend payments 460 million share repurchases use approximately 40 million cash hand repay outstanding indebtedness prior credit agreement funding increased working capital requirements monitor depository institutions hold cash equivalents regular basis believe placed deposits creditworthy financial institutions approximately 5 new term loan due mature 2011 2012 noted new term loan new revolving credit facility mature december 2015 effects 3500 million notional interest rate swaps approximately 68 term debt fixed rates december 31 2010 december 31 2010 borrowing capacity 3661 million 5000 million new revolving credit facility due outstanding letters credit net available capacity new european loc facility 466 million new revolving credit facility new european loc facility committed held diversified group financial institutions 2010 2009 experienced increases values us pension plan assets experienced significant declines values us pension plan assets 2008 resulting primarily declines global equity markets consideration impact contributions 2009 partial recovery 2009 2010 asset value declines 2008 intent become fullyfunded contributed 334 million us pension plan 2010 continue maintain asset allocation consistent strategy maximize total return reducing portfolio risks asset class diversification continue monitor evaluate implications lingering effects global financial markets banking systems disruptions experienced 2008 2009 current business including access capital customers suppliers state global economy credit capital markets stabilized recent months additional disruptions lingering uncertainty functioning markets could potentially materially impair customers’ ability access markets increase associated costs well customers’ ability pay full andor timely basis outlook 2011 future results operations forwardlooking statements contained annual report including mda involve number risks uncertainties particular statements regarding goals strategies new product introductions plans cultivate new businesses future economic conditions revenue pricing gross profit margin costs capital spending depreciation amortization research development expenses potential impairment investments tax rate pending tax legal proceedings future results operations may also affected amount type valuation sharebased awards granted well amount awards forfeited due employee turnover addition various important factors discussed number factors could cause actual results differ materially expectations see risks described “item 1a risk factors” annual report bookings increased 88 2010 compared 2009 backlog december 31 2010 increased 94 compared december 31 2009 expected drive increased revenue 2011 compared 2010 excluding currency fluctuations booking represents contract certain circumstances modified canceled include varying lengths time booking time revenue recognition guarantee increase bookings result comparable increase revenues otherwise indicative future results believe primary markets continue provide opportunities evidenced nine consecutive quarters approximately 1 billion bookings yearoveryear increase backlog remain cautious outlook 2011 given continuing uncertainty global economic conditions experienced disruption business resulting recent developing political economic conditions middle east continue closely monitor conditions additional discussion markets opportunities see “business overview markets” section mda expect experience increased external pressures gross profit margin 2011 compared 2010 2009 due price competition associated current global economic conditions expect gross profit margin pressures least partially offset planned increases shipments operational improvements continuation end user strategy strength aftermarket business supply chain initiatives disciplined contract bidding savings achieved realignment programs part previously communicated realignment programs plan incur 50 million realignment costs 2011 result activities borrowings new credit facilities carry floating rate interest december 31 2010 3500 million derivative contracts convert portion floating interest rates fixed interest rates reduce exposure interest rate volatility result reducing volatility may fully benefit decrease interest rates expect interest expense 2011 comparable 2010 however portion debt carries floating rate interest debt subject volatility rates could negatively impact interest expense results operations may also impacted unfavorable foreign currency exchange rate movements see “item 7aitem 7 managements discussion analysis financial condition results operations following discussion analysis provided increase understanding read conjunction accompanying consolidated financial statements notes see “item 1a risk factors” “forwardlooking statements” included annual report form 10k year ended december 31 2012 annual report discussion risks uncertainties assumptions associated statements unless otherwise noted amounts discussed herein consolidated executive overview company believe worldleading manufacturer aftermarket service provider comprehensive flow control systems develop manufacture precisionengineered flow control equipment integral movement control protection flow materials customers’ critical processes product portfolio pumps valves seals automation aftermarket services supports global infrastructure industries including oil gas chemical power generation water management well general industrial markets products services add value manufacturing platform global network quick response centers qrcs offer broad array aftermarket equipment services installation advanced diagnostics repair retrofitting currently employ approximately 17000 employees 50 countries business model significantly influenced capital spending global infrastructure industries placement new products service aftermarket services existing operations worldwide installed base products important source aftermarket revenue products expected ensure maximum operating time many key industrial processes past several years significantly invested aftermarket strategy provide local support drive customer investments offerings use services replace repair installed products aftermarket portion business also helps provide business stability various economic periods aftermarket business served network 177 qrcs located around globe provides variety service offerings customers including spare parts service solutions product life cycle solutions valueadded services generally higher margin business compared original equipment business key component profitable growth strategy operations conducted three business segments referenced throughout management’s discussion analysis financial condition results operations mda • engineered product division epd long lead time custom highlyengineered pumps pump systems mechanical seals auxiliary systems replacement parts related services • industrial product division ipd preconfigured engineered pumps pump systems related products services • flow control division fcd engineered industrial valves control valves actuators controls related services business segments share focus industrial flow control technology high number common customers segments also complementary product offerings technologies often combined applications provide us net competitive advantage segments also benefit global footprint economies scale reducing administrative overhead costs serve customers cost effectively example segment leadership reports chief operating officer coo segments share leadership operational support functions research development marketing supply chain reputation product portfolio built 50 wellrespected brand names worthington idp valtek limitorque durco edward anchordarling durametallic believe one comprehensive industry products services sold either directly designated channels 10000 companies including world’s leading engineering procurement construction epc firms original equipment manufacturers distributors end users continue build geographic breadth qrc network goal positioned near customers possible service support order capture valuable aftermarket business along ensuring local capability sell install service equipment remote regions equally imperative continuously improve global operations continue expand global supply chain capability meet global customer demands ensure quality timely delivery products continue devote resources improving supply chain processes across business segments find areas synergy cost reduction improve supply chain management capability ensure meet global customer demands also remain focused improving ontime delivery quality managing warranty costs percentage sales across global operations assistance focused continuous improvement process cip initiative goal cip initiative includes lean manufacturing six sigma business management strategy value engineering maximize service fulfillment customers ontime delivery reduced cycle time quality highest internal productivity experienced improved bookings 2012 despite environment continued global macroeconomic uncertainty oil gas industry experienced stable conditions chemical industry saw increased activity growth chemical industry driven asia pacific middle eastern countries accelerating investment chemical processing capabilities north america producers investing utilize natural gas lowcost feedstock experienced modest decline bookings europe economic conditions region remain challenged power generation industry experienced slowing level investment 2012 due uncertainty relating environmental regulations potential regulatory impact overall civilian nuclear market 2012 continued favorable conditions aftermarket business driven customers need maintain continuing operations across several industries expansion aftermarket capabilities integrated solutions offerings pursuit major capital projects globally investments localized customer service remain key components longterm growth strategy also provide stability various economic periods believe commitment localize service support capabilities close customers operations qrc network enabled us grow market share aftermarket portion business believe customer relationships global presence highlyregarded technical capabilities continue opportunities core industries however face ongoing challenges affecting many companies industry significant multinational presence economic political currency risks december 31 2012 direct investments european sovereign nonsovereign debt however certain defined benefit plans hold investments european equity fixed income securities discussed note 12 consolidated financial statements included item 8 financial statements supplementary data item 8 annual report broad macrolevel economic impacts including foreign exchange rate impacts experience direct measurable disruptions 2012 due european economic crisis continue monitor evaluate impact future developments region current business customers suppliers state global economy additional adverse developments could potentially impact customers’ exposures sovereign nonsovereign european debt could soften level capital investment demand products services may 31 2012 announced board directors endorsed updated capital structure strategy designed make financial structure efficient capital structure strategy includes targeting longterm gross leverage ratio 10x20x total debt ebitda business cycle versus thencurrent gross leverage ratio 07x ii expanded share repurchase program 10 billion authorization included approximately 233 million remaining previous repurchase authorization expanded share repurchase program includes amounts incremental previouslyannounced policy annually returning 40 50 running twoyear average net earnings shareholders intend adhere policy foreseeable future returns cash whether combination dividends share repurchases reviewed individually declared board directors implemented management discretion depending financial condition business opportunities time market conditions part 10 billion share repurchase program june 14 2012 entered accelerated share repurchase program asr program asr program completed december 12 2012 note 15 consolidated financial statements included item 8 annual report includes discussion asr program share repurchase program payments quarterly dividends common stock part continuing effort execute capital structure strategy entered new credit agreement august 2012 new agreement provided additional debt capacity execute growth initiatives also enhanced operating flexibility reduced borrowing costs attaining investment grade credit ratings three rating agencies additionally september 11 2012 issued 5000 million aggregate principal amount senior notes due september 15 2022 senior notes see note 10 consolidated financial statements included item 8 annual report complete discussion longterm debt markets following discussion read conjunction outlook 2013 section included mda products services used several distinct industries oil gas chemical power generation water management number industries collectively referred general industries demand products depends level new capital investment planned unplanned maintenance expenditures customers level new capital investment depends turn capital infrastructure projects driven need oil gas power generation water management well general economic conditions drivers generally related phase business cycle respective industries expectations future market behavior levels maintenance expenditures additionally driven reliability equipment planned unplanned downtime maintenance required capacity utilization process customers include epc firms original equipment manufacturers end users distributors sales epc firms original equipment manufacturers typically large project orders critical applications certain sales distributors project orders typically procured customers either directly us indirectly contractors new construction projects facility enhancement projects quick turnaround business also refer book ship defined orders received customer booked shipped within three months receipt orders typically standardized general purpose products parts services three business segments generate certain levels type business sale aftermarket products services benefit large installed base original equipment requires periodic maintenance repair replacement parts use manufacturing platform global network qrcs offer broad array aftermarket equipment services installation advanced diagnostics repair retrofitting geographic regions positioned provide quick response believe customers traditionally relied us rather competitors aftermarket products due highly engineered customized products however aftermarket standard products competitive existence common standards allows easier replacement installed products proximity service centers timeliness delivery quality important considerations aftermarket products services continue selectively expand global qrc network improve ability capture important aftermarket business oil gas oil gas industry represented approximately 41 40 bookings 2012 2011 respectively experienced stable level capital spending 2012 compared previous year due need continue building infrastructure bring future capacity line meet future demand expectations majority investment major oil companies continued focus upstream production activities however improved levels spending midstream pipeline downstream refining operations particularly developing markets refining overcapacity remained concern throughout year mature regions overall demand oil remained volatile throughout year aftermarket opportunities industry improved throughout year integrated solutions offering helping offset reduction servicerelated business many refineries performed work personnel outlook oil gas industry heavily dependent demand growth mature markets developing geographies believe oil gas companies continue upstream downstream investment plans line projections future demand growth production declines existing operations projected decline demand could cause oil gas companies reduce overall level spending could decrease demand products services however believe longterm fundamentals industry remain solid based current supply projected depletion rates existing fields forecasted longterm demand growth longstanding reputation providing successful solutions upstream midstream downstream applications along advancements portfolio offerings believe continue wellpositioned pursue global opportunities industry chemical industry represented approximately 19 18 bookings 2012 2011 respectively capital spending chemical industry increased 2012 expansion existing facilities approval new projects around world middle east asia seen significant growth chemical projects countries regions try access higher margins available downstream petrochemical markets additionally north america seen revival chemical industry shale gas changed economics production allowing lower cost abundant feedstock drive high value chemical projects aftermarket opportunities improved majority year indications improvements continue 2013 despite strong year outlook chemical industry remains heavily dependent global economic conditions global economies stabilize unemployment conditions improve rise consumer spending follow increase spending would drive greater demand chemicalbased products supporting improved levels capital investment believe chemical industry nearterm continue invest maintenance upgrades optimization existing assets developing regions continue investing capital infrastructure meet current future indigenous demand believe global presence localized aftermarket capabilities wellpositioned serve potential growth opportunities industry power generation power generation industry represented approximately 14 16 bookings 2012 2011 respectively 2012 power generation industry continued experience softness capital spending mature regions driven uncertainty related environmental regulations well potential regulatory impacts overall civilian nuclear market developing regions capital investment remained place driven increased demand forecasts electricity countries china india global concerns environment continue support increase desired future capacity renewable energy sources majority active planned construction throughout 2012 continued utilize designs based fossil fuels natural gas increased percentage utilization driven market prices gas remaining low relatively stable potential unconventional sources gas shale gas power generation industry forecasting increased use form fuel power generation plants believe outlook power generation industry remains favorable current legislative efforts limit emissions carbon dioxide may adverse effect investment plans depending potential requirements imposed timing compliance country however believe proposed methods limiting carbon dioxide emissions offer business opportunities products services believe longterm fundamentals power generation industry remain solid based projected increases demand electricity driven global population growth advancements industrialization growth urbanization developing markets also believe longstanding reputation power generation industry portfolio offerings various generating methods advancements serving renewable energy market carbon capture methodologies well global service support structure position us well future opportunities important industry water management water management industry represented approximately 4 bookings 2012 2011 although water management industry displayed weakness spending levels 2012 desalination projects continued delayed worldwide demand fresh water treatment continues create requirements new facilities upgrades existing systems many require products offer particularly pumps believe persistent demand fresh water economic cycles supports continued investments water management industry facing future supplydemand challenge relative forecasted global population growth coupled advancement industrialization urbanization due limitations usable fresh water around globe continues need increased investment desalination investment forecasted significantly increase next several decades believe global leader desalination market already important source fresh water mediterranean region middle east expect trend desalination expand traditional areas coastal areas around globe believe presents significant market opportunity pumps valves actuation products energy recovery devices general industries general industries represented aggregate approximately 22 bookings 2012 2011 general industries comprises variety different businesses including mining ore processing pharmaceuticals pulp paper food beverage smaller applications none individually represented 5 total bookings 2012 2011 general industries also includes sales distributors whose end customers operate industries primarily serve outlook group industries heavily dependent upon condition global economies consumer confidence levels longterm fundamentals many industries remain sound many products produced industries common staples industrialized urbanized economies believe specialty product offerings designed industries aftermarket service capabilities provide continued business opportunities results operations throughout discussion results operations discuss impact fluctuations foreign currency exchange rates calculated currency effects translating current year results monthly basis prior year exchange rates periods discussed note 2 consolidated financial statements included item 8 annual report effective october 28 2011 acquired inclusion epd lawrence pumps inc lpi privatelyowned united states us based company specializing design development manufacture engineered centrifugal slurry pumps critical services within petroleum refining petrochemical pulp paper energy markets also acquired inclusion fcd valbart srl valbart privatelyowned italian valve manufacturer effective july 16 2010 results operations lpi valbart consolidated since respective dates acquisition pro forma information provided acquisitions due immateriality following discussion read conjunction “outlook 2013” section included mda bookings backlog define booking receipt customer order contractually engages us perform activities behalf customer regards manufacture delivery andor support products delivery service bookings recorded subsequently canceled within fiscal period excluded bookings 2012 increased 516 million 11 compared 2011 increase included negative currency effects approximately 204 million increase primarily driven oil gas chemical industries epd ipd general industries epd partially offset declines power generation industry epd ipd oil gas general industries fcd increase heavily weighted toward aftermarket bookings epd lesser extent original equipment bookings ipd offset reduced original equipment bookings fcd increase included 2012 impact ipd orders excess 90 million supply offshore oil gas platform equipment next five years order 2011 excess 80 million supply variety pumps refinery recur 2012 bookings 2011 increased 4330 million 102 compared 2010 increase included currency benefits approximately 149 million increase primarily attributable increased original equipment bookings fcd ipd coupled increased aftermarket bookings epd increases partially offset decreased original equipment bookings epd including impact order excess 80 million supply variety pumps refinery received primarily first quarter 2011 well impact order excess 80 million crude oil pumps seals related support services booked 2010 recur increase also attributable strength oil gas chemical industries fcd general industries fcd ipd power generation chemical industries epd partially offset decrease oil gas industry epd backlog represents aggregate value booked uncompleted customer orders influenced primarily bookings sales cancellations currency effects backlog 26 billion december 31 2012 decreased 412 million 15 compared december 31 2011 currency effects provided increase approximately 22 million currency effects backlog calculated using change period end exchange rates approximately 24 backlog december 31 2012 2011 related aftermarket orders backlog 27 billion december 31 2011 increased 954 million 37 compared december 31 2010 currency effects provided decrease approximately 51 million sales 2012 increased 2411 million 53 compared 2011 increase included negative currency effects approximately 204 million increase primarily due increased original equipment sales ipd fcd aftermarket sales epd increase driven customer sales north america asia pacific middle east partially offset decrease customer sales europe sales 2011 increased 4782 million 119 compared 2010 increase included currency benefits approximately 144 million increase primarily due increased original equipment sales fcd ipd increased aftermarket sales epd increase driven customer sales north america asia pacific middle east sales international customers including export sales us approximately 71 sales 2012 73 2011 2010 sales europe middle east africa ema approximately 37 39 40 total sales 2012 2011 2010 respectively sales asia pacific approximately 20 19 18 total sales 2012 2011 2010 respectively sales latin america approximately 10 total sales 2012 2011 2010 gross profit gross profit margin gross profit 2012 increased 674 million 45 compared 2011 gross profit margin 2012 333 decreased 336 2011 decrease primarily attributed larger effect revenue certain large lower margin projects shipped backlog epd compared period 2011 partially offset effects operational execution improvements epd ipd aftermarket sales approximately 41 total sales consistent period 2011 gross profit 2011 increased 1039 million 74 compared 2010 increase included effect approximately 13 million increased savings realized 99 million decreased charges resulting realignment programs partially offset 68 million charges related ipd recovery plan compared 2010 gross profit margin 2011 336 decreased 350 2010 decrease primarily attributable lower margins certain large projects primarily beginning year backlog negative impact currency margins us dollardenominated sales produced nonus facilities incremental charges associated certain projects shipped late epd charges related ipd recovery plan increased material costs fcd decrease partially offset mix shift higher margin aftermarket sales business segments result sales mix shift aftermarket sales increased approximately 41 total sales compared approximately 39 total sales period 2010 selling general administrative expense sga 2012 increased 80 million 09 compared 2011 currency effects yielded decrease approximately 28 million sellingrelated expenses broadbased annual incentive compensation expenses primarily contributed increase increases partially offset 104 million gain epd first quarter 2012 sale manufacturing facility rio de janeiro brazil preparation opening new manufacturing facility 2013 sga percentage sales 2012 improved 90 basis points compared 2011 due part continued focus cost management sga 2011 increased 691 million 82 compared 2010 increase included currency effects yielded increase approximately 25 million also included effect approximately 10 million increased savings realized 36 million decreased charges resulting realignment programs compared 2010 increase primarily attributable incremental selling marketingrelated expenses associated mentioned increase sales meritrelated compensation increases acquisitionrelated costs incremental sga costs associated acquisition lpi fourth quarter 2011 impact hiring associates support highgrowth areas business increases partially offset decrease broadbased annual longterm incentive program compensation sga percentage sales 2011 improved 70 basis points compared 2010 net earnings affiliates net earnings affiliates represents net income investments eight joint ventures one located japan saudi arabia south korea united arab emirates two located china india accounted using equity method accounting net earnings affiliates 2012 decreased 21 million 110 compared 2011 primarily due decreased earnings fcd joint venture india net earnings affiliates 2011 increased 25 million 151 compared 2010 primarily due increased earnings fcd joint venture india operating income operating income 2012 increased 571 million 92 compared 2011 increase included negative currency effects approximately 36 million increase primarily result 674 million increase gross profit improvement operating income percentage sales primarily due sga percentage sales decreasing 194 203 period 2011 partially offset slight decrease gross profit margin operating income 2011 increased 373 million 64 compared 2010 increase included currency benefits approximately 17 million increase included effect approximately 24 million increased savings realized realignment programs compared 2010 overall net increase primarily result 1039 million increase gross profit partially offset 691 million increase sga discussed interest expense interest income interest expense 2012 increased 73 million compared 2011 increase primarily attributable interest expense associated increased borrowings bridge loan senior notes 13 million unamortized deferred loan costs related prior credit agreement expensed third quarter 2012 see note 10 consolidated financial statements included item 8 annual report definition discussion various credit resources interest expense 2011 increased 19 million compared 2010 primarily due increased interest expense local borrowings fund shortterm cash needs support growth emerging markets impact refinancing credit facilities late 2010 december 31 2012 approximately 70 debt fixed rates including effects 2750 million notional interest rate swaps interest income 2012 decreased 06 million compared 2011 decrease primarily attributable lower average cash balances 2012 compared 2011 interest income 2011 consistent 2010 expense income net expense income net 2012 decreased 253 million expense net 216 million compared income net 37 million 2011 decrease primarily due 216 million increase losses reflecting 143 million loss 2012 relating primarily euro mexican peso compared 73 million gain 2011 arising transactions currencies sites’ functional currencies well 34 million increase losses foreign exchange contracts income expense net 2011 increased 220 million income 37 million compared expense 183 million 2010 increase primarily due 239 million increase gains arising transactions currencies sites functional currencies reflect relative strengthening us dollar versus euro 2011 compared 2010 currency losses 2010 included impact 76 million net loss recorded result venezuelas currency devaluation settlement us dollar denominated liabilities favorable essential items rate 260 bolivars us dollar losses partially offset 31 million gain sale investment joint venture 2010 accounted cost method tax expense tax rate 2012 2011 2010 effective tax rates differed federal statutory rate 35 primarily due net impact foreign operations included impacts lower foreign tax rates changes reserves established uncertain tax positions may 17 2006 tax increase prevention reconciliation act 2005 signed law creating exclusion us taxable income certain types foreign related party payments dividends interest rents royalties prior 2006 subject us taxation exclusion effective years 2006 2013 applies certain related party payments effective tax rate based upon current earnings estimates future taxable earnings domestic international location changes factors including ability utilize foreign tax credits net operating losses results tax audits could impact tax rate future periods december 31 2012 foreign tax credits 314 million expiring 2020 2021 recorded valuation allowances additionally recorded net deferred tax assets 732 million relate net operating losses tax credits deductible temporary differences available reduce taxable income future periods definite expiration able utilize portion credits losses effective tax rate would increase net earnings per share net earnings 2012 increased 197 million 4483 million 851 per diluted share compared 2011 increase primarily attributable 571 million increase operating income partially offset 253 million decrease income net 73 million increase interest expense 23 million increase tax expense net earnings 2011 increased 403 million 4286 million 764 per diluted share compared 2010 increase primarily attributable 373 million increase operating income 220 million increase income expense net partially offset 19 million increase interest expense 169 million increase tax expense comprehensive loss comprehensive loss 2012 decreased 573 million primarily reflecting strengthening euro mexican peso indian rupee december 31 2012 compared december 31 2011 comprehensive loss 2011 increased 642 million primarily reflecting strengthening us dollar exchange rate versus euro december 31 2011 compared december 31 2010 business segments conduct operations three business segments based type product manage business evaluate segment performance allocate resources based segment’s operating income see note 17 consolidated financial statements included item 8 annual report discussion segments key operating results three business segments epd ipd fcd discussed engineered product division segment results largest business segment epd design manufacture distribute service custom highlyengineered pumps pump systems mechanical seals auxiliary systems collectively referred original equipment epd includes longer lead time highlyengineered pump products shorter cycle engineered pumps mechanical seals generally manufactured much quickly epd also manufactures replacement parts related equipment provides full array replacement parts repair support services collectively referred aftermarket epd primarily operates oil gas power generation chemical water management general industries epd operates 41 countries 29 manufacturing facilities worldwide nine located europe 11 north america four asia five latin america 128 qrcs including colocated manufacturing facilities andor shared fcd 1 includes postacquisition operating results lpi acquired october 2011 bookings 2012 increased 396 million 17 compared 2011 increase included negative currency effects approximately 105 million increase customer bookings primarily driven chemical oil gas general industries partially offset power generation industry customer bookings increases 801 million north america 530 million asia pacific 471 million europe partially offset decrease 1298 million middle east overall net increase driven aftermarket bookings increase included impact order first quarter 2011 excess 80 million supply variety pumps refinery middle east recur 2012 24 billion bookings 2012 approximately 51 oil gas 17 power generation 15 chemical 2 water management 15 general industries trend toward globalization continuing drive spending chemical oil gas general industries 2012 north american pipeline business global fertilizer market strengthened compared last year interdivision bookings eliminated included consolidated bookings disclosed decreased 112 million bookings 2011 increased 915 million 41 compared 2010 increase included currency benefits approximately 65 million customer bookings increases 941 million north america 645 million asia pacific 473 middle east 232 million latin america partially offset decrease 1364 million europe overall net increase primarily consisted increase power generation chemical industries 23 billion bookings 2011 approximately 50 oil gas 21 power generation 13 chemical 1 water management 15 general industries interdivision bookings eliminated included consolidated bookings disclosed increased 33 million sales 2012 increased 817 million 35 compared 2011 increase included negative currency effects approximately 106 million increase heavily weighted towards aftermarket sales primarily resulting customer sales increases 750 million north america 529 million middle east 211 million asia pacific partially offset sales decreases 286 million europe 216 million latin america interdivision sales eliminated included consolidated sales disclosed decreased 174 million sales 2011 increased 1687 million 78 compared 2011 increase included currency benefits approximately 67 million increase primarily driven increased aftermarket sales increases 717 million latin america 494 million north america 437 million asia pacific 391 million middle east partially offset sales decreases 289 million europe interdivision sales eliminated included consolidated sales disclosed increased 163 million gross profit 2012 increased 78 million 10 compared 2011 gross profit margin 2012 338 decreased 346 2011 decrease primarily attributed larger effect revenue certain large lower margin projects shipped backlog compared period 2011 partially offset effects operational execution improvements sales mix shift towards higher margin aftermarket sales gross profit 2011 increased 205 million 26 compared 2010 gross profit margin 2011 346 decreased 364 2010 decrease primarily attributable larger effect revenue certain large projects low margins primarily beginning year backlog negative impact currency margins us dollar denominated sales produced nonus facilities incremental charges associated certain projects shipped late partially offset sales mix shift towards higher margin aftermarket sales operating income 2012 increased 09 million 02 compared 2011 increase included negative currency effects approximately 20 million increase due primarily gross profit increase 78 million partially offset increased sga 74 million including decrease due currency effects approximately 13 million increase sga included 104 million gain sale manufacturing facility rio de janeiro brazil preparation opening new manufacturing facility 2013 offset increased sga costs associated lpi increased broadbased annual incentive compensation increased sellingrelated expenses operating income 2011 decreased 174 million 42 compared 2010 decrease included currency benefits approximately 9 million overall net decrease due primarily sga increase 379 million including increase due currency effects approximately 12 million partially offset increased gross profit 205 million increased sga attributable incremental selling marketingrelated expenses associated mentioned increase sales meritrelated compensation increases impact hiring associates support highgrowth areas business acquisitionrelated incremental sga costs associated acquisition lpi fourth quarter 2011 39 million penalty assessed spanish regulatory commission second quarter 2011 increases partially offset decrease broadbased annual longterm incentive program compensation backlog 14 billion december 31 2012 decreased 413 million 29 compared december 31 2011 currency effects provided increase approximately 11 million backlog december 31 2012 included 214 million interdivision backlog eliminated included consolidated backlog disclosed backlog 14 billion december 31 2011 increased 61 million 04 compared december 31 2010 currency effects provided decrease approximately 14 million backlog december 31 2011 included 199 million interdivision backlog eliminated included consolidated backlog disclosed industrial product division segment results ipd design manufacture distribute service engineered preconfigured industrial pumps pump systems including submersible motors specialty products collectively referred original equipment additionally ipd manufactures replacement parts related equipment provides full array support services collectively referred aftermarket ipd primarily operates oil gas chemical water management power generation general industries ipd operates 12 manufacturing facilities three located us six europe operates 20 qrcs worldwide including 11 sites europe three us including colocated manufacturing facilities bookings 2012 increased 589 million 65 compared 2011 increase included negative currency effects approximately 35 million increase primarily driven increased customer bookings oil gas chemical industries partially offset power industry increase included impact 2012 orders excess 90 million supply offshore oil gas platform equipment next five years primarily end customer latin america customer bookings increases 1052 million latin america 327 million north america partially offset decrease 377 million europe 228 million asia pacific increase heavily weighted toward customer original equipment bookings interdivision bookings eliminated included consolidated bookings disclosed decreased 247 million 9643 million bookings 2012 approximately 35 oil gas 16 water management 13 chemical 5 power generation 31 general industries 2012 opportunities chemical industry driven inexpensive natural gas north america demand product diversification middle east additionally stable pricing 2012 promoted investment conventional unconventional oil bookings 2011 increased 779 million 94 compared 2010 increase included currency benefits approximately 29 million customer bookings increases 498 million asia pacific 128 million africa 127 million europe partially offset decrease 194 million middle east 155 million latin america customer bookings increases driven general chemical industries partially offset decreased customer bookings water management industry interdivision bookings eliminated included consolidated bookings disclosed increased 322 million 9054 million bookings 2011 approximately 29 oil gas 19 water management 11 chemical 8 power generation 33 general industries sales 2012 increased 757 million 86 compared 2011 increase included negative currency effects approximately 31 million increase customer sales primarily driven original equipment sales customer sales increases 359 million north america 152 million middle east 143 million asia pacific 121 million latin america partially offset decreased sales 227 million europe interdivision sales eliminated included consolidated sales disclosed increased 146 million sales 2011 increased 780 million 97 compared 2010 increase included currency benefits approximately 29 million increase primarily driven increased aftermarket sales increase customer sales attributed increase 489 million north america interdivision sales eliminated included consolidated sales disclosed increased 300 million gross profit 2012 increased 328 million 166 compared 2011 gross profit margin 2012 241 increased 225 2011 increase primarily attributable 71 million ipd recovery plan realignment charges incurred 2011 recur 2012 lower costs resulting operational improvements continued realization realignment savings partially offset sales mix shift lower margin original equipment sales gross profit 2011 decreased 72 million 35 compared 2010 gross profit margin 2011 225 decreased 256 2010 decrease primarily attributable less favorable pricing projects shipped backlog increased material costs charges related ipd recovery plan incremental charges resulting operational efficiency issues certain sites partially offset increased savings realized realignment programs compared period 2010 mix shift higher margin aftermarket sales operating income 2012 increased 366 million 582 compared 2011 increase included negative currency effects approximately 4 million increase due 328 million increase gross profit discussed 38 million decrease sga operating income 2011 decreased 56 million 82 compared 2010 decrease included currency benefits approximately 2 million overall net decrease due 72 million decrease gross profit discussed partially offset 16 million decrease sga backlog 5930 million december 31 2012 increased 252 million 44 compared december 31 2011 currency effects provided increase approximately 13 million backlog december 31 2012 included 407 million interdivision backlog eliminated included consolidated backlog disclosed backlog 5678 million december 31 2011 remained flat compared december 31 2010 currency effects provided decrease approximately 13 million backlog december 31 2011 included 567 million interdivision backlog eliminated included consolidated backlog disclosed flow control division segment results second largest business segment fcd designs manufactures distributes broad portfolio engineeredtoorder configuredtoorder isolation valves control valves valve automation products boiler controls related services fcd leverages experience application knowhow offering complete menu engineered services complement expansive product portfolio fcd total 58 manufacturing facilities qrcs 25 countries around world five 25 manufacturing operations located us 13 located europe based independent industry sources believe fcd fourth largest industrial valve supplier global basis 1 includes postacquisition operating results valbart acquired july 2010 bookings 2012 decreased 762 million 48 compared 2011 decrease included negative currency effects approximately 63 million decrease customer bookings primarily attributable customer project delays oil gas industry fewer pulp paper projects general industries customer bookings decreases 686 million europe 219 million latin america partially offset increase 136 million middle east decrease heavily weighted toward original equipment bookings 15 billion bookings 2012 approximately 29 oil gas 29 chemical 27 general industries 14 power generation 1 water management bookings 2011 increased 2964 million 227 compared 2010 increase included currency benefits approximately 54 million valbart bookings increases 1104 million increase customer bookings primarily attributable strength oil gas industry increased bookings chemical general industries increased bookings partially offset decreases power generation industry due primarily slowdown global nuclear power projects customer bookings increased 980 million europe 794 asia pacific 627 million north america 380 million latin america 16 billion bookings 2011 approximately 31 oil gas 27 chemical 27 general industries 14 power generation 1 water management sales 2012 increased 838 million 57 compared 2011 increase included negative currency effects approximately 67 million increase primarily driven customer original equipment sales oil gas chemical industries sales increases 778 million asia pacific 475 million north america partially offset decrease 424 million europe sales 2011 increased 2758 million 230 compared 2010 increase included currency benefits approximately 48 million customer sales increased approximately 927 million europe reflecting continued recovery oil gas industry included valbart sales increases 746 million customer sales increased 598 million middle east 498 million asia pacific 472 million north america gross profit 2012 increased 299 million 58 compared 2011 gross profit margin 2012 348 comparable period 2011 gross profit 2011 increased 892 million 211 compared 2010 gross profit margin 2011 347 decreased 353 period 2010 decrease attributable increased material costs partially offset increased sales favorably impacted absorption fixed manufacturing costs various cip initiatives operating income 2012 increased 201 million 86 compared 2011 increase included negative currency effects approximately 12 million increase principally attributable 299 million increase gross profit noted partially offset 72 million increase sga including decrease due currency effects approximately 11 million increased sga primarily attributable increased selling research development costs operating income 2011 increased 529 million 293 compared 2010 increase included currency benefits approximately 7 million increase principally attributable 892 million increase gross profit discussed increase partially offset 388 million increase sga attributable incremental selling marketingrelated expenses associated mentioned increase sales meritrelated compensation increases increased research development costs impact hiring associates support highgrowth areas business backlog 7239 million december 31 2012 decreased 360 million 47 compared december 31 2011 currency effects provided decrease approximately 3 million backlog 7599 million december 31 2011 increased 1014 million 154 compared december 31 2010 currency effects provided decrease approximately 24 million liquidity capital resources cash flow analysis existing cash generated operations borrowings available existing revolving credit facility primary sources shortterm liquidity monitor depository institutions hold cash equivalents regular basis believe placed deposits creditworthy financial institutions sources operating cash generally include sale products services conversion working capital particularly accounts receivable inventories total cash balance december 31 2012 3043 million compared 3374 million december 31 2011 5576 million december 31 2010 cash balance decreased 331 million 3043 million december 31 2012 compared december 31 2011 cash used 2012 included 7719 million share repurchases 1355 million capital expenditures funding increased working capital requirements discussed 800 million net payments longterm debt 738 million dividend payments partially offset 4981 million proceeds issuance senior notes discussed cash provided operating activities 5171 million 2182 million 3558 million 2012 2011 2010 respectively provided cash support shortterm working capital needs working capital increased 2012 due primarily higher inventory 727 million higher accounts receivable 351 million 2012 contributed 281 million defined benefit pension plans working capital increased 2011 due primarily higher accounts receivable 2431 million higher inventory 1398 million 2011 contributed 270 million defined benefit pension plans increases accounts receivable used 351 million cash flow 2012 compared 2431 million 2011 520 million 2010 use cash accounts receivable 2012 primarily attributable delays collection accounts receivable due slower anticipated payments certain customers use cash accounts receivable 2011 primarily attributable delays collection accounts receivable due slower anticipated payments certain customers relatively strong sales december 2011 part due completion certain previously past due projects contractually longer payment terms 2011 compared 2010 fourth quarter 2012 days sales outstanding dso 75 days compared 75 days 66 days periods 2011 2010 respectively reference purposes based 2012 sales dso improvement one day could provide approximately 15 million cash experienced significant increase customer payment defaults 2012 increases inventory used 727 million cash flow 2012 compared 1398 million 2011 529 million 2010 use cash inventory 2012 primarily due decrease progress billings large orders december 31 2012 higher raw material inventory needed support increased level bookings use cash inventory 2011 primarily due shipment delays growth short cycle orders 2011 requiring higher raw material work process inventory support end period backlog inventory turns 32 times december 31 2012 compared 34 times december 31 2011 2010 calculation inventory turns reflect impact advanced cash received customers reference purposes based 2012 data improvement onetenth turn could yield approximately 26 million cash flows used investing activities 1264 million 1942 million 2867 million 2012 2011 2010 respectively due primarily capital expenditures cash paid 2011 2010 acquisitions capital expenditures 2012 1355 million increase 276 million compared 2011 2012 capital expenditures focused strategic initiatives pursue new markets geographic capacity expansion information technology infrastructure cost reduction opportunities cash flows used financing activities 4289 million 2012 compared 2390 million 2011 1429 million 2010 cash outflows 2012 resulted primarily repurchase 7719 million common stock including 3000 million asr program payment discussed 800 million net payments longterm debt 738 million dividend payments partially offset 4981 million net proceeds issuance senior notes cash outflows 2011 resulted primarily repurchase 1500 million common stock payment 696 million dividends 250 million payments longterm debt may 31 2012 announced board directors endorsed updated capital structure strategy designed make financial structure efficient capital structure strategy includes targeting longterm gross leverage ratio 10x20x total debt ebitda business cycle versus thencurrent gross leverage ratio 07x ii expanded share repurchase program 10 billion authorization included approximately 233 million remaining previous repurchase authorization expanded share repurchase program includes amounts incremental previouslyannounced policy annually returning 40 50 running twoyear average net earnings shareholders intend adhere policy foreseeable future returns cash whether combination dividends share repurchases reviewed individually declared board directors implemented management discretion depending financial condition business opportunities time market conditions part 10 billion share repurchase program june 14 2012 entered asr program jp morgan securities llc agent jpmorgan chase bank na london branch agreed repurchase aggregate 3000 million common stock asr program completed december 12 2012 note 15 consolidated financial statements included item 8 annual report includes discussion share repurchase program including asr program payments quarterly dividends common stock part continuing effort execute capital structure strategy entered new credit agreement provides aggregate commitment 125 billion including 4000 million term loan facility maturity date august 20 2017 “term loan facility” 8500 million revolving credit facility maturity date august 20 2017 “revolving credit facility” together term loan facility “senior credit facility” new agreement provided additional debt capacity execute growth initiatives enhance operating flexibility reduced borrowing costs additionally september 11 2012 issued 5000 million aggregate principal amount senior notes bear annual stated interest rate 350 see note 10 consolidated financial statements included item 8 annual report cash needs next 12 months expected less 2012 resulting decreased level anticipated share repurchases improvements working capital partially offset increases pension contributions incentive compensation payments cash dividends believe cash flows operating activities combined availability revolving credit facility existing cash balances sufficient enable us meet cash flow needs next 12 months however cash flows operations could adversely affected decrease rate general global economic growth well economic political risks associated sales products operational factors competition regulatory actions fluctuations foreign currency exchange rates fluctuations interest rates among factors believe cash flows operating activities expectation continuing availability draw upon credit agreements also sufficient meet cash flow needs periods beyond next 12 months payments acquisitions regularly evaluate acquisition opportunities various sizes cost terms financing raised conjunction acquisition including ability raise economical capital critical consideration evaluation note 2 consolidated financial statements included item 8 annual report contains discussion acquisitions financing discussion refinanced senior credit facility european letter credit loc facility related covenants included note 10 consolidated financial statements included item 8 annual report compliance covenants december 31 2012 certain financing arrangements contain provisions may result event default failure financing arrangements meet payment terms observe covenants could result acceleration payment due provisions referred cross default provisions senior credit facility senior notes european loc facility crossdefaulted rating agencies assign credit ratings certain debt access capital markets costs debt could directly affected credit ratings adverse action respect credit ratings could generally cause borrowing costs increase potential pool investors fundings sources decrease particular decline credit ratings would increase cost borrowing senior credit facility entered interest rate swap agreements hedge exposure variable interest payments related senior credit facility agreements fully described note 6 consolidated financial statements included item 8 annual report item 7aitem 7 managements discussion analysis financial condition results operations following discussion analysis provided increase understanding read conjunction accompanying consolidated financial statements notes see “item 1a risk factors” “forwardlooking statements” included annual report form 10k year ended december 31 2014 annual report discussion risks uncertainties assumptions associated statements unless otherwise noted amounts discussed herein consolidated executive overview company believe worldleading manufacturer aftermarket service provider comprehensive flow control systems develop manufacture precisionengineered flow control equipment integral movement control protection flow materials customers’ critical processes product portfolio pumps valves seals automation aftermarket services supports global infrastructure industries including oil gas chemical power generation water management well general industrial markets products services add value manufacturing platform global network quick response centers qrcs offer broad array aftermarket equipment services installation advanced diagnostics repair retrofitting currently employ approximately 18000 employees 50 countries business model significantly influenced capital spending global infrastructure industries placement new products service aftermarket services existing operations worldwide installed base products important source aftermarket revenue products expected ensure maximum operating time many key industrial processes past several years significantly invested aftermarket strategy provide local support drive customer investments offerings use services replace repair installed products aftermarket portion business also helps provide business stability various economic periods aftermarket business primarily served network 171 qrcs located around globe provides variety service offerings customers including spare parts service solutions product life cycle solutions valueadded services generally higher margin business compared original equipment business key component profitable growth strategy operations conducted three business segments referenced throughout management’s discussion analysis financial condition results operations mda • engineered product division epd long lead time custom highlyengineered pumps pump systems mechanical seals auxiliary systems replacement parts related services • industrial product division ipd preconfigured engineered pumps pump systems related products services • flow control division fcd engineered industrial valves control valves actuators controls related services business segments share focus industrial flow control technology high number common customers segments also complementary product offerings technologies often combined applications provide us net competitive advantage segments also benefit global footprint economies scale reducing administrative overhead costs serve customers cost effectively example segment leadership reports chief operating officer coo segments share leadership operational support functions research development marketing supply chain reputation product portfolio built 50 wellrespected brand names worthington idp valtek limitorque durco edward anchordarling durametallic believe one comprehensive industry products services sold either directly designated channels 10000 companies including world’s leading engineering procurement construction epc firms original equipment manufacturers distributors end users continue build geographic breadth qrc network goal positioned near customers possible service support order capture valuable aftermarket business along ensuring local capability sell install service equipment remote regions equally imperative continuously improve global operations continue expand global supply chain capability meet global customer demands ensure quality timely delivery products continue devote resources improving supply chain processes across business segments find areas synergy cost reduction improve supply chain management capability ensure meet global customer demands also remain focused improving ontime delivery quality managing warranty costs percentage sales across global operations assistance focused continuous improvement process cip initiative goal cip initiative includes lean manufacturing six sigma business management strategy value engineering maximize service fulfillment customers ontime delivery reduced cycle time quality highest internal productivity experienced improved bookings 2014 chemical oil gas power general industries saw increased activity despite environment continued global macroeconomic uncertainty growth oil gas industry driven investment north america middle east growth chemical industry driven largely north america producers investing utilize natural gas lowcost feedstock experienced modest increase bookings europe economic conditions region remained stable power generation industry experienced stable level investment 2014 due low levels economic growth continued uncertainty related environmental regulations 2014 continued favorable conditions aftermarket business driven customers need maintain continuing operations across several industries expansion aftermarket capabilities integrated solutions offerings pursuit major capital projects globally investments localized customer service remain key components longterm growth strategy also provide stability various economic periods believe commitment localize service support capabilities close customers operations qrc network enabled us grow market share aftermarket portion business believe customer relationships global presence highlyregarded technical capabilities continue opportunities core industries however customers oil gas capital investment expected decline 2015 due significant decline oil prices began fourth quarter 2014 additionally face ongoing challenges affecting many companies industry significant multinational presence economic political currency risks example strengthening us dollar 2014 significant impact results operations markets following discussion read conjunction outlook 2015 section included mda products services used several distinct industries oil gas chemical power generation water management number industries collectively referred general industries demand products depends level new capital investment planned unplanned maintenance expenditures customers level new capital investment depends turn capital infrastructure projects driven need oil gas chemicals power generation water management well general economic conditions drivers generally related phase business cycle respective industries expectations future market behavior levels maintenance expenditures additionally driven reliability equipment planned unplanned downtime maintenance required capacity utilization process sales epc firms original equipment manufacturers typically large project orders critical applications certain sales distributors project orders typically procured customers either directly us indirectly contractors new construction projects facility enhancement projects quick turnaround business also refer shortcycle defined orders received customer booked shipped generally within six months receipt orders typically standardized general purpose products parts services three business segments generate certain levels type business sale aftermarket products services benefit large installed base original equipment requires periodic maintenance repair replacement parts use manufacturing platform global network qrcs offer broad array aftermarket equipment services installation advanced diagnostics repair retrofitting geographic regions positioned provide quick response believe customers traditionally relied us rather competitors aftermarket products due highly engineered customized products however aftermarket standard products competitive existence common standards allows easier replacement installed products proximity service centers timeliness delivery quality important considerations aftermarket products services continue selectively expand global qrc network improve ability capture important aftermarket business oil gas oil gas industry represented approximately 43 41 bookings 2014 2013 respectively capital spending oil gas industry increased 2014 compared previous year due need continue building infrastructure bring capacity line meet future demand expectations majority investment major oil companies continued focus upstream production activities however improved levels spending midstream pipeline downstream refining operations particularly developing markets aftermarket opportunities industry improved 2014 refinery maintenance activity increased north american markets outlook oil gas industry heavily dependent demand growth mature markets developing geographies believe increased crude oil supply resulted significant decline price oil beginning fourth quarter 2014 believe lower oil prices negatively impact oil gas upstream investment acutely impact midstream downstream investment lesser extent addition reduction overall level spending oil gas companies could decrease demand products services however believe longterm fundamentals industry remain solid based current supply projected depletion rates existing fields forecasted longterm demand growth longstanding reputation providing successful solutions upstream midstream downstream applications along advancements portfolio offerings believe continue wellpositioned assist customers challenging environment chemical industry represented approximately 20 bookings 2014 2013 experienced increased level capital spending 2014 expansion existing facilities approval new projects around world north america experienced revival shale gas changed economics production allowing lower cost abundant feedstock drive high value chemical projects middle east asia seen growth chemical projects countries regions try access higher margins available downstream petrochemical markets aftermarket opportunities improved majority year indications improvements continue 2015 despite solid year outlook chemical industry remains heavily dependent global economic conditions global economies stabilize unemployment conditions improve rise consumer spending follow increase spending would drive greater demand chemicalbased products supporting improved levels capital investment believe chemical industry nearterm continue invest north america capacity additions maintenance upgrades optimization existing assets developing regions continue investing capital infrastructure meet current future indigenous demand believe global presence localized aftermarket capabilities wellpositioned serve potential growth opportunities industry power generation power generation industry represented approximately 12 13 bookings 2014 2013 respectively 2014 power generation industry continued experience softness capital spending mature regions driven uncertainty related environmental regulations well potential regulatory impacts overall civilian nuclear market developing regions capital investment remained place driven increased demand forecasts electricity countries china india global concerns environment continue support increase desired future capacity renewable energy sources majority active planned construction throughout 2014 continued utilize designs based fossil fuels natural gas increased percentage utilization driven market prices gas remaining low relatively stable potential unconventional sources gas shale gas power generation industry forecasting increased use form fuel power generation plants believe outlook power generation industry remains favorable current legislative efforts limit emissions carbon dioxide may adverse effect investment plans depending potential requirements imposed timing compliance country however believe proposed methods limiting carbon dioxide emissions offer business opportunities products services believe longterm fundamentals power generation industry remain solid based projected increases demand electricity driven global population growth advancements industrialization growth urbanization developing markets also believe longstanding reputation power generation industry portfolio offerings various generating methods advancements serving renewable energy market carbon capture methodologies well global service support structure position us well future opportunities important industry water management water management industry represented approximately 3 4 bookings 2014 2013 respectively water management industry activity level experienced softness 2014 despite worldwide demand fresh water treatment continuing create requirements new facilities upgrades existing systems many require products offer particularly pumps proportion people living regions find difficult meet water requirements expected double 2025 believe persistent demand fresh water economic cycles supports continued investments general industries general industries represented aggregate approximately 22 bookings 2014 2013 general industries comprises variety different businesses including mining ore processing pharmaceuticals pulp paper food beverage smaller applications none individually represented 5 total bookings 2014 2013 general industries also includes sales distributors whose end customers operate industries primarily serve outlook group industries heavily dependent upon condition global economies consumer confidence levels longterm fundamentals many industries remain sound many products produced industries common staples industrialized urbanized economies believe specialty product offerings designed industries aftermarket service capabilities provide continued business opportunities results operations throughout discussion results operations discuss impact fluctuations foreign currency exchange rates calculated currency effects translating current year results monthly basis prior year exchange rates periods effective december 10 2013 acquired inclusion ipd innovative magdrive llc innomag privatelyowned united states us based company specializing advanced sealless magnetic drive centrifugal pumps chemical general industries effective march 28 2013 joint venture partner agreed exit joint venture audco india limited “ail” manufactures integrated industrial valves india effect exit two separate transactions acquired 100 ownership ails plug valve manufacturing business asset purchase sold 50 equity interest ail joint venture partner results operations innomag ail consolidated since applicable acquisition dates pro forma information provided acquisitions due immateriality effective march 31 2014 sold fcd naval oy naval business finnish valve manufacturer sale included navals manufacturing facility located laitila finland service support center located st petersburg russia note 2 consolidated financial statements included item 8 financial statements supplementary data item 8 annual report discusses details disposition acquisitions exit joint venture fourth quarter 2013 initiated realignment program discussed note 20 consolidated financial statements included item 8 annual report currently expect total realignment program charges 158 million approved plans 16 million incurred 2014 107 million 2013 following discussion read conjunction “outlook 2015” section included mda bookings backlog define booking receipt customer order contractually engages us perform activities behalf customer regards manufacture delivery andor support products delivery service bookings recorded subsequently canceled within fiscal period excluded bookings 2014 increased 2796 million 57 compared 2013 increase included negative currency effects approximately 113 million increase driven oil gas chemical general industries partially offset water management industry increase heavily weighted toward customer original equipment bookings 2013 increased 1679 million 36 compared 2012 increase included negative currency effects approximately 30 million increase primarily driven oil gas chemical general industries increase heavily weighted toward original equipment bookings backlog represents aggregate value booked uncompleted customer orders influenced primarily bookings sales cancellations currency effects backlog 27 billion december 31 2014 increased 1473 million 58 compared december 31 2013 currency effects provided decrease approximately 154 million currency effects backlog calculated using change period end exchange rates backlog related aftermarket orders approximately 25 24 backlog december 31 2014 2013 respectively backlog 26 billion december 31 2013 decreased 920 million 35 compared december 31 2012 currency effects provided decrease approximately 8 million sales 2014 decreased 767 million 15 compared 2013 decrease included negative currency effects approximately 112 million decrease due decreased customer original equipment sales partially offset increased aftermarket sales driven decreased sales europe middle east asia pacific partially offset increased sales north america sale naval business first quarter 2014 also resulted negative impact 2013 comparison sales 2013 increased 2033 million 43 compared 2012 increase included negative currency effects approximately 33 million increase primarily due customer original equipment sales driven increased sales north america asia pacific latin america africa partially offset decreased sales middle east sales international customers including export sales us approximately 68 total sales 2014 71 2013 2012 sales europe middle east africa ema approximately 32 35 37 total sales 2014 2013 2012 respectively sales asia pacific approximately 20 total sales 2014 2013 2012 sales latin america approximately 11 total sales 2014 2013 10 2012 gross profit gross profit margin gross profit 2014 increased 265 million 16 compared 2013 gross profit margin 2014 352 increased 341 2013 increase gross profit margin primarily attributed mix shift higher margin aftermarket sales effects lower costs result operational improvements disciplined selectivity customer bookings compared period 2013 aftermarket sales increased approximately 42 total sales compared approximately 40 total sales period 2013 gross profit 2013 increased 1071 million 68 compared 2012 gross profit margin 2013 341 increased 333 2012 increase gross profit margin primarily attributed execution operational improvements disciplined selectivity customer bookings aftermarket sales decreased approximately 40 total sales compared approximately 41 total sales period 2012 selling general administrative expense sga 2014 decreased 299 million 31 compared 2013 currency effects yielded decrease approximately 15 million decrease primarily attributable 2014 gains noted decreased sellingrelated expenses sga percentage sales 2014 decreased 30 basis points compared period 2013 due primarily 134 million gain sale naval business first quarter 2014 gain certain legal matters fourth quarter 2014 sga 2013 increased 447 million 48 compared 2012 currency effects yielded decrease approximately 5 million increase primarily attributable 2012 gains noted recur 2013 increased sellingrelated expenses support higher sales lesser extent charges associated 2013 realignment program sga percentage sales 2013 increased 10 basis points compared period 2012 104 million gain sale manufacturing facility brazil gain certain legal matters 2012 neither recurred 2013 substantially offset favorable impact improved sga leverage continued focus cost containment 2013 net earnings affiliates net earnings affiliates represents net income investments seven joint ventures one located japan saudi arabia south korea united arab emirates india two china accounted using equity method accounting net earnings affiliates 2014 decreased 269 million primarily result ail transactions resulted total pretax gains 283 million recorded net earnings affiliates 2013 net earnings affiliates 2013 increased 220 million compared 2012 primarily result gains ail transactions operating income operating income 2014 increased 295 million 39 compared 2013 increase included negative currency effects approximately 23 million increase primarily result 265 million increase gross profit 299 million decrease sga discussed partially offset 283 million pretax gains 2013 ail transactions recur 2014 improvement operating income percentage sales primarily due factors operating income 2013 increased 845 million 125 compared 2012 increase included negative currency effects approximately 12 million increase primarily result 1071 million increase gross profit 283 million gains ail transactions partially offset 447 million increase sga discussed improvement operating income percentage sales also due improvement gross profit margin interest expense interest income interest expense 2014 increased 59 million compared 2013 increase attributable interest expense associated senior notes issued fourth quarter 2013 see note 10 consolidated financial statements included item 8 annual report definition discussion various credit resources interest expense 2013 increased 109 million compared 2012 primarily attributable interest expense associated senior notes issued third quarter 2012 fourth quarter 2013 increased shortterm borrowings compared 2013 december 31 2014 approximately 72 total debt fixed rates effects 400 million notional interest rate swaps interest income 2014 increased 03 million compared 2013 increase primarily attributable higher average cash balances 2014 compared 2013 interest income 2013 increased 04 million compared 2012 increase primarily attributable higher average cash balances 2013 compared 2012 income expense net income net increased 163 million loss 143 million 2013 gain 20 million 2014 increase primarily due 128 million increase gains foreign exchange contracts 27 million decrease losses arising transactions currencies sites’ functional currencies change primarily due foreign currency exchange rate movements mexican peso japanese yen euro relation us dollar expense net 2013 decreased 73 million compared 2012 decrease primarily due 60 million decrease losses arising transactions currencies sites’ functional currencies primarily due foreign currency exchange rate movements euro argentinian peso mexican peso relation us dollar tax expense tax rate 2014 2013 2012 effective tax rates differed federal statutory rate 35 primarily due net impact foreign operations included impacts lower foreign tax rates changes reserves established uncertain tax positions may 17 2006 tax increase prevention reconciliation act 2005 signed law creating exclusion us taxable income certain types foreign related party payments dividends interest rents royalties prior 2006 subject us taxation exclusion effective years 2006 2014 applies certain related party payments effective tax rate based upon current earnings estimates future taxable earnings domestic international location changes factors including ability utilize foreign tax credits net operating losses results tax audits could impact tax rate future periods december 31 2014 foreign tax credits 297 million expiring 2020 2023 recorded valuation allowance 06 million additionally recorded net deferred tax assets 295 million relate net operating losses tax credits deductible temporary differences available reduce taxable income future periods definite expiration able utilize portion credits losses effective tax rate would increase net earnings per share net earnings 2014 increased 333 million 5188 million 376 per diluted share compared 2013 increase primarily attributable 295 million increase operating income 163 million increase income net partially offset 59 million increase interest expense 36 million increase tax expense net earnings 2013 increased 372 million 4855 million 341 per diluted share compared 2012 increase primarily attributable 845 million increase operating income 73 million decrease expense partially offset 109 million increase interest expense 439 million increase tax expense comprehensive loss income comprehensive loss 2014 increased 1588 million compared income 28 million 2013 increase almost entirely due foreign currency translation impacts resulting weakening euro versus us dollar lesser extent major currencies exposure december 31 2014 compared december 31 2013 comprehensive income 2013 increased 28 million compared loss 83 million 2012 increase primarily due pension postretirement benefits activity partially offset foreign currency translation impacts resulting weakening argentinian peso mexican peso indian rupee canadian dollar australian dollar december 31 2013 compared december 31 2012 business segments conduct operations three business segments based type product manage business evaluate segment performance allocate resources based segment’s operating income see note 17 consolidated financial statements included item 8 annual report discussion segments key operating results three business segments epd ipd fcd discussed engineered product division segment results largest business segment epd design manufacture distribute service custom highlyengineered pumps pump systems mechanical seals auxiliary systems collectively referred original equipment epd includes longer lead time highlyengineered pump products shorter cycle engineered pumps mechanical seals generally manufactured within shorter lead times epd also manufactures replacement parts related equipment provides full array replacement parts repair support services collectively referred aftermarket epd primarily operates oil gas power generation chemical water management general industries epd operates 44 countries 32 manufacturing facilities worldwide nine located europe 11 north america seven asia five latin america 126 qrcs including colocated manufacturing facilities andor shared fcd bookings 2014 increased 2322 million 94 compared 2013 increase included negative currency effects approximately 103 million increase customer bookings primarily driven oil gas chemical industries partially offset power generation industry customer bookings increased 1988 million north america 617 million europe 447 million latin america 281 million middle east partially offset decrease 1121 million asia pacific increase heavily weighted toward customer aftermarket bookings 27 billion bookings 2014 approximately 54 oil gas 16 chemical 15 general industries 14 power generation 1 water management interdivision bookings eliminated included consolidated bookings disclosed increased 73 million bookings 2013 increased 1010 million 43 compared 2012 increase included negative currency effects approximately 39 million increase customer bookings primarily driven oil gas general chemical industries partially offset water management industry customer bookings increased 557 million asia pacific 173 million latin america 90 million middle east 78 million north america increase primarily driven customer original equipment bookings 25 billion bookings 2013 approximately 50 oil gas 17 general industries 16 power generation 16 chemical 1 water management interdivision bookings eliminated included consolidated bookings disclosed increased 29 million sales 2014 decreased 731 million 29 compared 2013 decrease included negative currency effects approximately 101 million decrease primarily driven decreased original equipment sales primarily resulting decreased customer sales 486 million middle east 463 million europe 343 million latin america 304 million asia pacific 179 million africa partially offset increased sales 956 million north america interdivision sales eliminated included consolidated sales disclosed increased 46 million sales 2013 increased 1340 million 56 compared 2012 increase included negative currency effects approximately 43 million increase primarily driven increased original equipment sales primarily resulting increased customer sales 887 million asia pacific 438 million north america 362 million latin america 361 million africa 129 million europe partially offset decreased sales 797 million middle east interdivision sales eliminated included consolidated sales disclosed abovedecreased 13 million gross profit 2014 decreased 89 million 10 compared 2013 gross profit margin 2014 346 increased 339 2013 increase gross profit margin primarily attributable mix shift higher margin aftermarket sales disciplined selectivity customer bookings effects lower costs associated operational execution improvements partially offset negative impact decreased sales absorption fixed manufacturing costs gross profit 2013 increased 501 million 62 compared 2012 gross profit margin 2013 339 comparable 2012 lower costs associated execution operational improvements lesser extent fewer lower margin projects shipped backlog substantially offset sales mix shift lower margin original equipment sales operating income 2014 increased 38 million 09 compared 2013 increase included negative currency effects approximately 20 million increase due 104 million decrease sga including decrease due currency effects approximately 14 million substantially offset 89 million decrease gross profit decrease sga due primarily decreased sellingrelated expenses operating income 2013 increased 272 million 69 compared 2012 increase included negative currency effects approximately 8 million increase due primarily gross profit increase 501 million partially offset increased sga 191 million including decrease due currency effects approximately 6 million increase sga due part increased bad debt expense related certain customers included 104 million gain sale manufacturing facility rio de janeiro brazil 2012 recur 2013 backlog 15 billion december 31 2014 increased 1811 million 138 compared december 31 2013 currency effects provided decrease approximately 72 million backlog december 31 2014 included 256 million interdivision backlog eliminated included consolidated backlog disclosed backlog 13 billion december 31 2013 decreased 889 million 63 compared december 31 2012 currency effects provided decrease approximately 19 million backlog december 31 2013 included 216 million interdivision backlog eliminated included consolidated backlog disclosed industrial product division segment results ipd design manufacture distribute service engineered preconfigured industrial pumps pump systems including submersible motors specialty products collectively referred original equipment additionally ipd manufactures replacement parts related equipment provides full array support services collectively referred aftermarket ipd primarily operates oil gas chemical water management power generation general industries ipd operates 13 manufacturing facilities four located us six europe operates 17 qrcs worldwide including nine sites europe four us including colocated manufacturing facilities bookings 2014 increased 419 million 47 compared 2013 increase included negative currency effects approximately 4 million increased customer bookings general chemical oil gas industries partially offset decrease power generation industry bookings increase 535 million north america partially offset decrease 118 million africa increase primarily driven customer original equipment bookings interdivision bookings eliminated included consolidated bookings disclosed decreased 73 million 9310 million bookings 2014 approximately 32 oil gas 31 general industries 16 water management 15 chemical 6 power generation bookings 2013 decreased 752 million 78 compared 2012 decrease included currency benefits approximately 4 million decrease included impact orders 2012 excess 90 million supply offshore oil gas platform equipment primarily end customer latin america nonrecurrence large orders similar size 2013 resulted decreased customer bookings oil gas general industries partially offset increase power generation industry customer bookings decreases 834 million latin america 51 million africa partially offset increases 87 million europe 56 million north america decrease driven customer original equipment bookings interdivision bookings eliminated included consolidated bookings disclosed decreased 59 million 8891 million bookings 2013 approximately 31 oil gas 29 general industries 18 water management 14 chemical 8 power generation sales 2014 decreased 173 million 18 compared 2013 decrease included negative currency effects approximately 4 million decreased customer sales 170 million middle east partially offset increased customer sales 81 million latin america interdivision sales eliminated included consolidated sales disclosed decreased 164 million sales 2013 decreased 37 million 04 compared 2012 decrease included currency benefits approximately 5 million decrease driven interdivision sales eliminated included consolidated sales disclosed decreased 132 million partially offset increase customer sales driven original equipment sales increased customer sales 317 million latin america 138 million africa partially offset decreased sales 225 million middle east 112 million europe 60 million asia pacific gross profit 2014 increased 140 million 57 compared 2013 gross profit margin 2014 278 increased 258 2013 increase primarily attributable sales mix shift higher margin aftermarket sales lower manufacturing costs resulting execution operational improvements disciplined selectivity customer bookings gross profit 2013 increased 150 million 65 compared 2012 gross profit margin 2013 258 increased 241 2012 increase primarily attributable lower manufacturing costs resulting execution operational improvements operating income 2014 increased 96 million 83 compared 2013 increase included negative currency effects approximately 2 million increase due 140 million increase gross profit partially offset 44 million increase sga due part increased spending research development operating income 2013 increased 162 million 163 compared 2012 increase included currency benefits approximately 1 million increase due 150 million increase gross profit 12 million decrease sga backlog 4914 million december 31 2014 decreased 387 million 73 compared december 31 2013 currency effects provided decrease approximately 41 million backlog december 31 2014 included 254 million interdivision backlog eliminated included consolidated backlog disclosed backlog 5301 million december 31 2013 decreased 629 million 106 compared december 31 2012 currency effects provided increase approximately 10 million backlog december 31 2013 included 300 million interdivision backlog eliminated included consolidated backlog disclosed flow control division segment results second largest business segment fcd designs manufactures distributes broad portfolio engineeredtoorder configuredtoorder isolation valves control valves valve automation products boiler controls related services fcd leverages experience application knowhow offering complete menu engineered services complement expansive product portfolio fcd total 58 manufacturing facilities qrcs 25 countries around world five 26 manufacturing operations located us 13 located europe seven located asia pacific based independent industry sources believe fcd fourth largest industrial valve supplier global basis bookings 2014 increased 33 million 02 compared 2013 increase included negative currency effects approximately 6 million increase customer bookings primarily attributable power chemical industries partially offset decreases oil gas general industries increased customer bookings 534 million middle east partially offset decreases 210 million latin america 110 million africa 93 million asia pacific increase driven increased customer aftermarket bookings 17 billion bookings 2014 approximately 32 oil gas 28 chemical 26 general industries 13 power generation 1 water management bookings 2013 increased 1351 million 88 compared 2012 increase included currency benefits approximately 5 million increase customer bookings primarily attributable oil gas general chemical industries partially offset decrease power generation industry increased customer bookings 601 million north america 473 million latin america 352 million europe 96 million asia pacific partially offset decrease 166 million middle east increase primarily driven increased customer original equipment bookings 17 billion bookings 2013 approximately 32 oil gas 27 chemical 26 general industries 13 power generation 2 water management sales 2014 flat compared 2013 included negative currency effects approximately 6 million sale naval business first quarter 2014 resulted negative impact comparison approximately 2 increases customer aftermarket sales substantially offset decreases customer original equipment sales increased sales 225 million latin america 95 million north america 88 million asia pacific 53 million africa substantially offset decreased sales 357 million europe 97 million middle east sales 2013 increased 586 million 38 compared 2012 increase included currency benefits approximately 6 million increase primarily driven customer original equipment sales growth oil gas power generation industries increased sales 459 million north america 166 million europe 96 million middle east partially offset decrease 147 million asia pacific gross profit 2014 increased 238 million 41 compared 2013 gross profit margin 2014 373 increased 358 period 2013 increase gross profit margin attributable continued focus low cost sourcing cost control initiatives gross profit 2013 increased 378 million 70 compared 2012 gross profit margin 2013 358 increased 348 period 2012 increase attributable favorable sales mix original equipment aftermarket shift product line mix continued traction low cost sourcing cost control initiatives operating income 2014 increased 148 million 48 compared 2013 increase included negative currency effects approximately 2 million increase primarily attributed 238 million increase gross profit 203 million decrease sga decrease sga primarily driven 134 million gain sale naval business first quarter 2014 lesser extent reductions personnel related expenses nonrecurring realignment charges 2013 2014 gross profit sga improvements partially offset 283 million pretax gains realized transactions concerning ail joint venture 2013 recur operating income 2013 increased 546 million 215 compared 2012 increase included negative currency effects approximately 5 million increase primarily attributed 283 million pretax gains realized transactions concerning ail joint venture 378 million increase gross profit partially offset 90 million increase sga primarily driven increased selling research development costs backlog 7748 million december 31 2014 increased 52 million 07 compared december 31 2013 currency effects provided decrease approximately 41 million backlog 7696 million december 31 2013 increased 457 million 63 compared december 31 2012 currency effects provided decrease approximately 1 million liquidity capital resources cash flow analysis existing cash generated operations borrowings available existing revolving credit facility primary sources shortterm liquidity monitor depository institutions hold cash equivalents regular basis believe placed deposits creditworthy financial institutions sources operating cash generally include sale products services conversion working capital particularly accounts receivable inventories total cash balance december 31 2014 4504 million compared 3638 million december 31 2013 3043 million december 31 2012 cash provided operating activities 5710 million 4878 million 5171 million 2014 2013 2012 respectively provided cash support shortterm working capital needs working capital increased 2014 due primarily higher accounts receivable 797 million higher inventory 355 million lower accrued liabilities 227 million partially offset higher accounts payable 508 million 2014 contributed 435 million defined benefit pension plans working capital increased 2013 due primarily higher accounts receivables 538 million 2013 contributed 469 million defined benefit pension plans increases accounts receivable used 797 million cash flow 2014 compared 538 million 2013 351 million 2012 use cash accounts receivable 2014 partially attributable increased aging slower collection accounts receivable balances latin america primarily national oil company venezuela primary venezuelan customer venezuelan accounts receivable primarily us dollardenominated disputed historically writeoffs relating customer total outstanding accounts receivable customer approximately 9 gross accounts receivable december 31 2014 given experienced delays collecting payments estimate approximately 48 outstanding accounts receivable likely collected within one year therefore classified longterm within assets net december 31 2014 consolidated balance sheet use cash accounts receivable 2013 directly related overall increase sales increased aging slower collection certain receivables latin america compared 2012 use cash accounts receivable 2012 primarily attributable delays collection accounts receivable due slower anticipated payments certain customers fourth quarter 2014 days sales outstanding dso 73 days including amount classified longterm discussed dso 75 days 2013 2012 reference purposes based 2014 sales dso improvement one day could provide approximately 15 million cash experienced significant increase customer payment defaults 2014 increases inventory used 355 million cash flow 2014 compared source 286 million 2013 use 727 million 2012 use cash inventory 2014 primarily due decrease progress billings large orders december 31 2014 cash provided inventory 2013 primarily due reduction delayed shipments increase progress billings large orders december 31 2013 use cash inventory 2012 primarily due decrease progress billings large orders december 2012 higher raw material inventory needed support increased level bookings inventory turns 36 times december 31 2014 compared 35 32 times period 2013 2012 respectively calculation inventory turns reflect impact advanced cash received customers reference purposes based 2014 data improvement onetenth turn could yield approximately 22 million cash flows used investing activities 841 million 1680 million 1264 million 2014 2013 2012 respectively capital expenditures 1326 million 1391 million 1355 million 2014 2013 2012 respectively 2015 expect capital expenditures 150 million 160 million consideration acquisition activity first quarter 2014 sold naval business 468 million net cash proceeds first quarter 2013 sold 50 equity interest ail joint venture partner 462 million cash 2014 cash used acquisitions compared expenditures 768 million 2013 40 million 2012 cash flows used financing activities 3677 million 2014 compared 2558 million 2013 4289 million 2012 cash outflows 2014 resulted primarily repurchase 2465 million common stock 851 million dividend payments 400 million payments longterm debt cash outflows 2013 resulted primarily repurchase 4583 million common stock 769 million dividend payments partially offset 2986 million net proceeds issuance senior notes may 31 2012 announced board directors endorsed capital structure strategy designed make financial structure efficient capital structure strategy includes targeting longterm gross leverage ratio 10x20x total debt ebitda business cycle ii expanded share repurchase program 10 billion completed maintained previouslyannounced policy annually returning 40 50 running twoyear average net earnings shareholders following attainment announced target leverage ratio february 19 2013 board directors approved 7500 million share repurchase authorization november 13 2014 board directors approved 5000 million share repurchase authorization included approximately 175 million remaining capacity previous 7500 million share repurchase authorization december 31 2014 4644 million remaining capacity current share repurchase program intend adhere policy foreseeable future returns cash dividends andor share repurchases reviewed individually declared board directors implemented management discretion depending financial condition business opportunities market conditions time part continuing effort execute capital structure strategy fourth quarter 2013 amended existing credit agreement provided initial 4000 million term loan “term loan facility” revolving credit facility “revolving credit facility” together term loan facility “senior credit facility” new agreement provided additional debt capacity enhance operating flexibility additionally november 1 2013 issued 3000 million aggregate principal amount senior notes bear annual stated interest rate 400 items fully described note 10 consolidated financial statements included item 8 annual report cash needs next 12 months expected greater 2014 resulting increased acquisition activity partially offset decreased level anticipated share repurchases improvements working capital management anticipate incurring longerterm indebtness first quarter 2015 repay borrowings revolving credit facility believe cash flows operating activities combined availability revolving credit facility existing cash balances sufficient enable us meet cash flow needs next 12 months however cash flows operations could adversely affected decrease rate general global economic growth well economic political risks associated sales products operational factors competition regulatory actions fluctuations foreign currency exchange rates fluctuations interest rates among factors believe cash flows operating activities expectation continuing availability draw upon credit agreements also sufficient meet cash flow needs periods beyond next 12 months acquisitions dispositions regularly evaluate acquisition opportunities various sizes cost terms financing raised conjunction acquisition including ability raise economical capital critical consideration evaluation note 2 consolidated financial statements included item 8 annual report contains discussion acquisitions disposition exit ail joint venture financing discussion debt related covenants included note 10 consolidated financial statements included item 8 annual report compliance covenants december 31 2014 certain financing arrangements contain provisions may result event default failure financing arrangements meet payment terms observe covenants could result acceleration payment due provisions referred cross default provisions senior credit facility senior notes crossdefaulted rating agencies assign credit ratings certain debt access capital markets costs debt could directly affected credit ratings adverse action respect credit ratings could generally cause borrowing costs increase potential pool investors funding sources decrease particular decline credit ratings would increase cost borrowing senior credit facility entered interest rate swap agreements hedge exposure variable interest payments related senior credit facility agreements fully described note 6 consolidated financial statements included item 8 annual report item 7aitem 7 managements discussion analysis financial condition results operations following discussion analysis provided increase understanding read conjunction accompanying consolidated financial statements notes see “item 1a risk factors” “forwardlooking statements” included annual report form 10k year ended december 31 2015 annual report discussion risks uncertainties assumptions associated statements unless otherwise noted amounts discussed herein consolidated executive overview company believe worldleading manufacturer aftermarket service provider comprehensive flow control systems develop manufacture precisionengineered flow control equipment integral movement control protection flow materials customers’ critical processes product portfolio pumps valves seals automation aftermarket services supports global infrastructure industries including oil gas chemical power generation water management well general industrial markets products services add value manufacturing platform global network quick response centers qrcs offer broad array aftermarket equipment services installation advanced diagnostics repair retrofitting currently employ approximately 19000 employees 50 countries business model significantly influenced capital spending global infrastructure industries placement new products service aftermarket services existing operations worldwide installed base products important source aftermarket revenue products expected ensure maximum operating time many key industrial processes past several years significantly invested aftermarket strategy provide local support drive customer investments offerings use services replace repair installed products aftermarket portion business also helps provide business stability various economic periods aftermarket business primarily served network 191 qrcs located around globe provides variety service offerings customers including spare parts service solutions product life cycle solutions valueadded services generally higher margin business compared original equipment business key component profitable growth strategy operations conducted three business segments referenced throughout management’s discussion analysis financial condition results operations mda • engineered product division epd long lead time custom highlyengineered pumps pump systems mechanical seals auxiliary systems replacement parts related services • industrial product division ipd preconfigured engineered pumps pump systems related products services • flow control division fcd engineered industrial valves control valves actuators controls related services business segments share focus industrial flow control technology high number common customers segments also complementary product offerings technologies often combined applications provide us net competitive advantage segments also benefit global footprint economies scale reducing administrative overhead costs serve customers cost effectively example segment leadership reports chief operating officer coo segments share leadership operational support functions research development marketing supply chain reputation product portfolio built 50 wellrespected brand names worthington idp valtek limitorque durco edward anchordarling durametallic believe one comprehensive industry products services sold either directly designated channels 10000 companies including world’s leading engineering procurement construction epc firms original equipment manufacturers distributors end users continue build geographic breadth qrc network goal positioned near customers possible service support order capture valuable aftermarket business along ensuring local capability sell install service equipment remote regions equally imperative continuously improve global operations continue expand global supply chain capability meet global customer demands ensure quality timely delivery products continue devote resources improving supply chain processes across business segments find areas synergy cost reduction improve supply chain management capability ensure meet global customer demands also remain focused improving ontime delivery quality managing warranty costs percentage sales across global operations assistance focused continuous improvement process cip initiative goal cip initiative includes lean manufacturing six sigma business management strategy value engineering maximize service fulfillment customers ontime delivery reduced cycle time quality highest internal productivity 2015 challenged broadbased capital spending declines originating oil gas industry heightened pricing pressures negative currency impacts caused stronger us dollar compounded economic geopolitical conditions latin america middle east china addition experienced lower expected activity levels aftermarket business due deferred spending customers repair maintenance budgets expect current environment persist 2016 better align costs improve longterm efficiency initiated realignment programs inclusive associated sihi acquisition accelerate short longterm strategic plans including targeted manufacturing optimization consolidation facilities sga efficiency initiatives transfer activities highcost regions lowercost facilities currently estimate approximate 18 reduction global workforce realignment programs expected total investment approximately 400 million including projects still final evaluation expect results realignment programs deliver annualized runrate savings approximately 230 million portion realized 2015 increasingly larger amount realized 2016 2017 addition continuing focus ongoing lowcost sourcing including greater use thirdparty suppliers increasing lowercost emerging market capabilities discussion realignment programs see note 18 consolidated financial statements included item 8 annual report markets following discussion read conjunction outlook 2016 section included mda products services used several distinct industries oil gas chemical power generation water management number industries collectively referred general industries demand products depends level new capital investment planned unplanned maintenance expenditures customers level new capital investment depends turn capital infrastructure projects driven need oil gas chemicals power generation water management well general economic conditions drivers generally related phase business cycle respective industries expectations future market behavior levels maintenance expenditures additionally driven reliability equipment planned unplanned downtime maintenance required capacity utilization process sales epc firms original equipment manufacturers typically large project orders critical applications certain sales distributors project orders typically procured customers either directly us indirectly contractors new construction projects facility enhancement projects quick turnaround business also refer shortcycle defined orders received customer booked shipped generally within six months receipt orders typically standardized general purpose products parts services three business segments generate certain levels type business sale aftermarket products services benefit large installed base original equipment requires periodic maintenance repair replacement parts use manufacturing platform global network qrcs offer broad array aftermarket equipment services installation advanced diagnostics repair retrofitting geographic regions positioned provide quick response believe customers traditionally relied us rather competitors aftermarket products due highly engineered customized products however aftermarket standard products competitive existence common standards allows easier replacement installed products proximity service centers timeliness delivery quality important considerations aftermarket products services continue selectively expand global qrc capabilities improve ability capture important aftermarket business oil gas oil gas industry represented approximately 36 43 bookings 2015 2014 respectively capital spending oil gas industry decreased 2015 compared previous year due broadbased capital spending declines heightened pricing pressures negative currency impacts caused stronger us dollar aftermarket opportunities industry decreased 2015 due deferred spending customers repair maintenance budgets impact enduser union strikes north america outlook oil gas industry heavily dependent demand growth mature markets developing geographies believe increased crude oil supply resulted significant decline price oil beginning fourth quarter 2014 believe lower oil prices continue negatively impact oil gas upstream investment acutely impact midstream downstream investment lesser extent addition reduction overall level spending oil gas companies could continue decrease demand products services however believe longterm fundamentals industry remain solid spite nearterm cycle industry works current excess supply projected depletion rates existing fields forecasted longterm demand growth longstanding reputation providing successful solutions upstream midstream downstream applications along advancements portfolio offerings believe continue wellpositioned assist customers challenging environment chemical industry represented approximately 22 20 bookings 2015 2014 respectively experienced decreased level capital spending 2015 due broadbased capital spending declines heightened pricing pressures negative currency impacts caused stronger us dollar aftermarket opportunities decreased 2015 due deferred spending customers repair maintenance budgets impact union strikes customers north america outlook chemical industry remains heavily dependent global economic conditions global economies stabilize unemployment conditions improve rise consumer spending follow increase spending would drive greater demand chemicalbased products supporting improved levels capital investment believe chemical industry nearterm continue invest north america capacity additions maintenance upgrades optimization existing assets developing regions selectively invest capital infrastructure meet current future indigenous demand believe global presence localized aftermarket capabilities wellpositioned serve potential growth opportunities industry power generation power generation industry represented approximately 14 12 bookings 2015 2014 respectively 2015 power generation industry continued experience softness capital spending mature regions driven uncertainty related environmental regulations well potential regulatory impacts overall civilian nuclear market developing regions capital investment remained place driven increased demand forecasts electricity countries china india global concerns environment continue support increase desired future capacity renewable energy sources majority active planned construction throughout 2015 continued utilize designs based fossil fuels natural gas increased percentage utilization driven market prices gas remaining low relatively stable potential unconventional sources gas shale gas power generation industry forecasting increased use form fuel power generation plants believe outlook power generation industry remains favorable current legislative efforts limit emissions carbon dioxide may adverse effect investment plans depending potential requirements imposed timing compliance country however believe proposed methods limiting carbon dioxide emissions offer business opportunities products services believe longterm fundamentals power generation industry remain solid based projected increases demand electricity driven global population growth advancements industrialization growth urbanization developing markets also believe longstanding reputation power generation industry portfolio offerings various generating methods advancements serving renewable energy market carbon capture methodologies well global service support structure position us well future opportunities important industry water management water management industry represented approximately 4 3 bookings 2015 2014 respectively water management industry activity level experienced softness 2015 despite worldwide demand fresh water treatment continuing create requirements new facilities upgrades existing systems many require products offer particularly pumps proportion people living regions find difficult meet water requirements expected double 2025 believe persistent demand fresh water economic cycles supports continued investments general industries general industries represented aggregate approximately 24 22 bookings 2015 2014 respectively general industries comprises variety different businesses including mining ore processing pharmaceuticals pulp paper food beverage smaller applications none individually represented 5 total bookings 2015 2014 general industries also includes sales distributors whose end customers operate industries primarily serve outlook group industries heavily dependent upon condition global economies consumer confidence levels longterm fundamentals many industries remain sound many products produced industries common staples industrialized urbanized economies believe specialty product offerings designed industries aftermarket service capabilities provide continued business opportunities results operations throughout discussion results operations discuss impact fluctuations foreign currency exchange rates calculated currency effects translating current year results monthly basis prior year exchange rates periods effective march 28 2013 joint venture partner agreed exit joint venture audco india limited “ail” manufactures integrated industrial valves india effect exit two separate transactions acquired 100 ownership ails plug valve manufacturing business asset purchase sold 50 equity interest ail joint venture partner effective december 10 2013 acquired inclusion ipd innovative magdrive llc innomag privatelyowned united states us based company specializing advanced sealless magnetic drive centrifugal pumps chemical general industries results operations innomag ail consolidated since applicable acquisition dates pro forma information provided acquisitions due immateriality effective march 31 2014 sold fcd naval oy naval business finnish valve manufacturer sale included navals manufacturing facility located laitila finland service support center located st petersburg russia effective january 7 2015 acquired inclusion ipd 100 sihi group bv sihi global provider engineered vacuum fluid pumps related services impact acquisition sihi year ended december 31 2015 included bookings 2701 million sales 2942 million gross profit 538 million operating loss 476 million including realignment costs 299 million purchase accounting adjustments 230 million acquisitionrelated costs 116 million period end backlog 942 million pro forma information provided acquisition due immateriality note 2 consolidated financial statements included item 8 financial statements supplementary data item 8 annual report discusses details acquisitions disposition exit joint venture first quarter 2015 initiated r1 realignment program reduce optimize certain nonstrategic qrcs manufacturing facilities sihi acquisition anticipate total investment program approximately 50 million second quarter 2015 initiated r2 realignment program better align costs improve longterm efficiency including manufacturing optimization consolidation facilities reduction workforce transfer activities highcost regions lowercost facilities fourth quarter 2015 expanded scope previously announced r2 realignment program accelerate longterm plans implementing key strategic structural changes operating platform cost structure subject final evaluation anticipate total investment program approximately 350 million including amounts recorded income tax expense total charges realignment programs segment detailed year ended december 31 2015 addition charges 89 million related realignment programs reported income tax expense consolidated statement income year ended december 31 2015 anticipate majority remaining charges related realignment programs incurred 2016 upon completion realignment programs expect annual runrate cost savings approximately 230 million portion realized 2015 increasingly larger amount realized 2016 2017 actual savings realized could vary expected savings represent management’s best estimate date following discussion read conjunction “outlook 2016” section included mda bookings backlog define booking receipt customer order contractually engages us perform activities behalf customer regards manufacture delivery andor support products delivery service bookings recorded subsequently canceled within fiscal period excluded bookings 2015 decreased 9842 million 191 compared 2014 decrease included negative currency effects approximately 377 million decrease primarily driven oil gas industry lesser extent general chemical industries decrease heavily weighted toward customer original equipment bookings 2014 increased 2796 million 57 compared 2013 increase included negative currency effects approximately 113 million increase driven oil gas chemical general industries partially offset water management industry increase heavily weighted toward customer original equipment bookings backlog represents aggregate value booked uncompleted customer orders influenced primarily bookings sales cancellations currency effects backlog 22 billion december 31 2015 decreased 5310 million 196 compared december 31 2014 decrease included negative currency effects approximately 145 million currency effects backlog calculated using change period end exchange rates decrease includes impact cancellations 1184 million orders booked prior years order cancellations typically result material negative impacts financial results due cancellation provisions long lead time contracts backlog related aftermarket orders approximately 26 25 backlog december 31 2015 2014 respectively backlog 27 billion december 31 2014 increased 1473 million 58 compared december 31 2013 increase included negative currency effects approximately 154 million sales 2015 decreased 3169 million 65 compared 2014 decrease included negative currency effects approximately 433 million decrease heavily weighted towards original equipment sales decreased every region except sales europe primarily due favorable impact sihi sales region sales 2015 include 2942 million sales sihi compare 2014 sales 2014 decreased 767 million 15 compared 2013 decrease included negative currency effects approximately 112 million decrease due decreased original equipment sales partially offset increased aftermarket sales driven decreased sales europe middle east asia pacific partially offset increased sales north america sale naval business first quarter 2014 also resulted negative impact 2013 comparison sales international customers including export sales us approximately 66 total sales 2015 68 2014 71 2013 sales europe middle east africa ema approximately 34 32 35 total sales 2015 2014 2013 respectively sales asia pacific approximately 18 total sales 2015 20 2014 2013 sales latin america approximately 9 total sales 2015 11 2014 2013 gross profit gross profit margin gross profit 2015 decreased 2273 million 133 compared 2014 gross profit margin 2015 326 decreased 352 2014 decrease gross profit margin primarily attributed negative impact margins resulting purchase accounting adjustments acquired sihi backlog inventory 181 million charges related realignment programs 669 million lesser extent certain lower margin projects shipped backlog negative impact decreased sales absorption fixed manufacturing costs compared period 2014 decrease partially offset decrease compensation included decrease broadbased annual incentive program compensation mix shift higher margin aftermarket sales aftermarket sales increased approximately 43 total sales compared approximately 42 total sales period 2014 gross profit 2014 increased 265 million 16 compared 2013 gross profit margin 2014 352 increased 341 2013 increase gross profit margin primarily attributed mix shift higher margin aftermarket sales effects lower costs result operational improvements disciplined selectivity customer bookings compared period 2013 aftermarket sales increased approximately 42 total sales compared approximately 40 total sales period 2013 sga 2015 increased 347 million 37 compared 2014 currency effects yielded decrease approximately 81 million sga percentage sales 2015 increased 210 basis points compared period 2014 due part 412 million charges related realignment programs 116 million sihi acquisitionrelated costs lower sales leverage 119 million increase bad debt expense 134 million gain sale naval business first quarter 2014 partially offset decrease compensation included decrease broadbased annual incentive program compensation 68 million gain reversal contingent consideration purchase innovative magdrive llc innomag sga 2014 decreased 299 million 31 compared 2013 currency effects yielded decrease approximately 15 million decrease primarily attributable 2014 gains noted decreased sellingrelated expenses sga percentage sales 2014 decreased 30 basis points compared period 2013 due primarily 134 million gain sale naval business first quarter 2014 gain certain legal matters fourth quarter 2014 net earnings affiliates net earnings affiliates represents net income investments eight joint ventures one located chile japan saudi arabia south korea united arab emirates india two china accounted using equity method accounting net earnings affiliates 2015 decreased 22 million primarily result decreased earnings epd joint venture south korea net earnings affiliates 2014 decreased 269 million compared 2013 primarily result ail transactions resulted total pretax gains 283 million recorded net earnings affiliates 2013 operating income operating income 2015 decreased 2642 million 335 compared 2014 decrease primarily result 2273 million decrease gross profit 347 million increase sga discussed decrease included negative currency effects approximately 46 million 1081 million realignment expense operating income 2014 increased 295 million 39 compared 2013 increase included negative currency effects approximately 23 million increase primarily result 265 million increase gross profit 299 million decrease sga discussed partially offset 283 million pretax gains 2013 ail transactions recur 2014 interest expense interest income interest expense 2015 increased 50 million compared 2014 increase primarily attributable interest expense associated increased borrowings 2015 related public offering €5000 million euro senior notes aggregate principal amount due march 17 2022 eur senior notes issued march 17 2015 interest expense 2014 increased 59 million compared 2013 increase attributable interest expense associated senior notes issued fourth quarter 2013 see note 10 consolidated financial statements included item 8 annual report definition discussion various credit resources interest income 2015 increased 04 million compared 2014 increase primarily attributable higher average cash balances 2015 compared 2014 interest income 2014 increased 03 million compared 2013 increase primarily attributable higher average cash balances 2014 compared 2013 expense income net expense net increased 422 million income 20 million 2014 loss 402 million 2015 increase primarily due 570 million increase losses arising transactions currencies sites functional currencies including impact 185 million loss result first quarter 2015 remeasurement bolivardenominated venezuelan net monetary assets partially offset 154 million increase gains foreign exchange contracts changes primarily due foreign currency exchange rate movements brazilian real mexican peso euro relation us dollar compared period 2014 income net increased 163 million loss 143 million 2013 gain 20 million 2014 increase primarily due 128 million increase gains foreign exchange contracts 27 million decrease losses arising transactions currencies sites’ functional currencies change primarily due foreign currency exchange rate movements mexican peso japanese yen euro relation us dollar tax expense tax rate 2015 tax rate differed federal statutory rate 35 primarily due tax impacts realignment programs nondeductible venezuelan exchange rate remeasurement loss establishment valuation allowance deferred tax assets brazil amount 126 million due deteriorating economic conditions brazil substantially offset net impact foreign operations included impacts lower foreign tax rates changes reserves established uncertain tax positions effective tax rate 353 year ended december 31 2015 increased 284 2014 due primarily unfavorable tax impacts described 2014 2013 effective tax rates differed federal statutory rate 35 primarily due net impact foreign operations included impacts lower foreign tax rates changes reserves established uncertain tax positions may 17 2006 tax increase prevention reconciliation act 2005 signed law creating exclusion us taxable income certain types foreign related party payments dividends interest rents royalties prior 2006 subject us taxation december 18 2015 exclusion extended five additional years exclusion effective years 2006 2019 applies certain related party payments effective tax rate based upon current earnings estimates future taxable earnings domestic international location changes factors including ability utilize foreign tax credits net operating losses results tax audits could impact tax rate future periods december 31 2015 foreign tax credits 465 million expiring 2021 2024 recorded valuation allowance 06 million additionally recorded net deferred tax assets 422 million relate net operating losses tax credits deductible temporary differences available reduce taxable income future periods definite expiration able utilize portion credits losses effective tax rate would increase net earnings per share net earnings 2015 decreased 2511 million 2677 million 200 per diluted share compared 2014 decrease primarily attributable 2642 million decrease operating income 422 million increase expense net 50 million increase interest expense partially offset 594 million decrease tax expense net earnings 2014 increased 333 million 5188 million 376 per diluted share compared 2013 increase primarily attributable 295 million increase operating income 163 million increase income net partially offset 59 million increase interest expense 36 million increase tax expense comprehensive loss income comprehensive loss 2015 decreased 06 million 1582 million compared 1588 million 2014 loss primarily due foreign currency exchange rate movements euro brazilian real argentine peso versus us dollar december 31 2015 compared 2014 comprehensive loss 2014 increased 1588 million compared income 28 million 2013 increase almost entirely due foreign currency translation impacts resulting weakening euro versus us dollar lesser extent major currencies exposure december 31 2014 compared december 31 2013 business segments conduct operations three business segments based type product manage business evaluate segment performance allocate resources based segment’s operating income see note 16 consolidated financial statements included item 8 annual report discussion segments key operating results three business segments epd ipd fcd discussed engineered product division segment results largest business segment epd design manufacture distribute service custom highlyengineered pumps pump systems mechanical seals auxiliary systems collectively referred original equipment epd includes longer lead time highlyengineered pump products shorter cycle engineered pumps mechanical seals generally manufactured within shorter lead times epd also manufactures replacement parts related equipment provides full array replacement parts repair support services collectively referred aftermarket epd primarily operates oil gas power generation chemical water management general industries epd operates 47 countries 33 manufacturing facilities worldwide 10 located europe 11 north america seven asia five latin america 129 qrcs including colocated manufacturing facilities andor shared fcd bookings 2015 decreased 7672 million 271 compared 2014 decrease included negative currency effects approximately 228 million decrease customer bookings primarily driven oil gas industry lesser extent chemical general industries customer bookings decreased 2675 million north america 2260 million latin america 1491 million europe 924 million asia pacific decrease heavily weighted toward customer original equipment bookings 21 billion bookings 2015 approximately 47 oil gas 19 general industries 17 chemical 15 power generation 2 water management interdivision bookings eliminated included consolidated bookings disclosed decreased 189 million bookings 2014 increased 2511 million 97 compared 2013 increase included negative currency effects approximately 103 million increase customer bookings primarily driven oil gas chemical industries partially offset power generation industry customer bookings increased 2086 million north america 608 million europe 468 million latin america 415 million middle east partially offset decrease 1158 million asia pacific increase heavily weighted toward customer aftermarket bookings 28 billion bookings 2014 approximately 55 oil gas 16 chemical 15 general industries 13 power generation 1 water management interdivision bookings eliminated included consolidated bookings disclosed increased 97 million sales 2015 decreased 3046 million 119 compared 2014 decrease included negative currency effects approximately 258 million decrease primarily driven decreased original equipment sales resulting decreased customer sales 1274 million asia pacific 714 million latin america 399 million middle east 278 million europe 113 million north america interdivision sales eliminated included consolidated sales disclosed decreased 100 million sales 2014 decreased 858 million 32 compared 2013 decrease included negative currency effects approximately 101 million decrease primarily driven decreased original equipment sales primarily resulting decreased customer sales 630 million asia pacific 414 million middle east 387 million europe 270 million latin america 199 million africa partially offset increased sales 967 million north america interdivision sales eliminated included consolidated sales disclosed increased 13 million gross profit 2015 decreased 1461 million 164 compared 2014 gross profit margin 2015 330 decreased 348 2014 decrease gross profit margin primarily attributable charges related realignment programs negative impact decreased sales absorption fixed manufacturing costs partially offset decrease broadbased annual incentive program compensation gross profit 2014 decreased 111 million 12 compared 2013 gross profit margin 2014 348 increased 341 2013 increase gross profit margin primarily attributable mix shift higher margin aftermarket sales disciplined selectivity customer bookings effects lower costs associated operational execution improvements partially offset negative impact decreased sales absorption fixed manufacturing costs operating income 2015 decreased 1182 million 264 compared 2014 decrease included negative currency effects approximately 28 million decrease due 1461 million decrease gross profit partially offset 310 million decrease sga including decrease due currency effects approximately 49 million decrease sga due primarily decreased selling marketingrelated expenses resulting lower sales savings associated strategic cost reduction programs decrease broadbased annual incentive program compensation partially offset charges related realignment programs increased bad debt expense operating income 2014 increased 20 million 04 compared 2013 increase included negative currency effects approximately 20 million increase due 109 million decrease sga including decrease due currency effects approximately 14 million substantially offset 111 million decrease gross profit decrease sga due primarily decreased sellingrelated expenses backlog 12 billion december 31 2015 decreased 4160 million 264 compared december 31 2014 currency effects provided decrease approximately 80 million decrease includes impact cancellations 1040 million orders booked prior years order cancellations typically result material negative impacts financial results due cancellation provisions long lead time contracts backlog december 31 2015 included 105 million interdivision backlog eliminated included consolidated backlog disclosed backlog 16 billion december 31 2014 increased 1935 million 140 compared december 31 2013 currency effects provided decrease approximately 72 million backlog december 31 2014 included 163 million interdivision backlog eliminated included consolidated backlog disclosed industrial product division segment results ipd design manufacture distribute service engineered preconfigured industrial pumps pump systems including submersible motors specialty products collectively referred original equipment additionally ipd manufactures replacement parts related equipment provides full array support services collectively referred aftermarket ipd primarily operates oil gas chemical water management power generation general industries ipd operates 22 manufacturing facilities five located us 12 europe four asia one latin america operates 34 qrcs worldwide including 21 sites europe six us three latin america four asia including colocated manufacturing facilities discussed note 2 consolidated financial statements included item 8 acquired sihi january 7 2015 sihis postacquisition operating results included ipds segment results operations proforma information provided acquisition due immateriality impact acquisition sihi year ended december 31 2015 includes bookings 2701 million sales 2942 million gross profit 538 million operating loss 476 million including acquisitionrelated costs 116 million purchase accounting adjustments 230 million realignment costs 299 million period end backlog 942 million bookings 2015 increased 1062 million 136 compared 2014 increase included negative currency effects approximately 42 million increased customer bookings chemical general power generation industries partially offset decrease oil gas water management industries bookings increased 1161 million europe due sihi 307 million asia pacific partially offset 305 million decrease north america increase primarily driven customer original equipment bookings interdivision bookings eliminated included consolidated bookings disclosed decreased 45 million 8872 million bookings 2015 approximately 38 general industries 23 chemical 18 oil gas 13 water management 8 power generation excluding 2701 million addition sihi bookings year ended december 31 2015 decreased 1639 million 210 compared period 2014 bookings 2014 increased 332 million 44 compared 2013 increase included negative currency effects approximately 4 million increased customer bookings general chemical oil gas industries partially offset decrease power generation industry bookings increase 437 million north america partially offset decrease 83 million africa increase primarily driven customer original equipment bookings interdivision bookings eliminated included consolidated bookings disclosed increased 1 million 7810 million bookings 2014 approximately 25 oil gas 34 general industries 18 water management 16 chemical 7 power generation sales 2015 increased 1760 million 218 compared 2014 increase included negative currency effects approximately 50 million primarily driven customer original equipment sales customer sales increased 1517 million europe 398 million north america 366 million asia pacific due sihi partially offset decreased sales 296 million latin america 221 million africa interdivision sales eliminated included consolidated sales disclosed decreased 08 million excluding 2942 million addition sihi sales year ended december 31 2015 decreased 1182 million 147 compared period 2014 sales 2014 increased 75 million 09 compared 2013 decrease included negative currency effects approximately 4 million decreased customer sales 242 million middle east partially offset increased customer sales 314 million asia pacific interdivision sales eliminated included consolidated sales disclosed decreased 11 million gross profit 2015 increased 187 million 85 compared 2014 gross profit margin 2015 244 decreased 274 2014 decrease gross profit margin primarily attributable charges related realignment programs negative impact sihis purchase accounting adjustments partially offset decrease broadbased annual incentive program compensation gross profit 2014 increased 170 million 83 compared 2013 gross profit margin 2014 274 increased 256 2013 increase primarily attributable sales mix shift higher margin aftermarket sales lower manufacturing costs resulting execution operational improvements disciplined selectivity customer bookings operating income 2015 decreased 768 million 718 compared 2014 decrease included negative currency effects approximately 5 million decrease primarily due 966 million increase sga due primarily inclusion sihis sga included charges related realignment programs acquisitionrelated costs increased bad debt expense partially offset decrease broadbased annual incentive compensation operating income 2014 increased 122 million 129 compared 2013 increase included negative currency effects approximately 2 million increase due 170 million increase gross profit partially offset 48 million increase sga due part increased spending research development backlog 4246 million december 31 2015 increased 307 million 78 compared december 31 2014 currency effects provided decrease approximately 16 million backlog december 31 2015 included 157 million interdivision backlog eliminated included consolidated backlog disclosed backlog 3939 million december 31 2014 decreased 487 million 110 compared december 31 2013 currency effects provided decrease approximately 41 million backlog december 31 2014 included 180 million interdivision backlog eliminated included consolidated backlog disclosed excluding 942 million impact sihi backlog decreased 635 million 161 compared december 31 2014 flow control division segment results second largest business segment fcd designs manufactures distributes broad portfolio engineeredtoorder configuredtoorder isolation valves control valves valve automation products boiler controls related services fcd leverages experience application knowhow offering complete menu engineered services complement expansive product portfolio fcd total 58 manufacturing facilities qrcs 25 countries around world five 26 manufacturing operations located us 13 located europe seven located asia pacific one located latin america based independent industry sources believe fcd fourth largest industrial valve supplier global basis bookings 2015 decreased 3467 million 208 compared 2014 decrease included negative currency effects approximately 107 million decrease customer bookings primarily driven general chemical oil gas industries customer bookings decreased 1362 million europe 1298 million asia pacific 463 million latin america 373 million north america decrease driven decreased customer original equipment bookings 13 billion bookings 2015 approximately 32 oil gas 27 chemical 24 general industries 15 power generation 2 water management bookings 2014 increased 33 million 02 compared 2013 increase included negative currency effects approximately 6 million increase customer bookings primarily attributable power chemical industries partially offset decreases oil gas general industries increased customer bookings 534 million middle east partially offset decreases 210 million latin america 110 million africa 93 million asia pacific increase driven increased customer aftermarket bookings 17 billion bookings 2014 approximately 32 oil gas 28 chemical 26 general industries 13 power generation 1 water management sales 2015 decreased 2002 million 124 compared 2014 decrease included negative currency effects approximately 125 million primarily driven decreased customer original equipment sales decreased 660 million asia pacific 548 million europe 384 million north america 243 million latin america 222 million africa partially offset increase 35 million middle east sales 2014 flat compared 2013 included negative currency effects approximately 6 million sale naval business first quarter 2014 resulted negative impact comparison approximately 2 increases customer aftermarket sales substantially offset decreases customer original equipment sales increased sales 225 million latin america 95 million north america 88 million asia pacific 53 million africa substantially offset decreased sales 357 million europe 97 million middle east gross profit 2015 decreased 1055 million 175 compared 2014 gross profit margin 2015 351 decreased 373 period 2014 decrease gross profit margin primarily attributable unfavorable shift product line mix charges related realignment programs partially offset decrease broadbased annual incentive compensation gross profit 2014 increased 238 million 41 compared 2013 gross profit margin 2014 373 increased 358 period 2013 increase gross profit margin attributable continued focus low cost sourcing cost control initiatives operating income 2015 decreased 884 million 274 compared 2014 decrease included negative currency effects approximately 14 million decrease primarily attributable 1055 million decrease gross profit partially offset 172 million decrease sga decrease sga primarily driven decrease broadbased annual incentive compensation partially offset charges related realignment programs 134 million gain sale naval business first quarter 2014 recur operating income 2014 increased 148 million 48 compared 2013 increase included negative currency effects approximately 2 million increase primarily attributed 238 million increase gross profit 203 million decrease sga decrease sga primarily driven 134 million gain sale naval business first quarter 2014 lesser extent reductions personnel related expenses nonrecurring realignment charges 2013 2014 gross profit sga improvements partially offset 283 million pretax gains realized transactions concerning ail joint venture 2013 recur backlog 6220 million december 31 2015 decreased 1528 million 197 compared december 31 2014 currency effects provided decrease approximately 49 million backlog 7748 million december 31 2014 increased 52 million 07 compared december 31 2013 currency effects provided decrease approximately 41 million liquidity capital resources cash flow analysis existing cash generated operations borrowings available existing revolving credit facility primary sources shortterm liquidity monitor depository institutions hold cash equivalents regular basis believe placed deposits creditworthy financial institutions sources operating cash generally include sale products services conversion working capital particularly accounts receivable inventories total cash balance december 31 2015 3664 million compared 4504 million december 31 2014 3638 million december 31 2013 cash provided operating activities 4171 million 5710 million 4878 million 2015 2014 2013 respectively provided cash support shortterm working capital needs working capital increased 2015 due primarily lower accounts payable 1136 million higher inventory 262 million partially offset lower accounts receivable 504 million 2015 contributed 438 million defined benefit pension plans working capital increased 2014 due primarily higher accounts receivable 797 million higher inventory 355 million lower accrued liabilities 227 million partially offset higher accounts payable 508 million 2014 contributed 435 million defined benefit pension plans decreases accounts receivable provided 504 million cash flow 2015 compared uses 797 million 2014 538 million 2013 decrease accounts receivable 2015 partially attributable lower sales period experienced delays collecting payment accounts receivable national oil company venezuela primary venezuelan customer accounts receivable primarily us dollardenominated disputed historically writeoffs relating customer total outstanding accounts receivable customer approximately 7 9 gross accounts receivable december 31 2015 december 31 2014 respectively given experienced delays collecting payments estimate approximately 64 outstanding accounts receivable likely collected within one year therefore classified longterm within assets net december 31 2015 consolidated balance sheet december 31 2014 approximately 48 classified longterm use cash accounts receivable 2014 partially attributable increased aging slower collection accounts receivable balances latin america compared 2013 fourth quarter 2015 days sales outstanding dso 72 days including amount classified longterm discussed dso 73 days 2014 75 2013 experienced significant increase customer payment defaults 2015 increases inventory used 262 million cash flow 2015 compared use 355 million 2014 source 286 million 2013 use cash inventory 2014 primarily due decrease progress billings large orders december 31 2014 inventory turns 36 times december 31 2015 compared 36 35 times period 2014 2013 respectively calculation inventory turns reflect impact advanced cash received customers cash flows used investing activities 5253 million 841 million 1680 million 2015 2014 2013 respectively capital expenditures 1819 million 1326 million 1391 million 2015 2014 2013 respectively 2016 currently estimate capital expenditures 105 million 115 million consideration acquisition activity discussed note 2 consolidated financial statements included item 8 january 2015 acquired sihi 3415 million cash first quarter 2014 sold naval business 468 million net cash proceeds first quarter 2013 sold 50 equity interest ail joint venture partner 462 million cash flows provided financing activities 613 million 2015 compared use cash 3677 million 2014 2558 million 2013 cash inflows 2015 resulted primarily 5263 million proceeds issuance 2022 eur senior notes partially offset outflows repurchase 3037 million common stock 937 million dividend payments 450 million payments longterm debt cash outflows 2014 resulted primarily repurchase 2465 million common stock 851 million dividend payments 400 million payments longterm debt maintained previouslyannounced policy annually returning 40 50 running twoyear average net earnings shareholders following attainment previously announced target leverage ratio february 19 2013 board directors approved 7500 million share repurchase authorization november 13 2014 board directors approved 5000 million share repurchase authorization included approximately 175 million remaining capacity previous 7500 million share repurchase authorization december 31 2015 1607 million remaining capacity current share repurchase program intend adhere policy foreseeable future returns cash dividends andor share repurchases reviewed individually declared board directors implemented management discretion depending financial condition business opportunities market conditions time fourth quarter 2015 amendment extended maturity senior credit facility two years october 14 2020 lowered sublimits issuance letters credit reduced commitment fee 0175 015 daily unused portions senior credit facility amended senior credit facility also increases maximum permitted leverage ratio 325 35 times debt total consolidated ebitda defined senior credit facility additionally march 17 2015 issued 5000 million 2022 eur senior notes bear annual stated interest rate 125 items fully described note 10 consolidated financial statements included item 8 annual report cash needs next 12 months expected less 2015 resulting decreased level anticipated capital expenditures share repurchases partially offset increased realignment cash expenditures believe cash flows operating activities combined availability revolving credit facility existing cash balances sufficient enable us meet cash flow needs next 12 months however cash flows operations could adversely affected decrease rate general global economic growth extended decrease capital spending customers well economic political risks associated sales products operational factors competition regulatory actions fluctuations foreign currency exchange rates fluctuations interest rates among factors believe cash flows operating activities expectation continuing availability draw upon credit agreements also sufficient meet cash flow needs periods beyond next 12 months acquisitions dispositions regularly evaluate acquisition opportunities various sizes cost terms financing raised conjunction acquisition including ability raise economical capital critical consideration evaluation note 2 consolidated financial statements included item 8 annual report contains discussion acquisitions disposition exit ail joint venture financing discussion debt related covenants included note 10 consolidated financial statements included item 8 annual report compliance covenants december 31 2015 certain financing arrangements contain provisions may result event default failure financing arrangements meet payment terms observe covenants could result acceleration payment due provisions referred cross default provisions senior credit facility senior notes described note 10 consolidated financial statements included item 8 annual report crossdefaulted rating agencies assign credit ratings certain debt access capital markets costs debt could directly affected credit ratings adverse action respect credit ratings could generally cause borrowing costs increase potential pool investors funding sources decrease particular decline credit ratings would increase cost borrowing senior credit facility entered interest rate swap agreements hedge exposure variable interest payments related senior credit facility agreements fully described note 6 consolidated financial statements included item 8 annual report item 7aitem 7 managements discussion analysis financial condition results operations following discussion analysis provided increase understanding read conjunction accompanying consolidated financial statements notes see “item 1a risk factors” “forwardlooking statements” included annual report form 10k year ended december 31 2016 annual report discussion risks uncertainties assumptions associated statements unless otherwise noted amounts discussed herein consolidated executive overview company believe worldleading manufacturer aftermarket service provider comprehensive flow control systems develop manufacture precisionengineered flow control equipment integral movement control protection flow materials customers’ critical processes product portfolio pumps valves seals automation aftermarket services supports global infrastructure industries including oil gas chemical power generation water management well general industrial markets products services add value manufacturing platform global network quick response centers qrcs offer broad array aftermarket equipment services installation advanced diagnostics repair retrofitting currently employ approximately 18000 employees 50 countries business model significantly influenced capital spending global infrastructure industries placement new products service maintenance spending aftermarket services existing operations worldwide installed base products important source aftermarket revenue products expected ensure maximum operating time many key industrial processes past several years significantly invested aftermarket strategy provide local support drive customer investments offerings use services replace repair installed products aftermarket portion business also helps provide business stability various economic periods aftermarket business primarily served network 183 qrcs located around globe provides variety service offerings customers including spare parts service solutions product life cycle solutions valueadded services generally higher margin business compared original equipment business key component profitable growth strategy operations conducted three business segments referenced throughout management’s discussion analysis financial condition results operations mda • engineered product division long lead time custom highlyengineered pumps pump systems mechanical seals auxiliary systems replacement parts related services • industrial product division preconfigured engineered pumps pump systems related products services • flow control division engineered industrial valves control valves actuators controls related services business segments share focus industrial flow control technology high number common customers segments also complementary product offerings technologies often combined applications provide us net competitive advantage segments also benefit global footprint economies scale reducing administrative overhead costs serve customers cost effectively example segment leadership reports chief operating officer coo segments share leadership operational support functions research development marketing supply chain reputation product portfolio built 50 wellrespected brand names worthington idp valtek limitorque durco edward anchordarling durametallic believe one comprehensive industry products services sold either directly designated channels 10000 companies including world’s leading engineering procurement construction epc firms original equipment manufacturers distributors end users continue leverage qrc network positioned near customers possible service support order capture valuable aftermarket business along ensuring local capability sell install service equipment remote regions equally imperative continuously improve global operations continue expand global supply chain capability meet global customer demands ensure quality timely delivery products additionally continue devote resources improving supply chain processes across business segments find areas synergy cost reduction improve supply chain management capability ensure meet global customer demands also remain focused improving ontime delivery quality managing warranty costs percentage sales across global operations assistance focused continuous improvement process cip initiative goal cip initiative includes lean manufacturing six sigma business management strategy value engineering maximize service fulfillment customers ontime delivery reduced cycle time quality highest internal productivity 2015 2016 early 2017 challenged broadbased capital spending declines originating oil gas industry heightened pricing pressures negative currency impacts caused stronger us dollar compounded economic geopolitical conditions latin america middle east china addition experienced lower expected activity levels aftermarket business due deferred spending customers repair maintenance budgets expect current environment persist 2017 potential improvement second half year experienced deterioration plan operating results engineered product operations epo ipd reporting units believe operationally market driven concluded impairment goodwill associated epo ipd december 31 2016 conditions uncertain quickly change markets operate could result sustained deterioration could impact recoverability certain longlived assets including goodwill continue closely monitor performance related market conditions better align costs improve longterm efficiency initiated realignment programs accelerate short longterm strategic plans including targeted manufacturing optimization consolidation facilities sga efficiency initiatives transfer activities highcost regions lowercost facilities divestiture certain nonstrategic assets completion programs expect 15 20 reduction global workforce relative early 2015 workforce levels expected nearterm investment approximately 400 million including projects still final evaluation expect results realignment programs deliver annualized runrate savings approximately 230 million since inception realignment programs 2015 incurred charges 2226 million expect incur remaining charges 2017 addition focusing ongoing lowcost sourcing including greater use thirdparty suppliers increasing lowercost emerging market capabilities markets following discussion read conjunction outlook 2017 section included mda products services used several distinct industries oil gas chemical power generation water management number industries collectively referred general industries demand products depends level new capital investment planned unplanned maintenance expenditures customers level new capital investment depends turn capital infrastructure projects driven need oil gas chemicals power generation water management well general economic conditions drivers generally related phase business cycle respective industries expectations future market behavior levels maintenance expenditures additionally driven reliability equipment planned unplanned downtime maintenance required capacity utilization process sales epc firms original equipment manufacturers typically large project orders critical applications certain sales distributors project orders typically procured customers either directly us indirectly contractors new construction projects facility enhancement projects quick turnaround business also refer shortcycle defined orders received customer booked shipped generally within six months receipt orders typically standardized general purpose products parts services three business segments generate certain levels type business sale aftermarket products services benefit large installed base original equipment requires periodic maintenance repair replacement parts use manufacturing platform global network qrcs offer broad array aftermarket equipment services installation advanced diagnostics repair retrofitting geographic regions positioned provide quick response believe customers traditionally relied us rather competitors aftermarket products due highly engineered customized products however aftermarket standard products competitive existence common standards allows easier replacement installed products proximity service centers timeliness delivery quality important considerations aftermarket products services continue selectively expand global qrc capabilities improve ability capture important aftermarket business oil gas oil gas industry represented approximately 36 bookings 2016 2015 capital spending oil gas industry decreased 2016 compared previous year due continued broadbased capital spending declines heightened pricing pressures negative currency impacts caused stronger us dollar aftermarket opportunities industry decreased 2016 due deferred spending customers repair maintenance budgets impact enduser union strikes north america outlook oil gas industry heavily dependent demand growth mature markets developing geographies believe lower oil prices began fourth quarter 2014 continue negatively impact oil gas upstream investment acutely impact midstream downstream investment lesser extent addition reduction overall level spending oil gas companies could continue decrease demand products services however believe longterm fundamentals industry remain solid spite current cycle industry works current excess supply projected depletion rates existing fields forecasted longterm demand growth longstanding reputation providing successful solutions upstream midstream downstream applications along advancements portfolio offerings believe continue wellpositioned assist customers challenging environment chemical industry represented approximately 21 22 bookings 2016 2015 respectively experienced decreased level capital spending 2016 due broadbased capital spending declines heightened pricing pressures negative currency impacts caused stronger us dollar aftermarket opportunities decreased 2016 due deferred spending customers repair maintenance budgets outlook chemical industry remains heavily dependent global economic conditions global economies stabilize unemployment conditions improve rise consumer spending follow increase spending would drive greater demand chemicalbased products supporting improved levels capital investment believe chemical industry nearterm continue invest north america middle east capacity additions maintenance upgrades optimization existing assets developing regions selectively invest capital infrastructure meet current future indigenous demand believe global presence localized aftermarket capabilities wellpositioned serve potential growth opportunities industry power generation power generation industry represented approximately 14 bookings 2016 2015 2016 power generation industry continued experience softness capital spending mature regions driven uncertainty related environmental regulations well potential regulatory impacts overall civilian nuclear market developing regions capital investment remained place driven increased demand forecasts electricity countries china india global concerns environment continue support increase desired future capacity renewable energy sources majority active planned construction throughout 2016 continued utilize designs based fossil fuels natural gas increased percentage utilization driven market prices gas remaining low relatively stable potential unconventional sources gas shale gas power generation industry forecasting increased use form fuel power generation plants believe outlook power generation industry remains favorable current legislative efforts limit emissions carbon dioxide may adverse effect investment plans depending potential requirements imposed timing compliance country however believe proposed methods limiting carbon dioxide emissions offer business opportunities products services believe longterm fundamentals power generation industry remain solid based projected increases demand electricity driven global population growth advancements industrialization growth urbanization developing markets also believe longstanding reputation power generation industry portfolio offerings various generating methods advancements serving renewable energy market carbon capture methodologies well global service support structure position us well future opportunities important industry water management water management industry represented approximately 4 bookings 2016 2015 water management industry activity level experienced softness 2016 despite worldwide demand fresh water treatment continuing create requirements new facilities upgrades existing systems many require products offer particularly pumps proportion people living regions find difficult meet water requirements expected double 2025 believe persistent demand fresh water economic cycles supports continued investments especially north america developing regions general industries general industries represented aggregate approximately 25 24 bookings 2016 2015 respectively general industries comprises variety different businesses including mining ore processing pharmaceuticals pulp paper food beverage smaller applications none individually represented 5 total bookings 2016 2015 general industries also includes sales distributors whose end customers operate industries primarily serve outlook group industries heavily dependent upon condition global economies consumer confidence levels longterm fundamentals many industries remain sound many products produced industries common staples industrialized urbanized economies believe specialty product offerings designed industries aftermarket service capabilities provide continued business opportunities results operations throughout discussion results operations discuss impact fluctuations foreign currency exchange rates calculated currency effects operations translating current year results monthly basis prior year exchange rates periods first second quarters 2015 initiated realignment programs consist restructuring nonrestructuring charges realignment programs discussed note 18 consolidated financial statements included item 8 annual report realignment programs continued throughout 2016 total charges realignment programs segment detailed years ended december 31 2016 2015 anticipate total investment realignment programs approximately 400 million including projects still final evaluation since inception realignment programs 2015 incurred charges 2226 million expect incur remaining charges 2017 based actions realignment programs estimate achieved annual cost savings approximately 120 million december 31 2016 approximately 75 million cos remainder sga upon completion realignment programs expect annual runrate cost savings approximately 230 million actual savings could vary expected savings represent management’s best estimate date effective january 7 2015 acquired inclusion ipd 100 sihi group bv sihi global provider engineered vacuum fluid pumps related services effective march 31 2014 sold fcd naval oy naval business finnish valve manufacturer sale included navals manufacturing facility located laitila finland service support center located st petersburg russia note 2 consolidated financial statements included item 8 annual report discusses details acquisition disposition bookings backlog define booking receipt customer order contractually engages us perform activities behalf customer regards manufacture delivery andor support products delivery service bookings recorded subsequently canceled within fiscal period excluded bookings 38 billion 2016 decreased 4164 million 100 compared 2015 decrease included negative currency effects approximately 108 million decrease primarily driven oil gas industry lesser extent chemical general industries decrease primarily due customer original equipment bookings 2015 decreased 9842 million 191 compared 2014 decrease included negative currency effects approximately 377 million decrease primarily driven oil gas industry lesser extent general chemical industries decrease heavily weighted toward customer original equipment bookings backlog represents aggregate value booked uncompleted customer orders influenced primarily bookings sales cancellations currency effects backlog 19 billion december 31 2016 decreased 2755 million 127 compared december 31 2015 decrease included negative currency effects approximately 18 million currency effects backlog calculated using change period end exchange rates backlog related aftermarket orders approximately 30 26 backlog december 31 2016 2015 respectively expect ship approximately 88 december 31 2016 backlog 2017 backlog 22 billion december 31 2015 decreased 5310 million 196 compared december 31 2014 decrease included negative currency effects approximately 145 million impact cancellations 1184 million orders booked prior years order cancellations typically result material negative impacts financial results due cancellation provisions long lead time contracts sales 2016 decreased 5695 million 125 compared 2015 decrease included negative currency effects approximately 114 million decrease heavily weighted toward original equipment sales decreased every region except sales middle east sales 2015 decreased 3169 million 65 compared 2014 decrease included negative currency effects approximately 433 million decrease heavily weighted towards original equipment sales decreased every region except sales europe primarily due favorable impact sihi sales region sales 2015 include 2942 million sales sihi compare 2014 sales international customers including export sales us approximately 64 total sales 2016 66 2015 68 2014 sales europe middle east africa ema approximately 35 34 32 total sales 2016 2015 2014 respectively sales asia pacific approximately 18 total sales 2016 18 2015 20 2014 sales latin america approximately 7 total sales 2016 9 2015 11 2014 gross profit gross profit margin gross profit 2016 decreased 2557 million 172 compared 2015 gross profit margin 2016 309 decreased 326 2015 decrease gross profit gross profit margin primarily attributed negative impact decreased sales absorption fixed manufacturing costs unfavorable impacts shortterm operational inefficiencies related initial execution certain realignment programs lower margin projects shipped backlog 155 million charge write inventory brazil partially offset realignment savings achieved related realignment programs mix shift higher margin aftermarket sales aftermarket sales increased approximately 45 total sales compared approximately 43 total sales period 2015 gross profit 2015 decreased 2273 million 133 compared 2014 gross profit margin 2015 326 decreased 352 2014 decrease gross profit gross profit margin primarily attributed negative impact resulting purchase accounting adjustments acquired sihi backlog inventory 181 million charges related realignment programs 667 million lesser extent certain lower margin projects shipped backlog negative impact decreased sales absorption fixed manufacturing costs compared period 2014 decrease partially offset decrease compensation included decrease broadbased annual incentive program compensation mix shift higher margin aftermarket sales aftermarket sales increased approximately 43 total sales compared approximately 42 total sales period 2014 sga 2016 decreased 63 million 06 compared 2015 currency effects yielded decrease approximately 24 million sga percentage sales 2016 increased 290 basis points compared period 2015 due primarily increased bad debt expense result 632 million reserve established primary venezuelan customer third quarter 2016 lower sales leverage partially offset decreased charges savings achieved related realignment programs lower sihi integration costs sga 2015 increased 347 million 37 compared 2014 currency effects yielded decrease approximately 81 million sga percentage sales 2015 increased 210 basis points compared period 2014 due part 412 million charges related realignment programs 116 million sihi acquisitionrelated costs lower sales leverage 119 million increase bad debt expense 134 million gain sale naval business first quarter 2014 partially offset decrease compensation included decrease broadbased annual incentive program compensation 68 million gain reversal contingent consideration purchase innovative magdrive llc innomag net earnings affiliates net earnings affiliates represents net income investments eight joint ventures one located chile japan saudi arabia south korea united arab emirates india two china accounted using equity method accounting net earnings affiliates 2016 increased 13 million primarily result increased earnings epd joint venture south korea ipd joint venture chile net earnings affiliates 2015 decreased 22 million primarily result decreased earnings epd joint venture south korea operating income operating income 2016 decreased 2481 million 472 compared 2015 decrease primarily result 2557 million decrease gross profit partially offset 63 million decrease sga discussed decrease included negative currency effects approximately 18 million operating income 2015 decreased 2642 million 335 compared 2014 decrease primarily result 2273 million decrease gross profit 347 million increase sga discussed decrease included negative currency effects approximately 46 million 1081 million realignment expense interest expense interest income interest expense 2016 decreased 52 million compared 2015 decrease primarily attributable decreased commitments borrowings revolving credit facility term defined note 10 consolidated financial statements item 8 annual report 2016 compared period 2015 interest expense 2015 increased 50 million compared 2014 increase primarily attributable interest expense associated increased borrowings 2015 related public offering €5000 million euro senior notes aggregate principal amount due march 17 2022 eur senior notes issued march 17 2015 interest income 2016 increased 07 million compared 2015 interest income 2015 increased 04 million compared 2014 income expense net income net increased 435 million expense 402 million 2015 income 33 million 2016 increase primarily due 607 million decrease losses arising transactions currencies sites functional currencies partially offset 182 million decrease gains foreign exchange contracts net change primarily due foreign currency exchange rate movements brazilian real canadian dollar british pound relation us dollar year ended december 31 2016 compared period 2015 185 million loss result remeasurement venezuelan bolivardenominated net monetary assets first quarter 2015 recur expense net increased 422 million income 20 million 2014 loss 402 million 2015 increase primarily due 570 million increase losses arising transactions currencies sites functional currencies including impact 185 million loss result first quarter 2015 remeasurement bolivardenominated venezuelan net monetary assets partially offset 154 million increase gains foreign exchange contracts changes primarily due foreign currency exchange rate movements brazilian real mexican peso euro relation us dollar compared period 2014 tax expense tax rate 2016 tax rate differed federal statutory rate 35 primarily due net impact foreign operations tax impacts realignment programs losses certain foreign jurisdictions tax benefit provided effective tax rate 337 year ended december 31 2016 decreased 353 2015 due primarily tax impacts described 2015 tax rate differed federal statutory rate 35 primarily due tax impacts realignment programs nondeductible venezuelan exchange rate remeasurement loss establishment valuation allowance deferred tax assets brazil amount 126 million partially offset net impact foreign operations included impacts lower foreign tax rates changes reserves established uncertain tax positions 2014 tax rate differed federal statutory rate 35 primarily due net impact foreign operations included impacts lower foreign tax rates changes reserves established uncertain tax positions may 17 2006 tax increase prevention reconciliation act 2005 signed law creating exclusion us taxable income certain types foreign related party payments dividends interest rents royalties prior 2006 subject us taxation december 18 2015 exclusion extended five additional years exclusion effective years 2006 2019 applies certain related party payments effective tax rate based upon current earnings estimates future taxable earnings domestic international location changes factors including ability utilize foreign tax credits net operating losses results tax audits could impact tax rate future periods december 31 2016 foreign tax credits 600 million expiring 2020 2026 recorded valuation allowance 06 million additionally recorded net deferred tax assets 860 million relate net operating losses tax credits deductible temporary differences available reduce taxable income future periods definite expiration able utilize portion credits losses effective tax rate would increase net earnings per share net earnings 2016 decreased 1226 million 1451 million 111 per diluted share compared 2015 decrease primarily attributable 2481 million decrease operating income partially offset 435 million increase income net 52 million decrease interest expense 736 million decrease tax expense net earnings 2015 decreased 2511 million 2677 million 200 per diluted share compared 2014 decrease primarily attributable 2642 million decrease operating income 422 million increase expense net 50 million increase interest expense partially offset 594 million decrease tax expense comprehensive loss comprehensive loss 2016 decreased 722 million 860 million compared 1582 million 2015 loss primarily due foreign currency translation adjustments resulting primarily exchange rate movements british pound euro mexican peso versus us dollar december 31 2016 compared 2015 comprehensive loss 2015 decreased 06 million 1582 million compared 1588 million 2014 loss primarily due foreign currency translation adjustments resulting primarily exchange rate movements euro brazilian real argentine peso versus us dollar december 31 2015 compared 2014 business segments conduct operations three business segments based type product manage business evaluate segment performance allocate resources based segment’s operating income see note 16 consolidated financial statements included item 8 annual report discussion segments key operating results three business segments epd ipd fcd discussed engineered product division segment results largest business segment epd design manufacture distribute service custom highlyengineered pumps pump systems mechanical seals auxiliary systems collectively referred original equipment epd includes longer lead time highlyengineered pump products shorter cycle engineered pumps mechanical seals generally manufactured within shorter lead times epd also manufactures replacement parts related equipment provides aftermarket services epd primarily operates oil gas power generation chemical general industries epd operates 47 countries 32 manufacturing facilities worldwide 10 located europe 10 north america seven asia five latin america 123 qrcs including colocated manufacturing facilities andor shared fcd bookings 2016 decreased 2418 million 117 compared 2015 decrease included negative currency effects approximately 76 million decrease customer bookings primarily driven oil gas general industries lesser extent chemical industry customer bookings decreased 870 million europe 520 million latin america 380 million north america 364 million middle east 262 million asia pacific 26 million africa decrease primarily driven decreased customer original equipment bookings 18 billion bookings 2016 approximately 48 oil gas 17 general industries 18 chemical 17 power generation interdivision bookings eliminated included consolidated bookings disclosed decreased 84 million bookings 2015 decreased 7672 million 271 compared 2014 decrease included negative currency effects approximately 228 million decrease customer bookings primarily driven oil gas industry lesser extent chemical general industries customer bookings decreased 2675 million north america 2260 million latin america 1491 million europe 924 million asia pacific decrease heavily weighted toward customer original equipment bookings 21 billion bookings 2015 approximately 47 oil gas 19 general industries 17 chemical 15 power generation 2 water management interdivision bookings eliminated included consolidated bookings disclosed decreased 189 million sales 2016 decreased 2652 million 117 compared 2015 decrease included negative currency effects approximately 87 million decrease proportionally driven decreased original equipment aftermarket sales resulting decreased customer sales 1102 million latin america 843 million north america 277 million europe 193 million africa 135 million asia pacific 20 million middle east interdivision sales eliminated included consolidated sales disclosed decreased 140 million sales 2015 decreased 3046 million 119 compared 2014 decrease included negative currency effects approximately 258 million decrease primarily driven decreased original equipment sales resulting decreased customer sales 1274 million asia pacific 714 million latin america 399 million middle east 278 million europe 113 million north america interdivision sales eliminated included consolidated sales disclosed decreased 100 million gross profit 2016 decreased 1313 million 176 compared 2015 gross profit margin 2016 308 decreased 330 2015 decrease gross profit margin primarily attributable negative impact decreased sales absorption fixed manufacturing costs 150 million charge write inventory brazil increased charges related realignment programs partially offset realignment savings achieved gross profit 2015 decreased 1461 million 164 compared 2014 gross profit margin 2015 330 decreased 348 2014 decrease gross profit margin primarily attributable charges related realignment programs negative impact decreased sales absorption fixed manufacturing costs partially offset decrease broadbased annual incentive program compensation operating income 2016 decreased 1589 million 483 compared 2015 decrease included negative currency effects approximately 14 million decrease due 1313 million decrease gross profit 291 million increase sga including decrease due currency effects approximately 21 million increase sga primarily due increased bad debt expense result epds 609 million portion 632 million reserve established primary venezuelan customer third quarter 2016 partially offset savings achieved related realignment programs lower sellingrelated expenses operating income 2015 decreased 1182 million 264 compared 2014 decrease included negative currency effects approximately 28 million decrease due 1461 million decrease gross profit partially offset 310 million decrease sga including decrease due currency effects approximately 49 million decrease sga due primarily decreased selling marketingrelated expenses resulting lower sales savings associated strategic cost reduction programs decrease broadbased annual incentive program compensation partially offset charges related realignment programs increased bad debt expenses backlog 10 billion december 31 2016 decreased 1905 million 165 compared december 31 2015 currency effects provided decrease approximately 2 million backlog december 31 2016 included 117 million interdivision backlog eliminated included consolidated backlog disclosed backlog 12 billion december 31 2015 decreased 4160 million 264 compared december 31 2014 currency effects provided decrease approximately 80 million decrease includes impact cancellations orders booked prior years order cancellations typically result material negative impacts financial results due cancellation provisions long lead time contracts backlog december 31 2015 included 105 million interdivision backlog eliminated included consolidated backlog disclosed industrial product division segment results ipd design manufacture distribute service engineered preconfigured industrial pumps pump systems including submersible motors specialty products collectively referred original equipment additionally ipd manufactures replacement parts related equipment provides full array support services collectively referred aftermarket ipd primarily operates oil gas chemical water management power generation general industries ipd operates 20 manufacturing facilities five located us 10 europe four asia one latin america operates 32 qrcs worldwide including 20 sites europe six us three latin america three asia including colocated manufacturing facilities bookings 2016 decreased 895 million 101 compared 2015 decrease included negative currency effects approximately 10 million decrease customer bookings primarily driven oil gas power generation chemical industries bookings decreased 367 million asia pacific 191 million europe 125 million africa 77 million latin america 72 million north america decrease driven customer original equipment bookings 7977 million bookings 2016 approximately 44 general industries 22 chemical 14 oil gas 14 water management 6 power generation interdivision bookings eliminated included consolidated bookings disclosed decreased 74 million bookings 2015 increased 1062 million 136 compared 2014 increase included negative currency effects approximately 42 million increased customer bookings chemical general power generation industries partially offset decrease oil gas water management industries bookings increased 1161 million europe 307 million asia pacific primarily due sihi partially offset 305 million decrease north america increase primarily driven customer original equipment bookings interdivision bookings eliminated included consolidated bookings disclosed decreased 45 million 8872 million bookings 2015 approximately 38 general industries 23 chemical 18 oil gas 13 water management 8 power generation sales 2016 decreased 1447 million 147 compared 2015 decrease included negative currency effects approximately 13 million primarily driven customer original equipment sales customer sales decreased 548 million europe 313 million north america 178 million asia pacific 145 million middle east 131 million latin america 54 million africa interdivision sales eliminated included consolidated sales disclosed decreased 90 million sales 2015 increased 1760 million 218 compared 2014 increase included negative currency effects approximately 50 million primarily driven customer original equipment sales customer sales increased 1517 million europe 398 million north america 366 million asia pacific primarily due sihi partially offset decreased sales 296 million latin america 221 million africa interdivision sales eliminated included consolidated sales disclosed decreased 08 million gross profit 2016 decreased 501 million 209 compared 2015 gross profit margin 2016 226 decreased 244 2015 decrease gross profit margin primarily attributable negative impact decreased sales absorption fixed manufacturing costs lower margin projects shipped backlog unfavorable impact shortterm operational inefficiencies related initial execution certain realignment programs partially offset savings achieved related realignment programs reduced impact sihi purchase accounting adjustments 2016 gross profit 2015 increased 187 million 85 compared 2014 gross profit margin 2015 244 decreased 274 2014 decrease gross profit margin primarily attributable charges related realignment programs negative impact sihis purchase accounting adjustments partially offset decrease broadbased annual incentive program compensation operating income 2016 decreased 292 million 967 compared 2015 decrease included negative currency effects approximately 2 million decrease primarily due 501 million decrease gross margin partially offset 210 million decrease sga related primarily savings achieved decreased charges related realignment programs lower sihi integration costs lower sellingrelated expenses operating income 2015 decreased 768 million 718 compared 2014 decrease included negative currency effects approximately 5 million decrease primarily due 966 million increase sga due primarily inclusion sihis sga included charges related realignment programs acquisitionrelated costs increased bad debt expense partially offset decrease broadbased annual incentive compensation backlog 3735 million december 31 2016 decreased 511 million 120 compared december 31 2015 currency effects provided decrease approximately 17 million backlog december 31 2016 included 142 million interdivision backlog eliminated included consolidated backlog disclosed backlog 4246 million december 31 2015 decreased 307 million 78 compared december 31 2014 currency effects provided decrease approximately 16 million backlog december 31 2015 included 157 million interdivision backlog eliminated included consolidated backlog disclosed flow control division segment results second largest business segment fcd designs manufactures distributes broad portfolio engineeredtoorder configuredtoorder isolation valves control valves valve automation products boiler controls related services fcd leverages experience application knowhow offering complete menu engineered services complement expansive product portfolio fcd total 58 manufacturing facilities qrcs 25 countries around world five 26 manufacturing operations located us 13 located europe seven located asia pacific one located latin america based independent industry sources believe fcd third largest industrial valve supplier global basis bookings 2016 decreased 1017 million 77 compared 2015 decrease included negative currency effects approximately 22 million decrease customer bookings primarily driven oil gas industry lesser extent general chemical industries decreased customer bookings 696 million north america 467 million middle east partially offset increased bookings 227 million europe 66 million latin america decrease primarily driven decreased customer original equipment bookings 12 billion bookings 2016 approximately 31 oil gas 28 chemical 24 general industries 16 power generation 1 water management bookings 2015 decreased 3467 million 208 compared 2014 decrease included negative currency effects approximately 107 million decrease customer bookings primarily driven general chemical oil gas industries customer bookings decreased 1362 million europe 1298 million asia pacific 463 million latin america 373 million north america decrease driven decreased customer original equipment bookings 13 billion bookings 2015 approximately 32 oil gas 27 chemical 24 general industries 15 power generation 2 water management sales 2016 decreased 1818 million 128 compared 2015 decrease included negative currency effects approximately 14 million primarily driven decreased customer original equipment sales decreased 835 million asia pacific 627 million europe 450 million north america 183 million latin america partially offset increase 259 million middle east sales 2015 decreased 2002 million 124 compared 2014 decrease included negative currency effects approximately 125 million primarily driven decreased customer original equipment sales decreased 660 million asia pacific 548 million europe 384 million north america 243 million latin america 222 million africa partially offset increase 35 million middle east gross profit 2016 decreased 704 million 142 compared 2015 gross profit margin 2016 346 decreased 351 period 2015 decrease gross profit margin primarily attributable negative impact decreased sales absorption fixed manufacturing costs lower margin projects shipped backlog partially offset savings achieved decreased charges related realignment programs compared period 2015 gross profit 2015 decreased 1055 million 175 compared 2014 gross profit margin 2015 351 decreased 373 period 2014 decrease gross profit margin primarily attributable unfavorable shift product line mix charges related realignment programs partially offset decrease broadbased annual incentive compensation operating income 2016 decreased 362 million 154 compared 2015 decrease included negative currency effects approximately 2 million decrease primarily attributable 704 million decrease gross profit partially offset 342 million decrease sga decrease sga primarily due savings achieved decreased charges related realignment programs lower sellingrelated expenses compared period 2015 operating income 2015 decreased 884 million 274 compared 2014 decrease included negative currency effects approximately 14 million decrease primarily attributable 1055 million decrease gross profit partially offset 172 million decrease sga decrease sga primarily driven decrease broadbased annual incentive compensation partially offset charges related realignment programs 134 million gain sale naval business first quarter 2014 recur backlog 5845 million december 31 2016 decreased 375 million 60 compared december 31 2015 currency effects provided increase less 1 million backlog 622 million december 31 2015 decreased 1528 million 197 compared december 31 2014 currency effects provided decrease approximately 49 million liquidity capital resources cash flow analysis existing cash generated operations borrowings available existing revolving credit facility primary sources shortterm liquidity monitor depository institutions hold cash equivalents regular basis believe placed deposits creditworthy financial institutions sources operating cash generally include sale products services conversion working capital particularly accounts receivable inventories total cash balance december 31 2016 3672 million compared 3664 million december 31 2015 4504 million december 31 2014 cash provided operating activities 2276 million 4181 million 5702 million 2016 2015 2014 respectively provided cash support shortterm working capital needs cash flow used working capital increased 2016 due primarily lower accounts payable 698 million lower accrued liabilities 977 million partially offset higher cash provided lower accounts receivable 377 million lower inventory 309 million 2016 contributed 425 million defined benefit pension plans working capital increased 2015 due primarily lower accounts payable 1136 million higher inventory 262 million partially offset lower accounts receivable 504 million 2015 contributed 438 million defined benefit pension plans decreases accounts receivable provided 377 million cash flow 2016 compared 504 million 2015 use 797 million 2014 decrease accounts receivable 2016 partially attributable lower sales period described fully note 1 consolidated financial statements included item 8 annual report estimated ability fully collect accounts receivable primary venezuelan customer became less probable third quarter 2016 recorded charge 632 million selling general administrative expense sga fully reserve potentially uncollectible accounts receivable continue pursue payments ongoing business venezuelan customer fourth quarter 2016 days sales outstanding dso 75 days dso 72 days 2015 73 2014 experienced significant increase customer payment defaults 2016 decreases inventory provided 309 million cash flow 2016 compared use 262 million 2015 use 355 million 2014 source cash inventory 2016 primarily due decreased inventory balances result decreased backlog use cash inventory 2015 primarily due decrease progress billings large orders december 31 2015 inventory turns 32 times december 31 2016 compared 36 times period 2015 2014 calculation inventory turns reflect impact advanced cash received customers decreases accounts payable used 698 million cash flow 2016 compared 1136 million 2015 decreases accrued liabilities income taxes payable used 977 million cash flow 2016 compared source cash 334 million 2015 cash flows used investing activities 915 million 5253 million 841 million 2016 2015 2014 respectively capital expenditures represent largest use 2016 897 million 1819 million 1326 million 2016 2015 2014 respectively second quarter 2016 divested nonstrategic foundry business resulted cash outflow 51 million loss 77 million cash outflows period 2015 resulted primarily payments sihi acquisition 3537 million 2017 currently estimate capital expenditures 80 million 90 million consideration acquisition activity cash flows used financing activities 1308 million 2016 compared source cash 603 million 2015 use cash 3669 million 2014 cash outflows 2016 resulted primarily 977 million dividend payments 600 million payments longterm debt cash inflows 2015 resulted primarily 5263 million proceeds issuance 2022 eur senior notes partially offset outflows repurchase 3037 million common stock 937 million dividend payments 450 million payments longterm debt cash outflows 2014 resulted primarily repurchase 2465 million common stock 851 million dividend payments 400 million payments longterm debt maintained previouslyannounced policy annually returning 40 50 running twoyear average net earnings shareholders following attainment previously announced target leverage ratio november 13 2014 board directors approved 5000 million share repurchase authorization included approximately 175 million remaining capacity previous share repurchase authorization december 31 2016 1607 million remaining capacity current share repurchase program intend adhere policy foreseeable future returns cash dividends andor share repurchases reviewed individually declared board directors implemented management discretion depending financial condition business opportunities market conditions time fourth quarter 2015 amendment extended maturity senior credit facility two years october 14 2020 lowered sublimits issuance letters credit reduced commitment fee 0175 015 daily unused portions senior credit facility amended senior credit facility also increases maximum permitted leverage ratio 325 35 times debt total consolidated ebitda defined senior credit facility additionally march 17 2015 issued 5000 million 2022 eur senior notes bear annual stated interest rate 125 items fully described note 10 consolidated financial statements included item 8 annual report cash needs next 12 months expected comparable 2016 believe cash flows operating activities combined availability revolving credit facility existing cash balances sufficient enable us meet cash flow needs next 12 months however cash flows operations could adversely affected decrease rate general global economic growth extended decrease capital spending customers well economic political risks associated sales products operational factors competition regulatory actions fluctuations foreign currency exchange rates fluctuations interest rates among factors believe cash flows operating activities expectation continuing availability draw upon credit agreements also sufficient meet cash flow needs periods beyond next 12 months acquisitions dispositions regularly evaluate acquisition opportunities various sizes cost terms financing raised conjunction acquisition including ability raise economical capital critical consideration evaluation note 2 consolidated financial statements included item 8 annual report contains discussion acquisition disposition activity financing discussion debt related covenants included note 10 consolidated financial statements included item 8 annual report compliance covenants december 31 2016 certain financing arrangements contain provisions may result event default failure financing arrangements meet payment terms observe covenants could result acceleration payment due provisions referred cross default provisions senior credit facility senior notes described note 10 consolidated financial statements included item 8 annual report crossdefaulted rating agencies assign credit ratings certain debt access capital markets costs debt could directly affected credit ratings adverse action respect credit ratings could generally cause borrowing costs increase potential pool investors funding sources decrease particular decline credit ratings would increase cost borrowing senior credit facility liquidity analysis cash balance increased 07 million 3672 million december 31 2016 compared december 31 2015 slight cash increase included 897 million capital expenditures 977 million dividend payments 600 million payments longterm debt partially offset 2276 million operating cash flows approximately 27 currently outstanding term loan facility term defined note 10 consolidated financial statements item 8 annual report 333 million shortterm borrowings due mature 2017 2018 senior credit facility matures october 2020 december 31 2016 revolving loans 1026 million letters credit outstanding 10 billion revolving credit facility december 31 2016 due financial covenant senior credit facility amount available borrowings revolving credit facility effectively limited 5535 million revolving credit facility committed held diversified group financial institutions december 31 2016 2015 result increases values plan’s assets contributions plan us pension plan fullyfunded defined applicable law consideration intent maintain fully funded status contributed 200 million us pension plan 2016 excluding direct benefits paid 25 million continue maintain asset allocation consistent strategy maximize total return reducing portfolio risks asset class diversification december 31 2016 3428 million total cash balance 3672 million held foreign subsidiaries 2288 million consider permanently reinvested outside us based expected 2017 liquidity needs various geographies currently anticipate need repatriate permanently reinvested cash fund domestic operations would generate adverse tax results however event cash needed fund domestic operations estimate 2288 million could repatriated resulting us cash tax liability 5 million 15 million required repatriate cash could limit ability assert permanent reinvestment foreign earnings invested capital future periods outlook 2017 future results operations forwardlooking statements contained annual report including mda involve number risks uncertainties particular statements regarding goals strategies new product introductions plans cultivate new businesses future economic conditions revenue pricing gross profit margin costs capital spending expected cost savings realignment programs depreciation amortization research development expenses potential impairment investments tax rate pending tax legal proceedings future results operations may also affected employee incentive compensation including annual program amount type valuation sharebased awards granted well amount awards forfeited due employee turnover addition various important factors discussed number factors could cause actual results differ materially expectations see risks described item 1a risk factors annual report bookings 37604 million 2016 booking represents contract certain circumstances modified canceled include varying lengths time booking time revenue recognition guarantee bookings result comparable revenues otherwise indicative future results believe lower oil prices began fourth quarter 2014 continue negatively impact oil gas upstream investment acutely impact midstream downstream investment lesser extent addition reduction overall level spending oil gas companies could continue decrease demand products services however believe longterm fundamentals industry remain solid spite current cycle industry works current excess supply projected depletion rates existing fields forecasted longterm demand growth longstanding reputation providing successful solutions upstream midstream downstream applications along advancements portfolio offerings believe continue wellpositioned assist customers challenging environment expect continued competitive economic environment 2017 continued execution realignment programs investments broadbased employee incentive compensation providing longterm benefits pressure operating margins 2017 anticipate benefits continuation enduser strategies strength high margin aftermarket business continued disciplined cost management diverse customer base broad product portfolio unified operating platform similar prior years expect results weighted towards second half year believe primary markets continue provide opportunities remain cautious outlook 2017 given continuing uncertainty capital spending many markets global economic conditions accordingly due decrease backlog december 31 2016 compared prior year continued competitive environment expect sales decline 6 11 2017 additional discussion markets opportunities see business overview markets section mda december 31 2016 13131 million fixedrate senior notes outstanding 2243 million variablerate debt term loan facility december 31 2016 variable fixed interest rate derivative contracts however portion debt carries variable rate interest debt subject volatility rates could impact interest expense expect interest expense 2017 relatively consistent amounts incurred 2016 results operations may also impacted unfavorable foreign currency exchange rate movements see “item 7aitem 7 managements discussion analysis financial condition results operations following discussion analysis provided increase understanding read conjunction accompanying consolidated financial statements notes see “item 1a risk factors” “forwardlooking statements” included annual report form 10k year ended december 31 2017 annual report discussion risks uncertainties assumptions associated statements unless otherwise noted amounts discussed herein consolidated executive overview company believe worldleading manufacturer aftermarket service provider comprehensive flow control systems develop manufacture precisionengineered flow control equipment integral movement control protection flow materials customers’ critical processes product portfolio pumps valves seals automation aftermarket services supports global infrastructure industries including oil gas chemical power generation water management well general industrial markets products services add value manufacturing platform global network quick response centers qrcs offer broad array aftermarket equipment services installation advanced diagnostics repair retrofitting employ approximately 17000 employees 50 countries december 31 2017 business model significantly influenced capital spending global infrastructure industries placement new products service maintenance spending aftermarket services existing operations worldwide installed base products important source aftermarket revenue products expected ensure maximum operating time many key industrial processes past several years significantly invested aftermarket strategy provide local support drive customer investments offerings use services replace repair installed products aftermarket portion business also helps provide business stability various economic periods aftermarket business primarily served network 174 qrcs located around globe provides variety service offerings customers including spare parts service solutions product life cycle solutions valueadded services generally higher margin business compared original equipment business key component profitable growth strategy operations conducted three business segments referenced throughout management’s discussion analysis financial condition results operations mda • epd long lead time custom highlyengineered pumps pump systems mechanical seals auxiliary systems replacement parts related services • ipd engineered preconfigured industrial pumps pump systems related products services • fcd engineered industrial valves control valves actuators controls related services business segments share focus industrial flow control technology high number common customers segments also complementary product offerings technologies often combined applications provide us net competitive advantage segments also benefit global footprint economies scale reducing administrative overhead costs serve customers cost effectively shared leadership operational support functions research development marketing supply chain reputation product portfolio built 50 wellrespected brand names worthington idp valtek limitorque durco edward anchordarling durametallic believe one comprehensive industry products services sold either directly designated channels 10000 companies including world’s leading engineering procurement construction epc firms original equipment manufacturers distributors end users continue leverage qrc network positioned near customers possible service support order capture valuable aftermarket business along ensuring local capability sell install service equipment remote regions equally imperative continuously improve global operations also continue expand global supply chain capability meet global customer demands ensure quality timely delivery products additionally continue devote resources improving supply chain processes across business segments find areas synergy cost reduction improve supply chain management capability ensure meet global customer demands also remain focused improving ontime delivery quality managing warranty costs percentage sales across global operations assistance focused continuous improvement process cip initiative goal cip initiative includes lean manufacturing six sigma business management strategy value engineering maximize service fulfillment customers ontime delivery reduced cycle time quality highest internal productivity 2015 2016 2017 challenged broadbased capital spending declines originating oil gas industry heightened pricing pressures negative currency impacts caused stronger us dollar compounded economic geopolitical conditions russia latin america middle east north africa asia pacific better align costs improve longterm efficiency executing realignment programs accelerate short longterm strategic plans including targeted manufacturing optimization consolidation facilities sga efficiency initiatives transfer activities highcost regions lowercost facilities divestiture certain nonstrategic assets completion programs expect 15 20 reduction global workforce relative early 2015 workforce levels expected nearterm investment approximately 360 million including projects still final evaluation expect results realignment programs deliver annualized runrate savings approximately 230 million since inception realignment programs 2015 incurred charges 2948 million expect incur remaining charges 2018 addition focusing ongoing lowcost sourcing including greater use thirdparty suppliers increasing lowercost emerging market capabilities markets following discussion read conjunction outlook 2018 section included mda products services used several distinct industries oil gas chemical power generation water management several industries mining steel paper collectively referred general industries demand products depends level new capital investment well planned unplanned maintenance expenditures customers level new capital investment depends turn capital infrastructure projects driven need products rely oil gas chemicals power generation water resource management well general economic conditions drivers generally related phase business cycle respective industries expectations future market behavior levels maintenance expenditures additionally driven reliability equipment planned unplanned downtime maintenance required capacity utilization process sales epc firms original equipment manufacturers typically large project orders critical applications certain sales distributors project orders typically procured customers either directly us indirectly contractors new construction projects facility enhancement projects quick turnaround business also refer shortcycle defined orders received customer booked shipped generally within six months receipt orders typically standardized general purpose products parts services three business segments generate certain levels type business sale aftermarket products services benefit large installed base original equipment requires periodic maintenance repair replacement parts use manufacturing platform global network qrcs offer broad array aftermarket equipment services installation advanced diagnostics repair retrofitting geographic regions positioned provide quick response believe customers traditionally relied us rather competitors aftermarket products due highly engineered customized products however aftermarket standard products competitive existence common standards allows easier replacement installed products proximity service centers timeliness delivery quality important considerations aftermarket products services continue selectively expand global qrc capabilities improve ability capture important aftermarket business oil gas oil gas industry represented approximately 38 36 bookings 2017 2016 respectively capital spending oil gas industry decreased 2017 compared previous year due continued broadbased capital spending declines heightened pricing pressures negative currency impacts caused stronger us dollar especially first half 2017 aftermarket opportunities industry solidified throughout 2017 due catch deferred spending customers repair maintenance budgets previous years outlook oil gas industry heavily dependent demand growth mature markets developing geographies shortterm believe improved oil price outlook somewhat positively impact oil gas upstream investment impact midstream downstream investment lesser extent recovery overall level spending oil gas companies could continue increase demand aftermarket products services believe medium longterm fundamentals industry remain attractive see stabilized environment industry works current excess supply addition believe projected depletion rates existing fields forecasted longterm demand growth require additional investments longstanding reputation providing successful solutions upstream midstream downstream applications along advancements portfolio offerings believe continue wellpositioned assist customers chemical industry represented approximately 21 bookings 2017 2016 experienced decreased level capital spending 2017 primarily due broadbased capital spending declines heightened pricing pressures negative currency impacts caused stronger us dollar especially first half 2017 aftermarket opportunities solidified throughout 2017 due catch deferred spending customers repair maintenance budgets previous years outlook chemical industry remains heavily dependent global economic conditions global economies stabilize unemployment conditions improve rise consumer spending follow increase spending would drive greater demand chemicalbased products supporting improved levels capital investment believe chemical industry nearterm continue invest north america middle east capacity additions maintenance upgrades optimization existing assets developing regions selectively invest capital infrastructure meet current future indigenous demand believe global presence localized aftermarket capabilities wellpositioned serve potential growth opportunities industry power generation power generation industry represented approximately 13 14 bookings 2017 2016 respectively 2017 power generation industry continued experience softness thermal power generation capital spending mature key developing markets china curtailed construction new coalfired power generation last year india southeast asia capital investment remained place driven increased demand forecasts natural gasfired combined cycle plants increased share energy mix driven market prices gas remaining low stable low capital expenditures ability stabilize unpredictable renewable sources potential unconventional sources gas global power generation industry forecasting increased use form fuel power generation plants political efforts limit emissions carbon dioxide may adverse effect thermal power investment plans depending potential requirements imposed timing compliance country however believe proposed methods capturing limiting carbon dioxide emissions offer business opportunities products services time continue take advantage new investments concentrated solar power generating capacity pumps valves seals uniquely positioned molten salt applications well traditional steam cycle believe longterm fundamentals power generation industry remain solid based projected increases demand electricity driven global population growth urbanization developing markets increased use electricity driven transportation also believe longstanding reputation power generation industry portfolio offerings various generating methods advancements serving renewable energy market carbon capture methodologies well global service support structure position us well future opportunities important industry water management water management industry represented approximately 4 bookings 2017 2016 water management industry activity levels experienced softness 2017 despite worldwide demand fresh water treatment continuing create requirements new facilities upgrades existing systems many require products offer particularly pumps proportion people living regions find difficult meet water requirements expected double 2025 believe persistent demand fresh water economic cycles supports continued investments especially north america developing regions general industries general industries represented aggregate approximately 24 25 bookings 2017 2016 respectively general industries comprise variety different businesses including mining ore processing pharmaceuticals pulp paper food beverage smaller applications none individually represented 5 total bookings 2017 2016 general industries also include sales distributors whose end customers operate industries primarily serve outlook group industries heavily dependent upon condition global economies consumer confidence levels longterm fundamentals many industries remain sound many products produced industries common staples industrialized urbanized economies believe specialty product offerings designed industries aftermarket service capabilities provide continued business opportunities results operations throughout discussion results operations discuss impact fluctuations foreign currency exchange rates calculated currency effects operations translating current year results monthly basis prior year exchange rates periods previously disclosed quarterly report form 10q quarterly period ended june 30 2017 identified accounting errors focused mainly two nonus sites inventory accounts receivable cost sales cos sga balances prior periods first quarter 2017 assessed errors individually aggregate concluded material prior annual interim period however facilitate comparisons among periods revised previously issued audited consolidated financial information included 2016 annual report unaudited condensed consolidated financial information interim periods included form 10qa form 10q quarters ended march 31 2017 june 30 2017 respectively effective july 6 2017 sold fcd vogt product line related assets liabilities privately held company 2016 sales related vogt business totaled approximately 17 million earnings interest taxes approximately 4 million effective may 2 2017 sold fcd gestra ag business leading provider steam system solutions 2016 gestra recorded sales approximately 101 million €92 million earnings interest taxes approximately 17 million €15 million note 2 consolidated financial statements included item 8 annual report discusses details dispositions 2015 initiated realignment programs consist restructuring nonrestructuring charges discussed note 16 consolidated financial statements included item 8 annual report realignment programs continue executed 2018 total charges realignment programs segment detailed years ended december 31 2017 2016 anticipate total investment realignment programs approximately 360 million including projects process final evaluation since inception realignment programs 2015 incurred charges 2948 million expect incur remaining charges throughout 2018 based actions realignment programs estimate achieved cost savings approximately 200 million december 31 2017 compared approximately 120 million period 2016 approximately 130 million savings cos remainder sga upon completion realignment programs expect runrate cost savings approximately 230 million vast majority expected achieved 2018 actual savings could vary expected savings represent management’s best estimate date bookings backlog define booking receipt customer order contractually engages us perform activities behalf customer regards manufacture delivery andor support products delivery service bookings recorded subsequently canceled within fiscal period excluded bookings 38 billion 2017 increased 435 million 12 compared 2016 increase included currency benefits approximately 27 million increase primarily driven oil gas industry partially offset decrease power generation industry increase heavily weighted towards customer original equipment bookings 38 billion 2016 decreased 4164 million 100 compared 2015 decrease included negative currency effects approximately 108 million decrease primarily driven oil gas industry lesser extent chemical general industries decrease primarily due customer original equipment bookings backlog represents aggregate value booked uncompleted customer orders influenced primarily bookings sales cancellations currency effects backlog 20 billion december 31 2017 increased 1316 million 69 compared december 31 2016 currency effects provided increase approximately 110 million currency effects backlog calculated using change period end exchange rates backlog related aftermarket orders approximately 31 30 backlog december 31 2017 2016 respectively expect ship approximately 92 december 31 2017 backlog 2018 backlog 19 billion december 31 2016 decreased 2746 million 126 compared december 31 2015 decrease included negative currency effects approximately 18 million currency effects backlog calculated using change period end exchange rates backlog related aftermarket orders approximately 30 26 backlog december 31 2016 2015 respectively expected ship approximately 88 december 31 2016 backlog 2017 sales 2017 decreased 3297 million 83 compared 2016 decrease included currency benefits approximately 34 million decrease heavily weighted toward original equipment sales decreased every region sales 2016 decreased 5673 million 124 compared 2015 decrease included negative currency effects approximately 115 million decrease heavily weighted toward original equipment sales decreased every region except sales middle east sales international customers including export sales us approximately 64 total sales 2017 64 2016 66 2015 sales europe middle east africa ema approximately 36 35 34 total sales 2017 2016 2015 respectively sales asia pacific approximately 19 total sales 2017 2016 2015 sales latin america approximately 6 total sales 2017 7 2016 9 2015 gross profit gross profit margin gross profit 2017 decreased 1458 million 118 compared 2016 gross profit margin 2017 296 decreased 309 2016 decrease gross profit gross profit margin primarily attributed negative impact decreased sales absorption fixed manufacturing costs lower margin projects shipped backlog 169 million charge costs incurred related contract supply oil gas platform equipment end user latin america partially offset 109 million charges write inventory brazil 2016 recur mix shift higher margin aftermarket sales lower charges increased savings related realignment programs aftermarket sales increased approximately 48 total sales compared approximately 45 total sales period 2016 gross profit 2016 decreased 2463 million 167 compared 2015 gross profit margin 2016 309 decreased 324 2015 decrease gross profit gross profit margin primarily attributed negative impact decreased sales absorption fixed manufacturing costs unfavorable impacts shortterm operational inefficiencies related initial execution certain realignment programs lower margin projects shipped backlog charge write inventory brazil partially offset realignment savings achieved related realignment programs mix shift higher margin aftermarket sales aftermarket sales increased approximately 45 total sales compared approximately 43 total sales period 2015 sga 2017 decreased 646 million 67 compared 2016 currency effects yielded increase approximately 6 million sga percentage sales 2017 increased 40 basis points compared period 2016 due 260 million impairment charge related manufacturing facility brazil increased accrued broadbased annual incentive compensation lower sales leverage partially offset 735 million reserve established primary venezuelan customer 2016 recur savings related realignment programs sga 2016 decreased 42 million 04 compared 2015 currency effects yielded decrease approximately 28 million sga percentage sales 2016 increased 300 basis points compared period 2015 due primarily increased bad debt expense result 735 million reserve established primary venezuelan customer third quarter 2016 lower sales leverage partially offset decreased charges savings achieved related realignment programs lower sihi integration costs gain loss sale businesses gain sale businesses 2017 result 1413 million pretax gain sales gestra vogt businesses see note 2 consolidated financial statements included item 8 annual report additional information sales 77 million loss 2016 resulted sale nonstrategic foundry business net earnings affiliates net earnings affiliates represents net income investments seven joint ventures one located chile india saudi arabia south korea united arab emirates two china accounted using equity method accounting net earnings affiliates 2017 remained relatively constant compared prior year net earnings affiliates 2016 increased 30 million primarily result increased earnings epd joint venture south korea ipd joint venture chile operating income operating income 2017 increased 674 million 251 compared 2016 increase included currency benefits approximately 2 million increase primarily result 1413 million pretax gain sales gestra vogt businesses 646 million decrease sga partially offset 1458 million decrease gross profit discussed operating income 2016 decreased 2467 million 479 compared 2015 decrease primarily result 2463 million decrease gross profit 77 million loss sale nonstrategic foundry business partially offset 42 million decrease sga decrease included negative currency effects approximately 12 million interest expense interest income interest expense 2017 decreased 04 million compared 2016 decrease primarily attributable decreased borrowings revolving credit facility 2017 compared period 2016 interest expense 2016 decreased 52 million compared 2015 decrease primarily attributable decreased commitments borrowings revolving credit facility 2016 compared period 2015 interest income 2017 increased 06 million compared 2016 interest income 2016 increased 07 million compared 2015 expense income net expense net increased 184 million income 23 million 2016 due primarily 132 million increase losses arising transactions currencies sites functional currencies 36 million increase losses foreign exchange contracts net change primarily due foreign currency exchange rate movements mexican peso euro brazilian real british pound relation us dollar year ended december 31 2017 compared period 2016 income net increased 414 million expense 391 million 2015 income 23 million 2016 increase primarily due 587 million decrease losses arising transactions currencies sites functional currencies partially offset 182 million decrease gains foreign exchange contracts net change primarily due foreign currency exchange rate movements brazilian real canadian dollar british pound relation us dollar year ended december 31 2016 compared period 2015 185 million loss result remeasurement venezuelan bolivardenominated net monetary assets first quarter 2015 recur tax expense tax rate december 22 2017 us enacted tax cuts jobs act 2017 “act” significantly changed us tax law act among things lowered company’s us statutory federal income tax rate 35 21 effective january 1 2018 imposing deemed repatriation tax deferred foreign income implementing modified territorial tax system act provides territorial tax system beginning 2018 provides two new antibase erosion provisions global intangible lowtaxed income “gilti” provision baseerosion antiabuse tax “beat” provision effectively creates new minimum tax certain future foreign earnings 2017 tax rate differed federal statutory rate 35 primarily due impacts pursuant enactment act net impact foreign operations establishment valuation allowances deferred tax assets various foreign jurisdictions primarily mexico taxes related sales gestra vogt businesses effective tax rate 984 year ended december 31 2017 increased 363 2016 due tax impacts described 2016 tax rate differed federal statutory rate 35 primarily due net impact foreign operations tax impacts realignment programs losses certain foreign jurisdictions tax benefit provided 2015 tax rate differed federal statutory rate 35 primarily due tax impacts realignment programs nondeductible venezuelan exchange rate remeasurement loss establishment valuation allowance deferred tax assets brazil amount 126 million partially offset net impact foreign operations included impacts lower foreign tax rates changes reserves established uncertain tax positions effective tax rate based upon current earnings estimates future taxable earnings domestic international location changes factors including ability utilize foreign tax credits net operating losses results tax audits could impact tax rate future periods december 31 2017 foreign tax credits 75 million expiring 2026 2027 recorded valuation allowance 75 million additionally recorded net deferred tax assets 520 million relate net operating losses tax credits deductible temporary differences available reduce taxable income future periods definite expiration able utilize portion credits losses effective tax rate would increase net earnings per share net earnings 2017 decreased 1298 million 27 million 002 per diluted share compared 2016 decrease primarily attributable 674 million increase operating income partially offset 184 million increase expense net 04 million decrease interest expense 1813 million increase tax expense net earnings 2016 decreased 1259 million 1325 million 101 per diluted share compared 2015 decrease primarily attributable 2467 million decrease operating income partially offset 414 million increase income net 52 million decrease interest expense 710 million decrease tax expense comprehensive income loss comprehensive income 2017 increased 2056 million 1198 million loss 858 million 2016 income primarily due foreign currency translation adjustments resulting primarily exchange rate movements euro british pound indian rupee versus us dollar december 31 2017 compared 2016 comprehensive loss 2016 decreased 709 million 858 million compared 1567 million 2015 loss primarily due foreign currency translation adjustments resulting primarily exchange rate movements british pound euro mexican peso versus us dollar december 31 2016 compared 2015 business segments conduct operations three business segments based type product manage business evaluate segment performance allocate resources based segment’s operating income see note 16 consolidated financial statements included item 8 annual report discussion segments key operating results three business segments epd ipd fcd discussed engineered product division segment results largest business segment epd design manufacture distribute service custom highlyengineered pumps pump systems mechanical seals auxiliary systems collectively referred original equipment epd includes longer lead time highlyengineered pump products mechanical seals generally manufactured within shorter lead times epd also manufactures replacement parts related equipment provides aftermarket services epd primarily operates oil gas power generation chemical general industries epd operates 47 countries 30 manufacturing facilities worldwide nine located europe nine north america seven asia five latin america 123 qrcs including colocated manufacturing facilities andor shared fcd bookings 2017 increased 183 million 10 compared 2016 included order approximately 80 million provide pumps related equipment hengli integrated refining complex project china increase included currency benefits approximately 11 million increase customer bookings primarily driven oil gas chemical industries partially offset decrease power generation general industries customer bookings increased 1128 million asia pacific 390 million africa partially offset decreased customer bookings 601 million middle east 469 million europe 200 million north america 184 million latin america increase driven customer original equipment bookings 18 billion bookings 2017 approximately 51 oil gas 19 chemical 17 general industries 13 power generation interdivision bookings eliminated included consolidated bookings disclosed increased 66 million bookings 2016 decreased 2418 million 117 compared 2015 decrease included negative currency effects approximately 76 million decrease customer bookings primarily driven oil gas general industries lesser extent chemical industry customer bookings decreased 870 million europe 520 million latin america 380 million north america 364 million middle east 262 million asia pacific 26 million africa decrease primarily driven decreased customer original equipment bookings 18 billion bookings 2016 approximately 48 oil gas 17 general industries 18 chemical 17 power generation interdivision bookings eliminated included consolidated bookings disclosed decreased 84 million sales 2017 decreased 2206 million 111 compared 2016 decrease included currency benefits approximately 13 million decrease heavily weighted towards customer original equipment sales resulting decreased customer sales 1292 million north america 640 million latin america 150 million europe 112 million middle east 63 million africa interdivision sales eliminated included consolidated sales disclosed increased 45 million sales 2016 decreased 2608 million 116 compared 2015 decrease included negative currency effects approximately 88 million decrease proportionally driven decreased original equipment aftermarket sales resulting decreased customer sales 1102 million latin america 843 million north america 277 million europe 193 million africa 135 million asia pacific 20 million middle east interdivision sales eliminated included consolidated sales disclosed decreased 140 million gross profit 2017 decreased 771 million 124 compared 2016 gross profit margin 2017 307 decreased 311 2016 decrease gross profit margin primarily attributable negative impact decreased sales absorption fixed manufacturing costs lower margin projects shipped backlog partially offset lower costs increased savings related realignment programs mix shift higher margin aftermarket sales 109 million charges write inventory brazil 2016 recur gross profit 2016 decreased 1167 million 158 compared 2015 gross profit margin 2016 311 decreased 327 2015 decrease gross profit margin primarily attributable negative impact decreased sales absorption fixed manufacturing costs charge write inventory brazil increased charges related realignment programs partially offset realignment savings achieved operating income 2017 decreased 106 million 63 compared 2016 decrease included currency benefits approximately 1 million decrease due 771 million decrease gross profit partially offset 588 million decrease sga including increase due currency effects approximately 2 million decrease sga primarily due epds 712 million portion 735 million reserve established primary venezuelan customer third quarter 2016 recur decreased charges increased savings related realignment programs partially offset 260 million impairment charge second quarter 2017 related manufacturing facility brazil operating income 2016 decreased 1526 million 477 compared 2015 decrease included negative currency effects approximately 10 million decrease due 1167 million decrease gross profit 314 million increase sga including decrease due currency effects approximately 22 million 77 million loss sale nonstrategic foundry business increase sga primarily due increased bad debt expense result epds 712 million portion 735 million reserve established primary venezuelan customer third quarter 2016 partially offset savings achieved related realignment programs lower sellingrelated expenses backlog 10 billion december 31 2017 increased 589 million 61 compared december 31 2016 currency effects provided increase approximately 52 million backlog december 31 2017 included 160 million interdivision backlog eliminated included consolidated backlog disclosed backlog 10 billion december 31 2016 decreased 1917 million 165 compared december 31 2015 currency effects provided decrease approximately 2 million decrease includes impact cancellations orders booked prior years order cancellations typically result material negative impacts financial results due cancellation provisions long lead time contracts backlog december 31 2016 included 117 million interdivision backlog eliminated included consolidated backlog disclosed industrial product division segment results ipd design manufacture distribute service engineered preconfigured industrial pumps pump systems including submersible motors specialty products collectively referred original equipment additionally ipd manufactures replacement parts related equipment provides full array support services collectively referred aftermarket ipd primarily operates oil gas chemical water management power generation general industries ipd operates 19 manufacturing facilities five located us eight europe six asia operates 30 qrcs worldwide including 19 sites europe six us two latin america three asia including colocated manufacturing facilities andor shared epd bookings 2017 increased 240 million 30 compared 2016 increase included currency benefits approximately 7 million increase customer bookings primarily driven oil gas general industries partially offset decrease chemical industry bookings increased 238 million europe 193 million latin america 126 million north america partially offset decreased bookings 225 million middle east 182 million asia pacific increase driven customer original equipment bookings 8217 million bookings 2017 approximately 45 general industries 19 chemical 17 oil gas 13 water management 6 power generation interdivision bookings eliminated included consolidated bookings disclosed increased 17 million bookings 2016 decreased 895 million 101 compared 2015 decrease included negative currency effects approximately 10 million decrease customer bookings primarily driven oil gas power generation chemical industries bookings decreased 367 million asia pacific 191 million europe 125 million africa 77 million latin america 72 million north america decrease driven customer original equipment bookings 7977 million bookings 2016 approximately 44 general industries 22 chemical 14 oil gas 14 water management 6 power generation interdivision bookings eliminated included consolidated bookings disclosed decreased 74 million sales 2017 decreased 599 million 72 compared 2016 decrease included currency benefits approximately 8 million driven decreased customer original equipment sales customer sales decreased 350 million asia pacific 260 million north america 141 million africa 57 million latin america partially offset increased sales 100 million middle east 74 million europe interdivision sales eliminated included consolidated sales disclosed increased 04 million sales 2016 decreased 1468 million 150 compared 2015 decrease included negative currency effects approximately 13 million primarily driven customer original equipment sales customer sales decreased 548 million europe 313 million north america 178 million asia pacific 145 million middle east 131 million latin america 54 million africa interdivision sales eliminated included consolidated sales disclosed decreased 90 million gross profit 2017 decreased 389 million 213 compared 2016 gross profit margin 2017 185 decreased 219 2016 decrease gross profit margin primarily attributable 169 million charge second quarter 2017 costs incurred related contract supply oil gas platform equipment end user latin america negative impact decreased sales absorption fixed manufacturing costs partially offset lower charges increased savings related realignment programs gross profit 2016 decreased 562 million 235 compared 2015 gross profit margin 2016 219 decreased 243 2015 decrease gross profit margin primarily attributable negative impact decreased sales absorption fixed manufacturing costs lower margin projects shipped backlog unfavorable impact shortterm operational inefficiencies related initial execution certain realignment programs partially offset savings achieved related realignment programs reduced impact sihi purchase accounting adjustments 2016 operating loss 2017 increased 431 million 6734 compared 2016 increase included negative currency effects approximately 1 million increase primarily due 389 million decrease gross profit 42 million increase sga including increase due currency effects approximately 2 million increase sga primarily due increased charges related realignment programs partially offset increased savings related realignment programs operating loss 2016 decreased 355 million 1220 compared 2015 decrease included currency benefits approximately 1 million decrease primarily due 562 million decrease gross profit partially offset 208 million decrease sga related primarily savings achieved decreased charges related realignment programs lower sihi integration costs lower sellingrelated expenses backlog 4243 million december 31 2017 increased 487 million 130 compared december 31 2016 currency effects provided increase approximately 38 million backlog december 31 2017 included 173 million interdivision backlog eliminated included consolidated backlog disclosed backlog 3756 million december 31 2016 decreased 490 million 115 compared december 31 2015 currency effects provided decrease approximately 17 million backlog december 31 2016 included 142 million interdivision backlog eliminated included consolidated backlog disclosed flow control division segment results second largest business segment fcd designs manufactures distributes broad portfolio engineeredtoorder configuredtoorder isolation valves control valves valve automation products boiler controls related services fcd leverages experience application knowhow offering complete menu engineered services complement expansive product portfolio fcd total 47 manufacturing facilities qrcs 21 countries around world five 22 manufacturing operations located us 10 located europe six located asia pacific based independent industry sources believe fcd third largest industrial valve supplier global basis bookings 2017 increased 89 million 07 compared 2016 increase included currency benefits approximately 9 million increase customer bookings primarily driven oil gas water management power generation industries partially offset decreased customer bookings general industries increased customer bookings 432 million north america 394 million asia pacific 100 million africa largely offset decreased bookings 668 million europe 188 million latin america increase driven customer aftermarket bookings 12 billion bookings 2017 approximately 32 oil gas 29 chemical 21 general industries 16 power generation 2 water management bookings 2016 decreased 1017 million 77 compared 2015 decrease included negative currency effects approximately 22 million decrease customer bookings primarily driven oil gas industry lesser extent general chemical industries decreased customer bookings 696 million north america 467 million middle east partially offset increased bookings 227 million europe 66 million latin america decrease primarily driven decreased customer original equipment bookings 12 billion bookings 2016 approximately 31 oil gas 28 chemical 24 general industries 16 power generation 1 water management sales 2017 decreased 456 million 37 compared 2016 decrease included currency benefits approximately 13 million driven decreased customer original equipment sales decreased 214 million europe 177 million middle east 161 million latin america partially offset increase 68 million asia pacific sales 2016 decreased 1818 million 128 compared 2015 decrease included negative currency effects approximately 14 million primarily driven decreased customer original equipment sales decreased 835 million asia pacific 627 million europe 450 million north america 183 million latin america partially offset increase 259 million middle east gross profit 2017 decreased 323 million 76 compared 2016 gross profit margin 2017 333 decreased 346 period 2016 decrease gross profit margin primarily attributable negative impact decreased sales absorption fixed manufacturing costs lower margin projects shipped backlog partially offset increased savings achieved related realignment programs compared period 2016 gross profit 2016 decreased 694 million 140 compared 2015 gross profit margin 2016 346 decreased 351 period 2015 decrease gross profit margin primarily attributable negative impact decreased sales absorption fixed manufacturing costs lower margin projects shipped backlog partially offset savings achieved decreased charges related realignment programs compared period 2015 operating income 2017 increased 1226 million 617 compared 2016 increase included currency benefits approximately 2 million increase primarily attributable 1412 million pretax gain sales gestra vogt businesses decrease sga 14 million including increase due currency effects approximately 1 million partially offset 323 million decrease gross profit decrease sga primarily due savings achieved related realignment programs compared period 2016 operating income 2016 decreased 350 million 150 compared 2015 decrease included negative currency effects approximately 3 million decrease primarily attributable 694 million decrease gross profit partially offset 344 million decrease sga decrease sga primarily due savings achieved decreased charges related realignment programs lower sellingrelated expenses compared period 2015 backlog 6174 million december 31 2017 increased 329 million 56 compared december 31 2016 currency effects provided increase approximately 20 million backlog 5845 million december 31 2016 decreased 375 million 60 compared december 31 2015 currency effects provided increase less 1 million liquidity capital resources cash flow analysis existing cash generated operations borrowings available existing revolving credit facility primary sources shortterm liquidity monitor depository institutions hold cash equivalents regular basis believe placed deposits creditworthy financial institutions sources operating cash generally include sale products services conversion working capital particularly accounts receivable inventories total cash balance december 31 2017 7034 million compared 3672 million december 31 2016 3664 million december 31 2015 cash provided operating activities 3111 million 2405 million 4408 million 2017 2016 2015 respectively provided cash support shortterm working capital needs cash flow provided working capital increased 2017 due primarily higher cash provided lower accounts receivable 602 million lower inventory 486 million higher accounts payable 124 million 2017 contributed 449 million defined benefit pension plans working capital increased 2016 due primarily lower accounts payable 710 million lower accrued liabilities 888 million partially offset higher cash provided lower accounts receivable 369 million lower inventory 529 million 2016 contributed 425 million defined benefit pension plans decreases accounts receivable provided 602 million cash flow 2017 compared 369 million 2016 531 million 2015 decrease accounts receivable 2017 partially attributable lower sales period compared period 2016 fourth quarter 2017 days sales outstanding dso 75 days compared 74 days 2016 72 days 2015 experienced significant increase customer payment defaults 2017 decreases inventory provided 486 million cash flow 2017 compared 529 million 2016 use 213 million 2015 source cash inventory 2017 primarily due decreased work process finished goods inventory 2016 primarily result decreased backlog inventory turns 33 times december 31 2017 compared 33 times 2016 37 2015 calculation inventory turns reflect impact advanced cash received customers increases accounts payable provided 124 million cash flow 2017 compared use 710 million 2016 decreases accrued liabilities income taxes payable used 34 million cash flow 2017 compared 888 million 2016 cash flows provided investing activities 1766 million 2017 compared use cash 915 million 5253 million 2016 2015 respectively cash flow provided investing activities include 2328 million net proceeds sale gestra vogt businesses cash outflows 2015 resulted primarily payments sihi acquisition 3537 million capital expenditures 616 million 897 million 1819 million 2017 2016 2015 respectively 2018 currently estimate capital expenditures 80 million 90 million consideration acquisition activity cash flows used financing activities 1854 million 2017 compared 1437 million 2016 source cash 377 million 2015 cash outflows 2017 resulted primarily 992 million dividend payments 600 million payments longterm debt cash outflows 2016 resulted primarily 977 million dividend payments 600 million payments longterm debt cash inflows 2015 resulted primarily 5263 million proceeds issuance 2022 eur senior notes partially offset outflows repurchase 3037 million common stock 937 million dividend payments 450 million payments longterm debt maintained previouslyannounced policy annually returning 40 50 running twoyear average net earnings shareholders following attainment previously announced target leverage ratio november 13 2014 board directors approved 5000 million share repurchase authorization december 31 2017 1607 million remaining capacity intend adhere policy foreseeable future returns cash dividends andor share repurchases reviewed individually declared board directors implemented management discretion depending financial condition business opportunities market conditions time cash needs next 12 months expected comparable 2017 believe cash flows operating activities combined availability revolving credit facility existing cash balances sufficient enable us meet cash flow needs next 12 months however cash flows operations could adversely affected decrease rate general global economic growth extended decrease capital spending customers well economic political risks associated sales products operational factors competition regulatory actions fluctuations foreign currency exchange rates fluctuations interest rates among factors believe cash flows operating activities expectation continuing availability draw upon credit agreements also sufficient meet cash flow needs periods beyond next 12 months acquisitions dispositions regularly evaluate acquisition opportunities various sizes cost terms financing raised conjunction acquisition including ability raise economical capital critical consideration evaluation note 2 consolidated financial statements included item 8 annual report contains discussion disposition acquisition activity financing credit agreement provides initial 4000 million term loan “term loan facility” 10 billion revolving credit facility “revolving credit facility” together term loan facility “senior credit facility” maturity october 14 2020 june 30 2017 amended existing senior credit facility amendment among changes includes following decrease revolving credit facility commitment 10 billion 800 million ii increase leverage ratio 350 400 times debt total consolidated ebitda june 30 2019 stepdown 375 fiscal quarter ending july 1 2019 iii addition new pricing level senior unsecured longterm debt ratings ba2bb increase interest rate margin libor loans 200 base rate loans 100 iv revision restrictions ability incur debt decreasing maximum principal amount priority debt allowed 15 75 consolidated tangible assets decrease maximum amount receivables could securitized 200 million 100 million subject certain conditions right increase amount term loan facility revolving credit facility aggregate amount exceed 4000 million material terms senior credit facility remained unchanged discussion debt related covenants included note 10 consolidated financial statements included item 8 annual report compliance covenants december 31 2017 certain financing arrangements contain provisions may result event default failure financing arrangements meet payment terms observe covenants could result acceleration payment due provisions referred cross default provisions senior credit facility senior notes described note 10 consolidated financial statements included item 8 annual report crossdefaulted rating agencies assign credit ratings certain debt access capital markets costs debt could directly affected credit ratings adverse action respect credit ratings could generally cause borrowing costs increase potential pool investors funding sources decrease particular decline credit ratings would increase cost borrowing senior credit facility liquidity analysis cash balance increased 3363 million 7034 million december 31 2017 compared december 31 2016 cash increase included 3111 million operating cash flows 2328 million net proceeds sale gestra vogt businesses partially offset 616 million capital expenditures 992 million dividend payments 600 million payments longterm debt approximately 36 currently outstanding term loan facility 222 million shortterm borrowings due mature 2018 2019 senior credit facility matures october 2020 december 31 2017 revolving loans 948 million letters credit outstanding 8000 million revolving credit facility revolving credit facility committed held diversified group financial institutions additional information senior credit facility see note 10 consolidated financial statements included item 8 annual report december 31 2017 2016 result increases values plan’s assets contributions plan us pension plan fullyfunded defined applicable law consideration intent maintain fully funded status contributed 200 million us pension plan 2017 excluding direct benefits paid 38 million continue maintain asset allocation consistent strategy maximize total return reducing portfolio risks asset class diversification december 31 2017 6353 million total cash balance 7034 million held foreign subsidiaries 5292 million consider permanently reinvested outside us based expected 2018 liquidity needs various geographies currently anticipate need repatriate permanently reinvested cash fund domestic operations would generate adverse tax results however event cash needed fund domestic operations estimate 5292 million could repatriated resulting us cash tax liability 5 million 15 million outlook 2018 future results operations forwardlooking statements contained annual report including mda involve number risks uncertainties particular statements regarding goals strategies new product introductions plans cultivate new businesses future economic conditions revenue pricing gross profit margin costs capital spending expected cost savings realignment programs depreciation amortization research development expenses potential impairment assets tax rate pending tax legal proceedings future results operations may also affected employee incentive compensation including annual program amount type valuation sharebased awards granted well amount awards forfeited due employee turnover addition various important factors discussed number factors could cause actual results differ materially expectations see risks described item 1a risk factors annual report bookings 38039 million 2017 booking represents contract certain circumstances modified canceled include varying lengths time booking time revenue recognition guarantee bookings result comparable revenues otherwise indicative future results outlook oil gas industry heavily dependent demand growth mature markets developing geographies shortterm believe improved oil price outlook somewhat positively impact oil gas upstream investment impact midstream downstream investment lesser extent addition recovery overall level spending oil gas companies could continue increase demand aftermarket products services believe medium longterm fundamentals industry remain solid industry works current excess supply projected depletion rates existing fields forecasted longterm demand grow longstanding reputation providing successful solutions upstream midstream downstream applications along advancements portfolio offerings believe continue wellpositioned assist customers challenging environment expect continued competitive economic environment 2018 continued execution realignment programs investments broadbased employee incentive compensation providing longterm benefits pressure operating margins 2018 anticipate benefits continuation enduser strategies strength high margin aftermarket business continued disciplined cost management diverse customer base broad product portfolio unified operating platform similar prior years expect results weighted towards second half year believe primary markets continue provide opportunities remain cautious outlook 2018 given continuing uncertainty capital spending many markets global economic conditions december 31 2017 13886 million fixedrate senior notes outstanding 1644 million variablerate debt term loan facility december 31 2017 variable fixed interest rate derivative contracts however portion debt carries variable rate interest debt subject volatility rates could impact interest expense expect interest expense 2018 relatively consistent amounts incurred 2017 results operations may also impacted unfavorable foreign currency exchange rate movements see “item 7aitem 7 managements discussion analysis financial condition results operations following discussion analysis provided increase understanding read conjunction accompanying consolidated financial statements notes see “item 1a risk factors” section titled “forwardlooking information subject risk uncertainty” included annual report form 10k year ended december 31 2018 annual report discussion risks uncertainties assumptions associated statements unless otherwise noted amounts discussed herein consolidated executive overview company believe worldleading manufacturer aftermarket service provider comprehensive flow control systems develop manufacture precisionengineered flow control equipment integral movement control protection flow materials customers’ critical processes product portfolio pumps valves seals automation aftermarket services supports global infrastructure industries including oil gas chemical power generation water management well general industrial markets products services add value manufacturing platform global network quick response centers qrcs offer broad array aftermarket equipment services installation advanced diagnostics repair retrofitting employ approximately 17000 employees 50 countries december 31 2018 business model significantly influenced capital spending global infrastructure industries placement new products service maintenance spending aftermarket services existing operations worldwide installed base products important source aftermarket revenue products expected ensure maximum operating time many key industrial processes past several years significantly invested aftermarket strategy provide local support drive customer investments offerings use services replace repair installed products aftermarket portion business also helps provide business stability various economic periods aftermarket business primarily served network 171 qrcs located around globe provides variety service offerings customers including spare parts service solutions product life cycle solutions valueadded services past several years significantly focused aftermarket strategy provide local support drive customer investments offerings use services replace repair installed base generally higher margin business compared original equipment business key component profitable growth strategy december 31 2018 operations conducted three business segments referenced throughout management’s discussion analysis financial condition results operations mda • epd long lead time custom highlyengineered pumps pump systems mechanical seals auxiliary systems replacement parts related services • ipd engineered preconfigured industrial pumps pump systems related products services • fcd engineered industrial valves control valves actuators controls related services business segments share focus industrial flow control technology high number common customers segments also complementary product offerings technologies often combined applications provide us net competitive advantage segments also benefit global footprint economies scale reducing administrative overhead costs serve customers cost effectively shared leadership operational support functions research development marketing supply chain reputation product portfolio built 50 wellrespected brand names worthington idp valtek limitorque durco argus edward valbart durametallic believe one comprehensive industry products services sold either directly designated channels 10000 companies including world’s leading engineering procurement construction epc firms original equipment manufacturers distributors end users continue leverage qrc network positioned near customers possible service support order capture valuable aftermarket business along ensuring local capability sell install service equipment remote regions equally imperative continuously improve global operations also continue expand global supply chain capability meet global customer demands ensure quality timely delivery products focusing ongoing lowcost sourcing including greater use thirdparty suppliers increasing lowercost emerging market capabilities additionally continue devote resources improving supply chain processes across business segments find areas synergy cost reduction improve supply chain management capability ensure meet global customer demands also remain focused improving ontime delivery quality managing warranty costs percentage sales across global operations assistance focused continuous improvement process cip initiative goal cip initiative includes lean manufacturing six sigma business management strategy value engineering maximize service fulfillment customers ontime delivery reduced cycle time quality highest internal productivity past year experienced stabilization business improved conditions certain key markets continued stability oil prices improved levels beginning second half 2017 middle 2018 largeproject business showing continued signs recovery anticipate customers continue invest maintenance short cycle equipment 2019 2016 2017 challenged broadbased capital spending declines originating oil gas industry heightened pricing pressures negative currency impacts caused stronger us dollar second quarter 2018 launched committed resources flowserve 20 transformation program designed transform business model drive operational excellence reduce complexity accelerate growth expand margins increase capital efficiency improve organizational health information regarding flowserve 20 transformation see “our results operations” note 19 consolidated financial statements included item 8 annual report latter part 2018 connection flowserve 20 transformation determined meaningful operational synergies benefits combining epd ipd reportable segments one reportable segment flowserve pump division fpd reorganization effective january 1 2019 result beginning 2019 report two operating segment structure fpd fcd prior periods retrospectively adjusted reflect new reportable segment structure markets following discussion read conjunction outlook 2019 section included mda products services used several distinct industries oil gas chemical power generation water management several industries mining steel paper collectively referred general industries demand products depends level new capital investment well planned unplanned maintenance expenditures customers level new capital investment depends turn capital infrastructure projects driven need products rely oil gas chemicals power generation water resource management well general economic conditions drivers generally related phase business cycle respective industries expectations future market behavior levels maintenance expenditures additionally driven reliability equipment planned unplanned downtime maintenance required capacity utilization process sales epc firms original equipment manufacturers typically large project orders critical applications certain sales distributors project orders typically procured customers either directly us indirectly contractors new construction projects facility enhancement projects quick turnaround business also refer shortcycle defined orders received customer booked shipped generally within six months receipt orders typically standardized general purpose products parts services three business segments generate certain levels type business sale aftermarket products services benefit large installed base original equipment requires periodic maintenance repair replacement parts use manufacturing platform global network qrcs offer broad array aftermarket equipment services installation advanced diagnostics repair retrofitting geographic regions positioned provide quick response believe customers traditionally relied us rather competitors aftermarket products due highly engineered customized products however aftermarket standard products competitive existence common standards allows easier replacement installed products proximity service centers timeliness delivery quality important considerations aftermarket products services continue selectively expand global qrc capabilities improve ability capture important aftermarket business oil gas oil gas industry represented approximately 38 bookings 2018 2017 experienced increase capital spending 2018 compared previous year increase primarily due increased broadbased maintenance short cycle investment aftermarket opportunities industry solidified throughout 2018 due catch deferred spending customers repair maintenance budgets previous years outlook oil gas industry heavily dependent demand growth mature markets developing geographies well changes regulatory environment shortterm believe stable oil prices support oil gas upstream midstream investment expect increased investment later cycle downstream projects due emerging market growth certain regulatory requirements imo 2020 recovery overall level spending oil gas companies could continue increase demand aftermarket products services believe medium longterm fundamentals industry remain attractive see stabilized environment industry works current excess supply addition believe projected depletion rates existing fields forecasted longterm demand growth require additional investments longstanding reputation providing successful solutions upstream midstream downstream applications along advancements portfolio offerings believe continue wellpositioned assist customers improving environment chemical industry represented approximately 22 21 bookings 2018 2017 respectively chemical industry comprised chemicalbased pharmaceutical products capital spending 2018 increased primarily due global economic growth forecasted demand chemicalbased products aftermarket opportunities solidified throughout 2018 due catch deferred spending customers repair maintenance budgets previous years outlook chemical industry remains heavily dependent global economic conditions global economies stabilize unemployment conditions improve rise consumer spending follow increase spending would drive greater demand chemicalbased products supporting improved levels capital investment believe chemical industry nearterm continue invest north america middle east capacity additions maintenance upgrades optimization existing assets developing regions selectively invest capital infrastructure meet current future indigenous demand believe global presence localized aftermarket capabilities wellpositioned serve potential growth opportunities industry power generation power generation industry represented approximately 11 13 bookings 2018 2017 respectively 2018 power generation industry continued experience softness thermal power generation capital spending mature key developing markets china continued curtail construction new coalfired power generation last year india southeast asia capital investment remained place driven increased demand forecasts natural gasfired combined cycle “ngcc” plants increased share energy mix driven market prices gas remaining low stable partially due increasing global availability liquefied natural gas “lng” low capital expenditures ability ngcc stabilize unpredictable renewable sources potential unconventional sources gas global power generation industry forecasting increased use form fuel power generation plants despite fewer new nuclear plants constructed nuclear power remains important contributor global energy mix continue support significant installed base global nuclear fleet providing aftermarket life extension products services due extensive history believe well positioned take advantage ongoing source aftermarket new construction opportunities political efforts limit emissions carbon dioxide may adverse effect thermal power investment plans depending potential requirements imposed timing compliance country however many proposed methods capturing limiting carbon dioxide emissions offer business opportunities products services time continue take advantage new investments concentrated solar power generating capacity pumps valves seals uniquely positioned molten salt applications well traditional steam cycle believe longterm fundamentals power generation industry remain solid based projected increases demand electricity driven global population growth urbanization developing markets increased use electricity driven transportation also believe longstanding reputation power generation industry portfolio offerings various generating methods advancements serving renewable energy market carbon capture methodologies well global service support structure position us well future opportunities important industry water management water management industry represented approximately 4 bookings 2018 2017 water management industry activity levels increased 2018 worldwide demand fresh water treatment reuse desalination flood control continued create requirements new facilities upgrades existing systems many require products offer particularly pumps capital aftermarket spending rise developed emerging markets governments private industry providing funding critical projects proportion people living regions find difficult meet water requirements expected double 2025 believe persistent demand fresh water economic cycles supports continued investments especially north america developing regions general industries general industries represented aggregate approximately 25 24 bookings 2018 2017 respectively general industries comprise variety different businesses including mining ore processing pulp paper food beverage smaller applications none individually represented 5 total bookings 2018 2017 general industries also include sales distributors whose end customers operate industries primarily serve outlook group industries heavily dependent upon condition global economies consumer confidence levels longterm fundamentals many industries remain sound many products produced industries common staples industrialized urbanized economies believe specialty product offerings designed industries aftermarket service capabilities provide continued business opportunities results operations effective january 1 2018 adopted asu 201409 revenue contracts customers topic 606 related asus new revenue standard using modified retrospective method transition discussion related adoption new revenue standard requirements refer note 2 consolidated financial statements included item 8 annual report throughout discussion results operations discuss impact fluctuations foreign currency exchange rates calculated currency effects operations translating current year results monthly basis prior year exchange rates periods effective august 9 2018 divested two ipd locations associated product lines including related assets liabilities included manufacturing facility germany related assembly facility france sale private company 2017 net sales related divested business totaled approximately 42 million although business produced operating loss last two fiscal years effective july 6 2017 sold fcd vogt product line related assets liabilities privately held company 2016 sales related vogt business totaled approximately 17 million earnings interest taxes approximately 4 million effective may 2 2017 sold fcd gestra ag business leading provider steam system solutions 2016 gestra recorded sales approximately 101 million earnings interest taxes approximately 17 million note 3 consolidated financial statements included item 8 annual report discusses details dispositions second quarter 2018 launched committed resources flowserve 20 transformation program designed transform business model drive operational excellence reduce complexity accelerate growth expand margins increase capital efficiency improve organizational health discussed note 19 consolidated financial statements included item 8 annual report anticipate flowserve 20 transformation continue incur restructuring charges nonrestructuring charges related transformation expenses professional services project management related travel expense year ended december 31 2018 incurred flowserve 20 transformation related expenses 412 million primarily consisting professional services project management costs recorded sga currently evaluating total investment financial benefits various initiatives associated program 2015 initiated realignment programs consist restructuring nonrestructuring charges discussed note 19 consolidated financial statements included item 8 annual report december 31 2018 realignment programs substantially complete total charges realignment programs segment detailed years ended december 31 2018 2017 anticipate total investment realignment programs approximately 360 million incurred charges 3478 million inception date based actions realignment programs estimate achieved cost savings approximately 230 million december 31 2018 compared approximately 200 million december 31 2017 approximately 169 million savings cos remainder sga realignment programs substantially complete bookings backlog define booking receipt customer order contractually engages us perform activities behalf customer regards manufacture delivery andor support products delivery service bookings recorded subsequently canceled within fiscal period excluded reported bookings 40 billion 2018 increased 2159 million 57 compared 2017 increase included currency benefits approximately 30 million increase primarily driven oil gas general chemical industries partially offset decrease power generation industry increase heavilyweighted towards customer aftermarket bookings 38 billion 2017 increased 435 million 12 compared 2016 increase included currency benefits approximately 27 million increase primarily driven oil gas industry partially offset decrease power generation industry increase heavily weighted towards customer original equipment bookings backlog represents aggregate value booked uncompleted customer orders influenced primarily bookings sales cancellations currency effects backlog 19 billion december 31 2018 decreased 1418 million 70 compared december 31 2017 currency effects provided decrease approximately 83 million currency effects backlog calculated using change period end exchange rates impact initial adoption new revenue standard reduced backlog approximately 237 million january 1 2018 backlog related aftermarket orders approximately 36 31 backlog december 31 2018 2017 respectively expect ship approximately 89 december 31 2018 backlog 2019 backlog includes unsatisfied partially unsatisfied performance obligations related contracts original expected duration excess one year approximately 450 million discussed note 2 consolidated financial statements included item 8 annual report backlog 20 billion december 31 2017 increased 1316 million 69 compared december 31 2016 currency effects provided increase approximately 110 million backlog related aftermarket orders approximately 31 30 backlog december 31 2017 2016 respectively expected ship approximately 92 december 31 2017 backlog 2018 sales 2018 increased 1719 million 47 compared 2017 increase included currency benefits approximately 31 million increase heavilyweighted aftermarket sales increased sales north america asia pacific africa partially offset decreased sales middle east europe impact adoption new revenue standard increased sales approximately 71 million year ended december 31 2018 sales 2017 decreased 3297 million 83 compared 2016 decrease included currency benefits approximately 34 million decrease heavily weighted toward original equipment sales decreased every region sales international customers including export sales us approximately 63 total sales 2018 64 2017 2016 sales europe middle east africa ema approximately 32 36 35 total sales 2018 2017 2016 respectively sales asia pacific approximately 20 total sales 2018 19 2017 2016 sales latin america approximately 6 total sales 2018 2017 7 2016 gross profit gross profit margin gross profit 2018 increased 988 million 91 compared 2017 gross profit margin 2018 310 increased 297 2017 impact adoption new revenue standard immaterial impact gross profit margin year ended december 31 2018 increase gross profit margin primarily attributable 169 million charge costs related contract supply oil gas platform equipment end user latin america 2017 recur revenue recognized higher margin projects mix shift higher margin aftermarket sales favorable impact increased sales absorption fixed manufacturing costs increased savings related realignment programs partially offset 77 million charge cost incurred related writedown inventory associated divestiture two ipd locations related product lines second quarter 2018 aftermarket sales increased approximately 50 total sales compared approximately 48 total sales 2017 gross profit 2017 decreased 1478 million 120 compared 2016 gross profit margin 2017 297 decreased 310 2016 decrease gross profit gross profit margin primarily attributable negative impact decreased sales absorption fixed manufacturing costs lower margin projects shipped backlog 169 million charge costs incurred related contract supply oil gas platform equipment end user latin america partially offset 109 million charges write inventory brazil 2016 recur mix shift higher margin aftermarket sales lower charges increased savings related realignment programs aftermarket sales increased approximately 48 total sales compared approximately 45 total sales 2016 sga 2018 increased 420 million 47 compared 2017 currency effects yielded increase approximately 7 million 2018 sga percentage sales remained relatively unchanged compared 2017 sga favorably impacted increased sales leverage 260 million impairment charge related manufacturing facility brazil 2017 recur lower stockbased compensation expense lower bad debt expense lower charges increased savings related realignment programs favorable cost impacts substantially offset charges related flowserve 20 transformation program implementation costs associated adoption new revenue standard increased accrued broadbased annual incentive compensation expense impairment charge 97 million related longlived assets associated divestiture two ipd locations related product lines second quarter 2018 sga 2017 decreased 637 million 66 compared 2016 currency effects yielded increase approximately 6 million sga percentage sales 2017 increased 40 basis points compared 2016 due 260 million impairment charge related manufacturing facility brazil increased accrued broadbased annual incentive compensation lower sales leverage partially offset 735 million reserve established primary venezuelan customer 2016 recur savings related realignment programs loss gain sale businesses loss sale businesses 2018 77 million resulted divestiture two ipd locations related product lines gain sale businesses 2017 result 1413 million gain sales gestra vogt businesses see note 3 consolidated financial statements included item 8 annual report additional information sales 77 million loss 2016 resulted sale nonstrategic foundry business net earnings affiliates net earnings affiliates represents net income investments seven joint ventures one located chile india saudi arabia south korea united arab emirates two china accounted using equity method accounting net earnings affiliates 2018 decreased 15 million 119 compared prior year primarily result decreased earnings epd joint venture south korea net earnings affiliates 2017 remained relatively constant compared prior year operating income operating income 2018 decreased 936 million 274 compared 2017 decrease included negative currency effects approximately 2 million decrease primarily result 1413 million gain sales gestra vogt businesses 2017 recur 420 million increase sga loss 77 million divestiture two ipd locations related product lines partially offset 988 million increase gross profit discussed operating income 2017 increased 644 million 233 compared 2016 increase included currency benefits approximately 2 million increase primarily result 1413 million pretax gain sales gestra vogt businesses 637 million decrease sga partially offset 1478 million decrease gross profit discussed interest expense interest income interest expense 2018 decreased 15 million compared 2017 decrease primarily attributable lower borrowings 2018 compared period 2017 interest expense 2017 decreased 04 million compared 2016 decrease primarily attributable decreased borrowings revolving credit facility 2017 compared period 2016 interest income 2018 increased 31 million compared 2017 increase interest income primarily attributable higher average cash balances compared 2017 interest income 2017 increased 06 million compared 2016 expense net expense net decreased 22 million compared 2017 due 64 million decrease net periodic benefit costs pensions post retirement obligations partially offset 53 million increase losses foreign exchange contracts net change transactions currencies foreign exchange contracts primarily due foreign currency exchange rate movements euro indian rupee mexican peso argentinian peso relation us dollar year ended december 31 2018 compared period 2017 expense net increased 154 million 2017 due primarily 132 million increase losses arising transactions currencies sites functional currencies 36 million increase losses foreign exchange contracts net change primarily due foreign currency exchange rate movements mexican peso euro brazilian real british pound relation us dollar year ended december 31 2017 compared period 2016 tax expense tax rate december 22 2017 us enacted tax reform act significantly changed us tax law tax reform act among things lowered company’s us statutory federal income tax rate 35 21 effective january 1 2018 imposing deemed repatriation tax deferred foreign income implementing modified territorial tax system tax reform act also provides onetime transition tax certain foreign earnings acceleration depreciation certain assets placed service september 27 2017 well prospective changes began 2018 including repeal domestic manufacturing deduction capitalization research development expenditures additional limitations executive compensation limitations deductibility interest tax reform act also provides two new antibase erosion provisions global intangible lowtaxed income “gilti” provision baseerosion antiabuse tax “beat” provision effectively creates new minimum tax certain future foreign earnings 2018 tax rate differed federal statutory rate 21 primarily due net impact foreign operations including losses certain foreign jurisdictions tax benefit provided effective tax rate 291 year ended december 31 2018 decreased 984 2017 due change us statutory tax rate 2018 taxation previously unremitted earnings year ended december 31 2017 imposed result tax reform act reoccur 2018 net impact foreign operations 2017 tax rate differed federal statutory rate 35 primarily due impacts pursuant enactment tax reform act net impact foreign operations establishment valuation allowance deferred tax assets various foreign jurisdictions primarily germany mexico taxes related sale gestra vogt businesses 2016 tax rate differed federal statutory rate 35 primarily due net impact foreign operations tax impacts realignment programs losses certain foreign jurisdictions tax benefit provided effective tax rate based upon current earnings estimates future taxable earnings domestic international location changes factors including ability utilize foreign tax credits net operating losses results tax audits could impact tax rate future periods december 31 2018 foreign tax credits 161 million expiring 2026 2028 tax years recorded valuation allowance 161 million additionally recorded net deferred tax assets 447 million relate net operating losses tax credits deductible temporary differences available reduce taxable income future periods definite expiration able utilize portion credits losses effective tax rate would increase net earnings per share net earnings 2018 increased 1170 million 1197 million 091 per diluted share compared 2017 increase primarily attributable 2075 million decrease tax expense 22 million decrease expense net 15 million decrease interest expense partially offset decrease operating income 936 million net earnings 2017 decreased 1298 million 27 million 002 per diluted share compared 2016 decrease primarily attributable 1813 million increase tax expense 184 million increase expense partially offset 674 million increase operating income 04 million decrease interest expense comprehensive loss income comprehensive loss 2018 increased 1876 million 678 million income 1198 million 2017 loss primarily due foreign currency translation adjustments resulting primarily exchange rate movements euro argentinian peso indian rupee british pound versus us dollar december 31 2018 compared 2017 discussion related hyperinflation argentina refer note 1 consolidated financial statements included item 8 annual report comprehensive income 2017 increased 2056 million 1198 million loss 858 million 2016 income primarily due foreign currency translation adjustments resulting primarily exchange rate movements euro british pound indian rupee versus us dollar december 31 2017 compared 2016 business segments conduct operations three business segments based type product manage business evaluate segment performance allocate resources based segment’s operating income loss see note 17 consolidated financial statements included item 8 annual report discussion segments key operating results three business segments epd ipd fcd discussed engineered product division segment results largest business segment epd design manufacture distribute service custom highlyengineered pumps pump systems mechanical seals auxiliary systems collectively referred original equipment epd includes longer lead time highlyengineered pump products mechanical seals generally manufactured within shorter lead times epd also manufactures replacement parts related equipment provides aftermarket services epd primarily operates oil gas petrochemical chemical power generation water management general industries epd operates 47 countries 28 manufacturing facilities worldwide eight located europe nine north america six asia five latin america 119 qrcs including colocated manufacturing facilities bookings 2018 increased 1530 million 83 compared 2017 included 2017 bookings order approximately 80 million provide pumps related equipment hengli integrated refining complex project china recur increase included currency benefits approximately 7 million increase customer bookings primarily driven oil gas water management general industries increased customer bookings 781 million europe 648 million middle east 583 million north america partially offset decreased customer bookings 271 million asia pacific 183 million africa increase driven increased customer aftermarket bookings 20 billion bookings 2018 approximately 51 oil gas 17 chemical 17 general industries 12 power generation 3 water management interdivision bookings eliminated included consolidated bookings disclosed decreased 13 million bookings 2017 increased 183 million 10 compared 2016 included order approximately 80 million provide pumps related equipment hengli integrated refining complex project china increase included currency benefits approximately 11 million increase customer bookings primarily driven oil gas chemical industries partially offset decrease power generation general industries customer bookings increased 1128 million asia pacific 390 million africa partially offset decreased customer bookings 601 million middle east 469 million europe 200 million north america 184 million latin america increase driven customer original equipment bookings 18 billion bookings 2017 approximately 51 oil gas 19 chemical 17 general industries 13 power generation interdivision bookings eliminated included consolidated bookings disclosed increased 66 million sales 2018 increased 1238 million 70 compared 2017 increase included currency benefits approximately 12 million increase heavilyweighted towards aftermarket sales resulting increased customer sales 577 million asia pacific 519 million africa 506 million latin america 492 million north america partially offset decreased sales 730 million middle east 114 million europe impact adoption new revenue standard increased sales approximately 44 million year ended december 31 2018 interdivision sales eliminated included consolidated sales disclosed increased 14 million sales 2017 decreased 2206 million 111 compared 2016 decrease included currency benefits approximately 13 million decrease heavily weighted towards customer original equipment sales resulting decreased customer sales 1292 million north america 640 million latin america 150 million europe 112 million middle east 63 million africa interdivision sales eliminated included consolidated sales disclosed increased 45 million gross profit 2018 increased 401 million 73 compared 2017 gross profit margin 2018 309 increased 307 2017 increase gross profit margin primarily attributable favorable impact increased sales absorption fixed manufacturing costs increased savings achieved related realignment programs partially offset increased charges related realignment programs revenue recognized lower margin projects impact adoption new revenue standard slightly favorable impact gross profit margin gross profit 2017 decreased 781 million 125 compared 2016 gross profit margin 2017 307 decreased 313 2016 decrease gross profit margin primarily attributable negative impact decreased sales absorption fixed manufacturing costs lower margin projects shipped backlog partially offset lower costs increased savings related realignment programs mix shift higher margin aftermarket sales 109 million charges write inventory brazil 2016 recur sga 2018 decreased 88 million 22 compared 2017 currency effects provided increase approximately 2 million decrease sga primarily attributable 260 million impairment charge related manufacturing facility brazil 2017 recur lower bad debt expense decreased charges related realignment programs partially offset higher selling administrative related expenses sga 2017 decreased 583 million 127 compared 2016 currency effects provided increase approximately 2 million decrease sga primarily due epds 712 million portion 735 million reserve established primary venezuelan customer third quarter 2016 recur increased savings related realignment programs partially offset 260 million impairment charge second quarter 2017 related manufacturing facility brazil operating income 2018 increased 478 million 300 compared 2017 increase included currency benefits approximately 1 million increase due 401 million increase gross profit 88 million decrease sga operating income 2017 decreased 120 million 70 compared 2016 decrease included currency benefits approximately 1 million decrease due 781 million decrease gross profit partially offset 583 million decrease sga backlog 9226 million december 31 2018 decreased 1051 million 102 compared december 31 2017 impact initial adoption new revenue standard reduced backlog approximately 181 million january 1 2018 currency effects provided decrease approximately 53 million backlog december 31 2018 included 153 million interdivision backlog eliminated included consolidated backlog disclosed backlog 10 billion december 31 2017 increased 589 million 61 compared december 31 2016 currency effects provided increase approximately 52 million backlog december 31 2017 included 160 million interdivision backlog eliminated included consolidated backlog disclosed industrial product division segment results ipd design manufacture distribute service engineered preconfigured industrial pumps pump systems collectively referred original equipment additionally ipd manufactures replacement parts related equipment provides full array support services collectively referred aftermarket ipd primarily operates chemical oil gas water resources power general industries ipd operates 16 manufacturing facilities five located us six europe four asia operates 29 qrcs worldwide including 18 sites europe five us three asia two latin america including colocated manufacturing facilities andor shared epd bookings 2018 increased 168 million 20 compared 2017 increase included currency benefits approximately 12 million partially offset approximately 23 million reduced bookings due divestiture two ipd locations related product lines third quarter 2018 increase customer bookings primarily driven chemical power generation general industries partially offset decrease water management industry increased customer bookings 220 million asia pacific 134 million europe partially offset decreased bookings 146 million north america 74 million latin america increase customer original equipment aftermarket bookings 8385 million bookings 2018 approximately 44 general industries 21 chemical 16 oil gas 12 water management 7 power generation interdivision bookings eliminated included consolidated bookings disclosed increased 69 million bookings 2017 increased 240 million 30 compared 2016 increase included currency benefits approximately 7 million increase customer bookings primarily driven oil gas general industries partially offset decrease chemical industry bookings increased 238 million europe 193 million latin america 126 million north america partially offset decreased bookings 225 million middle east 182 million asia pacific increase driven customer original equipment bookings 8217 million bookings 2017 approximately 45 general industries 19 chemical 17 oil gas 13 water management 6 power generation interdivision bookings eliminated included consolidated bookings disclosed increased 17 million sales 2018 increased 242 million 31 compared 2017 increase included currency benefits approximately 11 million partially offset approximately 19 million reduced sales due divestiture two ipd locations related product lines third quarter 2018 increase heavilyweighted towards aftermarket sales customer sales increased 169 million north america 89 million europe 39 million africa partially offset decreased sales 94 million middle east impact adoption new revenue standard increased sales approximately 19 million year ended december 31 2018 interdivision sales eliminated included consolidated sales disclosed increased 39 million sales 2017 decreased 599 million 72 compared 2016 decrease included currency benefits approximately 8 million driven decreased customer original equipment sales customer sales decreased 350 million asia pacific 260 million north america 141 million africa 57 million latin america partially offset increased sales 100 million middle east 74 million europe interdivision sales eliminated included consolidated sales disclosed increased 04 million gross profit 2018 increased 453 million 314 compared 2017 gross profit margin 2018 237 increased 186 2017 increase gross profit margin primarily attributable 169 million charge costs related contract supply oil gas platform equipment end user latin america 2017 recur lower charges increased savings related realignment programs revenue recognized higher margin projects partially offset 77 million charge cost incurred related writedown inventory associated divestiture two ipd locations related product lines gross profit 2017 decreased 391 million 213 compared 2016 gross profit margin 2017 186 decreased 219 2016 decrease gross profit margin primarily attributable 169 million charge second quarter 2017 costs incurred related contract supply oil gas platform equipment end user latin america negative impact decreased sales absorption fixed manufacturing costs partially offset lower charges increased savings related realignment programs sga 2018 decreased 53 million 27 compared 2017 currency effects provided increase 30 million decrease sga primarily due lower charges increased savings related realignment programs compared 2017 partially offset impairment charge longlived assets related divestiture two ipd locations related product lines 97 million sga 2017 increased 44 million 23 compared period 2016 currency effects provided increase approximately 2 million increase sga primarily due increased charges related realignment programs partially offset increased savings related realignment programs loss sale businesses 2018 77 million resulted divestiture two ipd locations related product lines refer note 3 consolidated financial statements included item 8 annual report additional information divestiture operating loss 2018 decreased 426 million 873 compared 2017 decrease included negative currency effects approximately 2 million decrease primarily due 453 million increase gross profit 53 million decrease sga partially offset 77 million loss divestiture two ipd locations related product lines operating loss 2017 increased 436 million 8385 compared 2016 increase included negative currency effects approximately 1 million increase primarily due 391 million decrease gross profit 44 million increase sga backlog 3940 million december 31 2018 decreased 303 million 71 compared december 31 2017 impact initial adoption new revenue standard reduced backlog approximately 34 million january 1 2018 currency effects provided decrease approximately 13 million backlog december 31 2018 included 172 million interdivision backlog eliminated included consolidated backlog disclosed backlog 4243 million december 31 2017 increased 487 million 130 compared december 31 2016 currency effects provided increase approximately 38 million backlog december 31 2017 included 173 million interdivision backlog eliminated included consolidated backlog disclosed flow control division segment results second largest business segment fcd designs manufactures distributes broad portfolio engineeredtoorder configuredtoorder isolation valves control valves valve automation products boiler controls related services fcd leverages experience application knowhow offering complete menu engineered services complement expansive product portfolio fcd total 47 manufacturing facilities qrcs 21 countries around world five 21 manufacturing operations located us 10 located europe five located asia pacific based independent industry sources believe fcd third largest industrial valve supplier global basis bookings 2018 increased 486 million 40 compared 2017 increase included currency benefits approximately 11 million increase customer bookings general oil gas chemical industries partially offset decreases power generation water management industries increased customer bookings 787 million north america 174 million asia pacific partially offset decreased bookings 277 million europe 180 million middle east increase driven customer original equipment aftermarket bookings 13 billion bookings 2018 approximately 33 oil gas 29 chemical 27 general industries 11 power generation bookings 2017 increased 89 million 07 compared 2016 increase included currency benefits approximately 9 million increase customer bookings primarily driven oil gas water management power generation industries partially offset decreased customer bookings general industries increased customer bookings 432 million north america 394 million asia pacific 100 million africa largely offset decreased bookings 668 million europe 188 million latin america increase driven customer aftermarket bookings 12 billion bookings 2017 approximately 32 oil gas 29 chemical 21 general industries 16 power generation 2 water management sales 2018 increased 277 million 23 compared 2017 increase included currency benefits approximately 8 million driven increased customer original equipment sales increased 624 million north america 401 million asia pacific 79 million africa partially offset decreased customer sales 460 million europe 251 million middle east 108 million latin america impact adoption new revenue standard increased sales approximately 8 million year ended december 31 2018 sales 2017 decreased 456 million 37 compared 2016 decrease included currency benefits approximately 13 million driven decreased customer original equipment sales decreased 214 million europe 177 million middle east 161 million latin america partially offset increase 68 million asia pacific gross profit 2018 increased 202 million 51 compared 2017 gross profit margin 2018 343 increased 334 2017 increase gross profit margin primarily attributable positive impact increased sales absorption fixed manufacturing costs decreased charges increased savings achieved related realignment programs compared period 2017 impact adoption new revenue standard slightly unfavorable impact gross profit margin gross profit 2017 decreased 332 million 77 compared 2016 gross profit margin 2017 334 decreased 348 2016 decrease gross profit margin primarily attributable negative impact decreased sales absorption fixed manufacturing costs lower margin projects shipped backlog partially offset increased savings achieved related realignment programs compared period 2016 sga 2018 increased 14 million 07 compared 2017 currency effects provided increase approximately 2 million increase sga primarily due higher selling administrative related expenses partially offset lower charges increased savings related realignment programs compared 2017 sga 2017 decreased 133 million 59 compared 2016 currency effects provided increase approximately 1 million decrease sga primarily due reduced salesrelated expenses savings achieved related realignment programs compared period 2016 gain sale businesses 2017 result 1413 million gain sales gestra vogt businesses see note 3 consolidated financial statements included item 8 annual report additional information sales operating income 2018 decreased 1225 million 378 compared 2017 decrease included negative currency effects approximately 1 million decrease due 1413 million gain sales gestra vogt businesses 2017 partially offset 202 million increase gross profit operating income 2017 increased 1211 million 598 compared 2016 increase included currency benefits approximately 2 million increase primarily attributable 1413 million gain sales gestra vogt businesses decrease sga 133 million partially offset 332 million decrease gross profit backlog 6084 million december 31 2018 decreased 90 million 15 compared december 31 2017 impact initial adoption new revenue standard reduced backlog approximately 35 million january 1 2018 currency effects provided decrease approximately 17 million backlog 6174 million december 31 2017 increased 329 million 56 compared december 31 2016 currency effects provided increase approximately 20 million liquidity capital resources cash flow analysis existing cash generated operations borrowings available existing revolving credit facility primary sources shortterm liquidity monitor depository institutions hold cash equivalents regular basis believe placed deposits creditworthy financial institutions sources operating cash generally include sale products services conversion working capital particularly accounts receivable inventories total cash balance december 31 2018 6197 million compared 7034 million december 31 2017 3672 million december 31 2016 cash provided operating activities 1908 million 3111 million 2405 million 2018 2017 2016 respectively provided cash support shortterm working capital needs cash flow used working capital increased 2018 due primarily cash used higher inventory 293 million higher accounts receivable 254 million higher contract assets 237 million lower accrued liabilities income taxes payable 182 million partially offset cash provided higher contract liabilities 337 million cash flow provided working capital increased 2017 due primarily cash provided lower accounts receivable 602 million lower inventory 486 million higher accounts payable 124 million 2018 contributed 481 million defined benefit pension plans compared 449 million 2017 increases accounts receivable used 254 million cash flow 2018 compared cash provided 602 million 2017 369 million 2016 increase cash used accounts receivable 2018 partially attributable higher sales period compared period 2017 fourth quarter 2018 days sales outstanding dso 72 days compared 75 days 2017 74 days 2016 adoption new revenue standard january 1 2018 estimated favorable impact 3 days dso december 31 2018 experienced significant increase customer payment defaults 2018 increases inventory used 293 million cash flow 2018 compared cash provided 486 million 529 million 2017 2016 respectively use cash inventory 2018 primarily due decreased progress billings 2017 cash provided due decreased work process finished goods inventory turns 42 times december 31 2018 compared 33 times 2017 2016 adoption new revenue standard january 1 2018 estimated favorable impact approximately 11 times inventory turn calculation december 31 2018 calculation inventory turns reflect impact advanced cash received customers increases contract assets used 237 million cash flow increases contact liabilities provided 337 million cash flow 2018 decreases accounts payable used 48 million cash flow 2018 compared cash provided 124 million 2017 cash used 710 million 2016 decreases accrued liabilities income taxes payable used 182 million cash flow 2018 compared 34 million 2017 888 million 2016 cash flows used investing activities 815 million 2018 compared cash provided 1766 million cash used 915 million 2017 2016 respectively decrease cash provided 2018 primarily due 2328 million net proceeds sale gestra vogt businesses 2017 recur capital expenditures 840 million 616 million 897 million 2018 2017 2016 respectively 2019 currently estimate capital expenditures 90 million 100 million consideration acquisition activity cash flows used financing activities 1733 million 2018 compared 1854 million 1437 million 2017 2016 respectively cash outflows 2018 resulted primarily 994 million dividend payments 600 million payments longterm debt cash outflows 2017 resulted primarily 992 million dividend payments 600 million payments longterm debt cash outflows 2016 resulted primarily 977 million dividend payments 600 million payments longterm debt maintained previouslyannounced policy annually returning 40 50 running twoyear average net earnings shareholders following attainment previously announced target leverage ratio share repurchase activity 2018 2017 2016 december 31 2018 1607 million remaining capacity share repurchase plan previously approved board directors intend adhere policy foreseeable future returns cash dividends andor share repurchases reviewed individually declared board directors implemented management discretion depending financial condition business opportunities market conditions time cash needs next 12 months expected lower 2018 due realignment programs substantially completed anticipated benefits working capital reductions believe cash flows operating activities combined availability revolving credit facility existing cash balances sufficient enable us meet cash flow needs next 12 months however cash flows operations could adversely affected decrease rate general global economic growth extended decrease capital spending customers well economic political risks associated sales products operational factors competition regulatory actions fluctuations foreign currency exchange rates fluctuations interest rates among factors believe cash flows operating activities expectation continuing availability draw upon credit agreements also sufficient meet cash flow needs periods beyond next 12 months dispositions regularly evaluate acquisition opportunities various sizes cost terms financing raised conjunction acquisition including ability raise economical capital critical consideration evaluation note 3 consolidated financial statements included item 8 annual report contains discussion disposition activity financing amended credit agreement provides 1950 million term loan “term loan facility” 8000 million revolving credit facility “revolving credit facility” together term loan facility “senior credit facility” maturity october 14 2020 current senior credit facility includes following leverage ratio 400 times debt total consolidated ebitda june 30 2019 stepdown 375 fiscal quarter ending july 1 2019 iia pricing level senior unsecured longterm debt ratings ba2bb interest rate margin libor loans 200 base rate loans 100 iii maximum principal amount priority debt 75 consolidated tangible assets maximum amount receivables securitized 100 million subject certain conditions including lender approval right increase amount term loan facility revolving credit facility aggregate amount exceed 4000 million discussion debt related covenants included note 11 consolidated financial statements included item 8 annual report compliance covenants december 31 2018 certain financing arrangements contain provisions may result event default failure financing arrangements meet payment terms observe covenants could result acceleration payment due provisions referred cross default provisions senior credit facility senior notes described note 11 consolidated financial statements included item 8 annual report crossdefaulted rating agencies assign credit ratings certain debt access capital markets costs debt could directly affected credit ratings adverse action respect credit ratings could generally cause borrowing costs increase potential pool investors funding sources decrease particular decline credit ratings would increase cost borrowing senior credit facility liquidity analysis cash balance decreased 838 million 6197 million december 31 2018 compared december 31 2017 cash decrease included 840 million capital expenditures 994 million dividend payments 600 million payments longterm debt partially offset 1908 million operating cash inflows approximately 57 currently outstanding term loan facility 135 million shortterm borrowings due mature 2019 2020 senior credit facility matures october 2020 borrowing capacity subject financial covenant limitations based terms senior credit facility also reduced outstanding letters credit december 31 2018 available capacity 5137 million borrowings outstanding 929 million letters credit outstanding revolving credit facility revolving credit facility committed held diversified group financial institutions additional information senior credit facility see note 11 consolidated financial statements included item 8 annual report december 31 2018 2017 result values plan’s assets contributions plan us pension plan fullyfunded defined applicable law consideration intent maintain fully funded status contributed 200 million us pension plan 2018 excluding direct benefits paid 33 million continue maintain asset allocation consistent strategy maximize total return reducing portfolio risks asset class diversification outlook 2019 future results operations forwardlooking statements contained annual report including mda involve number risks uncertainties particular statements regarding goals strategies new product introductions plans cultivate new businesses future economic conditions revenue pricing gross profit margin costs capital spending expected cost savings transformation realignment programs global economic political risk depreciation amortization research development expenses potential impairment assets tax rate pending tax legal proceedings future results operations may also affected employee incentive compensation including annual program amount type valuation sharebased awards granted well amount awards forfeited due employee turnover addition various important factors discussed number factors could cause actual results differ materially expectations see risks described item 1a risk factors well section titled “forwardlooking information subject risk uncertainty” annual report bookings 40198 million 2018 booking represents contract certain circumstances modified canceled include varying lengths time booking time revenue recognition guarantee bookings result comparable revenues otherwise indicative future results outlook oil gas industry heavily dependent demand growth mature markets developing geographies shortterm believe stable oil prices support oil gas upstream midstream investment expect increased investment later cycle downstream projects due emerging market growth certain regulatory requirements imo 2020 recovery overall level spending oil gas companies could continue increase demand aftermarket products services believe medium longterm fundamentals industry remain attractive see stabilized environment industry works current excess supply addition believe projected depletion rates existing fields forecasted longterm demand growth require additional investments longstanding reputation providing successful solutions upstream midstream downstream applications along advancements portfolio offerings believe continue wellpositioned assist customers improving environment expect continued competitive economic environment 2019 anticipate benefits continuation flowserve 20 transformation efforts enduser strategies strength high margin aftermarket business continued disciplined cost management diverse customer base broad product portfolio unified operating platform similar prior years expect results weighted towards second half year believe primary markets continue provide opportunities remain cautious outlook 2019 given continuing uncertainty capital spending many markets well economic political risk associated international operations could negative effect global economic conditions december 31 2018 13648 million fixedrate senior notes outstanding 1048 million variablerate debt term loan facility december 31 2018 variable fixed interest rate derivative contracts due fact portion debt carries variable rate interest debt subject volatility rates could impact interest expense expect interest expense 2019 relatively consistent amounts incurred 2018 results operations may also impacted unfavorable foreign currency exchange rate movements see “item 7aitem 7 managements discussion analysis financial condition results operations following discussion analysis provided increase understanding read conjunction accompanying consolidated financial statements notes see “item 1a risk factors” section titled “forwardlooking information subject risk uncertainty” included annual report form 10k year ended december 31 2019 annual report discussion risks uncertainties assumptions associated statements unless otherwise noted amounts discussed herein consolidated executive overview company believe worldleading manufacturer aftermarket service provider comprehensive flow control systems develop manufacture precisionengineered flow control equipment integral movement control protection flow materials customers’ critical processes product portfolio pumps valves seals automation aftermarket services supports global infrastructure industries including oil gas chemical power generation water management well general industrial markets products services add value manufacturing platform global network quick response centers qrcs offer broad array aftermarket equipment services installation advanced diagnostics repair retrofitting employ approximately 17000 employees 50 countries december 31 2019 business model significantly influenced capital spending global infrastructure industries placement new products service maintenance spending aftermarket services existing operations worldwide installed base products important source aftermarket revenue products expected ensure maximum operating time many key industrial processes past several years significantly invested aftermarket strategy provide local support drive customer investments offerings use services replace repair installed products aftermarket portion business also helps provide business stability various economic periods aftermarket business primarily served network 171 qrcs located around globe provides variety service offerings customers including spare parts service solutions product life cycle solutions valueadded services generally higher margin business compared original equipment business key component profitable growth strategy operations conducted two business segments referenced throughout management’s discussion analysis financial condition results operations mda • fpd custom highlyengineered pumps preconfigured industrial pumps pump systems mechanical seals auxiliary systems replacement parts related services • fcd engineered industrial valves control valves actuators controls related services business segments share focus industrial flow control technology high number common customers segments also complementary product offerings technologies often combined applications provide us net competitive advantage segments also benefit global footprint economies scale reducing administrative overhead costs serve customers cost effectively shared leadership operational support functions research development marketing supply chain reputation product portfolio built 50 wellrespected brand names worthington idp valtek limitorque durco argus edward valbart durametallic believe one comprehensive industry products services sold either directly designated channels 10000 companies including world’s leading engineering procurement construction epc firms original equipment manufacturers distributors end users continue leverage qrc network positioned near customers possible service support order capture valuable aftermarket business along ensuring local capability sell install service equipment remote regions continuously improve global operations also continue expand global supply chain capability meet global customer demands ensure quality timely delivery products focusing ongoing lowcost sourcing including greater use thirdparty suppliers increasing lowercost emerging market capabilities additionally continue devote resources improving supply chain processes across business segments find areas synergy cost reduction improve supply chain management capability ensure meet global customer demands also remain focused improving ontime delivery quality managing warranty costs percentage sales across global operations assistance focused continuous improvement process cip initiative goal cip initiative includes lean manufacturing six sigma business management strategy value engineering maximize service fulfillment customers ontime delivery reduced cycle time quality highest internal productivity past year experienced continued stabilization business improved conditions certain key markets continued stability oil prices improved levels middle 2018 2019 largeproject business showing continued signs recovery anticipate customers continue invest maintenance short cycle equipment 2020 second quarter 2018 launched committed resources flowserve 20 transformation program designed transform business model drive operational excellence reduce complexity accelerate growth expand margins increase capital efficiency improve organizational health information regarding flowserve 20 transformation see “our results operations” note 20 consolidated financial statements included item 8 annual report markets following discussion read conjunction outlook 2020 section included mda products services used several distinct industries oil gas chemical power generation water management several industries mining steel paper collectively referred general industries demand products depends level new capital investment well planned unplanned maintenance expenditures customers level new capital investment depends turn capital infrastructure projects driven need products rely oil gas chemicals power generation water resource management well general economic conditions drivers generally related phase business cycle respective industries expectations future market behavior levels maintenance expenditures additionally driven reliability equipment planned unplanned downtime maintenance required capacity utilization process sales epc firms original equipment manufacturers typically large project orders critical applications certain sales distributors project orders typically procured customers either directly us indirectly contractors new construction projects facility enhancement projects quick turnaround business also refer shortcycle defined orders received customer booked shipped generally within six months receipt orders typically standardized general purpose products parts services two business segments generate certain levels type business sale aftermarket products services benefit large installed base original equipment requires periodic maintenance repair replacement parts use manufacturing platform global network qrcs offer broad array aftermarket equipment services installation advanced diagnostics repair retrofitting geographic regions positioned provide quick response believe customers traditionally relied us rather competitors aftermarket products due highly engineered customized products however aftermarket standard products competitive existence common standards allows easier replacement installed products proximity service centers timeliness delivery quality important considerations aftermarket products services continue selectively expand global qrc capabilities improve ability capture important aftermarket business oil gas oil gas industry represented approximately 41 38 bookings 2019 2018 respectively experienced increase capital spending 2019 compared previous year increase primarily due increased project activity short cycle investment aftermarket opportunities industry remained stable throughout 2019 following increased spending 2018 due catch deferred spending customers repair maintenance budgets previous years outlook oil gas industry heavily dependent demand growth mature markets developing geographies well changes regulatory environment shortterm believe stable oil prices support oil gas upstream midstream investment expect continued investment later cycle downstream oil gas petrochemical projects due emerging market growth certain regulatory requirements imo 2020 also believe stable oil prices support increased demand aftermarket products services believe medium longterm fundamentals industry remain attractive see stabilized environment industry works current excess supply addition believe projected depletion rates existing fields forecasted longterm demand growth require additional investments longstanding reputation providing successful solutions upstream midstream downstream applications along advancements portfolio offerings believe continue wellpositioned assist customers improving environment chemical industry represented approximately 22 bookings 2019 2018 chemical industry comprised chemicalbased pharmaceutical products capital spending 2019 increased primarily due global economic growth forecasted demand chemicalbased products aftermarket opportunities remained stable throughout 2019 following increased spending 2018 due catch deferred spending customers repair maintenance budgets previous years outlook chemical industry remains heavily dependent global economic conditions global economies unemployment conditions improve rise consumer spending follow increase spending would drive greater demand chemicalbased products supporting improved levels capital investment believe chemical industry nearterm continue invest north america middle east capacity additions maintenance upgrades optimization existing assets developing regions selectively invest capital infrastructure meet current future indigenous demand believe global presence localized aftermarket capabilities wellpositioned serve potential growth opportunities industry power generation power generation industry represented approximately 11 bookings 2019 2018 2019 power generation industry continued experience softness thermal power generation capital spending mature key developing markets china continued curtail construction new coalfired power generation last year india southeast asia capital investment remained place driven increased demand forecasts natural gasfired combined cycle “ngcc” plants increased share energy mix driven market prices gas remaining low stable partially due increasing global availability liquefied natural gas “lng” low capital expenditures ability ngcc stabilize unpredictable renewable sources potential unconventional sources gas global power generation industry forecasting increased use form fuel power generation plants despite fewer new nuclear plants constructed nuclear power remains important contributor global energy mix continue support significant installed base global nuclear fleet providing aftermarket life extension products services due extensive history believe well positioned take advantage ongoing source aftermarket new construction opportunities political efforts limit emissions carbon dioxide may adverse effect thermal power investment plans depending potential requirements imposed timing compliance country however many proposed methods capturing limiting carbon dioxide emissions offer business opportunities products services time continue take advantage new investments concentrated solar power generating capacity pumps valves seals uniquely positioned molten salt applications well traditional steam cycle believe longterm fundamentals power generation industry remain solid based projected increases demand electricity driven global population growth urbanization developing markets increased use electricity driven transportation also believe longstanding reputation power generation industry portfolio offerings various generating methods advancements serving renewable energy market carbon capture methodologies well global service support structure position us well future opportunities important industry water management water management industry represented approximately 4 bookings 2019 2018 water management industry activity levels increased 2019 worldwide demand fresh water treatment reuse desalination flood control continued create requirements new facilities upgrades existing systems many require products offer particularly pumps capital aftermarket spending rise developed emerging markets governments private industry providing funding critical projects proportion people living regions find difficult meet water requirements expected double 2025 believe persistent demand fresh water economic cycles supports continued investments especially north america developing regions general industries general industries represented aggregate approximately 22 25 bookings 2019 2018 respectively general industries comprise variety different businesses including mining ore processing pulp paper food beverage smaller applications none individually represented 5 total bookings 2019 2018 general industries also include sales distributors whose end customers operate industries primarily serve sales distributors 2019 negatively impacted decreased upstream oil gas activity north america outlook group industries heavily dependent upon condition global economies consumer confidence levels longterm fundamentals many industries remain sound many products produced industries common staples industrialized urbanized economies believe specialty product offerings designed industries aftermarket service capabilities provide continued business opportunities results operations throughout discussion results operations discuss impact fluctuations foreign currency exchange rates calculated currency effects operations translating current year results monthly basis prior year exchange rates periods second quarter 2018 launched committed resources flowserve 20 transformation program designed transform business model drive operational excellence reduce complexity accelerate growth improve organizational health better leverage existing global platform discussed note 20 consolidated financial statements included item 8 annual report year ended december 31 2019 2018 incurred flowserve 20 transformation related expenses 280 million 412 million respectively flowserve 20 transformation expenses incurred primarily consist professional services project management related travel costs recorded sga 2015 initiated realignment programs consist restructuring nonrestructuring charges discussed note 20 consolidated financial statements included item 8 annual report december 31 2019 realignment programs substantially complete incurred charges 3517 million date total charges realignment programs flowserve 20 transformation segment detailed years ended december 31 2019 2018 1 includes gains sales nonstrategic manufacturing facilities included realignment programs 2 income tax expense benefit includes exit taxes 1 income tax expense benefit includes exit taxes bookings backlog define booking receipt customer order contractually engages us perform activities behalf customer regard manufacture delivery andor support products delivery service bookings recorded subsequently canceled within fiscal period excluded reported bookings 42 billion 2019 increased 2185 million 54 compared 2018 increase included negative currency effects approximately 108 million increase primarily driven customer original equipment bookings increase driven higher bookings oil gas power generation chemical water management industries partially offset decreased bookings general industries bookings 2018 included approximately 31 million related two fpd locations associated product lines divested third quarter 2018 bookings 40 billion 2018 increased 2159 million 57 compared 2017 increase included currency benefits approximately 30 million increase primarily driven oil gas general chemical industries partially offset decrease power generation industry increase heavilyweighted towards customer aftermarket bookings backlog represents aggregate value booked uncompleted customer orders influenced primarily bookings sales cancellations currency effects backlog 22 billion december 31 2019 increased 2654 million 140 compared december 31 2018 currency effects provided increase less 1 million currency effects backlog calculated using change period end exchange rates backlog related aftermarket orders approximately 33 36 backlog december 31 2019 2018 respectively expect recognize revenue approximately 88 december 31 2019 backlog 2020 backlog includes unsatisfied partially unsatisfied performance obligations related contracts original expected duration excess one year approximately 709 million discussed note 2 consolidated financial statements included item 8 annual report backlog 19 billion december 31 2018 decreased 1418 million 70 compared december 31 2017 currency effects provided decrease approximately 83 million backlog related aftermarket orders approximately 36 31 backlog december 31 2018 2017 respectively expected recognize revenue approximately 89 december 31 2018 backlog 2019 sales 2019 increased 1122 million 29 compared 2018 increase included negative currency effects approximately 94 million increase heavilyweighted aftermarket sales increased sales north america europe asia pacific partially offset decreased sales latin america africa middle east sales 2018 included approximately 30 million related two fpd locations associated product lines divested third quarter 2018 sales 2018 increased 1719 million 47 compared 2017 increase included currency benefits approximately 31 million increase heavilyweighted aftermarket sales increased sales north america asia pacific africa partially offset decreased sales middle east europe sales international customers including export sales us approximately 63 total sales 2019 2018 64 2017 sales europe middle east africa ema approximately 32 total sales 2019 2018 36 2017 sales asia pacific approximately 21 total sales 2019 20 2018 19 2017 sales latin america approximately 6 total sales 2019 2018 2017 gross profit gross profit margin gross profit 2019 increased 1076 million 91 compared 2018 gross profit margin 2019 328 increased 310 2018 increase gross profit margin primarily attributed favorable impact revenue recognized higher margin projects lower realignment charges associated realignment programs improvements operational efficiency 77 million charge related writedown inventory second quarter 2018 recur aftermarket sales represent approximately 50 total sales 2019 2018 gross profit 2018 increased 988 million 91 compared 2017 gross profit margin 2018 310 increased 297 2017 increase gross profit margin primarily attributable 169 million charge costs related contract supply oil gas platform equipment end user latin america 2017 recur revenue recognized higher margin projects mix shift higher margin aftermarket sales favorable impact increased sales absorption fixed manufacturing costs increased savings related realignment programs partially offset 77 million charge cost incurred related writedown inventory associated divestiture two fpd locations related product lines second quarter 2018 aftermarket sales increased approximately 50 total sales compared approximately 48 total sales 2017 sga 2019 decreased 439 million 47 compared 2018 currency effects yielded decrease approximately 18 million 2019 sga percentage sales decreased 180 basis points compared period 2018 primarily due lower charges related flowserve 20 transformation realignment programs decreased broadbased annual incentive compensation expense gains sales nonstrategic manufacturing facilities year favorable impacts resulting 2018 divestiture two fpd locations 97 million impairment charge related longlived assets second quarter 2018 recur sga 2018 increased 420 million 47 compared 2017 currency effects yielded increase approximately 7 million 2018 sga percentage sales remained relatively unchanged compared 2017 sga favorably impacted increased sales leverage 260 million impairment charge related manufacturing facility brazil 2017 recur lower stockbased compensation expense lower bad debt expense lower charges increased savings related realignment programs favorable cost impacts substantially offset charges related flowserve 20 transformation program implementation costs associated adoption new revenue standard increased accrued broadbased annual incentive compensation expense impairment charge 97 million related longlived assets associated divestiture two fpd locations related product lines second quarter 2018 loss gain sale businesses loss sale businesses 2018 77 million resulted divestiture two fpd locations related product lines gain sale businesses 2017 result 1413 million gain sales gestra vogt businesses see note 3 consolidated financial statements included item 8 annual report additional information sales net earnings affiliates net earnings affiliates represents net income investments six joint ventures one located chile china india saudi arabia south korea united arab emirates accounted using equity method accounting net earnings affiliates 2019 decreased 06 million 54 compared prior year primarily result decreased earnings fpd joint venture india net earnings affiliates 2018 decreased 15 million 119 compared prior year primarily result decreased earnings fpd joint venture south korea operating income operating income 2019 increased 1585 million 640 compared 2018 increase included negative currency effects approximately 12 million increase primarily result 1076 million increase gross profit 439 million decrease sga loss 77 million divestiture two fpd locations related product lines third quarter 2018 recur operating income 2018 decreased 936 million 274 compared 2017 decrease included currency benefits approximately 2 million decrease primarily result 1413 million gain sales gestra vogt businesses 2017 recur 420 million increase sga loss 77 million divestiture two fpd locations related product lines partially offset 988 million increase gross profit discussed interest expense interest income interest expense 2019 decreased 32 million compared 2018 decrease primarily attributable lower borrowings 2019 currency impacts interest expense associated outstanding eurodenominated senior notes compared period 2018 interest income 2019 increased 19 million compared 2018 increase interest income primarily attributable higher average cash balances compared period 2018 interest expense 2018 decreased 15 million compared 2017 decrease primarily attributable lower borrowings 2018 compared period 2017 interest income 2018 increased 31 million compared 2017 increase interest income primarily attributable higher average cash balances compared 2017 income expense net expense net decreased 20 million compared 2018 due 76 million decrease losses transactions currencies sites functional currencies partially offset 33 million increase losses foreign exchange contracts net change primarily due foreign currency exchange rate movements euro indian rupee singapore dollar mexican peso relation us dollar year ended december 31 2019 compared period 2018 expense net decreased 22 million 2018 due 64 million decrease net periodic benefit costs pensions post retirement obligations partially offset 53 million increase losses foreign exchange contracts net change primarily due foreign currency exchange rate movements euro indian rupee mexican peso argentinian peso relation us dollar year ended december 31 2018 compared period 2017 tax expense tax rate december 22 2017 us enacted 2017 tax cuts jobs act 2017 tax reform act significantly changed us tax law tax reform act among things lowered company’s us statutory federal income tax rate 35 21 effective january 1 2018 imposing deemed repatriation tax deferred foreign income implementing modified territorial tax system tax reform act also provides onetime transition tax certain foreign earnings acceleration depreciation certain assets placed service september 27 2017 well prospective changes began 2018 including repeal domestic manufacturing deduction capitalization research development expenditures additional limitations executive compensation limitations deductibility interest effective tax rate 234 year ended december 31 2019 decreased 291 2018 primarily due net impact foreign operations 2019 tax rate differed federal statutory rate 21 primarily due state tax foreign audit assessments partially offset net impact foreign operations 2018 tax rate differed federal statutory rate 21 primarily due net impact foreign operations including losses certain foreign jurisdictions tax benefit provided 2017 tax rate differed federal statutory rate 35 primarily due impacts pursuant enactment tax reform act net impact foreign operations establishment valuation allowance deferred tax assets various foreign jurisdictions primarily germany mexico taxes related sale gestra vogt businesses effective tax rate based upon current earnings estimates future taxable earnings domestic international location changes factors including ability utilize foreign tax credits net operating losses results tax audits could impact tax rate future periods december 31 2019 foreign tax credits 291 million expiring 2026 2028 2029 tax years recorded valuation allowance 291 million additionally recorded net deferred tax assets 550 million relate net operating losses tax credits deductible temporary differences available reduce taxable income future periods definite expiration able utilize portion credits losses effective tax rate would increase net earnings per share net earnings 2019 increased 1340 million 2537 million 193 per diluted share compared 2018 increase primarily attributable increase operating income 1585 million 20 million decrease expense net 51 million decrease interest expense net partially offset 289 million increase tax expense net earnings 2018 increased 1170 million 1197 million 091 per diluted share compared 2017 increase primarily attributable 2075 million decrease tax expense 22 million decrease expense net 15 million decrease interest expense partially offset decrease operating income 936 million comprehensive income loss comprehensive loss 2019 decreased 580 million compared 2018 decreased loss primarily due foreign currency translation adjustments resulting primarily exchange rate movements euro british pound chinese yuan indian rupee versus us dollar december 31 2019 compared 2018 comprehensive loss 2018 increased 1876 million 678 million income 1198 million 2017 loss primarily due foreign currency translation adjustments resulting primarily exchange rate movements euro argentinian peso indian rupee british pound versus us dollar december 31 2018 compared 2017 business segments conduct operations two business segments based type product manage business evaluate segment performance allocate resources based segment’s operating income see note 18 consolidated financial statements included item 8 annual report discussion segments key operating results two business segments fpd fcd discussed flowserve pump division segment results largest business segment fpd design manufacture pretest distribute service specialty highlyengineered custom preconfigured pumps pump systems mechanical seals auxiliary systems collectively referred original equipment fpd includes longer lead time highlyengineered pump products mechanical seals generally manufactured within shorter lead times fpd also manufactures replacement parts related equipment provides aftermarket services fpd primarily operates oil gas petrochemical chemical power generation water management general industries fpd operates 49 countries 39 manufacturing facilities worldwide 13 located europe 12 north america eight asia pacific six latin america 144 qrcs including colocated manufacturing facilities andor shared fcd bookings 2019 increased 2544 million 92 compared 2018 increase included negative currency effects approximately 79 million bookings 2018 included approximately 31 million related two fpd locations associated product lines divested third quarter 2018 increase customer bookings primarily driven oil gas chemical power generation industries partially offset decreased bookings general industries increased customer bookings 1004 million north america 781 million middle east 721 million asia pacific 186 million latin america 115 million africa partially offset decreased customer bookings 499 million europe increase primarily driven customer original equipment bookings 30 billion bookings 2019 approximately 44 oil gas 22 general industries 19 chemical 10 power generation 5 water management bookings 2018 increased 1661 million 64 compared 2017 included order approximately 80 million provide pumps related equipment hengli integrated refining complex project china partially offset approximately 23 million reduced bookings due divestiture two fpd locations related product lines third quarter 2018 increase included currency benefits approximately 19 million increase customer bookings primarily driven oil gas general chemical industries customer bookings increased 914 million europe 617 million middle east 436 million north america 34 million latin america partially offset decreased customer bookings 187 million africa 51 million asia pacific increase primarily aftermarket bookings 28 billion bookings 2018 approximately 41 oil gas 25 general industries 18 chemical 11 power generation 5 water management sales 2019 increased 830 million 32 compared 2018 increase included negative currency effects approximately 66 million sales 2018 included approximately 30 million related two fpd locations associated product lines divested third quarter 2018 increase primarily driven aftermarket sales resulting increased customer sales 453 million north america 286 million europe 168 million middle east 88 million africa partially offset decreased sales 178 million latin america 40 million asia pacific sales 2018 increased 1446 million 58 compared 2017 increase included currency benefits approximately 23 million partially offset approximately 19 million reduced sales due divestiture two fpd locations related product lines third quarter 2018 increase heavilyweighted towards aftermarket sales resulting increased customer sales 699 million north america 584 million asia pacific 558 million africa 509 million latin america partially offset decreased sales 824 million middle east 26 million europe gross profit 2019 increased 1236 million 159 compared 2018 gross profit margin 2019 332 increased 296 2018 increase gross profit margin primarily attributable revenue recognized higher margin projects lower realignment charges associated realignment programs sales mix shift higher margin aftermarket sales improvements operational efficiency 77 million charge related writedown inventory second quarter 2018 recur gross profit 2018 increased 836 million 121 compared 2017 gross profit margin 2018 296 increased 279 2017 increase gross profit margin primarily attributable favorable impact increased sales absorption fixed manufacturing costs 169 million charge costs related contract supply oil gas platform equipment end user latin america 2017 recur lower charges increased savings related realignment programs revenue recognized higher margin projects partially offset 77 million charge cost incurred related writedown inventory associated divestiture two fpd locations related product lines sga 2019 decreased 126 million 22 compared 2018 currency effects provided decrease approximately 13 million decrease sga including currency due favorable impacts sga due gains sales nonstrategic manufacturing facilities year 2018 divestiture two fpd locations 97 million impairment charge related longlived assets second quarter 2018 recur substantially offset increase sellingrelated expenses collections previously reserved bad debts 2018 recur sga 2018 decreased 141 million 24 compared 2017 currency effects provided increase approximately 5 million decrease sga primarily attributable 260 million impairment charge related manufacturing facility brazil 2017 recur lower bad debt expense decreased charges related realignment programs partially offset higher selling administrative related expenses impairment charge longlived assets related divestiture two fpd locations related product lines 97 million loss sale businesses 2018 77 million resulted divestiture two fpd locations related product lines refer note 3 consolidated financial statements included item 8 annual report additional information divestiture operating income 2019 increased 1425 million 709 compared 2018 increase included negative currency effects approximately 10 million increase due 1236 million increase gross profit 126 million decrease sga 77 million loss divestiture two fpd locations related product lines third quarter 2018 recur operating income 2018 increased 887 million 790 compared 2017 increase included negative currency effects approximately 1 million increase due 836 million increase gross profit 141 million decrease sga partially offset 77 million loss divestiture two fpd locations related product lines third quarter 2018 recur backlog 16 billion december 31 2019 increased 2747 million 214 compared december 31 2018 currency effects provided increase approximately 5 million backlog 13 billion december 31 2018 decreased 1356 million 95 compared december 31 2017 currency effects provided decrease approximately 66 million flow control division segment results fcd designs manufactures distributes services broad portfolio engineered industrial valve automation solutions including isolation control valves actuation controls related equipment fcd leverages experience application knowhow offering complete menu engineering project management services complement expansive product portfolio fcd total 49 manufacturing facilities qrcs 22 countries around world five 21 manufacturing operations located us 10 located europe five located asia pacific one located latin america believe fcd second largest industrial valve supplier world bookings 2019 decreased 334 million 26 compared 2018 decrease included negative currency effects approximately 29 million decrease customer bookings general chemical industries partially offset increases power generation oil gas water management industries decreased customer bookings 273 million north america 82 million asia pacific 26 million europe partially offset increased bookings 241 million middle east decrease heavily weighted towards customer aftermarket bookings 12 billion bookings 2019 approximately 34 oil gas 29 chemical 24 general industries 13 power generation bookings 2018 increased 486 million 40 compared 2017 increase included currency benefits approximately 11 million increase customer bookings general oil gas chemical industries partially offset decreases power generation water management industries increased customer bookings 787 million north america 174 million asia pacific partially offset decreased bookings 277 million europe 180 million middle east increase driven customer original equipment aftermarket bookings 13 billion bookings 2018 approximately 33 oil gas 29 chemical 27 general industries 11 power generation sales 2019 increased 282 million 23 compared 2018 increase included negative currency effects approximately 28 million driven increased customer original equipment sales increased 402 million asia pacific 176 million europe 65 million latin america 35 million north america partially offset decreased customer sales 235 million middle east 159 million africa sales 2018 increased 277 million 23 compared 2017 increase included currency benefits approximately 8 million driven increased customer original equipment sales increased 624 million north america 401 million asia pacific 79 million africa partially offset decrease customer sales 460 million europe 251 million middle east 108 million latin america gross profit 2019 decreased 53 million 13 compared 2018 gross profit margin 2019 331 decreased 343 2018 decrease gross profit margin primarily attributed mix shift original equipment sales revenue recognized lower margin original equipment orders compared period 2018 gross profit 2018 increased 202 million 51 compared 2017 gross profit margin 2018 343 increased 334 2017 increase gross profit margin primarily attributable positive impact increased sales absorption fixed manufacturing costs decreased charges increased savings achieved related realignment programs compared period 2017 sga 2019 decreased 14 million 07 compared 2018 currency effects provided decrease approximately 4 million decrease sga primarily due currency effects compared 2018 sga 2018 increased 14 million 07 compared 2017 currency effects provided increase approximately 2 million increase sga primarily due higher selling administrative related expenses partially offset lower charges increased savings related realignment programs compared 2017 gain sale businesses 2017 result 1413 million gain sales gestra vogt businesses see note 3 consolidated financial statements included item 8 annual report additional information sales operating income 2019 decreased 32 million 16 compared 2018 decrease included negative currency effects approximately 3 million decrease primarily due 53 million decrease gross profit partially offset decrease sga 14 million operating income 2018 decreased 1225 million 378 compared 2017 decrease included negative currency effects approximately 1 million decrease due 1413 million gain sales gestra vogt businesses 2017 partially offset 202 million increase gross profit backlog 6001 million december 31 2019 decreased 83 million 14 compared december 31 2018 currency effects provided decrease approximately 5 million backlog 6084 million december 31 2018 decreased 90 million 15 compared december 31 2017 currency effects provided decrease approximately 17 million liquidity capital resources cash flow analysis existing cash generated operations borrowings available senior credit facility primary sources shortterm liquidity monitor depository institutions hold cash equivalents regular basis believe placed deposits creditworthy financial institutions sources operating cash generally include sale products services conversion working capital particularly accounts receivable inventories total cash balance december 31 2019 6710 million compared 6197 million december 31 2018 7034 million december 31 2017 cash provided operating activities 3127 million 1908 million 3111 million 2019 2018 2017 respectively provided cash support shortterm working capital needs cash flow used working capital increased 2019 due primarily cash used higher contract assets 459 million higher inventory 311 million partially offset higher accounts payable 229 million higher accrued liabilities income taxes payable 42 million higher contract liabilities 144 million lower accounts receivable 29 million cash flow used working capital increased 2018 due primarily cash used higher inventory 293 million higher accounts receivables 254 million higher contract assets 237 million lower accrued liabilities income taxes payable 182 million partially offset cash provided higher contract liabilities 337 million 2019 contributed 373 million defined benefit pension plans compared 481 million 2018 decreases accounts receivable provided 29 million cash flow 2019 compared cash flow used 254 million 2018 cash flow provided 602 million 2017 respectively fourth quarter 2019 days sales outstanding dso 67 days compared 72 days 2018 75 days 2017 experienced significant increase customer payment defaults 2019 increases inventory used 311 million cash flow 2019 compared 293 million 2018 cash provided 486 million 2017 use cash inventory 2019 primarily due increase raw materials work process 2018 cash used due decreased progress billings inventory turns 43 times december 31 2019 compared 42 times 2018 33 times 2017 calculation inventory turns reflect impact advanced cash received customers increases contract assets used 459 million cash flow increases contact liabilities provided 144 million cash flow 2019 increases contract assets used 237 million cash flow increases contact liabilities provided 337 million cash flow 2018 increases accounts payable provided 229 million cash flow 2019 compared cash used 48 million 2018 cash provided 124 million 2017 increases accrued liabilities income taxes payable provided 42 million cash flow 2019 compared cash used 182 million 34 million 2018 2017 respectively cash used investing activities 238 million 2019 compared 815 million 2018 cash provided 1766 million 2017 decrease cash used 2019 primarily due decrease capital expenditures proceeds disposal assets year provided 423 million primarily sale nonstrategic manufacturing facilities included realignment programs capital expenditures 662 million 840 million 616 million 2019 2018 2017 respectively 2020 currently estimate capital expenditures 90 million 100 million consideration acquisition activity cash used financing activities 2297 million 2019 compared 1733 million 1854 million 2018 2017 respectively cash outflows 2019 resulted primarily 1050 million payments longterm debt 996 million dividend payments repurchase 150 million common stock cash outflows 2018 resulted primarily 994 million dividend payments 600 million payments longterm debt cash outflows 2017 resulted primarily 992 million dividend payments 600 million payments longterm debt 2019 repurchased 324889 shares outstanding common stock 150 million december 31 2019 1457 million remaining capacity share repurchase plan previously approved board directors cash needs next 12 months expected lower 2019 due realignment programs substantially completed anticipated benefits working capital reductions believe cash flows operating activities combined availability senior credit facility existing cash balances sufficient enable us meet cash flow needs next 12 months however cash flows operations could adversely affected decrease rate general global economic growth extended decrease capital spending customers well economic political risks associated sales products operational factors competition regulatory actions fluctuations foreign currency exchange rates fluctuations interest rates among factors believe cash flows operating activities expectation continuing availability draw upon credit agreements also sufficient meet cash flow needs periods beyond next 12 months acquisitions dispositions regularly evaluate acquisition opportunities various sizes cost terms financing raised conjunction acquisition including ability raise economical capital critical consideration evaluation note 3 consolidated financial statements included item 8 annual report contains discussion disposition activity financing credit agreement provides 8000 million unsecured senior credit facility maturity date july 16 2024 “senior credit facility” senior credit facility includes 7500 million sublimit issuance letters credit 300 million sublimit swing line loans right increase amount senior credit facility aggregate amount exceed 4000 million subject certain conditions including lenders approval providing increase interest rates per annum applicable senior credit facility respect swing line loans libor plus 1000 1750 depending debt rating either moody’s investors service inc standard poor’s sp ratings option base rate defined senior credit agreement plus 0000 0750 depending debt rating either moody’s investors service inc sp global ratings december 31 2019 interest rate senior credit facility libor plus 1375 case libor loans base rate plus 0375 case base rate loans addition commitment fee payable quarterly arrears daily unused portions senior credit facility commitment fee 0090 0300 unused amounts senior credit facility depending debt rating either moody’s investors service inc sp’s ratings certain financing arrangements contain provisions may result event default failure financing arrangements meet payment terms provisions referred cross default provisions discussion debt related covenants included note 12 consolidated financial statements included item 8 annual report compliance covenants december 31 2019 liquidity analysis cash balance increased 513 million 6710 million december 31 2019 compared december 31 2018 cash increase included 3127 million operating cash inflows 423 million sale nonstrategic manufacturing facilities included realignment programs partially offset 1050 million payments longterm debt 996 million dividend payments 662 million capital expenditures repurchase 150 million common stock december 31 2019 2018 result values plan’s assets contributions plan us pension plan fullyfunded defined applicable law consideration intent maintain fully funded status contributed 200 million us pension plan 2019 excluding direct benefits paid 06 million continue maintain asset allocation consistent strategy maximize total return reducing portfolio risks asset class diversification outlook 2020 future results operations forwardlooking statements contained annual report including mda involve number risks uncertainties particular statements regarding goals strategies new product introductions plans cultivate new businesses future economic conditions revenue pricing gross profit margin costs capital spending expected cost savings transformation realignment programs global economic political risk depreciation amortization research development expenses potential impairment assets tax rate pending tax legal proceedings future results operations may also affected employee incentive compensation including annual program amount type valuation sharebased awards granted well amount awards forfeited due employee turnover addition various important factors discussed number factors could cause actual results differ materially expectations see risks described item 1a risk factors well section titled “forwardlooking information subject risk uncertainty” annual report bookings 42383 million 2019 booking represents contract certain circumstances modified canceled include varying lengths time booking time revenue recognition guarantee bookings result comparable revenues otherwise indicative future results expect continued competitive economic environment 2020 anticipate benefits continuation flowserve 20 transformation efforts enduser strategies strength high margin aftermarket business continued disciplined cost management diverse customer base broad product portfolio unified operating platform similar prior years expect results weighted towards second half year believe primary markets continue provide opportunities remain cautious outlook 2020 given continuing uncertainty capital spending many markets well economic political risk associated international operations could negative effect global economic conditions december 31 2019 13541 million fixedrate senior notes outstanding expect interest expense 2020 modestly lower compared amounts incurred 2019 results operations may also impacted unfavorable foreign currency exchange rate movements see “item 7aitem 7managements discussion analysis financial condition results operations following discussion analysis provided increase understanding read conjunction accompanying consolidated financial statements notes see “item 1a risk factors” section titled “forwardlooking information subject risk uncertainty” included annual report form 10k year ended december 31 2020 annual report discussion risks uncertainties assumptions associated statements unless otherwise noted amounts discussed herein consolidated executive overview company worldleading manufacturer aftermarket service provider comprehensive flow control systems develop manufacture precisionengineered flow control equipment integral movement control protection flow materials customers’ critical processes product portfolio pumps valves seals automation aftermarket services supports global infrastructure industries including oil gas chemical power generation water management well general industrial markets products services add value manufacturing platform global network qrcs offer broad array aftermarket equipment services installation advanced diagnostics repair retrofitting december 31 2020 approximately 16000 employees “associates” globally footprint manufacturing facilities quick response centers 50 countries business model significantly influenced capital spending global infrastructure industries placement new products service maintenance spending aftermarket services existing operations worldwide installed base products important source aftermarket revenue products expected ensure maximum operating time many key industrial processes significantly invested aftermarket strategy provide local support drive customer investments offerings use services replace repair installed products aftermarket portion business also helps provide business stability various economic periods aftermarket business primarily served network 163 qrcs located around globe provides variety service offerings customers including spare parts service solutions product life cycle solutions valueadded services generally higher margin business compared original equipment business key component profitable growth strategy operations conducted two business segments referenced throughout management’s discussion analysis financial condition results operations mda •flowserve pump division fpd custom highlyengineered pumps preconfigured industrial pumps pump systems mechanical seals auxiliary systems replacement parts related services •flow control division fcd engineered industrial valves control valves actuators controls related services business segments share focus industrial flow control technology high number common customers segments also complementary product offerings technologies often combined applications provide us net competitive advantage segments also benefit global footprint economies scale reducing administrative overhead costs serve customers cost effectively shared leadership operational support functions research development marketing supply chain reputation product portfolio built 50 wellrespected brand names worthington idp valtek limitorque durco argus edward valbart durametallic believe one comprehensive industry products services sold either directly designated channels 10000 companies including world’s leading engineering procurement construction epc firms original equipment manufacturers distributors end users continue leverage qrc network positioned near customers possible service support order capture valuable aftermarket business along ensuring local capability sell install service equipment remote regions continuously improve global operations despite recent headwinds caused covid19 pandemic continue enhance global supply chain capability increase ability meet global customer demands improve quality timely delivery products longterm additionally continue devote resources improving supply chain processes across business segments find areas synergy cost reduction improve supply chain management capability meet global customer demands also remain focused improving ontime delivery quality managing warranty costs percentage sales across global operations assistance focused continuous improvement process cip initiative goal cip initiative includes lean manufacturing six sigma business management strategy value engineering maximize service fulfillment customers ontime delivery reduced cycle time quality highest internal productivity covid19 update covid19 pandemic continues impact human health global economy society large pandemic expected continue adversely impact duration operations financial performance response continue actively monitor impacts covid19 pandemic aspects business geographies crossfunctional crisis management team established first quarter 2020 continued monitoring making recommendations management help us continue operating essential business across jurisdictions also protecting health safety associates despite evolving response covid19 pandemic adverse effect performance year expect impact continue least second quarter 2021 cannot reasonably estimate certainty ongoing duration severity covid19 pandemic including effects vaccine ultimate impact global economy business financial condition results nonetheless remain committed providing critical support products services customers rely currently believe emerge events well positioned longterm growth health safety associates health safety associates suppliers customers around world continues first priority continue navigate covid19 pandemic including recent spikes cases returning workfromhome restrictions various geographies operate incredibly proud great teamwork exhibited global workforce demonstrated strong resilience adapting continually evolving health safety guidelines addressing challenging times providing products services customers implemented policies practices help protect workforce safely effectively carry vital work continued revise policies practices light guidance received local regional health authorities appropriate instituted global restrictions nonessential travel march 2020 workfromhome policy nonessential employees able continued effect locations health officials advised policies including global headquarters irving texas maintain workfromhome policy least second quarter 2021 locations employees going work facilities continued taking steps light guidelines local global health experts protect employees continue manufacture critical technologies equipment including providing face coverings personal protective equipment enhanced cleaning sites implemented social distancing protocols employees facilities key role keeping essential infrastructure industries operating including oil gas water chemical power generation essential industries food beverage healthcare facilities experienced periods temporary closures 2020 accordance decrees orders laws respective countries geographies february 18 2021 facilities open operational running close precovid19 levels continue make essential products provide services customers however measures described combined continued employee costs underabsorption manufacturing costs result temporary closures workfromhome policies expected continue adverse impact financial performance throughout remainder pandemic customer demand 2020 2021 reduction global demand oil gas driven covid19 pandemic coupled excessive supply due disagreements organization petroleum exporting countries “opec” oil producing nations first half 2020 led extreme volatility global markets oil prices conditions adversely impacted customers particularly oil gas markets example first half 2020 conditions drove significant broadbased decrease customer planned capital spending leading many large customers announce doubledigit capital expenditure budget decreases remainder 2020 result saw overall bookings decline approximately 20 2020 compared period 2019 resulting lower sequential backlog though seen significant increase levels customer cancellations existing backlog additionally rapidly evolving impacts covid19 pandemic 2020 2021 caused reduced activity levels aftermarket business due deferred spending customers repair maintenance budgets including impact restricted access customers facilities expect repair maintenance projects ultimately need completed timing largely depend duration covid19 pandemic virus variants continue spread customers various geographies trends likely continue duration covid19 pandemic various actions implemented combat pandemic continue reduce demand oil gas result experienced decreased bookings sales financial performance anticipate continuing throughout remainder pandemic additionally expect headwinds oil gas markets resulted likely continue result reduced capital expenditures bookings oil gas customers continue least oil demand prices stabilize may occur pandemic subsides supply chain impact since onset pandemic many suppliers also experienced varying lengths production shipping conditions related covid19 pandemic continue exist highly affected countries conditions adverse effect speed manufacture ship products customers also led increase logistics transportation freight costs requiring diversify supply chain instances source materials new suppliers additionally conditions cases impacted ability deliver products customers time turn led increase backlog manufacturing sites though issues abated second half 2020 2021 certain disruptions supply chain effects continued year expect continue covid19 pandemic continues operational impacts also engaged number cost savings measures order help mitigate certain adverse effects covid19 pandemic financial results including certain realignment activities described “results operations freeze nonessential open employment requisitions cancellation meritbased payroll increases 2020 reduction capital expenditures approximately 60 million cuts discretionary spending together planned approximately 100 million cost reductions excluding realignment charges 2020 compared 2019 due large part response effects covid19 partially offsets increased costs operational impacts safety protocols procedures implemented described heading health safety associates continue evaluate additional cost savings measures continue implement measures near term order reduce impact covid19 pandemic financial results continue monitor assess spread covid19 including areas seen recent increases cases continue adapt operations respond changing conditions needed continue manage business unprecedented time uncertainty market volatility remain focused health safety associates suppliers customers continue provide essential products services customers markets products services used several distinct industries oil gas chemical power generation water management several industries mining steel paper collectively referred general industries oil gas oil gas industry represented approximately 34 41 bookings 2020 2019 respectively experienced material decrease capital spending 2020 compared previous year decrease primarily due decreased project activity short cycle investment resulting pandemics negative impact demand refined products aftermarket opportunities industry also experienced material decrease 2020 due deferred spending customers repair maintenance budgets pandemic related challenges accessing customers’ facilities outlook oil gas industry heavily dependent duration pandemic impact fuel demand growth mature markets developing geographies well changes regulatory environment shortterm believe pandemic continue negatively impact customers’ capital investment maintenance budgets believe improved stable oil prices provide support increased demand aftermarket products services believe medium longterm fundamentals industry remain attractive see stabilized environment expected increased fuel demand improved pandemic management industry works current excess supply addition believe projected depletion rates existing fields forecasted longterm demand growth require additional investments longstanding reputation providing successful solutions upstream midstream downstream applications along advancements portfolio offerings believe continue wellpositioned assist customers improving environment chemical industry represented approximately 24 22 bookings 2020 2019 respectively chemical industry comprised petrochemical specialty chemical pharmaceutical products capital spending 2020 decreased materially primarily due pandemics negative impact demand chemical products aftermarket opportunities also materially decreased 2020 due deferred spending customers repair maintenance budgets pandemic related challenges accessing customers’ facilities outlook chemical industry remains heavily dependent global economic conditions global economies unemployment conditions improve rise consumer spending follow increase spending would drive greater demand petrochemical specialty chemical pharmaceutical products supporting improved levels capital investment believe chemical industry continue invest north america middle east capacity additions maintenance upgrades optimization existing assets developing regions selectively invest capital infrastructure meet current future indigenous demand believe global presence localized aftermarket capabilities wellpositioned serve potential growth opportunities industry power generation power generation industry represented approximately 13 11 bookings 2020 2019 respectively 2020 power generation industry continued experience softness thermal power generation capital spending mature key developing markets china continued curtail construction new coalfired power generation last year india southeast asia capital investment remained place driven increased demand forecasts natural gasfired combined cycle “ngcc” plants increased share energy mix driven market prices gas remaining low stable partially due increasing global availability liquefied natural gas “lng” low capital expenditures ability ngcc stabilize unpredictable renewable sources potential unconventional sources gas global power generation industry forecasting increased use form fuel power generation plants despite fewer new nuclear plants constructed recent years nuclear power remains important contributor global energy mix continue support significant installed base global nuclear fleet providing aftermarket life extension products services due extensive history believe well positioned take advantage ongoing source aftermarket new construction opportunities political efforts limit emissions carbon dioxide may adverse effect thermal power investment plans depending potential requirements imposed timing compliance country however many proposed methods capturing limiting carbon dioxide emissions offer business opportunities products services time continue take advantage new investments concentrated solar power generating capacity pumps valves seals uniquely positioned molten salt applications well traditional steam cycle believe longterm fundamentals power generation industry remain solid based projected increases demand electricity driven global population growth urbanization developing markets increased use electricity driven transportation also believe longstanding reputation power generation industry portfolio offerings various generating methods advancements serving renewable energy market carbon capture methodologies well global service support structure position us well future opportunities important industry water management water management industry represented approximately 3 4 bookings 2020 2019 respectively water management industry activity levels decreased 2020 primarily due pandemics negative impact government budgets across globe worldwide demand fresh water treatment reuse desalination flood control expected create requirements new facilities upgrades existing systems many require products offer particularly pumps improved management pandemic expect capital aftermarket spending rise developed emerging markets governments private industry providing funding critical projects priorities shift away pandemicmanagement proportion people living regions find difficult meet water requirements expected double 2025 believe persistent demand fresh water economic cycles supports continued investments especially north america developing regions general industries general industries represented aggregate approximately 26 22 bookings 2020 2019 respectively general industries comprise variety different businesses including mining ore processing pulp paper food beverage smaller applications none individually represented 5 total bookings 2020 2019 general industries also include sales distributors whose end customers operate industries primarily serve sales distributors 2020 negatively impacted decreased upstream oil gas activity north america outlook group industries heavily dependent upon condition global economies consumer confidence levels longterm fundamentals many industries remain sound many products produced industries common staples industrialized urbanized economies believe specialty product offerings designed industries aftermarket service capabilities provide continued business opportunities outlook 2021 headwinds experienced year continue impact business experienced approximately 20 decline bookings compared period 2019 less impact revenue declined approximately 5 compared period 2019 anticipate pressure revenue year decline approximately 4 7 2021 result lower bookings 2020 resulting lower customer backlog enter 2021 despite effects however expect maintain adequate liquidity next 12 months manage current market environment continue actively monitor potential impacts covid19 related events credit markets order maintain sufficient liquidity access capital throughout 2021 future results operations forwardlooking statements contained annual report including mda involve number risks uncertainties particular statements regarding goals strategies new product introductions plans cultivate new businesses future economic conditions revenue pricing gross profit margin costs capital spending expected cost savings transformation realignment programs global economic political risk depreciation amortization research development expenses potential impairment assets tax rate pending tax legal proceedings future results operations may also affected employee incentive compensation including annual program amount type valuation sharebased awards granted well amount awards forfeited due employee turnover addition various important factors discussed number factors could cause actual results differ materially expectations see risks described item 1a risk factors well section titled “forwardlooking information subject risk uncertainty” annual report bookings 34116 million 2020 booking represents contract certain circumstances modified canceled include varying lengths time booking time revenue recognition guarantee bookings result comparable revenues otherwise indicative future results december 31 2020 17015 million fixedrate senior notes outstanding expect interest expense 2021 modestly higher compared amounts incurred 2020 results operations may also impacted unfavorable foreign currency exchange rate movements see “item 7aitem 7 managements discussion analysis financial condition results operations overview november 1995 company merged durametallic corporation global manufacturer mechanical seals sealing systems terms merger agreement duriron acquired durametallic issuance approximately 535 million shares taxfree exchange common stock durametallics shareholders acquisition valued 150 million merger agreement accounted pooling interests method accounting requires financial data presented report restated current prior periods see note 3 consolidated financial statements additional discussion acquisition net sales earnings record levels 1995 due strong capital spending companys process industries customers compared 1994 restated net sales increased 157 5327 million restated net earnings increased 438 351 million 142 per share excluding merger transaction expenses 44 million merger durametallic accretive earnings 05 per share 1995 excluding transaction expenses financial condition company remained strong merger reflected debt ratio 169 cash balance 194 million december 31 1995 results operations net sales 1995 5327 million record level ninth consecutive year reflecting increases 157 4605 million 1994 263 4218 million 1993 increase sales 1995 reflects strong capital spending global markets served company particularly north america europe asiapacific companys sales mix contains major project activity high levels maintenance replacement orders addition strengthening european currencies us dollar moderate price increases strategic acquisitions favorably impacted reported net sales growth 1995 acquisitions favorably impacting 1995 sales durametallics acquisition pacseal manufacturer mechanical seals located burr ridge illinois august 1995 durirons acquisitions sereg vannes manufacturer automatic control valves located thiers france may 1994 sales compared 1993 reflected stronger capital spending north american asian markets recovering european economy sales 1993 unfavorably impacted weakness international marketplace period addition 1994 acquisition mecair spa manufacturer valve actuators located milan italy sereg vannes contributed 1994 sales growth incoming business 1995 5552 million record level 191 previous years record 4664 million 1994 320 4205 million 1993 1995 incoming business volume reflected aggressive capital spending worldwide process industries strengthening european currencies us dollar moderate price increases impact aforementioned acquisitions asiapacific incoming business doubled european incoming business increased 30 particularly strong throughout 1995 strong incoming business 1995 resulted ending backlog 1014 million december 31 1995 increase 232 million 1994 ending backlog 782 million international subsidiary contributions consolidated net sales historic high 334 1995 compared 305 254 1994 1993 respectively majority international sales distributed companys international subsidiaries export sales united states 271 million 1995 compared 271 million 370 million 1994 1993 respectively export sales unusually high 1993 due shipment malaysian liquified natural gas project companys valtek incorporated subsidiary total net sales international customers percentage net sales record 385 1995 compared 364 1994 341 1993 improvement international sales reflects strength asiapacific european markets 1995 strengthening european currencies acquisitions sereg vannes mecair company expects percent international sales contributions consolidated net sales increase future years management continues strategic emphasis international sales market development asiapacific region gross profit margins 404 1995 compared 403 408 1994 1993 respectively 1995 gross profit margin favorably impacted moderate price increases improvements burden absorption related higher levels plant utilization continuing positive effects cost reduction productivity improvement programs throughout company partially offsetting onetime startup problems related transition training issues installation new computer system valtek international springville utah resulted unfavorable variances 15 million third quarter 1995 valteks fourth quarter 1995 gross profit margin historical average level valteks customer oriented reengineering program supported new computer system favorable future impact gross profit margin 1993 gross profit margin unusually high due positive impact planned reduction inventories favorably impacted lifo inventory pool resulting earnings 08 per share pricing throughout three year periods competitive especially within sealing systems automatic control valve businesses expected remain competitive company believes emphasis becoming low total cost producer continued emphasis improving customer service favorable impact gross profit margin future selling administrative expenses percent net sales 258 1995 compared 272 1994 1993 respectively leveraging selling administrative expense percent net sales 1995 compared 1994 planned selling administrative expense dollars increased 1995 1994 due continued development growth international markets especially asiapacific strength european currencies us dollar acquisitions pacseal sereg vannes impact general wage increases selling administrative expense dollars increased 1994 1993 due predominately consolidation mecair sereg vannes expense excluding 1994 acquisitions selling administrative expenses 1994 relatively flat 1993 without durametallic slightly durametallic company continues invest resources development growth international operations increased selling service costs expense shortterm profits programs consistent companys longerrange goals company expects leverage selling administrative expenses percent net sales 1996 continued emphasis cost containment research engineering development expenses including research development expenses reported note 15 consolidated financial statements 150 million 1995 compared 149 million 139 million 1994 1993 respectively spending level 1995 reflects companys continued investment new products production processes research engineering development percent net sales declined three year period planned reduction expenses manufacturing engineering majority companys transition focused factory cellular programs implemented company believes continued investment research engineering development provide important new products processes benefit customers shareholders future years expense 28 million 1995 compared 20 29 million 1994 1993 respectively increase expense 1995 reflects higher levels incentive compensation expense related companys long short term incentive plans since company achieved record financial results exceeded goals addition severance costs associated personnel reductions companys european operations recognized 1995 1994 expense included unusually high foreign currency losses offset part gain sale durametallic service center facility 1993 expense included 14 million writeoff impaired goodwill durametallic merger transaction expenses 50 million pretax recognized 1995 result merger durametallic approximately 33 million expense nontax deductible related financial advisory legal accounting printing related services associated merger remaining expense 17 million tax deductible included severance fees certain durametallic management elected retire executive severance agreements assumed company became effective change control company discounts postretirement health care pension obligations using 75 interest rate used discount durametallics postretirement health care obligation reduced 1995 80 rates used discount durirons postretirement health care pension obligations reduced 80 1993 addition company 1994 modified postretirement health care benefit pension plans net effect aforementioned plan changes increased accumulated pension postretirement health care obligations less 5 aggregate effective january 1 1993 company adopted principles sfas 112 employers accounting postemployment benefits compliance standard resulted cumulative tax loss 9 million 04 per share represents accumulated postemployment benefit obligation january 1 1993 compliance sfas 112 impact 1995 1994 earnings expected materially impact future earnings effective tax rate 388 1995 compared 368 399 1994 1993 respectively 1995 tax rate reflects unfavorable impact nontax deductible merger transaction expenses effect increasing tax rate 23 1995 rate favorably impacted utilization tax loss carryforwards generated within companys european asiapacific operations 1994 rate included favorable impacts fourth quarter liquidation wholly owned foreign entity utilization tax loss carryforwards generated within companys european operations resolution multiyear state tax issue 1993 tax rate reflects losses companys foreign operations due weak business conditions nontax deductible goodwill writtenoff durametallic record net earnings 1995 reflect third consecutive year earnings improvement excluding merger fees 44 million tax net earnings 1995 improved 438 351 million 142 per share compares 244 million 99 per share 178 million 72 per share 1994 1993 respectively merger durametallic accretive earnings 05 per share 1995 excluding transaction expenses 09 per share 1994 including merger transaction fees record net earnings still achieved 307 million 124 per share increase earnings resulted improved global business conditions led stronger north american european profits generation profits asiapacific operations companys focus controlling costs excluding impact merger durametallic earnings increased 539 264 million previously reported 1994 earnings 172 million operating costs effectively leveraged sales growth 155 durametallics earnings increased 197 87 million previously reported 1994 earnings 72 million 1994 earnings growth reflected general economic improvements 1993 earnings depressed due weakness european economy capital resources liquidity companys capital structure consisting longterm debt deferred items shareholders equity continues enable company finance short longrange business objectives december 31 1995 longterm debt 169 capital structure compared 158 142 december 31 1994 1993 respectively increase longterm debt 1995 1994 percent capital structure absolute dollars resulted acquisition pacseal partially funded external borrowings partially offset scheduled debt repayments return average net assets 115 including merger transaction expenses 130 excluding merger transaction expenses compares 104 1994 81 1993 1995 return average shareholders equity 166 190 excluding merger transaction expenses compared 145 1994 113 1993 change returns resulted improvements profitability three year period resulting strong business conditions focus cost management continues focus improving performance areas capital expenditures 1995 133 million compared 144 million 121 million 1994 1993 respectively 1995 expenditures invested equipment process technology enable company progress toward goal highest quality lowest total cost producer market addition manufacturing equipment 1994 expenditures included improved information systems associated valteks customer oriented reengineering program planned 1996 expenditures expected approximately 175 million invested new replacement products international market development general manufacturing equipment upgrades cash equivalents 194 million compared 196 million 263 million december 31 1994 1993 respectively cash flow operations past three years enabled company fully fund capital expenditures debt repayments dividend payments partially fund acquisitions pacseal sereg vannes mecair cash excess current requirements invested highgrade shortterm securities cash amounts available borrowing arrangements adequate fund operating needs capital expenditures coming year companys liquidity position reflected current ratio 25 1 december 31 1995 compares 26 1 27 1 december 31 1994 1993 respectively working capital increased 1350 million 1995 compared 1144 million 1088 million 1994 1993 respectively working capital percent net sales 253 compared 248 258 1994 1993 respectively item 8item 7 managements discussion analysis managements discussion analysis appears pages 14 17 1997 annual report shareholders incorporated herein reference item 8item 7 management’s discussion analysis financial condition results operations following discussion analysis provided increase understanding read conjunction accompanying consolidated financial statements notes see “item 1a risk factors” “forwardlooking information” sections discussion risks uncertainties assumptions associated statements unless otherwise noted amounts discussed herein consolidated executive overview established leader fluid motion control business strong portfolio pumping systems valves sealing solutions automation services support power oil gas chemical process markets products mission critical movement control protection fluids customers’ critical processes whether refinery power generation facility transportation pipeline business model heavily influenced capital spending industries placement new products service worldwide installed base products another important source revenue products expected ensure maximum operating time many key industrial processes aftermarket business generally higher margin business key component profitable growth experienced steadily improving conditions 2004 2005 several core markets including oil gas chemical numerous general industries rise continued elevation price crude oil natural gas particular spurred capital investment oil gas market resulting many new projects expansion opportunities although feedstock costs increasing chemical market greater global demand allowing companies pass pricing strengthen global market opportunity increase installed base new products drive recurring aftermarket business future years critical byproduct market conditions six key strategies well communicated throughout business one key strategies globalization business see “our strategies” section management’s discussion analysis discussion six key strategies currently approximately 13000 employees 56 countries continue implement new quick response centers “qrcs” better positioned near customers possible service support means capture important aftermarket business markets improved see corresponding growth business much nontraditional areas world new oil gas reserves discovered customers seeing rapid growth asia china providing source significant project growth strategy place increase presence china capture aftermarket business current installed base well new projects process plant expansions along ensuring local capability sell install service equipment remote regions becomes imperative continuously improve global operations global supply chain capability expanded meet global customer demands ensure quality timely delivery products significant efforts underway reduce supply base drive processes across divisions find areas synergy cost reduction addition improving supply chain management capability insure meet global customer demands continue focus improving ontime delivery quality reducing warranty costs across global operations focused continuous improvement process “cip” initiative goal cip initiative maximize service fulfillment customers ontime delivery reduced cycle time quality highest internal productivity program key factor margin expansion plans recent developments sec matters february 4 2004 received informal inquiry sec requesting voluntary production documents information related february 3 2004 announcement would restate financial results nine months ended september 30 2003 full years 2002 2001 2000 june 2 2004 advised sec issued formal order private investigation issues regarding restatement issues arise investigation may 31 2006 informed staff sec concluded investigation without recommending enforcement action us february 7 2006 received subpoena sec regarding goods services certain foreign subsidiaries delivered iraq 1996 2003 united nations oilforfood program investigation includes review whether inappropriate payments made iraqi officials violation foreign corrupt practices act investigation includes periods prior well subsequent acquisition foreign operations involved investigation may subject liabilities violations found regardless whether relate periods subsequent acquisition addition one foreign subsidiary’s operations cooperating foreign governmental investigation site’s involvement united nations oilforfood program cooperation included responding investigative trip foreign authorities foreign subsidiary’s site providing relevant documentation authorities answering questions unable predict foreign authorities pursue matter future believe sec foreign authority investigating companies actions arising united nations oilforfood program process reviewing responding sec subpoena assessing implications foreign investigation including continuation thorough internal investigation early stages included include detailed review contracts iraqi government period question certain payments associated therewith additionally continue conduct interviews employees knowledge contracts payments question early phases internal investigation result unable make definitive determination whether inappropriate payments made accordingly unable predict ultimate outcome matter continue fully cooperate sec foreign investigations progress point incomplete accordingly sec andor foreign authorities take enforcement action regard investigations may required pay fines consent injunctions future conduct suffer penalties could potentially materially impact business financial statements cash flows legal matters march 14 2006 shareholder derivative lawsuit filed purportedly behalf federal court northern district texas lawsuit names defendants c scott greer former chairman president chief executive officer renée j hornbaker former vice president chief financial officer current board members hugh k coble george haymaker jr lewis kling william c rusnack michael f johnston charles rampacek kevin e sheehan diane c harris james rollans christopher bartlett named nominal defendant based primarily certain purported misstatements alleged federal securities case filed september 30 2003 described note 13 consolidated financial statements included annual report plaintiff asserts claims defendants breaches fiduciary duty plaintiff alleges purported breaches fiduciary duty occurred 2000 2004 plaintiff seeks behalf us unspecified amount damages disgorgement mr greer ms hornbaker salaries bonuses restricted stock options recovery attorneys’ fees costs strongly believe suit improperly filed intend file motion seeking dismissal case additional information regarding pending securities class action derivative lawsuits see “item 3 legal proceedings” march 2006 initiated process determine compliance posture respect us export control laws regulations upon initial investigation appears product transactions technology transfers may technically compliance us export control laws regulations require review assistance outside counsel currently involved systematic process conduct review believe take approximately 18 months complete given complexity export laws scope investigation potential violations us export control laws regulations identified may result civil criminal penalties including fines andor penalties review issue ongoing currently unable determine full extent potential violations nature amount potential penalties might subject future given resolution matter uncertain time able reasonably estimate maximum amount liability could result final resolution matter cannot currently predict whether ultimate resolution matter material adverse affect business including ability business outside us financial condition irs audits recently concluded internal revenue service “irs” audit us federal income tax returns years 1999 2001 based audit work irs issued proposed adjustments increase taxable income 1999 2001 128 million deny foreign tax credits 24 million aggregate tax liability resulting proposed adjustments offset foreign tax credit carryovers refund claims therefore result material future cash payment pending final review joint committee taxation anticipate review completed december 31 2006 effect adjustments current deferred taxes reflected previously filed consolidated financial statements applicable periods 2006 irs commence audit us federal income tax returns years 2002 2004 expect upcoming irs audit similar scope recently completed examination upcoming audit may broader furthermore preliminary results audit 1999 2001 indicative future result audit 2002 2004 audit 2002 2004 may result additional tax payments us amount may material known irs audit finalized course irs audit 1999 2001 identified record keeping material internal control weaknesses caused us incur significant expense substantiate tax return items address information document requests made irs expect incur similar expense respect upcoming irs audit years 2002 2004 irs issued notice inadequate records years 1999 2001 may issue similar notice years 2002 2004 irs agreed assess penalties inadequacy records respect years 1999 2001 assurances made irs seek assess penalties types penalties respect years 2002 2004 penalties could result material impact consolidated results operations additionally record keeping issues noted may result future us state local tax assessments tax penalties interest could material impact consolidated results operations management changes employee matters past two years following resignations several senior executives hired lewis kling chief operating officer subsequently appointed president chief executive officer hired mark blinn vice president chief financial officer richard j guiltinan jr controller chief accounting officer deborah k bethune vice president taxes thomas l pajonas president flow control division linda p jojo vice president chief information officer joseph r pinkston vice president human resources appointed mark dailey chief compliance officer paul w fehlman treasurer created staffed new positions responsible accounting policy procedures financial reporting tax compliance internal audit promote continuity senior management march 2005 board directors approved transitional executive security plan provides cash stockbased incentives key management personnel remain employed us near term result plan recorded additional compensation expenses 2005 26 million expense approximately 2 million recorded 2006 see “transitional executive security plan” “item 11 executive compensation” annual report detailed discussion plan divestitures effort better align business portfolio core strategic objectives first quarter 2005 made definitive decision divest general services group “gsg” noncore service operations provide online repair thirdparty services engaged investment banking firm commence marketing result reclassified group discontinued operations first quarter 2005 sales gsg 103 million 116 million 2005 2004 respectively total assets march 31 2005 ascribed gsg inclusive approximately 12 million allocated goodwill approximately 60 million performed impairment analysis gsg march 31 2005 held sale basis allocation goodwill recognized impairment charge approximately 6 million first quarter 2005 initial estimated fair value march 31 2005 based upon investment banker’s valuation gsg’s estimated fair value well initial bids received potential purchasers year progressed number potential buyers diminished one potential purchaser business underperformed due pending sale result lone bidder reduced initial offer accordingly recognized additional impairment charges aggregating approximately 24 million throughout 2005 total impairment charges 2005 approximately 30 million gsg sold december 31 2005 approximately 16 million gross cash proceeds subject final working capital adjustments remain negotiation retaining approximately 12 million net accounts receivable used approximately 11 million net cash proceeds reduce outstanding indebtedness business overview company believe world leading manufacturer aftermarket service provider comprehensive flow control systems develop manufacture precisionengineered flow control equipment pumps valves seals critical service applications require high reliability use manufacturing platform offer broad array aftermarket equipment services installation advanced diagnostics repair retrofitting conduct operations three business segments • flowserve pump division “fpd” engineered pumps industrial pumps related services • flow control division “fcd” industrial valves manual valves control valves nuclear valves valve actuators controls related services • flow solutions division “fsd” precision mechanical seals related services product portfolio built 50 wellrespected brand names durco idp valtek durametallic believe comprehensive industry sell products services 10000 companies including world’s leading engineering construction firms original equipment manufacturers “oems” distributors end users markets products services used several distinct industries oil gas chemical power generation water treatment several industries collectively refer general industries demand products depends level new capital investment maintenance expenditures customers level capital expenditures customers depends turn general economic conditions industries affect profitability level capital expenditures customers also depends liquidity whether cash flows operations access financing oil gas industry represented approximately 35 32 sales 2005 2004 respectively high petroleum prices generally spur additional investment upstream petroleum projects high prices 2005 2004 contributed increase bookings projects particularly asia africa middle east south america contrast effect upstream petroleum projects high crude oil prices often reduce demand products services crude oil refineries natural gas processors seek take advantage favorable refining margins operating high levels capacity utilization deferring maintenance clean fuel regulations particularly us led project business crude oil refiners profitability projects however typically lower maintenance related products services generally large projects obtained competitive bidding process high oil gas prices generally good oil gas customers generally adverse chemical companies since crude oil natural gas critical inputs manufacturing products 2005 price natural gas us increased almost 50 compared 2004 increased 25 2004 compared 2003 significantly affected chemical customers faced high feed stock costs however greater global demand allowing companies pass pricing strengthen global market demand chemicalbased products appears increasing expect see improvement demand products chemical industry’s improved profitability could spur new investment parts world asia would expect benefit investments well 2005 2004 chemical industry represented approximately 19 18 respectively sales increased natural gas prices also diminished profitability many power generators recent years made significant investments power plants generate electricity natural gas able recover portion higher costs rate increases liquidity still challenged due overinvestment power facilities recent years however number nuclear power generators planning significant maintenance activities seen increase orders area positive contributor 2005 orders sales earnings addition several coalfired power plants planned us actively pursuing flow control opportunities projects revenue opportunity products coalfired plant typically three times natural gas power plant power industry represented approximately 14 16 sales 2005 2004 respectively worldwide demand fresh water treatment continues create demand new facilities upgrades existing systems many require products offer especially pumps believe global leader desalination market important source fresh water mediterranean area middle east significant market pump valve actuation products 2005 2004 water market represented approximately 7 6 respectively sales general industries represents variety different businesses including mining pulp paper food beverage steel heating ventilation airconditioning “hvac” none individually represents 5 total sales 2005 2004 general industries represented approximately 25 28 sales 2005 2004 respectively started see improvement businesses 2005 notably mining steel experienced appeared troughs 2004 industries food beverage hvac relatively stable customers include engineering contractors oems end users distributors sales engineering contractors oems typically large project orders certain sales distributors project orders generally lead times excess three months project orders provide product customers either directly indirectly new construction projects facility enhancement projects quick turnaround business also refer book ship business defined orders received customer booked shipped within three months receipt typically standard products parts services three segments generates type business use manufacturing platform offer broad array aftermarket equipment services installation advanced diagnostics repair retrofitting timelines delivery quality proximity service centers important considerations aftermarket products services geographic regions positioned provide quick response customers traditionally relied us rather competitors aftermarket products relating highly engineered customized products however aftermarket standard products competitive price competition generally increasing price competition tends significant oems aftermarket services generally increasing sale aftermarket products services benefit large installed base pumps seals valves require maintenance repair replacement parts reporting trends product type customer type business type based upon analytical review individual operational results knowledge respective businesses formally track revenues categories trends analyzed secondary reporting mechanism derived directly general ledger system strategies overarching objective grow position integrated solutions provider flow control industry objective includes continuing sell products building existing sales relationships marketing power portfolio products also includes delivering specific end user solutions help customers attain business goals ensuring maximum reliability decreased cost ownership sustainable profitable growth driven using six strategies communicated throughout company strategies include organic growth globalization process excellence portfolio management organizational capability technologyinnovation key elements strategies outlined organic growth organic growth key longterm initiative grow top line revenues goal develop launch new products solutions well customer partnering initiatives maximize capture product’s total life cycle one pump valve seal companies offer customers differentiated option products services also offer additional option includes combination products solution support packages across portfolio combined pump seal end user teams particularly successful delivering new solution programs increasing organic aftermarket growth seek capture additional market share creating “winwin” opportunities us customers sourcing maintenance alliance programs pursuant provide agreed portion customers’ parts servicing needs customer alliances enable us develop longterm professional relationships customers serve effective platform introducing new products services customers generating additional sales additionally seek continue review substantial installed pump seal valve base means expand aftermarket services business customers increasingly use thirdparty aftermarket service providers like us reduce fixed costs improve profitability aftermarket services business provides us steady source revenues cash flows higher margins original equipment sales allows us frequent contact customers building knowledge customer needs providing crossselling opportunities building established presence extensive qrc global network provide immediate parts service technical support required effectively manage win aftermarket business installed base new product service development driven product management organization working concert engineering operations sales goal increase revenues new products services developed last five years new product development process made significant progress demonstrating pipeline new modified products services expect research development costs increase beginning 2006 support goal increased revenues new products services globalization initiative business several facets include • expanding global presence capture business outside traditional geographic market areas china russia south america middle east africa • utilizing low cost sourcing opportunities remain competitive global economy • attract retain global intellectual capital required support global growth plans new geographical areas believe attractive oem opportunities international markets particularly south america middle east asia pacific intend continue utilize global presence penetrate markets recent successes markets include contracts worth 40 million supply pumps related equipment nanhai petrochemicals project china contracts worth 12 million shenhua coal liquefaction project china aftermarket services business seek strategically add sites customers customer base grow order provide customers rapid response fast delivery onsite field repair focused shifting appropriate certain manufacturing engineering functions increasing supply materials components lower cost areas india china mexico south america eastern europe 2005 areas accounted approximately 20 direct material spending compared approximately 5 2001 also focused utilizing supply chain management reduce procurement costs including expanding purchases reverse auctions consolidating procurement goods better value addition expanded china presence additional sales supply chain professionals new management growth plans include acquisition development new capabilities enhance penetration products china oil gas power projects well provide base export products process excellence process excellence initiative encapsulates ongoing programs drive increased customer fulfillment lowest cost initiative includes • driving improved customer fulfillment across company metrics ontime delivery cost reduction quality cycle time reduction warranty reduction • continuing develop culture continuous improvement delivers maximum productivity cost efficiencies implements consistent processes across company ensures future success integrated company seek increase operational efficiency cip initiative utilizes tools six sigma methodology lean manufacturing constraint management improve quality processes reduce product cycle times lower costs recognizing employees valuable resource achieving operational excellence goals instituted broad cip training date 900 employees cip trained certified “green belts” “black belts” deployed cip projects throughout company result cip initiatives developed implemented processes reduce engineering manufacturing process cycle time improve ontime delivery service response time lower inventory levels otherwise reduce costs also experienced success sharing applying “best practices” achieved one businesses deployed another flowserve business continue look opportunities apply cip tools improved performance seek continue improve working capital utilization particular focus improving management accounts receivable inventory see discussion “liquidity capital resources” section management’s discussion analysis portfolio management continued management portfolio products services critical company’s success continue pursue selective acquisitions rationalize portfolio products services ensure alignment customers shareholders intend continue evaluate acquisition investment opportunities seek broaden product portfolio operational capabilities expedite expansion faster growing asian african south american markets regard additional investment thompsons kelly lewis pty ltd “tkl” march 2004 strengthened product offering mining industry broadened manufacturing capabilities asia pacific region includes china japan singapore korea india australia new zealand thailand see discussion tkl acquisition “our results operations” section management’s discussion analysis note 3 consolidated financial statements included annual report seeking divest operations consider noncore overall business operations serve core customer base provide limited synergies businesses example november 2004 sold government marine business unit “gmbu” december 2005 sold gsg see discussion discontinued operations note 2 consolidated financial statements included annual report organizational capability believe several elements building enhanced organizational capability • development deeper talent pool training crossdivisional functional assignments allows us flexibility grow expand organization fill positions internally believe career learning development critical building improved global organizational capability future • need capture intellectual capital workforce customers share within company considered competitive advantage • building organization improved compliance mandatory recommended processes procedures implementing information systems ensure compliance backbone culture move forward multiyear agreement completed 2005 distribute electronic learning packages multiple languages flowserve code business conduct compliance programs globally throughout company expanded include export compliance regulatory compliance us foreign well programs around harassment employee behaviors emphasis ethics compliance significantly strengthened 2005 core organizational capability new chief compliance officer 2005 installed learning management system “lms” allowed development tracking delivery electronic learning systems system allows us track employees’ compliance policy understanding electronic means lms also permits online enrollment customer training means share improve intellectual capital technologyinnovation infusion new product technologies become core requirement look improve development new products services internal goal improve percentage new products function revenue next five years investment technology continue increase 2006 crossdivisional technology team place ensure technologies developed available wide use across divisions maximize return investments development intelligent pumping system showcases technologies available maximize uptime proactively identify anomalies become major issues sponsor national energy summit 2005 brought together major companies pursuit energy management initiatives technologies available decrease energy usage customers infused new services customers results operations result selling gsg included fcd december 2005 gmbu fpd business november 2004 treated dispositions discontinued operations reclassified financial information reported periods presented loss discontinued operations net tax increased 327 million 2005 compared loss 17 million 2004 increase due primarily impairment gsg fully discussed note 2 consolidated financial statements included annual report sales 2005 increased 1645 million 65 excluding currency benefits approximately 8 million compared 2004 increase sales attributable three segments increases due primarily continued growth oil gas industry positively impacted flowserve pump flow solutions divisions continued recovery strengthening major valve markets sales 2004 increased 1598 million 71 excluding currency benefits approximately 114 million compared 2003 currency benefits result strengthening international currencies particularly euro us dollar increase sales includes new sales 352 million resulting acquisition tkl march 2004 increased activities core markets served including oil gas power chemicals strong growth asia pacific region sales international customers including export sales us approximately 65 sales 2005 compared 68 sales 2004 60 sales 2003 sales asia pacific region approximately 14 9 2005 2004 2003 respectively sales europe middle east africa “ema” approximately 39 43 40 2005 2004 2003 respectively excluding currency translation impacts believe sales international customers continue increase percentage total sales believe highest revenue growth opportunities asia south america africa bookings backlog define booking receipt customer order contractually engages us perform activities behalf customer regard manufacture service support amounts presented include bookings related discontinued operations 954 million 1368 million 1595 million 2005 2004 2003 respectively bookings 2005 increased 3965 million 157 excluding currency benefits approximately 10 million discontinued operations compared 2004 bookings tkl acquired march 2004 increased 288 million 2005 compared 2004 increased bookings also attributable improved bookings ema flowserve pump division improved bookings asia pacific flowserve pump flow control divisions establishment customer alliances resulted increased bookings flow solutions division described bookings also positively impacted continued strength oil gas industry recovery major valve markets bookings 2004 increased 1416 million 63 excluding currency benefits approximately 115 million discontinued operations compared 2003 bookings tkl acquired march 2004 405 million 2004 increased bookings due increases oil gas industry one primary served markets spurred increased crude oil prices backlog represents accumulation uncompleted customer orders amounts presented include backlog related discontinued operations 0 112 million 341 million 2005 2004 2003 respectively backlog december 31 2005 increased 2355 million 285 excluding negative currency effects approximately 67 million discontinued operations compared 2004 primarily attributable strong bookings performance 2005 well increase large oil gas project orders ema flowserve pump division end 2006 expect ship 94 backlog december 31 2004 decreased 145 million 18 excluding currency benefits approximately 33 million compared 2003 decrease due improved customer delivery time gross profit gross profit margin gross profit margin 320 2005 increased compared 2004 gross profit margin 2005 positively impacted operational improvements attributable cip initiative resulted cost savings higher mix aftermarket business generally higher margin increased sales favorably impacts absorption fixed costs additionally charge cost sales increase reserve obsolete slow moving inventory significantly lower 2005 charge recorded 2004 favorable impact gross profit margin gross profit margin 301 2004 decreased slightly compared 2003 gross profit margin 2004 positively impacted operational improvements attributable cip initiative resulted cost savings synergies higher mix aftermarket business generally higher margin offset significant charge cost sales increase reserve obsolete slow moving inventory flow control division discussed 141 million increase incentive compensation compared 2003 selling general administrative expense “sga” three years presented least 55 sga consisted employeerelated costs includes payroll benefits incentive payments least 10 sga consisted professional fees includes audit legal contractor consulting fees sga 2005 increased 716 million 120 excluding currency effects approximately 3 million compared 2004 increase sga due primarily following employeerelated costs 385 million including sales commissions incentive compensation equity incentive programs arising improved performance higher stock price 111 million severance transition expenses 81 million modification stock options expiration terms former executives current retired employees board directors 72 million see discussion stock modifications note 8 consolidated financial statements included annual report increase sga also attributable increases professional fees resulting restatement 2002 2003 first quarter 2004 includes 241 million increase audit fees 138 million increase professional fees related tax consulting accounting internal audit assistance increases professional fees partially offset 155 million decrease legal fees expenses 68 million decrease costs incurred related section 404 compliance sga 2004 increased 644 million 126 excluding currency effects approximately 21 million compared 2003 increase due 299 million increase annual incentive compensation 217 million increase professional consulting fees related primarily restatement consolidated financial results 2003 prior years 2004 2003 financial statement audits compliance section 404 integration restructuring expense integration restructuring expenses relate integration invensys’ flow control division “ifc” flow control division conjunction acquisition ifc 2002 initiated restructuring program designed reduce costs eliminate excess capacity closing existing facilities reducing sales related support personnel incur integration restructuring expenses 2005 2004 largely completed restructuring integration programs related ifc 2003 except final severance payments exit activities primarily related european integration activities approximately 40 million 07 million integration restructuring expenses respectively year ended december 31 2003 included discontinued operations consolidated statements operations related gsg facilities affected restructuring program see note 7 consolidated financial statements included annual report discussion integration restructuring expenses operating income operating income 2005 increased 286 million 177 compared 2004 primarily result increases gross profit margin partially offset increases sga discussed currency nominal effect 2005 operating income 2004 decreased 56 million 36 excluding currency benefits approximately 14 million compared 2003 discussed sga costs increased 2004 result increased incentive compensation increased professional consulting fees increase sga costs partially offset reduction integration restructuring costs interest expense loss repayment debt interest expense decreased 63 million 2005 compared 2004 primarily result refinancing 1225 senior subordinated notes proceeds borrowings new credit facilities see discussion refinancing “liquidity capital resources” section management’s discussion analysis note 11 consolidated financial statements included annual report interest expense decreased 33 million 2004 due primarily lower prevailing interest rates reduced debt levels associated optional scheduled debt paydowns since acquisition ifc well lower borrowing interest rate spreads associated renegotiation revolving line credit april 2002 december 31 2005 approximately 62 debt fixed rates including effects 410 million notional interest rate swaps interest income increased 15 million 2005 compared 2004 due significantly higher average cash balances interest income decreased 22 million 2004 compared 2003 due lower average cash balances 2005 incurred charge 277 million result debt repayments extinguishment related refinancing expenses incurred result refinancing fully described “liquidity capital resources” section management’s discussion analysis 2000 credit facilities described note 11 consolidated financial statements included annual report required use proceeds asset sales new debt issuance among things pay principal amount outstanding credit facilities addition mandatory repayments paid optional prepayments principal excess cash generated operations 2004 incurred charge 27 million debt repayments extinguishment related accelerated writeoff unamortized prepaid financing fees resulting 1600 million optional debt prepayments 1679 million mandatory debt prepayments triggered gmbu divestiture 229 million issuance european investment bank “eib” credit facility 850 million receivables securitization 600 million 2003 incurred losses 13 million related accelerated writeoff unamortized prepaid financing fees resulting 1631 million optional debt prepayments throughout year expense net expense net decreased 57 million 2005 expense 141 million 2004 due primarily 26 million decrease unrealized losses forward contracts foreign currency transaction losses expense net increased 97 million 2004 loss 44 million 2003 due primarily 92 million increase unrealized losses forward contracts tax expense tax rate 2005 effective tax rate differed federal statutory rate 35 primarily due extraterritorial income “eti” exclusion benefits 19 million state income tax benefits 27 million resulting primarily net reductions valuation allowances 127 million net tax impact foreign operations 2004 effective tax rate differed federal statutory rate 35 primarily due eti exclusion benefits 49 million 220 million net tax impact foreign operations resulting primarily approximately 85 million foreign earnings repatriation pay us debt 2003 effective tax rate differed federal statutory rate 35 primarily due eti exclusion benefits 25 million changes valuation allowances 55 million primarily relating foreign tax credits net impact non us operations 28 million operations european asian countries provide various tax incentives 2003 granted indefinite preferential tax rate approximately 10 switzerland certain sales marketing activities 2004 received 5year 10 tax rate singapore income excess prescribed base amount generated certain regional headquarter activities subject certain employment investment requirements india granted tax exemptions profits derived export sales certain manufacturing operations prescribed areas period 10 years indian tax exemptions expire 2007 2011 respectively october 22 2004 american jobs creation act 2004 “2004 act” signed law creating temporary incentive us multinationals repatriate accumulated income earned outside us effective tax rate 525 versus us federal statutory rate 35 2004 repatriated approximately 46 million part 85 million discussed pursuant dividend reinvestment plan described 2004 act recognized lower tax rate dividends financial statements due uncertainties surrounding interpretation 2004 act extent uncertainty favorably resolved future reporting period benefit associated dividends recognized period 2004 act also provides phase existing eti exclusion foreign export sales viewed inconsistent international trade protocols set european union phase provides benefit otherwise qualifying export sales 2005 2006 limited approximately 80 60 respectively replacement loss eti export incentive 2004 act provides deduction income qualified domestic production activities phased 2005 2010 manufacturing deduction impact 2005 tax rate impact future tax rate yet quantified guidance financial accounting standards board staff position fas 1091 “application fasb statement 109 tax deduction qualified production activities provided american jobs creation act 2004” tax deduction qualified production activities treated special deduction described statement financial accounting standards “sfas” 109 “accounting income taxes” special deduction reported period deduction claimed tax return may 17 2006 tax increase prevention reconciliation act 2005 signed law creating exclusion us taxable income certain types foreign related party payments dividends interest rents royalties prior 2006 subject us taxation exclusion applies years 2006 2008 may apply certain related party payments expect effective tax rate 2006 similar lower 2005 due lower levels us income inclusions low taxed foreign subsidiaries effective tax rate based upon current earnings estimates future taxable earnings domestic international location estimated impact tax planning strategies changes factors including ability utilize foreign tax credits net operating losses results tax audits could impact tax rate future periods december 31 2005 foreign tax credits approximately 213 million expiring 2010 2015 recorded valuation allowances additionally recorded us net deferred tax assets 1118 million relate net operating losses tax credits deductible temporary differences available reduce taxable income future periods definite expiration able utilize portion credits losses effective tax rate would negatively impacted net earnings per share income continuing operations increased 203 million 2005 462 million 082 per diluted share primarily result factors discussed regarding operating income net earnings declined 2005 compared 2004 primarily result impairment charges 301 million related gsg included discontinued operations fully discussed note 2 consolidated financial statements included annual report earnings per share 2005 negatively impacted 17 higher average diluted share count income continuing operations decreased 246 million 2004 259 million 046 per diluted share addition factors discussed regarding operating income 2004 income continuing operations also impacted increases effective tax rate compared 2003 losses derivative contracts 2005 2004 increases average diluted shares reflect issuance stock awards dilutive effects increases stock price comprehensive income expense comprehensive income declined expense 637 million 2005 income 151 million 2004 decline primarily result decrease 563 million currency translation adjustments compared 2004 decrease due primarily devaluation euro british pound versus us dollar 2005 minimum pension liability expense 319 million 2005 increased compared expense 82 million 2004 primarily result decreased discount rate comprehensive income declined 151 million 2004 compared 2003 decrease primarily result decrease 365 million currency translation adjustments compared 2003 decline currency translation adjustment income due primarily devaluation us dollar versus euro british pound 2004 addition minimum pension liability decreased 167 million compared 2003 primarily result slight decrease pension plan asset returns business segments conduct business three business segments represent major product areas evaluate segment performance allocate resources based segment’s operating income excluding special items restructuring integration costs related ifc acquisition believe special items indicative efforts integrate ifc business reflect ongoing business results believe investors users financial statements better evaluate analyze historical future business trends special items excluded segment’s operating income operating income special items recognized measure gaap viewed alternative better indicator gaap measures performance see note 17 consolidated financial statements included annual report discussion segments key operating results three business segments fpd fcd fsd discussed flowserve pump division segment results fpd design manufacture distribute service engineered industrial pumps pump systems replacement parts related equipment principally industrial markets fpd 27 manufacturing facilities worldwide nine located north america 11 europe four south america three asia fpd also 50 service centers either free standing colocated manufacturing facility march 2004 acquired remaining 75 interest tkl leading australian designer manufacturer supplier centrifugal pumps railway track work products steel castings result acquisition strengthened product offering mining industry broadened manufacturing capacity asia pacific region gained foundry capacity bookings 2005 increased 2334 million 174 excluding currency benefits approximately 3 million compared 2004 due increases regions ema bookings increased approximately 1392 million excluding currency effects north south america bookings increased 425 million 197 million respectively excluding currency effects due several large engineered projects asia pacific increased 331 million due primarily tkl increase also attributable continued growth oil gas industry bookings 2004 increased 740 million 61 excluding currency benefits approximately 58 million compared 2003 increase due additional bookings 405 million resulting primarily tkl increase aftermarket bookings aftermarket bookings represented 463 total fpd bookings 2004 compared 443 2003 primary served markets oil gas chemicals industries experienced growth operated near capacity levels due continued increases crude oil prices sales 2005 increased 651 million 49 excluding currency benefits approximately 4 million compared 2004 sales north south america increased 208 million 142 million respectively excluding currency benefits north america higher sales primarily attributable improvement general industrial products well parts service us canada asia pacific increased 167 million due primarily tkl 14 billion sales 2005 approximately 49 oil gas 18 power 12 water 8 chemical 13 general industries sales 2004 increased 1058 million 91 excluding currency benefits approximately 59 million compared 2003 sales improved regions active core oil gas markets water projects especially focusing desalination improved chemical markets remained strong despite increasing feedstock prices 91 increase 30 directly attributable increased sales tkl offsetting favorable sales decreased business north american water market sales 145 million lower previous year fpd selective bidding opportunities 13 billion sales 2004 approximately 43 oil gas 20 power 10 water 8 chemical 19 general industries gross profit margin increased 279 2005 compared 257 2004 243 2003 increase years primarily result increase sales favorably impacts absorption fixed costs higher mix historically profitable general industrial products services increased productivity 2004 positive effects partially offset increase incentive compensation 74 million included cost sales operating income 2005 increased 357 million 324 excluding unfavorable currency effects approximately 1 million compared 2004 increase primarily result increase gross profit margin discussed operating income 2004 increased 172 million 200 excluding currency benefits approximately 7 million compared 2003 addition increased sales gross profit margin discussed operating income also increased due 29 million operating income tkl gain 85 million involuntary conversion patterns lost fire one foundries slightly offset increase incentive compensation 74 million included cost sales discussed incremental increase incentive compensation 91 million included sga backlog 2005 increased 1798 million 312 excluding negative currency effects approximately 52 million compared 2004 increase primarily attributable strong bookings performance 2005 across regions well increase large oil gas project orders ema flow control division segment results second largest business segment fcd designs manufactures distributes broad portfolio industrial valve products including modulating finite valves actuators controls addition fcd leverages experience application knowhow offering complete menu engineered services complement expansive product portfolio fcd 4000 employees manufacturing service facilities 19 countries around world five 22 manufacturing operations located us 2005 focus execution coupled strong operational performance fcd’s key endmarkets yielded financial results prior years effort better align business portfolio core strategic objectives fcd made decision divest gsg provides online repair thirdparty services effective december 31 2005 sold assets gsg furmanite unit dallasbased xanser corporation believe divestiture allows us continue focus core enduser objectives 2005 fcd bookings increased 815 million 96 excluding currency effects approximately 3 million compared 2004 growth primarily attributable increases order volume particularly asia pacific coupled believe sustainable price increases fcd’s core endmarkets including oil gas power chemical industries bookings 2004 increased 418 million 55 excluding currency benefits approximately 45 million compared 2003 increase result strengthening chemical oil gas segments market fcd sales 2005 increased 534 million 64 excluding currency effects approximately 2 million compared 2004 recovery major valve markets began 2004 strengthened 2005 progressed drove sales increases process power valve customers sales performance 2005 reflects increase sales volume improvement worldwide power markets us chemical markets sales 2005 also reflect improvement asian russian markets 8943 million sales 2005 approximately 38 general industry sales 32 sales chemical companies 15 oil gas industry sales 15 sales power industry customers sales 2004 increased 376 million 50 excluding currency benefits approximately 43 million compared 2003 increase primarily attributable many major valve markets beginning recover several years decline increased customer demand valve products services power chemical general industrial markets helped drive 2004 sales increases 8387 million sales 2004 approximately 43 general industry sales 26 sales chemical companies 16 oil gas industry sales 15 sales power industry customers gross profit margin 319 2005 increased compared 2004 increase due efforts continuously monitor inventory levels coupled successful management aged inventory resulted charge cost sales increase reserve obsolete slow moving inventory 37 million 2005 significantly lower compared 141 million charge recorded 2004 aforementioned volume sales price increases favorable mix aftermarket sales typically higher margin positively impacted gross profit margin gross profit margin 301 2004 decreased compared 2003 resulted primarily 141 million charge cost sales increase reserve obsolete slow moving inventory resulted comparatively large portion inventory purchased acquisition ifc 2002 sell anticipated rates thus triggering recognition additional obsolescence reserves 2005 operating income special items increased 232 million 356 excluding currency effects less 1 million driven primarily increase gross profit margin discussed operating income negatively impacted higher sales commissions incurred generate sales increase higher costs associated sarbanesoxley compliance costs incurred expanding footprint asia operating income special items 2004 decreased 72 million 106 excluding currency benefits approximately 4 million compared 2003 decrease results primarily 141 million charge income increased provision obsolete slow moving inventory discussed plus incremental 76 million increase incentive compensation included sga special items 2003 associated acquisition integration ifc fcd backlog 2005 increased 365 million 169 excluding negative currency effects approximately 12 million compared 2004 increase primarily attributable strong bookings performance 2005 flow solutions division segment results fsd design manufacture distribute mechanical seals sealing systems parts provide related services principally industrial markets fsd seven manufacturing operations three located us fsd operates 64 qrcs worldwide including 25 sites north america 14 europe remainder south america asia ability manufacture engineered seal products within 72 hours customer’s request design engineering manufacturing testing delivery significant competitive advantage based independent industry sources believe second largest mechanical seal supplier world bookings 2005 increased 645 million 163 excluding currency benefits approximately 4 million compared 2004 bookings 2004 increased 225 million 62 excluding currency benefits approximately 11 million compared 2003 bookings growth reflects increased business projects includes oems aftermarket experienced strong growth compressor pump seals project business continued success end users due focus servicing customers locally increasing network qrcs addition bookings improvement reflects fsd’s success establishing longerterm customer alliance programs including fixed fee alliances fixed fee alliances contractual agreements customers wherein customer pays us fixed amount period usually monthly term agreement return fixed cost customer entitled new seals repairs upgraded equipment replacements maintenance services defined within scope agreement believe fixed fee strategy coupled higher levels customer service reliability drive repair business equipment upgrades replacements maintenance services led increases market share 2005 2004 sales 2005 increased 470 million 119 excluding currency benefits approximately 3 million compared 2004 increase due following strength oil gas industry led oil prices high demand share growth mineral ore processing industry due strong demand increased sales gas compressor business due growth natural gas industry 4436 million sales 2005 approximately 33 oil gas 26 chemical 41 general industries sales 2004 increased 252 million 70 excluding currency benefits approximately 11 million compared 2003 continuous improvements focused end user customer business well meeting strategic growth initiatives led fsd increased shipments regions 2004 3940 million sales 2004 approximately 30 oil gas 27 chemical 43 general industries gross profit margin increased 436 2005 compared 2004 primarily result ability pass along price increases improved product mix aftermarket typically higher margin gross profit margin fsd decreased 432 2004 compared 448 2003 primarily due 41 million increase annual incentive compensation included cost sales increases worldwide metals pricing charge cost sales resulting increase reserve slow moving inventory operating income 2005 increased 128 million 176 excluding currency benefits less 1 million compared 2004 improvement 2005 reflects increased gross profit margins discussed greater control sga operating income 2004 decreased 37 million 50 excluding currency benefits approximately 2 million compared 2003 decrease operating income primarily result decrease gross profit margin discussed increase sga resulting increase annual incentive compensation 41 million backlog 2005 increased 197 million 451 excluding negative currency effects approximately 2 million compared 2004 increase primarily attributable strong bookings performance 2005 well one significant contract final shipment due 2008 liquidity capital resources cash flow analysis cash generated operations borrowings available existing revolving line credit primary sources shortterm liquidity sources operating cash include sale products services reduction working capital particularly accounts receivable inventories total cash balance december 31 2005 965 million compared 638 million 2004 535 million 2003 cash flows provided operating activities 2005 primarily reflect increase working capital particularly higher accounts receivable 372 million impact termination accounts receivable securitization agreement 487 million increase cash flows provided operating activities 2004 primarily relates implementation accounts receivable securitization agreement increases accounts payable accrued liabilities retirement obligations liabilities 2003 also benefited receipt 49 million us income tax refund cash outflows related ifc integration 272 million 2003 operating cash flows 2005 reflect increased funding pension plans approximately 30 million compared 2004 reduction working capital 2004 reflects increases 466 million accounts payable due deferred payment invoices yearend 2004 321 million accrued liabilities due primarily increase approximately 44 million bonus accrual 2004 reduction working capital 2004 also reflects continued emphasis improving accounts receivable collections reducing inventory improvement accounts receivable 2004 compared 2003 primarily reflects improved collections impact accounts receivable securitization 487 million discussed addition incremental factoring certain nonus receivables contributed 07 million 2005 used 34 million 2004 contributed 155 million 2003 goal days’ sales receivables outstanding “dso” 60 days fourth quarter 2005 achieved dso 58 days compared 59 days period 2004 reference purposes based 2005 sales improvement one day could provide approximately 8 million cash inventory reductions contributed 47 million cash flow 2005 compared 255 million cash flow 2004 294 million 2003 majority inventory reduction 2004 projectrelated work process inventory required support shipments products backlog offset part increase raw materials result inventory reductions inventory turns 56 times december 31 2005 compared 51 times 44 times december 31 2004 2003 respectively reference purposes based 2005 data improvement one turn could yield approximately 55 million cash outflows investing activities 393 million 141 million 266 million 2005 2004 2003 respectively due primarily capital expenditures cash outflows financing activities 533 million 2005 compared 2506 million 2004 1628 million 2003 change 2005 primarily result debt paydown change 2004 results primarily increased mandatory repayments longterm debt triggered gmbu divestiture issuance eib credit facility accounts receivables securitization cash needs next 12 months expected substantially similar 2005 except decrease debt payments required new credit facilities partially offset increase pension contributions increases capital expenditures related information technology infrastructure capacity expansion believe cash flows operating activities combined availability revolving line credit existing cash balances sufficient enable us meet cash flow needs next 12 months however cash flows operations could adversely affected economic political risks associated sales products operational factors competition fluctuations foreign exchange rates fluctuations interest rates among factors believe cash flows operating activities expectation continuing availability draw upon revolving credit agreements also sufficient meet cash flow needs periods exceeding next 12 months generated 11 million 68 million cash flow related exercise employee stock options 2005 2004 respectively reflected financing activities consolidated statement cash flows amounts generated exercise employee stock options 2003 significant stock option shares currently exercisable due temporary suspension stock option exercise program result current employees including executive officers qualified retirees directors unable exercise vested options stock option exercise program temporarily suspended due fact able timely file annual quarterly periodic reports sec made impossible issue registered shares upon option exercises substantial number outstanding stock options granted past years employees stock option plans unexercisable extended period due noncurrent filing status sec financial reports outstanding options include options 809667 shares held former chairman president chief executive officer c scott greer given significant increase share price period optionees unable exercise options possible many holders may want exercise soon first able reopen stock option exercise program allow optionees exercise options become current sec financial reporting obligations registered issuance common shares upon exercise stock options sec currently expect occur 2006 holders large number options promptly exercise following reopening would dilutive impact earnings per share anticipate significant number stock option exercises one time would positively impact cash flow however still evaluating extent impact alternatives satisfy obligation stock option program including repurchasing shares market offset dilutive impact earnings per share could negatively impact cash flow impacts cash flow earnings per share dependent upon share price number shares strike price shares exercised payments acquisitions regularly evaluate acquisition opportunities various sizes cost terms financing raised conjunction acquisition including ability raise economical capital critical consideration evaluation march 2004 acquired remaining 75 interest tkl approximately 12 million paid acquisition cash generated operations prior acquisition held 25 interest tkl result acquisition strengthened product offering mining industry broadened manufacturing capacity asia pacific region gained foundry capacity capital expenditures capital expenditures funded primarily operating cash flows lesser extent bank borrowings 2005 capital expenditures focused new product development information technology infrastructure cost reduction opportunities 2003 2004 capital expenditures invested new replacement machinery equipment information technology acquisition integration activities including structures equipment required receiving facilities capital expenditures 2004 include approximately 5 million purchase building previously leased manufacture valves year capital expenditures less depreciation expense due excess capacity upgrading equipment integration processes 2006 capital expenditures focused capacity expansion enterprise resource planning application upgrades project star simplification teamwork accelerates results information technology infrastructure cost reduction opportunities expected 70 million 75 million certain facilities may face capacity constraints foreseeable future may lead higher capital expenditure levels financing debt including capital lease obligations consisted new credit facilities august 12 2005 entered new credit facilities comprised 6000 million term loan maturing august 10 2012 4000 million revolving line credit utilized provide 3000 million letters credit expiring august 12 2010 used proceeds borrowings new credit facilities refinance 1225 senior subordinated notes indebtedness outstanding 2000 credit facilities replaced letter credit agreement guaranteed eib credit facility described letter credit issued part new credit facilities borrowings new credit facilities bear interest rate equal option either 1 base rate based greater prime rate recently announced administrative agent new credit facilities federal funds rate plus 050 2 london interbank offered rate “libor” plus applicable margin determined reference ratio total debt consolidated earnings interest taxes depreciation amortization “ebitda” december 31 2005 175 libor borrowings eib credit facility april 14 2004 one european subsidiaries flowserve bv entered agreement eib pursuant eib agreed loan us 70 million ability draw funds multiple currencies finance part specified research development projects undertaken us europe borrowings eib credit facility bear interest fixed floating rate interest agreed us eib respect borrowing facility loans eib credit facility subject mandatory prepayment eib’s discretion upon occurrence certain events including change control prepayment certain indebtedness addition eib credit facility contains covenants among things limit ability dispose assets related financed project require us deliver eib audited annual financial statements within 30 days publication august 2004 borrowed 85 million floating interest rate based 3month us libor resets quarterly december 31 2005 interest rate 442 maturity loan june 15 2011 may repaid time without penalty additional discussion new credit facilities eib credit facility debt instruments longer effect december 31 2005 included note 11 consolidated financial statements included annual report entered interest rate currency swap agreements hedge exposure cash flows related credit facilities discussed agreements fully described “item 7aitem 7 managements discussion analysis financial condition results operations following discussion analysis provided increase understanding read conjunction accompanying consolidated financial statements notes see “item 1a risk factors” “forwardlooking statements” section therein discussion risks uncertainties assumptions associated statements unless otherwise noted amounts discussed herein consolidated executive overview company believe worldleading manufacturer aftermarket service provider comprehensive flow control systems develop manufacture precisionengineered flow control equipment integral movement control protection flow materials customers’ critical processes product portfolio pumps valves seals automation aftermarket services supports global infrastructure industries including oil gas chemical power generation water management well general industrial markets products services add value manufacturing platform global network quick response centers qrcs offer broad array aftermarket equipment services installation advanced diagnostics repair retrofitting currently employ approximately 16000 employees 50 countries business model significantly influenced capital spending global infrastructure industries placement new products service aftermarket services existing operations worldwide installed base products important source aftermarket revenue products expected ensure maximum operating time many key industrial processes past several years significantly invested aftermarket strategy provide local support maximize customers’ investment offerings well provide business stability various economic periods aftermarket business served network 171 qrcs located around globe provides variety service offerings customers including spare parts service solutions product life cycle solutions valueadded services generally higher margin business key component profitable growth strategy operations conducted three business segments referenced throughout management’s discussion analysis financial condition results operations mda • fsg engineered product division epd long leadtime custom highlyengineered pumps pump systems mechanical seals auxiliary systems replacement parts related services • fsg industrial product division ipd preconfigured engineered pumps pump systems related products services • flow control division fcd engineered industrial valves control valves actuators controls related services business segments share focus industrial flow control technology high number common customers segments also complementary product offerings technologies often combined applications provide us net competitive advantage segments also benefit global footprint economies scale reducing administrative overhead costs serve customers cost effectively reputation product portfolio built 50 wellrespected brand names worthington idp valtek limitorque durametallic believe one comprehensive industry products services sold either directly designated channels 10000 companies including world’s leading engineering procurement construction firms original equipment manufacturers distributors end users continue build geographic breadth qrc network goal positioned near customers possible service support throughout product life cycle order capture important aftermarket business along ensuring local capability sell install service equipment remote regions equally imperative continuously improve global operations continue expand global supply chain capability meet global customer demands ensure quality timely delivery products continue devote resources improving supply chain processes across divisions find areas synergy cost reduction improve supply chain management capability ensure meet global customer demands continue focus improving ontime delivery quality managing warranty costs percentage sales across global operations assistance focused continuous improvement process cip initiative goal cip initiative includes lean manufacturing six sigma business management strategy value engineering maximize service fulfillment customers ontime delivery reduced cycle time quality highest internal productivity experienced improved demand original equipment 2011 compared 2010 effects global recession began diminish several demand forecasts improved promoted increased capital investment spending planning oil gas industry saw improved conditions developing regions’ economic growth plans rekindled projections demand growth oil natural gas pipeline refining investments driven infrastructure expansion plans growing regions developing regions also experienced improved conditions investment chemical processing general industries mature regions three industries experienced moderate increase levels investment although overcapacity oil refining affected capital investments area power generation uncertainty environmental regulations challenged spending levels water management industry displayed weakness spending levels planned desalination projects continue delayed governments evaluated fiscal priorities critical component growth strategy remains investment expanding aftermarket capabilities provide local support maximize customers’ investment offerings well provide stability business various economic periods 2011 experienced improved demand global aftermarket business compared 2010 driven customers’ need maintain continuing operations expansion aftermarket capabilities provided new integrated solutions offerings customers’ desire gain operational efficiencies increase throughput existing facilities provided opportunities leverage engineering knowledge technological capabilities design solutions produce desired business result 2011 continued execute strategy increase presence regions global market capture aftermarket opportunities believe customer relationships global presence highly regarded technical capabilities continue opportunities core industries however face challenges affecting many companies industry significant multinational presence economic political currency risks markets following discussion read conjunction outlook 2012 section included mda products services used several distinct industries oil gas chemical power generation water management number industries collectively referred general industries demand products depends level new capital investment planned unplanned maintenance expenditures customers level new capital investment depends turn capital infrastructure projects driven need oil gas power generation water management well general economic conditions drivers generally related phase business cycle respective industries expectations future market behavior levels maintenance expenditures additionally driven reliability equipment planned unplanned downtime maintenance required capacity utilization process customers include engineering procurement construction firms original equipment manufacturers end users distributors sales engineering procurement construction firms original equipment manufacturers typically large project orders critical applications certain sales distributors project orders typically procured customers either directly us indirectly contractors new construction projects facility enhancement projects quick turnaround business also refer book ship defined orders received customer booked shipped within three months receipt orders typically standardized general purpose products parts services three business segments generates certain levels type business sale aftermarket products services benefit large installed base original equipment requires maintenance repair replacement parts use manufacturing platform global network qrcs offer broad array aftermarket equipment services installation advanced diagnostics repair retrofitting geographic regions positioned provide quick response believe customers traditionally relied us rather competitors aftermarket products due highly engineered customized products however aftermarket standard products competitive existence common standards allows easier replacement installed products proximity service centers timeliness delivery quality important considerations aftermarket products services continue expand global qrc network improve ability capture important aftermarket business oil gas oil gas industry represented approximately 40 42 bookings 2011 2010 respectively experienced stable level capital spending 2011 compared previous year due need continue building infrastructure order bring future capacity line meet future demand expectations majority investment major oil companies continued focus upstream production activities however improved levels spending midstream pipeline downstream refining operations particularly developing markets refining overcapacity remained concern throughout year mature regions overall demand oil remained volatile throughout year aftermarket opportunities industry improved throughout year integrated solutions offering helping offset reduction servicerelated business many refineries performed work personnel outlook oil gas industry heavily dependent demand growth mature markets developing geographies believe oil gas companies continue upstream downstream investment plans line projections future demand growth production declines existing operations projected decline demand could cause oil gas companies reduce overall level spending could decrease demand products services however believe longterm fundamentals industry remain solid based current supply projected depletion rates existing fields forecasted longterm demand growth longstanding reputation providing successful solutions upstream midstream downstream applications along advancements portfolio offerings believe continue wellpositioned pursue opportunities industry around globe chemical industry represented approximately 18 16 bookings 2011 2010 respectively capital spending chemical industry rebounded 2011 expansion existing facilities approval new projects around world middle east asia seen significant growth chemical projects countries regions try access higher margins available downstream petrochemical markets additionally north america seen revival chemical industry shale gas changed economics production allowing lower cost abundant feedstock drive high value chemical projects aftermarket opportunities improved majority year indications improvements continue 2012 despite strong year outlook chemical industry remains heavily dependent global economic conditions global economies stabilize unemployment conditions improve rise consumer spending follow increase spending would drive greater demand chemicalbased products supporting improved levels capital investment believe chemical industry nearterm continue invest maintenance upgrades optimization existing assets developing regions continue investing capital infrastructure meet current future indigenous demand believe global presence localized aftermarket capabilities wellpositioned serve potential growth opportunities industry power generation power generation industry represented approximately 16 17 bookings 2011 2010 respectively 2011 power generation industry continued experience softness capital spending mature regions driven uncertainty related environmental regulations well potential regulatory impacts overall civilian nuclear market developing regions capital investment remained place driven increased demand forecasts electricity countries china india global concerns environment continue support increase desired future capacity renewable energy sources majority active planned construction throughout 2011 continued utilize designs based fossil fuels natural gas increased percentage utilization driven market prices gas remaining low relatively stable potential unconventional sources gas shale gas power generation industry forecasting increased use form fuel power generation plants believe outlook power generation industry remains favorable current legislative efforts limit emissions carbon dioxide may adverse effect investment plans depending potential requirements imposed timing compliance country however believe proposed methods limiting carbon dioxide emissions offer business opportunities products services believe longterm fundamentals power generation industry remain solid based projected increases demand electricity driven global population growth advancements industrialization growth urbanization developing markets also believe longstanding reputation power generation industry portfolio offerings various generating methods advancements serving renewable energy market carbon capture methodologies well global service support structure position us well future opportunities important industry water management water management industry represented approximately 4 5 bookings 2011 2010 respectively although water management industry displayed weakness spending levels 2011 desalination projects continued delayed worldwide demand fresh water treatment continues create requirements new facilities upgrades existing systems many require products offer particularly pumps believe persistent demand fresh water economic cycles supports continuing investments water management industry facing future supplydemand challenge relative forecasted global population growth coupled advancement industrialization urbanization due limitations usable fresh water around globe continues increased investment desalination investment forecasted significantly increase next several decades believe global leader desalination market already important source fresh water mediterranean region middle east expect trend desalination expand traditional areas coastal areas around globe believe presents significant market opportunity pumps valves actuation products energy recovery devices general industries general industries comprises variety different businesses including mining ore processing pharmaceuticals pulp paper food beverage smaller applications none individually represented 5 total bookings 2011 2010 general industries also includes sales distributors whose end customers operate industries primarily serve general industries represented aggregate approximately 22 20 bookings 2011 2010 respectively 2011 saw improving conditions majority businesses pulp paper mining ore processing food beverage saw improved conditions 2011 compared 2010 generally supported improving economic conditions several parts world also experienced increased business levels distribution network business conditions improved inventory levels required replenishment outlook group industries heavily dependent upon condition global economies consumer confidence levels longterm fundamentals many industries remain sound many products produced industries common staples industrialized urbanized economies believe specialty product offerings designed industries aftermarket service capabilities provide future business opportunities results operations throughout discussion results operations discuss impact fluctuations foreign currency exchange rates calculated currency effects translating current year results monthly basis prior year exchange rates periods discussed note 1 consolidated financial statements included item 8 financial statements supplementary data item 8 annual report form 10k year ended december 31 2011 annual report ongoing political economic conditions north africa caused us experience shipment delays region estimate shipments region delayed resulted lost delayed opportunities operating income 112 million 80 million epd 32 million ipd 2011 preponderance physical assets region located kingdom saudi arabia united arab emirates date significantly affected unrest elsewhere region continue assess conditions potential adverse impacts earthquake tsunami japan early 2011 particular relate customers suppliers impacted regions well announced potential regulatory impacts global nuclear power market 2011 experience significant adverse impacts due shipment delays collection issues supply chain disruptions related events also closely monitoring effects japan crisis global nuclear power industry difficult estimate longterm effect fukushima plant shutdown global nuclear power market continued ship nuclear orders backlog without significant disruption believe related reduction nuclear orders could continue near term though parts overall power generation business could benefit nuclear power priorities reevaluated broad macrolevel economic impacts experience direct measurable disruptions 2011 due european sovereign debt crisis continue monitor evaluate impact future developments region current business customers suppliers state global economy additional adverse developments could potentially impact customers’ exposures sovereign nonsovereign european debt could soften level capital investment demand products services discussed note 2 consolidated financial statements included item 8 annual report effective october 28 2011 acquired inclusion epd lawrence pumps inc lpi privatelyowned united states us based company specializing design development manufacture engineered centrifugal slurry pumps critical services within petroleum refining petrochemical pulp paper energy markets lpi acquired cash transaction valued 896 million subject final adjustments acquired inclusion fcd valbart srl valbart privatelyowned italian valve manufacturer effective july 16 2010 acquired inclusion epd calder ag calder swiss supplier energy recovery technology effective april 21 2009 results operations lpi valbart calder consolidated since respective dates acquisition pro forma information provided acquisitions due immateriality discussed note 7 consolidated financial statements included item 8 annual report beginning 2009 initiated realignment programs reduce optimize certain nonstrategic manufacturing facilities overall cost structure improving operating efficiency reducing redundancies maximizing global consistency driving improved financial performance well expanding efforts optimize assets respond reduced orders drive enhanced customerfacing organization realignment programs substantially complete currently expect total realignment program charges approximately 93 million approved plans 912 million incurred december 31 2011 charges net adjustments related realignment programs 48 million 183 million 681 million years ended december 31 2011 2010 2009 respectively ipd incurred 48 million 89 million 113 million realignment charges net adjustments years ended december 31 2011 2010 2009 respectively fcd incurred 01 million 62 million 115 million realignment charges net adjustments years ended december 31 2011 2010 2009 respectively epd incurred 02 million 17 million 424 million realignment charges net adjustments years ended december 31 2011 2010 2009 respectively eliminations incurred 03 million adjustment due changes estimates year ended december 31 2011 15 million 29 million realignment charges net adjustments years ended december 31 2010 2009 respectively based actions realignment programs year ended december 31 2011 realized approximately 24 million additional savings compared year ended december 31 2010 expect realize annual run rate savings 2012 beyond approximately 120 million approximately twothirds savings realignment programs realized cost sales cos remainder selling general administrative expense sga actual savings realized could vary expected savings represent managements best estimate date addition connection previously announced ipd recovery plan second quarter 2011 initiated new activities optimize structural parts ipds business expect charges related program nonrestructuring nature approximate 9 million 72 million incurred 2011 substantial majority recorded cos following discussion read conjunction “outlook 2012” section included mda bookings backlog define booking receipt customer order contractually engages us perform activities behalf customer regard manufacture service support bookings recorded subsequently canceled within yeartodate period excluded yeartodate bookings 2011 increased 4330 million 102 compared 2010 increase included currency benefits approximately 149 million increase primarily attributable increased original equipment bookings fcd ipd coupled increased aftermarket bookings epd increases partially offset decreased original equipment bookings epd including impact order excess 80 million supply variety pumps refinery received primarily first quarter 2011 well impact order excess 80 million crude oil pumps seals related support services booked 2010 recur increase also attributable strength oil gas chemical industries fcd general industries fcd ipd power generation chemical industries epd partially offset decrease oil gas industry epd bookings 2010 increased 3436 million 88 compared 2009 increase included negative currency effects approximately 12 million overall net increase primarily attributable increased original equipment aftermarket bookings epd principally oil gas industry including impact order excess 80 million crude oil pumps seals related support services received second quarter 2010 increase also attributed higher bookings fcd driven oil gas general industries increases partially offset impact orders 45 million supply valves four westinghouse electric co nuclear power units booked 2009 recur decreased original equipment bookings ipd backlog represents accumulation uncompleted customer orders backlog 27 billion december 31 2011 increased 954 million 37 compared december 31 2010 currency effects provided decrease approximately 51 million currency effects backlog calculated using change period end exchange rates approximately 24 backlog december 31 2011 related aftermarket orders backlog 26 billion december 31 2010 increased 2235 million 94 compared december 31 2009 currency effects provided decrease approximately 51 million sales 2011 increased 4782 million 119 compared 2010 increase included currency benefits approximately 144 million increase primarily due fcd increased original equipment sales europe middle east africa ema reflecting continued recovery oil gas industry increased sales attributable valbart 746 million aftermarket sales epd driven north america latin america also contributed overall increase sales partially offset decreased original equipment sales epd primarily ema north america sales ipd also contributed overall increase primarily driven original equipment sales 2010 decreased 3333 million 76 compared 2009 decrease included negative currency effects approximately 32 million decrease primarily attributable decreased original equipment orders across divisions primarily driven lower beginning backlog oil gas general industries 2010 compared 2009 reflecting lower demand customerdriven project delays due significant decrease rate general global economic growth 2009 decreases slightly offset increased aftermarket sales epd driven latin america asia pacific fcd sales provided valbart 383 million sales international customers including export sales us approximately 73 sales 2011 2010 2009 sales ema approximately 39 40 total sales 2011 2010 2009 respectively sales asia pacific approximately 19 18 20 total sales 2011 2010 2009 respectively sales latin america approximately 10 9 total sales 2011 2010 2009 respectively gross profit gross profit margin gross profit 2011 increased 1039 million 74 compared 2010 increase included effect approximately 13 million increased savings realized 99 million decreased charges resulting realignment programs partially offset 68 million charges related ipd recovery plan compared 2010 gross profit margin 2011 336 decreased 350 2010 decrease primarily attributable lower margins certain large projects primarily beginning year backlog negative impact currency margins us dollardenominated sales produced nonus facilities incremental charges associated certain projects shipped late epd charges related ipd recovery plan increased material costs fcd decrease partially offset mix shift higher margin aftermarket sales divisions result sales mix shift aftermarket sales increased approximately 41 total sales compared approximately 39 total sales period 2010 gross profit 2010 decreased 1384 million 89 compared 2009 decrease included effect approximately 37 million increased savings realized decrease 270 million charges resulting realignment programs compared 2009 gross profit margin 2010 350 decreased 355 2009 decrease primarily attributable less favorable pricing beginning year backlog epd ipd compared 2009 negative impact decreased sales absorption fixed manufacturing costs effects partially offset sales mix shift toward higher margin aftermarket sales epd ipd increased utilization lowcost regions fcd positive impacts realignment programs various cip initiatives aftermarket sales increased approximately 39 total sales 2010 compared approximately 36 total sales 2009 selling general administrative expense sga 2011 increased 691 million 82 compared 2010 increase included currency effects yielded increase approximately 25 million also included effect approximately 10 million increased savings realized 36 million decreased charges resulting realignment programs compared 2010 increase primarily attributable incremental selling marketingrelated expenses associated mentioned increase sales meritrelated compensation increases acquisitionrelated costs incremental sga costs associated acquisition lpi fourth quarter 2011 impact hiring associates support highgrowth areas business increases partially offset decrease broadbased annual longterm incentive program compensation sga percentage sales 2011 improved 70 basis points compared 2010 sga 2010 decreased 895 million 96 compared 2009 currency effects yielded decrease approximately 2 million decrease included effect approximately 23 million increased savings realized decrease 228 million charges resulting realignment programs compared 2009 decrease primarily attributable positive impacts realignment programs decreased selling marketingrelated expenses strict cost control actions 2010 legal fees accrued resolution costs 2009 related shareholder class action litigation resolved second quarter 2010 recur partially offset cash recoveries bad debt adjustment contingent consideration 2009 recur see note 2 consolidated financial statements included item 8 annual report sga percentage sales 2010 improved 40 basis points compared 2009 net earnings affiliates net earnings affiliates represents net income investments eight joint ventures one located japan south korea saudi arabia united arab emirates two located china india accounted using equity method accounting net earnings affiliates 2011 increased 25 million 151 compared 2010 primarily due increased earnings fcd joint venture india net earnings affiliates 2010 increased 08 million 51 compared 2009 primarily due increased earnings epd joint ventures south korea india partially offset decreased earnings fcd joint venture india epd joint venture japan operating income operating income 2011 increased 373 million 64 compared 2010 increase included currency benefits approximately 17 million increase included effect approximately 24 million increased savings realized realignment programs compared 2010 overall net increase primarily result 1039 million increase gross profit partially offset 691 million increase sga discussed operating income 2010 decreased 481 million 76 compared 2009 operating income included effect approximately 60 million increased savings realized decrease 498 million charges resulting realignment programs compared 2009 included negative currency effects approximately 4 million overall net decrease primarily result 1384 million decrease gross profit partially offset 895 million decrease sga discussed interest expense interest income interest expense 2011 increased 19 million compared 2010 primarily due increased interest expense local borrowings fund shortterm cash needs support growth emerging markets impact refinancing credit facilities late 2010 interest expense decreased 57 million 2010 compared 2009 result decreased interest rates december 31 2011 approximately 70 debt fixed rates including effects 3300 million notional interest rate swaps interest income 2011 consistent 2010 interest income 2010 decreased 16 million compared 2009 due primarily decreased interest rates income expense net income expense net 2011 increased 220 million income 37 million compared expense 183 million 2010 primarily due 239 million increase gains arising transactions currencies sites functional currencies reflect relative strengthening us dollar versus euro 2011 compared 2010 currency losses 2010 included impact 76 million net loss recorded result venezuelas currency devaluation settlement us dollar denominated liabilities favorable essential items rate 260 bolivars us dollar losses partially offset 31 million gain sale investment joint venture 2010 accounted cost method income expense net 2010 increased 103 million 1288 expense 183 million compared 2009 primarily due 139 million increase losses forward exchange contracts 48 million increase losses arising transactions currencies sites’ functional currencies abovementioned changes primarily reflected strengthening us dollar exchange rate versus euro also included increase losses arising transactions currencies site’s functional currencies impact 76 million net loss recorded result venezuela’s devaluation bolivar settlement us dollar denominated liabilities favorable essential items rate see note 1 consolidated financial statements included item 8 annual report additional details impact venezuela’s currency devaluation addition expensed 16 million loan costs associated refinancing credit facilities fourth quarter 2010 losses partially offset miscellaneous gains income largest 31 million gain sale investment joint venture 2010 accounted cost method tax expense tax rate 2011 2010 2009 effective tax rates differed federal statutory rate 35 primarily due net impact foreign operations included impacts lower foreign tax rates changes reserves established uncertain tax positions may 17 2006 tax increase prevention reconciliation act 2005 signed law creating exclusion us taxable income certain types foreign related party payments dividends interest rents royalties prior 2006 subject us taxation exclusion effective years 2006 2011 applies certain related party payments effective tax rate based upon current earnings estimates future taxable earnings domestic international location changes factors including ability utilize foreign tax credits net operating losses results tax audits could impact tax rate future periods december 31 2011 foreign tax credits 434 million expiring 2018 2020 recorded valuation allowances additionally recorded net deferred tax assets 386 million relate net operating losses tax credits deductible temporary differences available reduce taxable income future periods definite expiration able utilize portion credits losses effective tax rate would increase net earnings per share net earnings 2011 increased 403 million 4286 million 764 per diluted share compared 2010 increase primarily attributable 373 million increase operating income 220 million increase income expense net partially offset 19 million increase interest expense 169 million increase tax expense net earnings 2010 decreased 396 million 3883 million 688 per diluted share compared 2009 decrease primarily attributable 481 million decrease operating income 103 million increase income expense net partially offset 57 million decrease interest expense 149 million decrease tax expense comprehensive expense income comprehensive expense income 2011 increased 642 million primarily reflecting strengthening us dollar exchange rate versus euro december 31 2011 compared december 31 2010 comprehensive expense income 2010 decreased 644 million expense 14 million primarily reflecting strengthening us dollar exchange rate versus euro december 31 2010 compared december 31 2009 partially offset decrease pension postretirement expense 2010 business segments conduct operations three business segments based type product manage business evaluate segment performance allocate resources based segment’s operating income see note 17 consolidated financial statements included item 8 annual report discussion segments key operating results three business segments epd ipd fcd discussed fsg engineered product division segment results largest business segment epd design manufacture distribute service custom highlyengineered pumps pump systems mechanical seals auxiliary systems replacement parts collectively referred original equipment epd includes longer leadtime highlyengineered pump products shorter cycle engineered pumps mechanical seals generally manufactured much quickly epd also manufactures replacement parts related equipment provides full array replacement parts repair support services collectively referred aftermarket epd primarily operates oil gas power generation chemical water management general industries epd operates 41 countries 28 manufacturing facilities worldwide nine located europe 11 north america four asia four latin america 120 qrcs including colocated manufacturing facilities discussed note 2 consolidated financial statements included item 8 annual report acquired inclusion epd lpi privatelyowned usbased pump manufacturer effective october 28 2011 lpis results operations consolidated since date acquisition included epds segment results operations pro forma information provided acquisition due immateriality bookings 2011 increased 915 million 41 compared 2010 increase included currency benefits approximately 65 million increase bookings reflected impact order excess 80 million supply variety pumps refinery received primarily first quarter 2011 well impact order excess 80 million crude oil pumps seals related support services booked 2010 recur customer bookings increased 599 million latin america 468 million including currency benefits approximately 19 million asia pacific 317 million north america increases partially offset decrease 422 million ema including currency benefits approximately 41 million overall net increase primarily consisted increase power generation chemical industries 23 billion bookings 2011 approximately 50 oil gas 21 power generation 13 chemical 1 water management 15 general industries interdivision bookings eliminated included consolidated bookings disclosed increased 33 million bookings 2010 increased 2660 million 135 compared 2009 increase included currency benefits approximately 13 million increase bookings reflected higher demand products oil gas general industries across regions including impact order excess 80 million crude oil pumps seals related support services received second quarter 2010 customer bookings increased 1149 million including currency benefits approximately 13 million latin america 782 million north america including currency benefits approximately 8 million 634 million including negative currency effects approximately 26 million ema 238 million including currency benefits approximately 18 million asia pacific increases attributable original equipment aftermarket bookings major projects oil gas general mining power generation chemical industries partially offset decreased bookings water management industry decreased aftermarket bookings ema 22 billion bookings 2010 approximately 54 oil gas 19 power generation 12 chemical 1 water management 14 general industries interdivision bookings eliminated included consolidated bookings disclosed increased 124 million sales 2011 increased 1687 million 78 compared 2010 increase included currency benefits approximately 67 million customer sales increased north america 757 million latin america 613 million asia pacific 587 million including currency benefits approximately 18 million increases primarily driven increased aftermarket sales north america latin america original equipment sales asia pacific increases partially offset decrease customer sales ema 330 million including currency benefits approximately 41 million primarily driven decreased original equipment sales interdivision sales eliminated included consolidated sales disclosed increased 163 million sales 2010 decreased 1636 million 71 compared 2009 decrease included negative currency effects approximately 4 million customer sales decreased ema 1313 million including negative currency effects approximately 43 million north america 798 million including currency benefits approximately 8 million primarily driven original equipment sales decreases partially offset increases customer sales latin america 325 million including currency benefits 14 million asia pacific 102 million including currency benefits approximately 17 million primarily driven increased aftermarket sales interdivision sales eliminated included consolidated sales disclosed decreased 14 million gross profit 2011 increased 205 million 26 compared 2010 gross profit margin 2011 346 decreased 364 2010 decrease primarily attributable effect revenue certain large projects low margins primarily beginning year backlog negative impact currency margins us dollar denominated sales produced nonus facilities incremental charges associated certain projects shipped late partially offset sales mix shift towards higher margin aftermarket sales gross profit 2010 decreased 606 million 72 compared 2009 gross profit margin 2010 364 comparable period 2009 gross profit margin negatively impacted less favorable pricing beginning year backlog compared 2009 negative impact decreased sales absorption fixed manufacturing costs decrease gross profit margin mostly offset sales mix shift towards higher margin aftermarket sales increased savings realized decreased charges resulting realignment programs compared 2009 well operational efficiencies savings realized supply chain initiatives operating income 2011 decreased 174 million 42 compared 2010 decrease included currency benefits approximately 9 million overall net decrease due primarily increased sga 379 million including increases due currency effects approximately 12 million partially offset increased gross profit 205 million discussed increased sga attributable incremental selling marketingrelated expenses associated mentioned increase sales meritrelated compensation increases impact hiring associates support highgrowth areas business acquisitionrelated incremental sga costs associated acquisition lpi fourth quarter 2011 39 million penalty assessed spanish regulatory commission second quarter 2011 increases partially offset decrease broadbased annual longterm incentive program compensation operating income 2010 decreased 222 million 51 compared 2009 decrease included negative currency effects less 1 million overall net decrease due primarily reduced gross profit 606 million discussed partially offset decreased sga 360 million due increased savings realized decrease charges resulting realignment programs compared 2009 decreased selling marketingrelated expenses strict cost control actions 2010 additionally 44 million benefit adjustment contingent consideration 2009 related acquisition calder recur see note 2 consolidated financial statements included item 8 annual report backlog 14 billion december 31 2011 increased 61 million 04 compared december 31 2010 currency effects provided decrease approximately 14 million backlog 14 billion december 31 2011 included 199 million interdivision backlog eliminated included consolidated backlog disclosed backlog 14 billion december 31 2010 increased 534 million 39 compared december 31 2009 currency effects provided decrease approximately 14 million backlog december 31 2010 includes 255 million interdivision backlog eliminated included consolidated backlog disclosed fsg industrial product division segment results ipd design manufacture distribute service engineered preconfigured industrial pumps pump systems including submersible motors specialty products eg thrusters collectively referred original equipment additionally ipd manufactures replacement parts related equipment provides full array support services collectively referred aftermarket ipd primarily operates oil gas chemical water management power generation general industries ipd operates 12 manufacturing facilities three located us six europe operates 21 qrcs worldwide including 11 sites europe four us including colocated manufacturing facilities bookings 2011 increased 779 million 94 compared 2010 increase included currency benefits approximately 29 million increase primarily driven increased customer bookings 454 million including currency benefits approximately 20 million ema australia increased customer bookings driven general chemical industries partially offset decreased customer bookings water management industry interdivision bookings eliminated included consolidated bookings disclosed increased 322 million 9054 million bookings 2011 approximately 29 oil gas 19 water management 11 chemical 8 power generation 33 general industries bookings 2010 increased 44 million 05 compared 2009 increase included negative currency effects approximately 11 million overall net increase primarily driven increase customer bookings 571 million americas increase interdivision bookings eliminated included consolidated bookings disclosed 202 million mostly offset decreased customer bookings 743 million ema australia overall net decrease customer bookings primarily driven decreased orders original equipment power generation mining chemical industries partially offset increased customer bookings oil gas markets primarily europe 8275 million bookings 2010 approximately 31 oil gas 21 water management 10 chemical 9 power generation 29 general industries sales 2011 increased 780 million 97 compared 2010 increase included currency benefits approximately 29 million increase customer sales driven increase 642 million americas partially offset decrease 161 million including currency benefits approximately 21 million ema australia increase americas primarily driven original equipment sales decline ema australia primarily attributable decreased original equipment sales resulted lower beginning year original equipment backlog compared 2010 interdivision sales eliminated included consolidated sales disclosed increased 300 million sales 2010 decreased 1708 million 176 compared 2009 decrease included negative currency effects approximately 9 million decreases customer sales primarily attributable decline sales 1330 million ema australia 305 million americas declines primarily power generation mining chemical industries attributable lower backlog compared 2009 included impact thruster sales orders booked 2008 recur 2010 interdivision sales eliminated included consolidated sales disclosed decreased 63 million gross profit 2011 decreased 72 million 35 compared 2010 gross profit margin 2011 225 decreased 256 2010 decrease primarily attributable less favorable pricing projects shipped backlog increased material costs charges related ipd recovery plan incremental charges resulting operational efficiency issues certain sites partially offset increased savings realized realignment programs compared period 2010 mix shift higher margin aftermarket sales gross profit 2010 decreased 578 million 220 compared 2009 gross profit margin 2010 256 decreased 270 2009 decrease primarily attributable negative impact decreased sales absorption fixed manufacturing costs less favorable pricing backlog compared 2009 partially offset sales mix shift toward profitable aftermarket sales increased savings realized lower charges resulting realignment programs compared period 2009 operating income 2011 decreased 56 million 82 compared 2010 decrease included currency benefits approximately 2 million overall net decrease due 72 million decrease gross profit discussed partially offset 16 million decrease sga operating income 2010 decreased 394 million 365 compared 2009 decrease included negative currency effects approximately 3 million decrease due 578 million decrease gross profit discussed partially offset 184 million decrease sga decrease sga due decreased sellingrelated expenses strict cost control actions 2010 increased savings realized lower charges resulting realignment programs compared 2009 backlog 5678 million december 31 2011 remained flat compared december 31 2010 currency effects provided decrease approximately 13 million backlog december 31 2011 included 567 million interdivision backlog eliminated included consolidated backlog disclosed backlog 5680 million december 31 2010 increased 124 million 22 compared december 31 2009 currency effects provided decrease approximately 24 million backlog december 31 2010 included 385 million interdivision backlog eliminated included consolidated backlog disclosed flow control division segment results second largest business segment fcd designs manufactures distributes broad portfolio engineeredtoorder configuredtoorder isolation valves control valves valve automation products boiler controls related services fcd leverages experience application knowhow offering complete menu engineered services complement expansive product portfolio fcd total 55 manufacturing facilities qrcs 23 countries around world five 25 manufacturing operations located us 14 located europe based independent industry sources believe fourth largest industrial valve supplier global basis discussed note 2 consolidated financial statements included item 8 annual report acquired inclusion fcd valbart privatelyowned italian valve manufacturer effective july 16 2010 valbart’s results operations consolidated since date acquisition included fcd’s segment results operations pro forma information provided acquisition due immateriality bookings 2011 increased 2964 million 227 compared 2010 increase included currency benefits approximately 54 million increased valbart bookings 1104 million increase bookings primarily attributable strength oil gas industry primarily ema asia pacific increased bookings chemical general industries increased bookings partially offset decreases power generation industry due primarily slowdown global nuclear power projects 16 billion bookings 2011 approximately 31 oil gas 27 chemical 27 general industries 14 power generation 1 water management bookings 2010 increased 1083 million 90 compared 2009 increase included negative currency effects approximately 14 million overall net increase bookings attributable bookings provided valbart 546 million strength oil gas industry primarily ema north america increased bookings general industries driven growth district heating market russia growing aftermarket repair replacement orders inventory restocking orders distributors key driver north american market recovery increased bookings partially offset decreases power generation industry driven orders 45 million supply valves four westinghouse electric co nuclear power units booked period 2009 recur customerdriven large project delays chemical oil gas industries 13 billion bookings 2010 approximately 27 oil gas 27 chemical 26 general industries 18 power generation 2 water management sales 2011 increased 2758 million 230 compared 2010 increase included currency benefits approximately 48 million customer sales increased approximately 172 million including currency benefits approximately 39 million ema reflecting continued recovery oil gas industry included increased valbart sales 746 million customer sales increased approximately 50 million asia pacific 47 million north america 10 million latin america sales 2010 decreased 57 million 05 compared 2009 decrease included negative currency effects approximately 19 million decrease customer sales ema approximately 27 million included impact customer sales provided valbart 383 million primarily driven decline customer sales chemical industry well customerdriven delays large projects oil gas industry decrease partially offset increase customer sales approximately 17 million asia pacific primarily driven nuclear fossil power markets china gross profit 2011 increased 892 million 211 compared 2010 gross profit margin 2011 347 decreased 353 period 2010 decrease attributable increased material costs partially offset increased sales favorably impacted absorption fixed manufacturing costs various cip initiatives gross profit 2010 decreased 229 million 51 compared 2009 gross profit margin 2010 353 decreased 370 period 2009 decrease primarily attributable negative impact low margins acquired valbart backlog well decreased sales absorption fixed manufacturing costs partially offset favorable product mix increased savings realized decreased charges resulting realignment programs compared 2009 well various cip initiatives improved utilization lowcost regions operating income 2011 increased 529 million 293 compared 2010 increase included currency benefits approximately 7 million increase principally attributable 892 million increase gross profit discussed increase partially offset 388 million increase sga attributable incremental selling marketingrelated expenses associated mentioned increase sales meritrelated compensation increases increased research development costs impact hiring associates support highgrowth areas business operating income 2010 decreased 237 million 116 compared 2009 decrease included negative currency effects approximately 1 million decrease principally attributable 229 million decrease gross profit discussed partially offset 08 million decrease sga decreased sga attributable decreased selling marketingrelated expenses increased savings realized decreased charges resulting realignment programs compared 2009 partially offset 50 million bad debt recoveries period 2009 recur 27 million valbart acquisitionrelated costs valbart provided net operating loss 124 million including impact acquisitionrelated costs backlog 7599 million december 31 2011 increased 1014 million 154 compared december 31 2010 currency effects provided decrease approximately 24 million backlog 6585 million december 31 2010 increased 1732 million 357 compared december 31 2009 currency effects provided decrease approximately 13 million overall net increase included backlog related acquisition valbart 948 million liquidity capital resources cash flow analysis existing cash generated operations borrowings available existing revolving line credit primary sources shortterm liquidity sources operating cash generally include sale products services conversion working capital particularly accounts receivable inventories total cash balance december 31 2011 3374 million compared 5576 million december 31 2010 6543 million december 31 2009 lower cash provided operating activities reflected additional cash used support shortterm working capital needs impact trend towards contractually longer payment terms 2011 compared 2010 working capital increased 2011 due primarily higher accounts receivable 2431 million higher inventory 1398 million 2011 contributed 89 million us pension plan working capital increased 2010 due primarily lower accrued liabilities 1256 million resulting primarily reductions accruals longterm broadbased annual incentive program payments higher inventory 529 million higher accounts receivable 520 million partially offset higher accounts payable 707 million 2010 contributed 334 million us pension plan increases accounts receivable used 2431 million cash flow 2011 compared 520 million 2010 providing cash 507 million 2009 increase primarily attributable delays collection accounts receivable due slower anticipated payments certain customers relatively strong sales december 2011 part due completion certain previously past due projects contractually longer payment terms 2011 compared 2010 fourth quarter 2011 dso 75 days compared 66 days 59 days periods 2010 2009 respectively reference purposes based 2011 sales dso improvement one day could provide approximately 14 million cash experienced significant increase customer payment defaults increase inventory used 1398 million cash flow 2011 compared 529 million 2010 providing cash 747 million 2009 increase primarily due shipment delays growth short cycle orders 2011 requiring higher raw material work process inventory support end period backlog inventory turns 34 times december 31 2011 compared 34 times december 31 2010 40 times december 31 2009 calculation inventory turns reflect impact advanced cash received customers reference purposes based 2011 data improvement onetenth turn could yield approximately 23 million cash continue work isolated execution issues contributed delays mentioned work customers finalize collection accounts receivable end 2011 began see past due projects trend downward due efforts target projects remain highly focused reducing past due projects cash outflows investing activities 1942 million 2867 million 1386 million 2011 2010 2009 respectively due primarily capital expenditures cash paid acquisitions cash outflows 2011 included 896 million acquisition lpi discussed payments acquisitions capital expenditures 2011 1080 million increase 60 million compared 2010 2011 capital expenditures focused strategic initiatives pursue new markets geographic expansion enterprise resource planning application upgrades information technology infrastructure cost reduction opportunities cash outflows financing activities 2390 million 2011 compared 1429 million 2010 1071 million 2009 cash outflows 2011 resulted primarily repurchase 1500 million common stock payment 696 million dividends 250 million payments longterm debt cash outflows 2010 resulted primarily payment 636 million dividends 460 million repurchase common stock approximately 40 million liquidate debt completing new credit agreement december 2010 february 21 2011 board directors authorized increase payment quarterly dividends common stock 029 per share 032 per share payable quarterly beginning april 14 2011 february 20 2012 board directors authorized increase payment quarterly dividends common stock 032 per share 036 per share payable quarterly beginning april 13 2012 generally dividend dateofrecord last month quarter dividend paid following month february 27 2008 board directors announced approval program repurchase 3000 million outstanding common stock concluded fourth quarter 2011 september 12 2011 board directors announced approval new program repurchase 3000 million outstanding common stock unspecified time period repurchased 73 million 1016 million common stock old new programs respectively fourth quarter 2011 december 15 2011 announced board directors approved replenishment new 3000 million share repurchase program providing full 3000 million remaining authorized repurchase capacity december 31 2011 share repurchase program expiration date reserve right limit terminate repurchase program time without notice repurchased 1482833 450000 544500 shares 1500 million 460 million 409 million 2011 2010 2009 respectively date repurchased total 4218433 shares 4019 million programs december 15 2011 announced board directors endorsed policy annually returning shareholders 40 50 running twoyear average net earnings form quarterly dividends stock repurchases intend adhere policy foreseeable future returns cash whether combination dividends share repurchases reviewed individually declared board directors implemented management discretion depending financial condition business opportunities time market conditions cash needs next 12 months expected consistent 2011 resulting impact anticipated share repurchases expected improvement working capital utilization small decrease incentive compensation payments offset anticipated increases pension contributions capital expenditures cash dividends believe cash flows operating activities combined availability revolving line credit existing cash balances sufficient enable us meet cash flow needs next 12 months however cash flows operations could adversely affected decrease rate general global economic growth well economic political risks associated sales products operational factors competition regulatory actions fluctuations foreign currency exchange rates fluctuations interest rates among factors believe cash flows operating activities expectation continuing availability draw upon credit agreements also sufficient meet cash flow needs periods beyond next 12 months payments acquisitions regularly evaluate acquisition opportunities various sizes cost terms financing raised conjunction acquisition including ability raise economical capital critical consideration evaluation discussed note 2 consolidated financial statements included item 8 annual report effective october 28 2011 acquired inclusion epd 100 lpi privatelyowned usbased pump manufacturer share purchase cash 896 million subject final adjustments lpi specializes design development manufacture engineered centrifugal slurry pumps critical services within petroleum refining petrochemical pulp paper energy markets effective july 16 2010 acquired inclusion fcd 100 valbart privatelyowned italian valve manufacturer share purchase cash 1994 million included 338 million existing valbart net debt defined valbart’s third party debt less cash hand repaid closing valbart manufactures trunnionmounted ball valves used primarily upstream midstream oil gas applications enables us offer complete valve product portfolio oil gas project customers effective april 21 2009 acquired inclusion epd calder private swiss company supplier energy recovery technology use global desalination market 308 million net cash acquired financing debt including capital lease obligations consisted credit facilities december 14 2010 entered credit agreement credit agreement bank america na swingline lender letter credit issuer administrative agent lenders party thereto together lenders credit agreement provides 5000 million term loan facility maturity date december 14 2015 5000 million revolving credit facility maturity date december 14 2015 collectively referred credit facilities revolving credit facility includes 3000 million sublimit issuance letters credit subject certain conditions right increase amount revolving credit facility aggregate amount exceed 2000 million december 31 2011 98 million deferred loan costs included assets net costs amortized term credit agreement recorded interest expense december 31 2011 2010 amounts outstanding revolving credit facility respectively outstanding letters credit 1474 million 1339 million december 31 2011 2010 respectively reduced borrowing capacity 3526 million 3661 million respectively borrowings credit facilities respect swingline loans bear interest rate equal option either 1 london interbank offered rate libor plus 175 250 applicable depending consolidated leverage ratio 2 base rate based greater prime rate recently announced administrative agent credit facilities federal funds rate plus 050 3 daily rate equal one month libor plus 10 plus applicable margin 075 150 determined reference ratio total debt consolidated earnings interest taxes depreciation amortization ebitda applicable interest rate december 31 2011 258 borrowings credit facilities connection credit facilities entered 3300 million notional amount interest rate swaps december 31 2011 hedge exposure floating interest rates pay lenders credit facilities commitment fee equal percentage ranging 030 050 determined reference ratio total debt consolidated ebitda unutilized portion revolving credit facility letter credit fees respect standby letter credit outstanding credit facilities equal percentage based applicable margin effect libor borrowings revolving credit facility fees financial performance standby letters credit 20 10 respectively obligations credit facilities unconditionally guaranteed jointly severally substantially existing subsequently acquired organized domestic subsidiaries 65 capital stock certain foreign subsidiaries subject certain controlled company materiality exceptions lenders agreed release collateral achieve investment grade rating moody’s investors service inc standard poor’s ratings services senior unsecured noncreditenhanced longterm debt case outlook stable better understanding identical collateral required pledged lenders anytime following release collateral investment grade rating maintained addition prior obtaining maintaining investment grade credit ratings guarantors’ obligations credit facilities collateralized substantially guarantors’ assets achieved ratings december 31 2011 european letter credit facilities october 30 2009 entered new 364day unsecured european letter credit facility “new european loc facility” initial commitment €1250 million new european loc facility renewable annually consistent previous european letter credit facility old european loc facility used contingent obligations respect surety performance bonds bank guarantees similar obligations maturities five years renewed new european loc facility october 2011 consistent terms additional 364day period pay fees 110 135 utilized capacity 040 unutilized capacity new european loc facility outstanding letters credit drawn new european loc facility €810 million 1050 million €557 million 745 million december 31 2011 2010 respectively ability issue additional letters credit old european loc facility commitment €1100 million expired november 9 2009 paid annual fronting fees 0875 010 respectively letters credit written old european loc facility outstanding letters credit written old european loc facility €122 million 158 million €333 million 445 million december 31 2011 2010 respectively certain banks parties facilities managing exposures aggregated basis commitment new european loc facility reduced face amount existing letters credit written old european loc facility prior expiration existing letters credit remain outstanding accordingly offset €1250 million capacity new european loc facility maturity december 31 2011 approximately one year majority outstanding existing letters credit consideration outstanding commitments facilities available capacity new european loc facility €1167 million december 31 2011 €810 million utilized debt prepayments repayments made total scheduled repayments current credit agreement previous credit agreement 250 million 43 million 57 million 2011 2010 2009 respectively made mandatory repayments optional prepayments 2011 2010 2009 exception proceeds advanced term loan facility credit agreement along approximately 40 million cash hand used repay previously outstanding indebtedness previous credit agreement included 6000 million term loan 4000 million revolving line credit may prepay loans credit facilities whole part without premium penalty time debt covenants matters credit agreement contains among things covenants defining subsidiaries’ ability dispose assets merge pay dividends repurchase redeem capital stock indebtedness incur indebtedness guarantees create liens enter agreements negative pledge clauses make certain investments acquisitions enter transactions affiliates engage business activity existing business credit agreement also contains covenants requiring us deliver lenders leverage interest coverage financial covenant certificates compliance maximum permitted leverage ratio 325 times debt total consolidated ebitda minimum interest coverage 325 times consolidated ebitda total interest expense compliance financial covenants credit agreement tested quarterly complied covenants december 31 2011 credit agreement includes customary events default including nonpayment principal interest violation covenants incorrectness representations warranties cross defaults cross acceleration bankruptcy material judgments employee retirement income security act 1974 amended erisa events actual asserted invalidity guarantees security documents certain changes control company occurrence event default could result acceleration guarantors’ obligations credit facilities european letter credit facilities contain covenants restricting ability certain foreign subsidiaries issue debt incur liens sell assets merge consolidate make certain investments pay dividends enter agreements negative pledge clauses engage business activity existing business european letter credit facilities also incorporate reference covenants contained credit facilities european letter credit facilities include events default usual types letter credit facilities including nonpayment fee obligation violation covenants incorrectness representations warranties cross defaults cross acceleration bankruptcy material judgments erisa events actual asserted invalidity guarantees certain changes control company occurrence event default could result termination commitments acceleration obligations european letter credit facilities complied covenants european letter credit facilities december 31 2011 liquidity analysis cash balance decreased 2202 million 3374 million december 31 2011 compared december 31 2010 cash usage included funding increased working capital requirements reductions advanced cash received customers 1500 million share repurchases 1080 million capital expenditures acquisition lpi 896 million 696 million dividend payments monitor depository institutions hold cash equivalents regular basis believe placed deposits creditworthy financial institutions approximately 5 term loan due mature 2012 approximately 11 2013 noted term loan revolving line credit mature december 2015 effects 3300 million notional interest rate swaps approximately 70 term debt fixed rates december 31 2011 december 31 2011 borrowing capacity 3526 million 5000 million revolving line credit due outstanding letters credit net available capacity new european loc facility €357 million credit facilities new european loc facility committed held diversified group financial institutions december 31 2011 2010 result increases values plan’s assets contributions plan us pension plan fully funded defined applicable law consideration intent maintain fully funded status contributed 89 million us pension plan 2011 excluding direct benefits paid continue maintain asset allocation consistent strategy maximize total return reducing portfolio risks asset class diversification december 31 2011 1884 million total cash balance 3374 million held foreign subsidiaries 1499 million consider permanently reinvested outside us based expected 2012 liquidity needs various geographies currently anticipate need repatriate permanently reinvested cash fund domestic operations would generate adverse tax results however event cash needed fund domestic operations estimate 1499 million could repatriated without resulting material us tax liability december 31 2011 direct investments european sovereign nonsovereign debt however certain defined benefit plans hold investments european equity fixed income securities discussed note 12 consolidated financial statements included item 8 annual report broad macrolevel economic impacts experience direct measurable disruptions 2011 due european sovereign debt crisis continue monitor evaluate impact future developments region current business customers suppliers state global economy additional adverse developments could potentially impact customers’ exposures sovereign nonsovereign european debt could soften level capital investment demand products services outlook 2012 future results operations forwardlooking statements contained annual report including mda involve number risks uncertainties particular statements regarding goals strategies new product introductions plans cultivate new businesses future economic conditions revenue pricing gross profit margin costs capital spending depreciation amortization research development expenses potential impairment investments tax rate pending tax legal proceedings future results operations may also affected amount type valuation sharebased awards granted well amount awards forfeited due employee turnover addition various important factors discussed number factors could cause actual results differ materially expectations see risks described item 1a risk factors annual report bookings increased 102 2011 compared 2010 backlog december 31 2011 increased 37 compared december 31 2010 expected generate increased revenue 2012 compared 2011 excluding impact currency fluctuations booking represents contract certain circumstances modified canceled include varying lengths time booking time revenue recognition guarantee increase bookings result comparable increase revenues otherwise indicative future results expect continued competitive economic environment 2012 however anticipate benefits planned increases shipments existing backlog continuation end user strategy strength high margin aftermarket business continued disciplined cost management diverse customer base broad product portfolio unified operating platform first half 2012 expect results impacted efforts reduce past due backlog large low margin late project shipments well reduced level aftermarket shipments compared fourth quarter 2011 expected result 2012 performance weighted towards second half year believe primary markets continue provide opportunities evidenced eight consecutive quarters 1 billion bookings yearoveryear increase backlog remain cautious outlook 2012 given continuing uncertainty global economic conditions additional discussion markets opportunities see business overview markets section mda borrowings credit facilities carry floating rate interest december 31 2011 3300 million derivative contracts convert portion floating interest rates fixed interest rates reduce exposure interest rate volatility result reducing volatility may fully benefit decrease interest rates expect interest expense 2012 comparable 2011 however portion debt carries floating rate interest debt subject volatility rates could negatively impact interest expense results operations may also impacted unfavorable foreign currency exchange rate movements see “item 7aitem 7 managements discussion analysis financial condition results operations following discussion analysis provided increase understanding read conjunction accompanying consolidated financial statements notes see “item 1a risk factors” “forwardlooking statements” included annual report form 10k year ended december 31 2013 annual report discussion risks uncertainties assumptions associated statements unless otherwise noted amounts discussed herein consolidated executive overview company believe worldleading manufacturer aftermarket service provider comprehensive flow control systems develop manufacture precisionengineered flow control equipment integral movement control protection flow materials customers’ critical processes product portfolio pumps valves seals automation aftermarket services supports global infrastructure industries including oil gas chemical power generation water management well general industrial markets products services add value manufacturing platform global network quick response centers qrcs offer broad array aftermarket equipment services installation advanced diagnostics repair retrofitting currently employ approximately 18000 employees 50 countries business model significantly influenced capital spending global infrastructure industries placement new products service aftermarket services existing operations worldwide installed base products important source aftermarket revenue products expected ensure maximum operating time many key industrial processes past several years significantly invested aftermarket strategy provide local support drive customer investments offerings use services replace repair installed products aftermarket portion business also helps provide business stability various economic periods aftermarket business served network 175 qrcs located around globe provides variety service offerings customers including spare parts service solutions product life cycle solutions valueadded services generally higher margin business compared original equipment business key component profitable growth strategy operations conducted three business segments referenced throughout management’s discussion analysis financial condition results operations mda • engineered product division epd long lead time custom highlyengineered pumps pump systems mechanical seals auxiliary systems replacement parts related services • industrial product division ipd preconfigured engineered pumps pump systems related products services • flow control division fcd engineered industrial valves control valves actuators controls related services business segments share focus industrial flow control technology high number common customers segments also complementary product offerings technologies often combined applications provide us net competitive advantage segments also benefit global footprint economies scale reducing administrative overhead costs serve customers cost effectively example segment leadership reports chief operating officer coo segments share leadership operational support functions research development marketing supply chain reputation product portfolio built 50 wellrespected brand names worthington idp valtek limitorque durco edward anchordarling durametallic believe one comprehensive industry products services sold either directly designated channels 10000 companies including world’s leading engineering procurement construction epc firms original equipment manufacturers distributors end users continue build geographic breadth qrc network goal positioned near customers possible service support order capture valuable aftermarket business along ensuring local capability sell install service equipment remote regions equally imperative continuously improve global operations continue expand global supply chain capability meet global customer demands ensure quality timely delivery products continue devote resources improving supply chain processes across business segments find areas synergy cost reduction improve supply chain management capability ensure meet global customer demands also remain focused improving ontime delivery quality managing warranty costs percentage sales across global operations assistance focused continuous improvement process cip initiative goal cip initiative includes lean manufacturing six sigma business management strategy value engineering maximize service fulfillment customers ontime delivery reduced cycle time quality highest internal productivity experienced improved bookings 2013 chemical oil gas general industries saw increased activity despite environment continued global macroeconomic uncertainty growth chemical industry driven asia pacific countries investing chemical processing capabilities north america producers investing utilize natural gas lowcost feedstock experienced modest increase bookings europe economic conditions region stabilized power generation industry experienced stable level investment 2013 due low levels economic growth continued uncertainty related environmental regulations 2013 continued favorable conditions aftermarket business driven customers need maintain continuing operations across several industries expansion aftermarket capabilities integrated solutions offerings pursuit major capital projects globally investments localized customer service remain key components longterm growth strategy also provide stability various economic periods believe commitment localize service support capabilities close customers operations qrc network enabled us grow market share aftermarket portion business believe customer relationships global presence highlyregarded technical capabilities continue opportunities core industries however face ongoing challenges affecting many companies industry significant multinational presence economic political currency risks markets following discussion read conjunction outlook 2014 section included mda products services used several distinct industries oil gas chemical power generation water management number industries collectively referred general industries demand products depends level new capital investment planned unplanned maintenance expenditures customers level new capital investment depends turn capital infrastructure projects driven need oil gas power generation water management well general economic conditions drivers generally related phase business cycle respective industries expectations future market behavior levels maintenance expenditures additionally driven reliability equipment planned unplanned downtime maintenance required capacity utilization process sales epc firms original equipment manufacturers typically large project orders critical applications certain sales distributors project orders typically procured customers either directly us indirectly contractors new construction projects facility enhancement projects quick turnaround business also refer shortcycle defined orders received customer booked shipped generally within three months receipt orders typically standardized general purpose products parts services three business segments generate certain levels type business sale aftermarket products services benefit large installed base original equipment requires periodic maintenance repair replacement parts use manufacturing platform global network qrcs offer broad array aftermarket equipment services installation advanced diagnostics repair retrofitting geographic regions positioned provide quick response believe customers traditionally relied us rather competitors aftermarket products due highly engineered customized products however aftermarket standard products competitive existence common standards allows easier replacement installed products proximity service centers timeliness delivery quality important considerations aftermarket products services continue selectively expand global qrc network improve ability capture important aftermarket business oil gas oil gas industry represented approximately 41 bookings 2013 2012 experienced increased level capital spending 2013 compared previous year due need continue building infrastructure bring future capacity line meet future demand expectations majority investment major oil companies continued focus upstream production activities however improved levels spending midstream pipeline downstream refining operations particularly developing markets refining overcapacity remained concern throughout year mature regions overall demand oil remained volatile throughout year aftermarket opportunities industry improved throughout year spite deferred north american refinery maintenance activity integrated solutions offering helped offset reduction servicerelated business many refineries performed work personnel outlook oil gas industry heavily dependent demand growth mature markets developing geographies believe oil gas companies continue upstream downstream investment plans line projections future demand growth production declines existing operations projected decline demand could cause oil gas companies reduce overall level spending could decrease demand products services however believe longterm fundamentals industry remain solid based current supply projected depletion rates existing fields forecasted longterm demand growth longstanding reputation providing successful solutions upstream midstream downstream applications along advancements portfolio offerings believe continue wellpositioned pursue global opportunities industry chemical industry represented approximately 20 19 bookings 2013 2012 respectively capital spending chemical industry increased 2013 expansion existing facilities approval new projects around world middle east asia seen significant growth chemical projects countries regions try access higher margins available downstream petrochemical markets additionally north america seen revival chemical industry shale gas changed economics production allowing lower cost abundant feedstock drive high value chemical projects aftermarket opportunities improved majority year indications improvements continue 2014 despite strong year outlook chemical industry remains heavily dependent global economic conditions global economies stabilize unemployment conditions improve rise consumer spending follow increase spending would drive greater demand chemicalbased products supporting improved levels capital investment believe chemical industry nearterm continue invest maintenance upgrades optimization existing assets developing regions continue investing capital infrastructure meet current future indigenous demand believe global presence localized aftermarket capabilities wellpositioned serve potential growth opportunities industry power generation power generation industry represented approximately 13 14 bookings 2013 2012 respectively 2013 power generation industry continued experience softness capital spending mature regions driven uncertainty related environmental regulations well potential regulatory impacts overall civilian nuclear market developing regions capital investment remained place driven increased demand forecasts electricity countries china india global concerns environment continue support increase desired future capacity renewable energy sources majority active planned construction throughout 2013 continued utilize designs based fossil fuels natural gas increased percentage utilization driven market prices gas remaining low relatively stable potential unconventional sources gas shale gas power generation industry forecasting increased use form fuel power generation plants believe outlook power generation industry remains favorable current legislative efforts limit emissions carbon dioxide may adverse effect investment plans depending potential requirements imposed timing compliance country however believe proposed methods limiting carbon dioxide emissions offer business opportunities products services believe longterm fundamentals power generation industry remain solid based projected increases demand electricity driven global population growth advancements industrialization growth urbanization developing markets also believe longstanding reputation power generation industry portfolio offerings various generating methods advancements serving renewable energy market carbon capture methodologies well global service support structure position us well future opportunities important industry water management water management industry represented approximately 4 bookings 2013 2012 although water management industry displayed weakness spending levels 2013 projects continued delayed worldwide demand fresh water treatment continues create requirements new facilities upgrades existing systems many require products offer particularly pumps proportion people living regions find difficult meet water requirements expected double 2025 believe persistent demand fresh water economic cycles supports continued investments general industries general industries represented aggregate approximately 22 bookings 2013 2012 general industries comprises variety different businesses including mining ore processing pharmaceuticals pulp paper food beverage smaller applications none individually represented 5 total bookings 2013 2012 general industries also includes sales distributors whose end customers operate industries primarily serve outlook group industries heavily dependent upon condition global economies consumer confidence levels longterm fundamentals many industries remain sound many products produced industries common staples industrialized urbanized economies believe specialty product offerings designed industries aftermarket service capabilities provide continued business opportunities results operations throughout discussion results operations discuss impact fluctuations foreign currency exchange rates calculated currency effects translating current year results monthly basis prior year exchange rates periods effective december 10 2013 acquired inclusion industrial product division ipd innovative magdrive llc innomag privatelyowned united states us based company specializing advanced sealless magnetic drive centrifugal pumps chemical general industries effective march 28 2013 joint venture partner agreed exit joint venture audco india limited “ail” manufactures integrated industrial valves india effect exit flow control division fcd acquired 100 ownership ails plug valve manufacturing business asset purchase sold 50 equity interest ail joint venture partner effective october 28 2011 acquired inclusion epd lawrence pumps inc lpi privatelyowned usbased company specializing design development manufacture engineered centrifugal slurry pumps critical services within petroleum refining petrochemical pulp paper energy markets results operations innomag ail lpi consolidated since applicable acquisition dates pro forma information provided acquisitions due immateriality note 2 consolidated financial statements included item 8 financial statements supplementary data item 8 annual report discusses details acquisitions exit joint venture fourth quarter 2013 initiated realignment program discussed note 20 consolidated financial statements included item 8 annual report currently expect total realignment program charges 158 million approved plans 107 million incurred december 31 2013 upon completion realignment program expect annual run rate savings approximately 10 million actual savings realized could vary expected savings represent managements best estimate date following discussion read conjunction “outlook 2014” section included mda bookings backlog define booking receipt customer order contractually engages us perform activities behalf customer regards manufacture delivery andor support products delivery service bookings recorded subsequently canceled within fiscal period excluded bookings 2013 increased 1679 million 36 compared 2012 increase included negative currency effects approximately 30 million increase primarily driven oil gas chemical general industries increase heavily weighted toward original equipment bookings 2012 increased 516 million 11 compared 2011 increase included negative currency effects approximately 204 million increase primarily driven oil gas chemical industries partially offset declines power generation industry increase heavily weighted toward aftermarket bookings increase included 2012 impact ipd orders excess 90 million supply offshore oil gas platform equipment next five years order 2011 excess 80 million supply variety pumps refinery recur 2012 backlog represents aggregate value booked uncompleted customer orders influenced primarily bookings sales cancellations currency effects backlog 26 billion december 31 2013 decreased 920 million 35 compared december 31 2012 currency effects provided decrease approximately 8 million currency effects backlog calculated using change period end exchange rates approximately 24 backlog december 31 2013 2012 related aftermarket orders backlog 26 billion december 31 2012 decreased 412 million 15 compared december 31 2011 currency effects provided increase approximately 22 million sales 2013 increased 2033 million 43 compared 2012 increase included negative currency effects approximately 33 million increase primarily due increased original equipment sales driven increased sales north america asia pacific latin america africa partially offset decrease middle east sales 2012 increased 2411 million 53 compared 2011 increase included negative currency effects approximately 204 million increase heavily weighted toward original equipment sales driven customer sales north america asia pacific middle east partially offset decrease customer sales europe sales international customers including export sales us approximately 71 sales 2013 2012 73 2011 sales europe middle east africa ema approximately 35 37 39 total sales 2013 2012 2011 respectively sales asia pacific approximately 20 total sales 2013 2012 19 total sales 2011 sales latin america approximately 11 2013 10 2012 2011 gross profit gross profit margin gross profit 2013 increased 1071 million 68 compared 2012 gross profit margin 2013 341 increased 333 2012 increase primarily attributable execution operational improvements disciplined selectivity customer bookings aftermarket sales decreased approximately 40 total sales compared approximately 41 total sales period 2012 gross profit 2012 increased 674 million 45 compared 2011 gross profit margin 2012 333 decreased 336 2011 decrease primarily attributed larger effect revenue certain large lower margin projects shipped backlog compared period 2011 partially offset effects operational execution improvements aftermarket sales approximately 41 total sales consistent period 2011 selling general administrative expense sga 2013 increased 447 million 48 compared 2012 currency effects yielded decrease approximately 5 million increase primarily attributable 2012 gains noted recur 2013 increased sellingrelated expenses support higher sales lesser extent charges associated 2013 realignment program sga percentage sales twelve months ended december 31 2013 increased 10 basis points compared period 2012 104 million gain sale manufacturing facility brazil gain certain legal matters 2012 neither recurred 2013 substantially offset favorable impact improved sga leverage continued focus cost containment 2013 sga 2012 increased 80 million 09 compared 2011 increase included currency effects yielded decrease approximately 28 million sellingrelated expenses broadbased annual incentive compensation expenses primarily contributed increase increases partially offset 104 million gain epd first quarter 2012 sale manufacturing facility rio de janeiro brazil preparation opening new manufacturing facility 2013 sga percentage sales 2012 improved 90 basis points compared 2011 due part continued focus cost management net earnings affiliates net earnings affiliates represents net income investments seven joint ventures one located japan saudi arabia south korea united arab emirates india two china accounted using equity method accounting net earnings affiliates increased primarily result ail transactions resulted total pretax gains 283 million recorded net earnings affiliates 2013 net earnings affiliates 2012 decreased 21 million 110 compared 2011 primarily due decreased earnings fcd joint venture india operating income operating income 2013 increased 845 million 125 compared 2012 increase included negative currency effects approximately 12 million increase primarily result 1071 million increase gross profit 283 million gains transactions concerning ail joint venture discussed partially offset 447 million increase sga discussed improvement operating income percentage sales primarily due improvement gross profit margin operating income 2012 increased 571 million 92 compared 2011 increase included negative currency effects approximately 36 million overall net increase primarily result 674 million increase gross profit improvement operating income percentage sales primarily due sga percentage sales decreasing 194 203 period 2011 partially offset slight decrease gross profit margin interest expense interest income interest expense 2013 increased 109 million compared 2012 increase primarily attributable interest expense associated senior notes issued third quarter 2012 fourth quarter 2013 increased shortterm borrowings compared 2012 see note 10 consolidated financial statements included item 8 annual report definition discussion various credit resources interest expense 2012 increased 73 million compared 2011 primarily attributable interest expense associated increased borrowings bridge loan senior notes 13 million unamortized deferred loan costs related prior credit agreement expensed third quarter 2012 december 31 2013 approximately 38 debt fixed rates including effects 1400 million notional interest rate swaps interest income 2013 increased 04 million compared 2012 increase primarily attributable higher average cash balances 2013 compared 2012 interest income 2012 decreased 06 million compared 2011 decrease primarily attributable lower average cash balances 2012 compared 2011 expense income net expense income net 2013 decreased 73 million compared 2012 decrease primarily due 60 million decrease losses arising transactions currencies sites’ functional currencies primarily due foreign currency exchange rate movements euro argentinian peso mexican peso relation us dollar expense income net 2012 decreased 253 million expense net 216 million compared income net 37 million 2011 decrease primarily due 216 million increase losses arising transactions currencies sites’ functional currencies well 34 million increase losses foreign exchange contracts decrease primarily due foreign currency exchange rate movements euro mexican peso relation us dollar tax expense tax rate 2013 2012 2011 effective tax rates differed federal statutory rate 35 primarily due net impact foreign operations included impacts lower foreign tax rates changes reserves established uncertain tax positions may 17 2006 tax increase prevention reconciliation act 2005 signed law creating exclusion us taxable income certain types foreign related party payments dividends interest rents royalties prior 2006 subject us taxation exclusion effective years 2006 2013 applies certain related party payments effective tax rate based upon current earnings estimates future taxable earnings domestic international location changes factors including ability utilize foreign tax credits net operating losses results tax audits could impact tax rate future periods december 31 2013 foreign tax credits 279 million expiring 2020 2023 recorded valuation allowance 08 million additionally recorded net deferred tax assets 273 million relate net operating losses tax credits deductible temporary differences available reduce taxable income future periods definite expiration able utilize portion credits losses effective tax rate would increase net earnings per share net earnings 2013 increased 372 million 4855 million 341 per diluted share compared 2012 increase primarily attributable 845 million increase operating income 73 million decrease expense partially offset 109 million increase interest expense 439 million increase tax expense net earnings 2012 increased 197 million 4483 million 284 per diluted share compared 2011 increase primarily attributable 571 million increase operating income partially offset 253 million decrease income 73 million increase interest expense 23 million increase tax expense comprehensive income loss comprehensive income loss 2013 increased 111 million increase primarily due pension postretirement benefits activity partially offset foreign currency translation impact resulting weakening argentinian peso mexican peso indian rupee canadian dollar australian dollar december 31 2013 compared december 31 2012 comprehensive loss 2012 decreased 573 million primarily reflecting foreign currency translation impact resulting strengthening euro mexican peso indian rupee december 31 2012 compared december 31 2011 business segments conduct operations three business segments based type product manage business evaluate segment performance allocate resources based segment’s operating income see note 17 consolidated financial statements included item 8 annual report discussion segments key operating results three business segments epd ipd fcd discussed engineered product division segment results largest business segment epd design manufacture distribute service custom highlyengineered pumps pump systems mechanical seals auxiliary systems collectively referred original equipment epd includes longer lead time highlyengineered pump products shorter cycle engineered pumps mechanical seals generally manufactured within shorter lead times epd also manufactures replacement parts related equipment provides full array replacement parts repair support services collectively referred aftermarket epd primarily operates oil gas power generation chemical water management general industries epd operates 42 countries 29 manufacturing facilities worldwide nine located europe 11 north america four asia five latin america 127 qrcs including colocated manufacturing facilities andor shared fcd 1 includes postacquisition operating results lpi acquired october 2011 bookings 2013 increased 1010 million 43 compared 2012 increase included negative currency effects approximately 39 million increase customer bookings primarily driven oil gas general chemical industries partially offset water management industry customer bookings increased 557 million asia pacific 173 million latin america 90 million middle east 78 million north america primarily driven customer original equipment bookings 25 billion bookings 2013 approximately 50 oil gas 17 general industries 16 power generation 16 chemical 1 water management interdivision bookings eliminated included consolidated bookings disclosed increased 29 million bookings 2012 increased 396 million 17 compared 2011 increase included negative currency effects approximately 105 million increase customer bookings primarily driven chemical oil gas general industries partially offset power generation industry customer bookings increases 801 million north america 530 million asia pacific 471 million europe partially offset decrease 1298 million middle east overall net increase driven aftermarket bookings increase included impact order first quarter 2011 excess 80 million supply variety pumps refinery middle east recur 2012 24 billion bookings 2012 approximately 51 oil gas 17 power generation 15 chemical 2 water management 15 general industries trend toward globalization continuing drive spending chemical oil gas general industries 2012 north american pipeline business global fertilizer market strengthened compared last year interdivision bookings eliminated included consolidated bookings disclosed decreased 112 million sales 2013 increased 1340 million 56 compared 2012 increase included negative currency effects approximately 43 million increase primarily driven increased original equipment sales primarily resulting increased customer sales 887 million asia pacific 438 million north america 361 million africa 362 million latin america 129 million europe partially offset decreased sales 797 million middle east interdivision sales eliminated included consolidated sales disclosed decreased 13 million sales 2012 increased 817 million 35 compared 2011 increase included negative currency effects approximately 106 million increase heavily weighted towards aftermarket sales primarily resulting customer sales increases 750 million north america 529 million middle east 211 million asia pacific partially offset sales decreases 286 million europe 216 million latin america interdivision sales eliminated included consolidated sales disclosed decreased 174 million gross profit 2013 increased 501 million 62 compared 2012 gross profit margin 2013 339 comparable 2012 lower costs associated execution operational improvements lesser extent fewer lower margin projects shipped backlog substantially offset sales mix shift lower margin original equipment sales gross profit 2012 increased 78 million 10 compared 2011 gross profit margin 2012 338 decreased 346 2011 decrease primarily attributed larger effect revenue certain large lower margin projects shipped backlog compared period 2011 partially offset effects operational execution improvements sales mix shift towards higher margin aftermarket sales operating income 2013 increased 272 million 69 compared 2012 increase included negative currency effects approximately 8 million increase due primarily gross profit increase 501 million partially offset increased sga 191 million including decrease due currency effects approximately 6 million increase sga due part increased bad debt expense related certain customers included 104 million gain sale manufacturing facility rio de janeiro brazil 2012 recur 2013 operating income 2012 increased 09 million 02 compared 2011 increase included negative currency effects approximately 20 million increase due primarily gross profit increase 78 million partially offset increased sga 74 million including decrease due currency effects approximately 13 million increase sga included 104 million gain sale manufacturing facility rio de janeiro brazil opening new manufacturing facility 2013 offset increased sga costs associated lpi increased broadbased annual incentive compensation increased sellingrelated expenses backlog 13 billion december 31 2013 decreased 889 million 63 compared december 31 2012 currency effects provided decrease approximately 19 million backlog december 31 2013 included 216 million interdivision backlog eliminated included consolidated backlog disclosed backlog 14 billion december 31 2012 decreased 413 million 29 compared december 31 2011 currency effects provided increase approximately 11 million backlog december 31 2012 included 214 million interdivision backlog eliminated included consolidated backlog disclosed industrial product division segment results ipd design manufacture distribute service engineered preconfigured industrial pumps pump systems including submersible motors specialty products collectively referred original equipment additionally ipd manufactures replacement parts related equipment provides full array support services collectively referred aftermarket ipd primarily operates oil gas chemical water management power generation general industries ipd operates 13 manufacturing facilities four located us six europe operates 19 qrcs worldwide including nine sites europe four us including colocated manufacturing facilities 1 includes postacquisition operating results innomag acquired december 2013 bookings 2013 decreased 752 million 78 compared 2012 decrease included currency benefits approximately 4 million decrease included impact orders 2012 excess 90 million supply offshore oil gas platform equipment primarily end customer latin america nonrecurrence large orders similar size 2013 resulted decreased customer bookings oil gas general industries partially offset increase power generation industry customer bookings decreases 834 million latin america 51 million africa partially offset increases 87 million europe 56 million north america decrease driven customer original equipment bookings interdivision bookings eliminated included consolidated bookings disclosed decreased 59 million 8891 million bookings 2013 approximately 31 oil gas 29 general industries 18 water management 14 chemical 8 power generation bookings 2012 increased 589 million 65 compared 2011 increase included negative currency effects approximately 35 million increase primarily driven increased customer bookings oil gas chemical industries partially offset power industry increase included impact 2012 orders excess 90 million supply offshore oil gas platform equipment next five years primarily end customer latin america customer bookings increases 1052 million latin america 327 million north america partially offset decrease 377 million europe 228 million asia pacific increase heavily weighted toward customer original equipment bookings interdivision bookings eliminated included consolidated bookings disclosed decreased 247 million 9643 million bookings 2012 approximately 35 oil gas 16 water management 13 chemical 5 power generation 31 general industries 2012 opportunities chemical industry driven inexpensive natural gas north america demand product diversification middle east additionally stable pricing 2012 promoted investment conventional unconventional oil sales 2013 decreased 37 million 04 compared 2012 decrease included currency benefits approximately 5 million decrease driven interdivision sales eliminated included consolidated sales disclosed decreased 132 million partially offset increase customer sales driven original equipment sales increased customer sales 317 million latin america 138 million africa partially offset decreased sales 225 million middle east 112 million europe 60 million asia pacific sales 2012 increased 757 million 86 compared 2011 increase included negative currency effects approximately 31 million increase customer sales primarily driven original equipment sales customer sales increases 359 million north america 152 million middle east 143 million asia pacific 121 million latin america partially offset decreased sales 227 million europe interdivision sales eliminated included consolidated sales disclosed increased 146 million gross profit 2013 increased 150 million 65 compared 2012 gross profit margin 2013 258 increased 241 2012 increase primarily attributable lower manufacturing costs resulting execution operational improvements gross profit 2012 increased 328 million 166 compared 2011 gross profit margin 2012 241 increased 225 2011 increase primarily attributable 71 million ipd recovery plan realignment charges incurred 2011 recur 2012 lower costs resulting operational improvements continued realization realignment savings partially offset sales mix shift lower margin original equipment sales operating income 2013 increased 162 million 163 compared 2012 increase included currency benefits approximately 1 million increase due 150 million increase gross profit 12 million decrease sga operating income 2012 increased 366 million 582 compared 2011 increase included negative currency effects approximately 4 million increase due 328 million increase gross profit discussed 38 million decrease sga backlog 5301 million december 31 2013 decreased 629 million 106 compared december 31 2012 currency effects provided increase approximately 10 million backlog december 31 2013 included 300 million interdivision backlog eliminated included consolidated backlog disclosed backlog 5930 million december 31 2012 increased 252 million 44 compared december 31 2011 currency effects provided increase approximately 13 million backlog december 31 2012 included 407 million interdivision backlog eliminated included consolidated backlog disclosed flow control division segment results second largest business segment fcd designs manufactures distributes broad portfolio engineeredtoorder configuredtoorder isolation valves control valves valve automation products boiler controls related services fcd leverages experience application knowhow offering complete menu engineered services complement expansive product portfolio fcd total 60 manufacturing facilities qrcs 25 countries around world five 27 manufacturing operations located us 14 located europe seven located asia pacific based independent industry sources believe fcd fourth largest industrial valve supplier global basis bookings 2013 increased 1351 million 88 compared 2012 increase included currency benefits approximately 5 million increase customer bookings primarily attributable oil gas general chemical industries partially offset decrease power generation industry increased customer bookings 601 million north america 473 million latin america 352 million europe 96 million asia pacific partially offset decrease 166 million middle east increase primarily driven increased customer original equipment bookings 17 billion bookings 2013 approximately 32 oil gas 27 chemical 26 general industries 13 power generation 2 water management bookings 2012 decreased 762 million 48 compared 2011 decrease included negative currency effects approximately 63 million decrease customer bookings primarily attributable customer project delays oil gas industry fewer pulp paper projects general industries customer bookings decreases 686 million europe 219 million latin america partially offset increase 136 million middle east decrease heavily weighted toward original equipment bookings 15 billion bookings 2012 approximately 29 oil gas 29 chemical 27 general industries 14 power generation 1 water management sales 2013 increased 586 million 38 compared 2012 increase included currency benefits approximately 6 million increase primarily driven customer original equipment sales growth oil gas power generation industries increased sales 459 million north america 166 million europe 96 million middle east partially offset decrease 147 million asia pacific sales 2012 increased 838 million 57 compared 2011 increase included negative currency effects approximately 67 million increase primarily driven customer original equipment sales oil gas chemical industries sales increases 778 million asia pacific 475 million north america partially offset decrease 424 million europe gross profit 2013 increased 378 million 70 compared 2012 gross profit margin december 31 2013 358 increased 348 period 2012 increase attributable favorable sales mix original equipment aftermarket shift product line mix continued traction low cost sourcing cost control initiatives gross profit 2012 increased 299 million 58 compared 2011 gross profit margin 2012 348 comparable period 2011 operating income 2013 increased 546 million 215 compared 2012 increase included negative currency effects approximately 5 million increase primarily attributable 283 million pretax gains realized transactions concerning ail joint venture discussed note 2 consolidated financial statements included annual report 378 million increase gross profit partially offset 90 million increase sga primarily driven increased selling research development costs operating income 2012 increased 201 million 86 compared 2011 increase included negative currency effects approximately 12 million increase principally attributable 299 million increase gross profit noted partially offset 72 million increase sga including decrease due currency effects approximately 11 million increased sga primarily attributable increased selling research development costs backlog 7696 million december 31 2013 increased 457 million 63 compared december 31 2012 currency effects provided increase approximately 1 million backlog 7239 million december 31 2012 decreased 360 million 47 compared december 31 2011 currency effects provided decrease approximately 3 million liquidity capital resources cash flow analysis existing cash generated operations borrowings available existing revolving credit facility primary sources shortterm liquidity monitor depository institutions hold cash equivalents regular basis believe placed deposits creditworthy financial institutions sources operating cash generally include sale products services conversion working capital particularly accounts receivable inventories total cash balance december 31 2013 3638 million compared 3043 million december 31 2012 3374 million december 31 2011 cash provided operating activities 4878 million 5171 million 2182 million 2013 2012 2011 respectively provided cash support shortterm working capital needs working capital increased 2013 due primarily higher accounts receivable 538 million 2013 contributed 469 million defined benefit pension plans working capital increased 2012 due primarily higher inventory 727 million higher accounts receivable 351 million 2012 contributed 281 million defined benefit pension plans increases accounts receivable used 538 million cash flow 2013 compared 351 million 2012 2431 million 2011 use cash accounts receivable 2013 directly related overall increase sales increased aging slower collection certain receivables latin america compared 2012 use cash accounts receivable 2012 primarily attributable delays collection accounts receivable due slower anticipated payments certain customers use cash accounts receivable 2011 primarily attributable delays collection accounts receivable due slower anticipated payments certain customers relatively strong sales december 2011 part due completion certain previously past due projects contractually longer payment terms 2011 fourth quarter 2013 2012 2011 days sales outstanding dso 75 days reference purposes based 2013 sales dso improvement one day could provide approximately 15 million cash experienced significant increase customer payment defaults 2013 decreases inventory provided 286 million cash flow 2013 compared uses 727 million 2012 1398 million 2011 cash provided inventory 2013 primarily due reduction delayed shipments increase progress billings large orders december 31 2013 use cash inventory 2012 primarily due decrease progress billings large orders december 31 2012 higher raw material inventory needed support increased level bookings use cash inventory 2011 primarily due shipment delays growth short cycle orders 2011 requiring higher raw material work process inventory support end period backlog inventory turns 35 times december 31 2013 compared 32 34 times period 2012 2011 respectively calculation inventory turns reflect impact advanced cash received customers reference purposes based 2013 data improvement onetenth turn could yield approximately 24 million cash flows used investing activities 1680 million 1264 million 1942 million 2013 2012 2011 respectively due primarily capital expenditures cash paid acquisitions partially offset cash received audco india limited ail transaction discussed note 2 consolidated financial statements included item 8 annual report capital expenditures 1391 million 1355 million 1080 million 2013 2012 2011 respectively 2013 capital expenditures focused strategic initiatives pursue new markets geographic capacity expansion information technology infrastructure cost reduction opportunities cash paid acquisitions 2013 768 million compared 40 million 2012 905 million 2011 additionally 2013 sold 50 equity interest ail joint venture partner 462 million cash flows used financing activities 2558 million 2013 compared 4289 million 2012 2390 million 2011 cash outflows 2013 resulted primarily repurchase 4583 million common stock 769 million dividend payments partially offset 2986 million net proceeds issuance senior notes cash outflows 2012 resulted primarily repurchase 7719 million common stock 800 million net payments longterm debt 738 million dividend payments partially offset 4981 million net proceeds issuance senior notes may 31 2012 announced board directors endorsed capital structure strategy designed make financial structure efficient capital structure strategy includes targeting longterm gross leverage ratio 10x20x total debt ebitda business cycle ii expanded share repurchase program 10 billion subsequently completed maintained previouslyannounced policy annually returning 40 50 running twoyear average net earnings shareholders following attainment announced target leverage ratio february 19 2013 board directors approved 7500 million share repurchase authorization included approximately193 million remaining capacity previous 10 billion share repurchase authorization december 31 2013 3844 million remaining capacity current share repurchase program intend adhere policy foreseeable future returns cash dividends andor share repurchases reviewed individually declared board directors implemented management discretion depending financial condition business opportunities market conditions time part continuing effort execute capital structure strategy fourth quarter 2013 amended existing credit agreement provided initial 4000 million term loan “term loan facility” revolving credit facility “revolving credit facility” together term loan facility “senior credit facility” significant amendments extended maturity senior credit facility one year october 4 2018 increased revolving credit facility 8500 million 10 billion removed 3000 million sublimit issuance performance letters credit revolving credit facility retained 300 million sublimit swing line loans significant existing terms credit agreement remained unchanged new agreement provides additional debt capacity enhance operating flexibility additionally november 1 2013 issued 3000 million aggregate principal amount senior notes bear annual stated interest rate 400 see note 10 consolidated financial statements included item 8 annual report cash needs next 12 months expected less 2013 resulting decreased level anticipated share repurchases improvements working capital management partially offset increased cash dividends believe cash flows operating activities combined availability revolving credit facility existing cash balances sufficient enable us meet cash flow needs next 12 months however cash flows operations could adversely affected decrease rate general global economic growth well economic political risks associated sales products operational factors competition regulatory actions fluctuations foreign currency exchange rates fluctuations interest rates among factors believe cash flows operating activities expectation continuing availability draw upon credit agreements also sufficient meet cash flow needs periods beyond next 12 months payments acquisitions regularly evaluate acquisition opportunities various sizes cost terms financing raised conjunction acquisition including ability raise economical capital critical consideration evaluation note 2 consolidated financial statements included item 8 annual report contains discussion acquisitions financing discussion debt related covenants included note 10 consolidated financial statements included item 8 annual report compliance covenants december 31 2013 certain financing arrangements contain provisions may result event default failure financing arrangements meet payment terms observe covenants could result acceleration payment due provisions referred cross default provisions senior credit facility senior notes european letter credit loc facility crossdefaulted rating agencies assign credit ratings certain debt access capital markets costs debt could directly affected credit ratings adverse action respect credit ratings could generally cause borrowing costs increase potential pool investors funding sources decrease particular decline credit ratings would increase cost borrowing senior credit facility entered interest rate swap agreements hedge exposure variable interest payments related senior credit facility agreements fully described note 6 consolidated financial statements included item 8 annual report item 7a nannanitem 7a quantitative qualitative disclosures market risk disclosure market risk appears page 18 companys 1998 annual report shareholders heading market risks associated financial instruments incorporated herein reference item 8item 7a quantitative qualitative disclosures market risk disclosure market risk appears page 29 companys 1999 annual report shareholders heading market risks associated financial instruments incorporated herein reference item 8item 7a quantitative qualitative disclosures market risk disclosure market risk appears page 31 companys 2000 annual report shareholders heading market risks associated financial instruments incorporated herein reference item 8item 7a quantitative qualitative disclosures market risk disclosure market risk appears page 30 companys 2001 annual report shareholders heading market risks associated financial instruments incorporated herein reference item 8item 7a quantitative qualitative disclosures market risk disclosure market risk beginning page 39 companys 2002 annual report shareholders heading market risks associated financial instruments incorporated herein reference item 8item 7a quantitative qualitative disclosures market risk market risks associated financial instruments market risk exposure arising changes interest rates foreign currency exchange rate movements enter forward contracts hedge risks associated transactions denominated foreign currencies risk management derivatives policy specify conditions may enter derivative contracts december 31 2003 2002 approximately 751 million 486 million respectively notional amount outstanding contracts third parties december 31 2003 maximum length forward contract currently place 17 months fair value outstanding forward contracts december 31 2003 2002 asset 54 million 33 million respectively also part risk management program enter interest rate swap agreements hedge exposure floating interest rates certain portions debt december 31 2003 2002 2150 million 1250 million respectively notional amount outstanding interest rate swaps third parties december 31 2003 maximum length interest rate contract currently place approximately three years december 31 2003 2002 fair value interest rate swap agreements liability 76 million 98 million respectively exposed risk creditrelated losses resulting nonperformance counterparties financial instruments perform credit evaluations counterparties forward contracts interest rate swap agreements expect counterparties meet obligations experienced credit losses counterparties earnings impacted changes shortterm interest rates result borrowings credit facility bears interest based floating rates december 31 2003 effect interest rate swaps approximately 4627 million variable rate debt obligations outstanding weighted average interest rate 39 hypothetical change 100basis points interest rate borrowings assuming constant variable rate debt levels would changed interest expense approximately 46 million 2003 employ foreign currency hedging strategy minimize potential losses earnings cash flows unfavorable foreign currency exchange rate movements strategies also minimize potential gains favorable exchange rate movements foreign currency exposures arise transactions including firm commitments anticipated transactions denominated currency entitys functional currency foreigndenominated revenues profits translated back us dollars based sensitivity analysis december 31 2003 10 adverse change foreign currency exchange rates could impact results operations 61 million analysis estimated impact currency follows adopted sfas 133 accounting derivative instruments hedging activities amended january 1 2001 accordance transition provisions sfas 133 recorded net 08 million cumulativeeffect adjustment comprehensive income representing fair value hedging instruments january 1 2001 deferred tax 05 million hedging related transactions recorded comprehensive income expense net deferred taxes summarized 1utilizing income tax rate approximately 37 comprised effective rates taxing jurisdiction following amounts net deferred taxes represent expected recognition earnings hedging contracts incurred foreign currency translation gains losses 368 million 2003 233 million 2002 401 million 2001 currency gains 2003 2002 primarily reflect strengthening euro versus us dollar currency losses 2001 result general strengthening us dollar versus euro currencies foreign subsidiaries euro conversion january 1 2002 eurodenominated bills coins issued 11 european union member states germany france netherlands austria italy spain finland ireland belgium portugal luxembourg adopted euro common national currency whereby euro accepted legal currency tender financial condition results operations cash flows materially impacted euro conversion item 8item 7a quantitative qualitative disclosures market risk market risks associated financial instruments market risk exposure arising changes interest rates foreign currency exchange rate movements enter forward contracts hedge risks associated transactions denominated currencies local currency facility engaging transaction risk management derivatives policy specifies conditions may enter derivative contracts december 31 2004 2003 approximately 139 million 75 million respectively notional amount outstanding forward contracts third parties december 31 2004 maximum length forward contract currently place 17 months certain forward contracts qualify hedge accounting fair value outstanding forward contracts december 31 2004 2003 asset 34 million 47 million respectively unrealized gains losses changes fair value forward contracts 25 million 16 million 29 million net tax years ended december 31 2004 2003 2002 respectively included income expense net consolidated statements operations fair value outstanding forward contracts qualifying hedge accounting liability 23 million december 31 2004 2003 unrealized gains losses changes fair value qualifying forward contracts associated underlying exposures 02 million 05 million 24000 net tax december 31 2004 2003 2002 respectively included accumulated comprehensive loss consolidated statements shareholders’ equity also part risk management program enter interest rate swap agreements hedge exposure floating interest rates certain portions debt december 31 2004 2003 1250 million 2150 million respectively notional amount outstanding interest rate swaps third parties december 31 2004 maximum length interest rate contract currently place approximately two years december 31 2004 2003 fair value interest rate swap agreements liability 34 million 76 million respectively 2004 entered compound derivative contract hedge exposure currency translation interest rate risks associated eib loan notional amount derivative 85 million served convert floating rate interest rate risk fixed rate well us dollar currency risk euros derivative matures 2011 december 31 2004 fair value derivative liability 159 million derivative contract qualify hedge accounting unrealized loss derivative foreign translation gain underlying loan aggregate net loss 51 million included expense income net consolidated statements operations exposed risk creditrelated losses resulting nonperformance counterparties financial instruments perform credit evaluations counterparties forward contracts interest rate swap agreements expect counterparties meet obligations experienced credit losses counterparties additionally exposed risk derivatives qualifying hedge accounting earnings impacted changes shortterm interest rates result borrowings 2000 credit facilities bear interest based floating rates december 31 2004 effect interest rate swaps approximately 216 million variable rate debt obligations outstanding weighted average interest rate 49 hypothetical change 100basis points interest rate borrowings assuming constant variable rate debt levels would changed interest expense approximately 22 million 2004 employ foreign currency hedging strategy minimize potential losses earnings cash flows unfavorable foreign currency exchange rate movements strategies also minimize potential gains favorable exchange rate movements foreign currency exposures arise transactions including firm commitments anticipated transactions denominated currency entity’s functional currency foreigndenominated revenues profits translated back us dollars based sensitivity analysis december 31 2004 10 adverse change foreign currency exchange rates could impact results operations 91 million analysis estimated impact currency follows hedging related transactions recorded comprehensive income expense net deferred taxes summarized following amounts net deferred taxes represent expected recognition earnings hedging contracts based fair values december 31 2004 incurred foreign currency translation gains 232 million 554 million 371 million 2004 2003 2002 respectively currency gains primarily reflect strengthening euro versus us dollar item 8item 7a quantitative qualitative disclosures market risk market risks associated financial instruments market risk exposure arising changes interest rates foreign currency exchange rate movements enter forward exchange contracts hedge risks associated transactions denominated currencies local currency operation engaging transaction risk management derivatives policy specifies conditions may enter derivative contracts december 31 2006 2005 4337 million 2871 million respectively notional amount outstanding forward contracts third parties december 31 2006 length forward contracts currently place two days 17 months fair market value adjustments substantial portion forward contracts recognized directly results operations fair value outstanding forward contracts december 31 2006 2005 net asset 34 million net liability 23 million respectively unrealized gains losses changes fair value forward contracts 58 million 52 million 25 million years ended december 31 2006 2005 2004 respectively included expense income net consolidated statements income fair value certain outstanding forward contracts qualify hedge accounting net liability 0 7000 december 31 2006 2005 respectively unrealized gains losses changes fair value qualifying forward contracts associated underlying exposures 0 35000 02 million net tax years ended december 31 2006 2005 2004 respectively included comprehensive income loss also part risk management program enter interest rate swap agreements hedge exposure floating interest rates certain portions debt december 31 2006 2005 4350 million 3250 million respectively notional amount outstanding interest rate swaps third parties december 31 2006 maximum remaining length interest rate contract place approximately 36 months fair value interest rate swap agreements net asset 19 million 09 million december 31 2006 2005 respectively unrealized gains changes fair value interest rate swap agreements net reclassifications 07 million 28 million net tax years ended december 31 2006 2005 respectively included comprehensive income loss exposed risk creditrelated losses resulting nonperformance counterparties financial instruments perform credit evaluations counterparties forward contracts interest rate swap agreements expect counterparties meet obligations experienced credit losses counterparties earnings impacted changes shortterm interest rates result borrowings credit facilities bear interest based floating rates december 31 2006 effect interest rate swaps approximately 1232 million variable rate debt obligations outstanding weighted average interest rate 688 hypothetical change 100basis points interest rate borrowings assuming constant variable rate debt levels would change interest expense approximately 12 million employ foreign currency hedging strategy minimize potential losses earnings cash flows unfavorable foreign currency exchange rate movements strategies also minimize potential gains favorable exchange rate movements foreign currency exposures arise transactions including firm commitments anticipated transactions denominated currency entity’s functional currency translation foreigndenominated assets liabilities us dollars based sensitivity analysis december 31 2006 consideration outstanding forward contracts 10 adverse change foreign currency exchange rates could impact results operations 2006 122 million analysis estimated impact currency follows millions hedging related transactions recorded comprehensive income expense net deferred taxes summarized expect recognize 12 million net deferred taxes earnings 2007 related interest rate swap agreements based fair values december 31 2006 incurred foreign currency translation gains losses 389 million 348 million 214 million 2006 2005 2004 respectively recognized comprehensive income expense currency gain 2006 primarily reflects strengthening euro british pound versus us dollar currency loss 2005 primarily reflects weakening euro versus us dollar currency gain 2004 primarily reflects strengthening euro versus us dollar item 8item 7a quantitative qualitative disclosures market risk market risks associated financial instruments market risk exposure arising changes interest rates foreign currency exchange rate movements enter forward exchange contracts hedge risks associated transactions denominated currencies local currency operation engaging transaction risk management derivatives policy specifies conditions may enter derivative contracts december 31 2007 2006 4649 million 4337 million respectively notional amount outstanding forward contracts third parties december 31 2007 length forward exchange contracts currently place ranged 2 days 20 months fair market value adjustments forward contracts recognized directly current period earnings fair value outstanding forward contracts december 31 2007 2006 net asset 66 million 34 million respectively realized unrealized gains losses changes fair value forward contracts 57 million 58 million 52 million years ended december 31 2007 2006 2005 respectively included income expense net consolidated statements income also part risk management program enter interest rate swap agreements hedge exposure floating interest rates certain portions debt december 31 2007 2006 3950 million 4350 million respectively notional amount outstanding interest rate swaps third parties december 31 2007 maximum remaining length interest rate contract place approximately 33 months fair value interest rate swap agreements net liability 41 million net asset 19 million december 31 2007 2006 respectively unrealized losses gains changes fair value interest rate swap agreements net reclassifications 39 million 07 million net tax years ended december 31 2007 2006 respectively included comprehensive income loss exposed risk creditrelated losses resulting nonperformance counterparties financial instruments perform credit evaluations counterparties forward contracts interest rate swap agreements expect counterparties meet obligations experienced credit losses counterparties earnings impacted changes shortterm interest rates result borrowings credit facilities bear interest based floating rates december 31 2007 effect interest rate swaps 1604 million variable rate debt obligations outstanding weighted average interest rate 64 hypothetical change 100basis points interest rate borrowings assuming constant variable rate debt levels would changed interest expense 2007 approximately 16 million employ foreign currency risk management strategy minimize potential losses earnings cash flows unfavorable foreign currency exchange rate movements strategies also minimize potential gains favorable exchange rate movements foreign currency exposures arise transactions including firm commitments anticipated transactions denominated currency entity’s functional currency translation foreigndenominated assets liabilities us dollars based sensitivity analysis december 31 2007 10 adverse change foreign currency exchange rates could impact results operations 2007 222 million analysis estimated impact currency follows millions hedging related transactions recorded comprehensive income expense net deferred taxes summarized expect recognize 15 million 10 million 01 million net deferred taxes earnings 2008 2009 2010 respectively related interest rate swap agreements based fair values december 31 2007 incurred foreign currency translation gains losses 487 million 389 million 348 million 2007 2006 2005 respectively recognized comprehensive income expense currency gains 2007 2006 primarily reflects weakening us dollar exchange rate primarily compared euro currency loss 2005 primarily reflects strengthening us dollar exchange rate primarily compared euro item 8item 7a quantitative qualitative disclosures market risk market risk exposure arising changes interest rates foreign currency exchange rate movements exposed creditrelated losses event nonperformance counterparties financial instruments including interest rate swaps forward exchange contracts currently expect counterparties continue meet obligations given current creditworthiness interest rate risk earnings impacted changes shortterm interest rates result borrowings credit facilities bear interest based floating rates december 31 2008 effect interest rate swaps 1647 million variable rate debt obligations outstanding credit facilities weighted average interest rate 299 hypothetical change 100 basis points interest rate borrowings assuming constant variable rate debt levels would changed interest expense 16 million year ended december 31 2008 december 31 2008 2007 3850 million 3950 million respectively notional amount outstanding interest rate swaps third parties varying maturities december 2010 foreign currency exchange rate risk substantial portion operations conducted subsidiaries outside us currencies us dollar almost nonus subsidiaries conduct business primarily local currencies also functional currencies foreign currency exposures arise translation foreigndenominated assets liabilities us dollars transactions including firm commitments anticipated transactions denominated currency nonus subsidiary’s functional currency generally view investments foreign subsidiaries longterm perspective therefore hedge investments use capital structuring techniques manage investment foreign subsidiaries deemed necessary realized net losses gains associated foreign currency translation 1259 million 487 million 389 million years ended december 31 2008 2007 2006 respectively included comprehensive expense income based sensitivity analysis december 31 2008 10 change foreign currency exchange rates year ended december 31 2008 would impacted net earnings approximately 38 million due primarily euro calculation assumes currencies change direction proportion relative us dollar indirect effects changes nonus dollar sales volumes prices calculation take account impact foreign currency forward exchange contracts discussed employ foreign currency risk management strategy minimize potential changes cash flows unfavorable foreign currency exchange rate movements use forward exchange contracts allows us mitigate transactional exposure exchange rate fluctuations gains losses incurred forward exchange contracts offset whole part losses gains underlying foreign currency exposure policy allows foreign currency coverage identifiable foreign currency exposures changes fair values instruments included income net accompanying consolidated statements income december 31 2008 us dollar equivalent 5557 million aggregate notional amount outstanding forward exchange contracts third parties compared 4649 million december 31 2007 transactional currency gains losses arising transactions outside sites’ functional currencies changes fair value certain forward exchange contracts included consolidated results operations recognized foreign currency net gains 166 million 63 million 75 million years ended december 31 2008 2007 2006 respectively included income net accompanying consolidated statements income hedging related transactions recorded comprehensive expense income net deferred taxes summarized expect recognize losses gains 53 million 18 million 01 million net deferred taxes earnings 2009 2010 2011 respectively related interest rate swap agreements based fair values december 31 2008 item 8item 7a quantitative qualitative disclosures market risk market risk exposure arising changes interest rates foreign currency exchange rate movements exposed creditrelated losses event nonperformance counterparties financial instruments including interest rate swaps forward exchange contracts currently expect counterparties continue meet obligations given current creditworthiness interest rate risk earnings impacted changes shortterm interest rates result borrowings credit facilities bear interest based floating rates december 31 2009 effect interest rate swaps 1590 million variable rate debt obligations outstanding credit facilities weighted average interest rate 181 hypothetical change 100 basis points interest rate borrowings assuming constant variable rate debt levels would changed interest expense 16 million year ended december 31 2009 december 31 2009 2008 3850 notional amount outstanding interest rate swaps third parties varying maturities december 2010 foreign currency exchange rate risk substantial portion operations conducted subsidiaries outside us currencies us dollar almost nonus subsidiaries conduct business primarily local currencies also functional currencies foreign currency exposures arise translation foreigndenominated assets liabilities us dollars transactions including firm commitments anticipated transactions denominated currency nonus subsidiary’s functional currency generally view investments foreign subsidiaries longterm perspective therefore hedge investments use capital structuring techniques manage investment foreign subsidiaries deemed necessary realized net gains losses associated foreign currency translation 630 million 1267 million 502 million years ended december 31 2009 2008 2007 respectively included comprehensive income expense based sensitivity analysis december 31 2009 10 change foreign currency exchange rates year ended december 31 2009 would impacted net earnings approximately 312 million due primarily euro calculation assumes currencies change direction proportion relative us dollar indirect effects changes nonus dollar sales volumes prices calculation take account impact foreign currency forward exchange contracts discussed see discussion impact 2010 devaluation venezuelan bolivar note 21 consolidated financial statements included item 8item 7a quantitative qualitative disclosures market risk market risk exposure arising changes interest rates foreign currency exchange rate movements exposed creditrelated losses event nonperformance counterparties financial instruments including interest rate swaps forward exchange contracts currently expect counterparties continue meet obligations given current creditworthiness interest rate risk earnings impacted changes shortterm interest rates result borrowings new credit facilities bear interest based floating rates december 31 2010 effect interest rate swaps 1500 million variable rate debt obligations outstanding new credit facilities weighted average interest rate 230 hypothetical change 100 basis points interest rate borrowings assuming constant variable rate debt levels would changed interest expense 15 million year ended december 31 2010 december 31 2010 2009 3500 million 3850 million respectively notional amount outstanding interest rate swaps third parties varying maturities september 2013 foreign currency exchange rate risk substantial portion operations conducted subsidiaries outside us currencies us dollar almost nonus subsidiaries conduct business primarily local currencies also functional currencies foreign currency exposures arise translation foreigndenominated assets liabilities us dollars transactions including firm commitments anticipated transactions denominated currency nonus subsidiary’s functional currency generally view investments foreign subsidiaries longterm perspective therefore hedge investments use capital structuring techniques manage investment foreign subsidiaries deemed necessary realized net losses gains associated foreign currency translation 106 million 630 million 1267 million years ended december 31 2010 2009 2008 respectively included comprehensive expense income based sensitivity analysis december 31 2010 10 change foreign currency exchange rates year ended december 31 2010 would impacted net earnings approximately 23 million due primarily euro calculation assumes currencies change direction proportion relative us dollar indirect effects changes nonus dollar sales volumes prices calculation take account impact foreign currency forward exchange contracts discussed see discussion impact 2010 devaluation venezuelan bolivar note 1 consolidated financial statements included item 8item 7a quantitative qualitative disclosures market risk market risk exposure arising changes interest rates foreign currency exchange rate movements exposed creditrelated losses event nonperformance counterparties financial instruments including interest rate swaps forward exchange contracts currently expect counterparties continue meet obligations given current creditworthiness interest rate risk earnings impacted changes shortterm interest rates result borrowings senior credit facility bear interest based floating rates december 31 2012 effect interest rate swaps 1200 million variable rate debt obligations outstanding senior credit facility weighted average interest rate 181 hypothetical change 100 basis points interest rate borrowings assuming constant variable rate debt levels would changed interest expense 12 million year ended december 31 2012 december 31 2012 2011 2750 million 3300 million respectively notional amount outstanding interest rate swaps third parties varying maturities june 2015 foreign currency exchange rate risk substantial portion operations conducted subsidiaries outside us currencies us dollar primary currencies operate addition us dollar argentine peso australian dollar brazilian real british pound canadian dollar chinese yuan colombian peso euro indian rupee japanese yen mexican peso singapore dollar swedish krona venezuelan bolivar almost nonus subsidiaries conduct business primarily local currencies also functional currencies foreign currency exposures arise translation foreigndenominated assets liabilities us dollars transactions including firm commitments anticipated transactions denominated currency nonus subsidiary’s functional currency generally view investments foreign subsidiaries longterm perspective therefore hedge investments use capital structuring techniques manage investment foreign subsidiaries deemed necessary realized net gains losses associated foreign currency translation 182 million 568 million 106 million years ended december 31 2012 2011 2010 respectively included comprehensive loss employ foreign currency risk management strategy minimize potential changes cash flows unfavorable foreign currency exchange rate movements available use forward exchange contracts allows us mitigate transactional exposure exchange rate fluctuations gains losses incurred forward exchange contracts offset whole part losses gains underlying foreign currency exposure policy allows foreign currency coverage identifiable foreign currency exposures changes fair values instruments included expense income net accompanying consolidated statements income december 31 2012 us dollar equivalent 6089 million aggregate notional amount outstanding forward exchange contracts third parties compared 4812 million december 31 2011 transactional currency gains losses arising transactions outside sites’ functional currencies changes fair value certain forward exchange contracts included consolidated results operations recognized foreign currency net losses gains 213 million 37 million 265 million years ended december 31 2012 2011 2010 respectively included expense income net accompanying consolidated statements income based sensitivity analysis december 31 2012 10 change foreign currency exchange rates year ended december 31 2012 would impacted net earnings approximately 29 million due primarily euro calculation assumes currencies change direction proportion relative us dollar indirect effects changes nonus dollar sales volumes prices calculation take account impact foreign currency forward exchange contracts discussed hedging related transactions related interest rate swaps recorded comprehensive loss net deferred taxes summarized expect recognize losses 10 million 05 million 02 million net deferred taxes earnings 2013 2014 2015 respectively related interest rate swap agreements based fair values december 31 2012 item 8item 7a quantitative qualitative disclosures market risk market risk exposure arising changes interest rates foreign currency exchange rate movements exposed creditrelated losses event nonperformance counterparties financial instruments including interest rate swaps forward exchange contracts currently expect counterparties continue meet obligations given current creditworthiness interest rate risk earnings impacted changes shortterm interest rates result borrowings senior credit facility bear interest based floating rates december 31 2014 effect interest rate swaps 2900 million variable rate debt obligations outstanding senior credit facility weighted average interest rate 151 hypothetical change 100 basis points interest rate borrowings assuming constant variable rate debt levels would changed interest expense 31 million year ended december 31 2014 december 31 2014 2013 400 million 1400 million respectively notional amount outstanding interest rate swaps third parties varying maturities june 2015 foreign currency exchange rate risk substantial portion operations conducted subsidiaries outside us currencies us dollar primary currencies operate addition us dollar argentine peso australian dollar brazilian real british pound canadian dollar chinese yuan colombian peso euro indian rupee japanese yen mexican peso singapore dollar swedish krona venezuelan bolivar almost nonus subsidiaries conduct business primarily local currencies also functional currencies foreign currency exposures arise translation foreigndenominated assets liabilities us dollars transactions including firm commitments anticipated transactions denominated currency nonus subsidiary’s functional currency generally view investments foreign subsidiaries longterm perspective therefore hedge investments use capital structuring techniques manage investment foreign subsidiaries deemed necessary realized net losses gains associated foreign currency translation 1486 million 289 million 182 million years ended december 31 2014 2013 2012 respectively included comprehensive loss income net loss 2014 primarily driven weakening euro versus us dollar december 31 2014 compared december 31 2013 employ foreign currency risk management strategy minimize potential changes cash flows unfavorable foreign currency exchange rate movements available use forward exchange contracts allows us mitigate transactional exposure exchange rate fluctuations gains losses incurred forward exchange contracts offset whole part losses gains underlying foreign currency exposure policy allows foreign currency coverage identifiable foreign currency exposures beginning fourth quarter 2013 instruments meet certain criteria designated hedge accounting december 31 2014 us dollar equivalent 5470 million aggregate notional amount outstanding foreign exchange contracts third parties compared 6169 million december 31 2013 transactional currency gains losses arising transactions outside sites’ functional currencies changes fair value nondesignated foreign exchange contracts included consolidated results operations recognized foreign currency net gains losses 28 million 126 million 213 million years ended december 31 2014 2013 2012 respectively included income expense net accompanying consolidated statements income see discussion impact 2013 devaluation venezuelan bolivar note 1 consolidated financial statements included item 8item 7a quantitative qualitative disclosures market risk market risk exposure arising changes interest rates foreign currency exchange rate movements exposed creditrelated losses event nonperformance counterparties financial instruments including interest rate swaps forward exchange contracts currently expect counterparties continue meet obligations given current creditworthiness interest rate risk earnings impacted changes shortterm interest rates result borrowings senior credit facility bear interest based floating rates december 31 2015 2850 million variable rate debt obligations outstanding senior credit facility weighted average interest rate 186 hypothetical change 100 basis points interest rate borrowings assuming constant variable rate debt levels would changed interest expense 29 million year ended december 31 2015 december 31 2015 notional amount outstanding interest rate swaps third parties compared 400 million december 31 2014 foreign currency exchange rate risk substantial portion operations conducted subsidiaries outside us currencies us dollar primary currencies operate addition us dollar argentine peso australian dollar brazilian real british pound canadian dollar chinese yuan colombian peso euro indian rupee japanese yen mexican peso singapore dollar swedish krona venezuelan bolivar almost nonus subsidiaries conduct business primarily local currencies also functional currencies foreign currency exposures arise translation foreigndenominated assets liabilities us dollars transactions including firm commitments anticipated transactions denominated currency nonus subsidiary’s functional currency march 2015 designated €2557 million €5000 million 2022 eur senior notes net investment hedge investments certain international subsidiaries use euro functional currency generally view investments foreign subsidiaries longterm perspective use capital structuring techniques manage investment foreign subsidiaries deemed necessary realized net losses associated foreign currency translation 1749 million 1486 million 289 million years ended december 31 2015 2014 2013 respectively included comprehensive loss income net loss 2015 primarily driven weakening euro brazilian real argentine peso versus us dollar december 31 2015 compared december 31 2014 employ foreign currency risk management strategy minimize potential changes cash flows unfavorable foreign currency exchange rate movements available use forward exchange contracts allows us mitigate transactional exposure exchange rate fluctuations gains losses incurred forward exchange contracts offset whole part losses gains underlying foreign currency exposure policy allows foreign currency coverage identifiable foreign currency exposures beginning fourth quarter 2013 instruments meet certain criteria designated hedge accounting december 31 2015 us dollar equivalent 3973 million aggregate notional amount outstanding foreign exchange contracts third parties compared 5470 million december 31 2014 transactional currency gains losses arising transactions outside sites’ functional currencies changes fair value nondesignated foreign exchange contracts included consolidated results operations recognized foreign currency net losses gains 387 million 28 million 126 million years ended december 31 2015 2014 2013 respectively included expense income net accompanying consolidated statements income see discussion impact 2015 2013 devaluation venezuelan bolivar note 1 consolidated financial statements included item 8item 7a quantitative qualitative disclosures market risk market risk exposure arising changes interest rates foreign currency exchange rate movements exposed creditrelated losses event nonperformance counterparties financial instruments currently expect counterparties continue meet obligations given current creditworthiness interest rate risk earnings impacted changes shortterm interest rates result borrowings senior credit facility bear interest based floating rates december 31 2016 2243 million variable rate debt obligations outstanding senior credit facility weighted average interest rate 225 hypothetical change 100 basis points interest rate borrowings assuming constant variable rate debt levels would changed interest expense 22 million year ended december 31 2016 foreign currency exchange rate risk substantial portion operations conducted subsidiaries outside us currencies us dollar primary currencies operate addition us dollar argentine peso australian dollar brazilian real british pound canadian dollar chinese yuan colombian peso euro indian rupee japanese yen mexican peso singapore dollar swedish krona russian ruble malaysian ringgit venezuelan bolivar almost nonus subsidiaries conduct business primarily local currencies also functional currencies foreign currency exposures arise translation foreigndenominated assets liabilities us dollars transactions including firm commitments anticipated transactions denominated currency nonus subsidiary’s functional currency march 2015 designated €2557 million €5000 million 2022 eur senior notes net investment hedge investments certain international subsidiaries use euro functional currency generally view investments foreign subsidiaries longterm perspective use capital structuring techniques manage investment foreign subsidiaries deemed necessary realized net losses associated foreign currency translation 721 million 1749 million 1486 million years ended december 31 2016 2015 2014 respectively included comprehensive loss net loss 2016 primarily driven weakening british pound euro mexican peso versus us dollar december 31 2016 compared december 31 2015 employ foreign currency risk management strategy minimize potential changes cash flows unfavorable foreign currency exchange rate movements available use forward exchange contracts allows us mitigate transactional exposure exchange rate fluctuations gains losses incurred forward exchange contracts offset whole part losses gains underlying foreign currency exposure policy allows foreign currency coverage identifiable foreign currency exposures beginning fourth quarter 2013 instruments meet certain criteria designated hedge accounting december 31 2016 us dollar equivalent 3938 million aggregate notional amount outstanding foreign exchange contracts third parties compared 3973 million december 31 2015 transactional currency gains losses arising transactions outside sites’ functional currencies changes fair value nondesignated foreign exchange contracts included consolidated results operations recognized foreign currency net gains losses 38 million 387 million 28 million years ended december 31 2016 2015 2014 respectively included income expense net accompanying consolidated statements income see discussion impact 2015 devaluation venezuelan bolivar note 1 consolidated financial statements included item 8item 7a quantitative qualitative disclosures market risk market risk exposure arising changes interest rates foreign currency exchange rate movements exposed creditrelated losses event nonperformance counterparties financial instruments currently expect counterparties continue meet obligations given current creditworthiness interest rate risk earnings impacted changes shortterm interest rates result borrowings senior credit facility bear interest based floating rates december 31 2017 1644 million variable rate debt obligations outstanding senior credit facility weighted average interest rate 319 hypothetical change 100 basis points interest rate borrowings assuming constant variable rate debt levels would changed interest expense 16 million year ended december 31 2017 foreign currency exchange rate risk substantial portion operations conducted subsidiaries outside us currencies us dollar primary currencies operate addition us dollar argentine peso australian dollar brazilian real british pound canadian dollar chinese yuan colombian peso euro indian rupee japanese yen mexican peso singapore dollar swedish krona russian ruble malaysian ringgit venezuelan bolivar almost nonus subsidiaries conduct business primarily local currencies also functional currencies foreign currency exposures arise translation foreigndenominated assets liabilities us dollars transactions including firm commitments anticipated transactions denominated currency nonus subsidiary’s functional currency march 2015 designated €2557 million €5000 million 2022 eur senior notes net investment hedge investments certain international subsidiaries use euro functional currency generally view investments foreign subsidiaries longterm perspective use capital structuring techniques manage investment foreign subsidiaries deemed necessary realized net gains losses associated foreign currency translation 988 million 720 million 1734 million years ended december 31 2017 2016 2015 respectively included comprehensive loss net gain 2017 primarily driven strengthening euro british pound indian rupee versus us dollar december 31 2017 compared december 31 2016 employ foreign currency risk management strategy minimize potential changes cash flows unfavorable foreign currency exchange rate movements available use forward exchange contracts allows us mitigate transactional exposure exchange rate fluctuations gains losses incurred forward exchange contracts offset whole part losses gains underlying foreign currency exposure policy allows foreign currency coverage identifiable foreign currency exposures december 31 2017 us dollar equivalent 2356 million aggregate notional amount outstanding foreign exchange contracts third parties compared 3938 million december 31 2016 transactional currency gains losses arising transactions outside sites’ functional currencies changes fair value nondesignated foreign exchange contracts included consolidated results operations recognized foreign currency net losses gains 140 million 28 million 377 million years ended december 31 2017 2016 2015 respectively included income expense net accompanying consolidated statements income based sensitivity analysis december 31 2017 10 change foreign currency exchange rates year ended december 31 2017 would impacted net earnings approximately 7 million calculation assumes currencies change direction proportion relative us dollar indirect effects changes nonus dollar sales volumes prices calculation take account impact foreign currency forward exchange contracts discussed item 8item 7a quantitative qualitative disclosures market risk market risk exposure arising changes interest rates foreign currency exchange rate movements exposed creditrelated losses event nonperformance counterparties financial instruments currently expect counterparties continue meet obligations given current creditworthiness interest rate risk earnings impacted changes shortterm interest rates result borrowings senior credit facility bear interest based floating rates december 31 2018 1048 million variable rate debt obligations outstanding senior credit facility weighted average interest rate 430 hypothetical change 100 basis points interest rate borrowings assuming constant variable rate debt levels would changed interest expense 10 million year ended december 31 2018 december 31 2017 1644 million variable rate debt obligations outstanding senior credit facility weighted average interest rate 319 hypothetical change 100 basis points interest rate borrowings assuming constant variable rate debt levels would changed interest expense 16 million year ended december 31 2017 foreign currency exchange rate risk substantial portion operations conducted subsidiaries outside us currencies us dollar primary currencies operate addition us dollar argentine peso australian dollar brazilian real british pound canadian dollar chinese yuan colombian peso euro indian rupee japanese yen mexican peso singapore dollar swedish krona russian ruble malaysian ringgit venezuelan bolivar almost nonus subsidiaries conduct business primarily local currencies also functional currencies foreign currency exposures arise translation foreigndenominated assets liabilities us dollars transactions including firm commitments anticipated transactions denominated currency nonus subsidiary’s functional currency march 2015 designated €2557 million €5000 million 2022 eur senior notes net investment hedge investments certain international subsidiaries use euro functional currency generally view investments foreign subsidiaries longterm perspective use capital structuring techniques manage investment foreign subsidiaries deemed necessary realized net losses gains associated foreign currency translation 631 million 988 million 720 million years ended december 31 2018 2017 2016 respectively included comprehensive loss net loss 2018 primarily driven weakening euro argentinian peso indian rupee british pound versus us dollar december 31 2018 compared december 31 2017 employ foreign currency risk management strategy minimize potential changes cash flows unfavorable foreign currency exchange rate movements available use forward exchange contracts allows us mitigate transactional exposure exchange rate fluctuations gains losses incurred forward exchange contracts offset whole part losses gains underlying foreign currency exposure policy allows foreign currency coverage identifiable foreign currency exposures december 31 2018 us dollar equivalent 2809 million aggregate notional amount outstanding foreign exchange contracts third parties compared 2356 million december 31 2017 transactional currency gains losses arising transactions outside sites’ functional currencies changes fair value foreign exchange contracts included consolidated results operations recognized foreign currency net losses gains 187 million 140 million 28 million years ended december 31 2018 2017 2016 respectively included expense net accompanying consolidated statements income based sensitivity analysis december 31 2018 10 change foreign currency exchange rates year ended december 31 2018 would impacted net earnings approximately 3 million december 31 2017 10 change foreign currency exchange rates year ended december 31 2017 would impacted net earnings approximately 7 million calculation assumes currencies change direction proportion relative us dollar indirect effects changes nonus dollar sales volumes prices calculation take account impact foreign currency forward exchange contracts discussed item 8item 7a quantitative qualitative disclosures market risk market risk exposure arising changes foreign currency exchange rate movements exposed creditrelated losses event nonperformance counterparties financial instruments currently expect counterparties continue meet obligations given current creditworthiness foreign currency exchange rate risk substantial portion operations conducted subsidiaries outside us currencies us dollar primary currencies operate addition us dollar argentine peso australian dollar brazilian real british pound canadian dollar chinese yuan colombian peso euro hungarian forint indian rupee japanese yen mexican peso singapore dollar swedish krona russian ruble malaysian ringgit venezuelan bolivar almost nonus subsidiaries conduct business primarily local currencies also functional currencies foreign currency exposures arise translation foreigndenominated assets liabilities us dollars transactions including firm commitments anticipated transactions denominated currency nonus subsidiary’s functional currency march 2015 designated €2557 million €5000 million 2022 eur senior notes net investment hedge investments certain international subsidiaries use euro functional currency generally view investments foreign subsidiaries longterm perspective use capital structuring techniques manage investment foreign subsidiaries deemed necessary realized net gains losses associated foreign currency translation 66 million 631 million 988 million years ended december 31 2019 2018 2017 respectively included comprehensive income loss net gain 2019 primarily driven weakening euro british pound chinese yuan indian rupee versus us dollar december 31 2019 compared december 31 2018 employ foreign currency risk management strategy minimize potential changes cash flows unfavorable foreign currency exchange rate movements available use forward exchange contracts allows us mitigate transactional exposure exchange rate fluctuations gains losses incurred forward exchange contracts offset whole part losses gains underlying foreign currency exposure policy allows foreign currency coverage identifiable foreign currency exposures december 31 2019 us dollar equivalent 3985 million aggregate notional amount outstanding foreign exchange contracts third parties compared 2809 million december 31 2018 transactional currency gains losses arising transactions outside sites’ functional currencies changes fair value foreign exchange contracts included consolidated results operations recognized foreign currency net losses 145 million 187 million 140 million years ended december 31 2019 2018 2017 respectively included income expense net accompanying consolidated statements income based sensitivity analysis december 31 2019 10 change foreign currency exchange rates year ended december 31 2019 would impacted net earnings approximately 17 million december 31 2018 10 change foreign currency exchange rates year ended december 31 2018 would impacted net earnings approximately 3 million calculation assumes currencies change direction proportion relative us dollar indirect effects changes nonus dollar sales volumes prices calculation take account impact foreign currency forward exchange contracts discussed item 8item 7aquantitative qualitative disclosures market risk market risk exposure arising changes foreign currency exchange rate movements exposed creditrelated losses event nonperformance counterparties financial instruments currently expect counterparties continue meet obligations given current creditworthiness foreign currency exchange rate risk substantial portion operations conducted subsidiaries outside us currencies us dollar primary currencies operate addition us dollar argentine peso australian dollar brazilian real british pound canadian dollar chinese yuan colombian peso euro hungarian forint indian rupee japanese yen mexican peso singapore dollar swedish krona russian ruble malaysian ringgit venezuelan bolivar almost nonus subsidiaries conduct business primarily local currencies also functional currencies foreign currency exposures arise translation foreigndenominated assets liabilities us dollars transactions including firm commitments anticipated transactions denominated currency nonus subsidiary’s functional currency designated €3363 million 125 eur senior notes due 2022 net investment hedge investments certain international subsidiaries use euro functional currency september 22 2020 means managing volatility foreign currency exposure eurous dollar exchange rate entered swap associated euro investment certain international subsidiaries designated net investment hedge december 31 2020 notional value swap €1632 million routinely review investments foreign subsidiaries longterm perspective use capital structuring techniques manage investment foreign subsidiaries deemed necessary realized net gains losses associated foreign currency translation 04 million 66 million 631 million years ended december 31 2020 2019 2018 respectively included comprehensive income loss net gain 2020 primarily driven strengthening euro chinese yuan british pound canadian dollar versus us dollar december 31 2020 compared december 31 2019 employ foreign currency risk management strategy minimize potential changes cash flows unfavorable foreign currency exchange rate movements available use forward exchange contracts allows us mitigate transactional exposure exchange rate fluctuations gains losses incurred forward exchange contracts offset whole part losses gains underlying foreign currency exposure policy allows foreign currency coverage identifiable foreign currency exposures december 31 2020 us dollar equivalent 3881 million aggregate notional amount outstanding foreign exchange contracts third parties compared 3985 million december 31 2019 transactional currency gains losses arising transactions outside sites’ functional currencies changes fair value foreign exchange contracts included consolidated results operations recognized foreign currency net losses 59 million 145 million 187 million years ended december 31 2020 2019 2018 respectively included income expense net accompanying consolidated statements income based sensitivity analysis december 31 2020 10 change foreign currency exchange rates year ended december 31 2020 would impacted net earnings approximately 15 million december 31 2019 10 change foreign currency exchange rates year ended december 31 2019 would impacted net earnings approximately 17 million calculation assumes currencies change direction proportion relative us dollar indirect effects changes nonus dollar sales volumes prices calculation take account impact foreign currency forward exchange contracts discussed item 8nannanitem 7a quantitative qualitative disclosures market risk market risks associated financial instruments market risk exposure arising changes interest rates foreign currency exchange rate movements enter forward contracts hedge risks associated transactions denominated currencies local currency operation engaging transaction risk management derivatives policy specifies conditions may enter derivative contracts december 31 2005 2004 approximately 236 million 139 million respectively notional amount outstanding forward contracts third parties december 31 2005 maximum length forward contract currently place 20 months certain forward contracts qualify hedge accounting fair value outstanding forward contracts december 31 2005 2004 net liability 23 million net asset 34 million respectively unrealized gains losses changes fair value forward contracts approximately 52 million 25 million 16 million years ended december 31 2005 2004 2003 respectively included expense income net consolidated statements operations fair value outstanding forward contracts qualifying hedge accounting net liability 7000 23 million december 31 2005 2004 respectively unrealized gains losses changes fair value qualifying forward contracts associated underlying exposures 35000 02 million 05 million net tax december 31 2005 2004 2003 respectively included comprehensive income expense consolidated statements shareholders’ equity also part risk management program enter interest rate swap agreements hedge exposure floating interest rates term loans december 31 2005 2004 3250 million 1250 million respectively notional amount outstanding interest rate swaps third parties december 31 2005 maximum length interest rate contract currently place approximately three years december 31 2005 2004 fair value interest rate swap agreements net asset 09 million net liability 34 million respectively 2004 entered compound derivative contract hedge exposure currency translation interest rate risks associated european investment bank “eib” loan notional amount derivative 85 million served convert floating rate interest rate risk fixed rate well us dollar currency risk euros derivative matures 2011 december 31 2005 2004 fair value derivative net liability 28 million 159 million respectively unrealized gain loss derivative offset foreign transaction gain underlying loan aggregate 02 million 51 million years ended december 31 2005 2004 respectively included expense income net consolidated statements operations exposed risk creditrelated losses resulting nonperformance counterparties financial instruments perform credit evaluations counterparties forward contracts interest rate swap agreements expect counterparties meet obligations experienced credit losses counterparties earnings impacted changes shortterm interest rates result borrowings credit facilities bear interest based floating rates december 31 2005 effect interest rate swaps approximately 2535 million variable rate debt obligations outstanding weighted average interest rate 636 hypothetical change 100basis points interest rate borrowings assuming constant variable rate debt levels would change interest expense approximately 25 million employ foreign currency hedging strategy minimize potential losses earnings cash flows unfavorable foreign currency exchange rate movements strategies also minimize potential gains favorable exchange rate movements foreign currency exposures arise transactions including firm commitments anticipated transactions denominated currency entity’s functional currency foreigndenominated revenues profits translated back us dollars based sensitivity analysis december 31 2005 consideration outstanding forward contracts 10 adverse change foreign currency exchange rates could impact results operations 117 million analysis estimated impact currency follows millions hedging related transactions recorded comprehensive income expense net deferred taxes summarized following amounts net deferred taxes represent expected recognition earnings hedging contracts based fair values december 31 2005 incurred foreign currency translation gains losses 348 million 214 million 579 million 2005 2004 2003 respectively currency loss 2005 primarily reflects weakening euro versus us dollar currency gains 2004 2003 primarily reflect strengthening euro versus us dollar item 8item 7a quantitative qualitative disclosures market risk market risk exposure arising changes interest rates foreign currency exchange rate movements exposed creditrelated losses event nonperformance counterparties financial instruments including interest rate swaps forward exchange contracts currently expect counterparties continue meet obligations given current creditworthiness interest rate risk earnings impacted changes shortterm interest rates result borrowings credit facilities bear interest based floating rates december 31 2011 effect interest rate swaps 1450 million variable rate debt obligations outstanding credit facilities weighted average interest rate 258 hypothetical change 100 basis points interest rate borrowings assuming constant variable rate debt levels would changed interest expense 15 million year ended december 31 2011 december 31 2011 2010 3300 million 3500 million respectively notional amount outstanding interest rate swaps third parties varying maturities june 2014 foreign currency exchange rate risk substantial portion operations conducted subsidiaries outside us currencies us dollar almost nonus subsidiaries conduct business primarily local currencies also functional currencies foreign currency exposures arise translation foreigndenominated assets liabilities us dollars transactions including firm commitments anticipated transactions denominated currency nonus subsidiary’s functional currency generally view investments foreign subsidiaries longterm perspective therefore hedge investments use capital structuring techniques manage investment foreign subsidiaries deemed necessary realized net losses gains associated foreign currency translation 568 million 106 million 630 million years ended december 31 2011 2010 2009 respectively included comprehensive expense income employ foreign currency risk management strategy minimize potential changes cash flows unfavorable foreign currency exchange rate movements available use forward exchange contracts allows us mitigate transactional exposure exchange rate fluctuations gains losses incurred forward exchange contracts offset whole part losses gains underlying foreign currency exposure policy allows foreign currency coverage identifiable foreign currency exposures changes fair values instruments included income expense net accompanying consolidated statements income december 31 2011 us dollar equivalent 4812 million aggregate notional amount outstanding forward exchange contracts third parties compared 3585 million december 31 2010 transactional currency gains losses arising transactions outside sites’ functional currencies changes fair value certain forward exchange contracts included consolidated results operations recognized net foreign currency gains losses 37 million 265 million 78 million years ended december 31 2011 2010 2009 respectively included income expense net accompanying consolidated statements income see discussion impact 2010 devaluation venezuelan bolivar note 1 consolidated financial statements included item 8item 7a quantitative qualitative disclosures market risk market risk exposure arising changes interest rates foreign currency exchange rate movements exposed creditrelated losses event nonperformance counterparties financial instruments including interest rate swaps forward exchange contracts currently expect counterparties continue meet obligations given current creditworthiness interest rate risk earnings impacted changes shortterm interest rates result borrowings senior credit facility bear interest based floating rates december 31 2013 effect interest rate swaps 2300 million variable rate debt obligations outstanding senior credit facility weighted average interest rate 150 hypothetical change 100 basis points interest rate borrowings assuming constant variable rate debt levels would changed interest expense 23 million year ended december 31 2013 december 31 2013 2012 1400 million 2750 million respectively notional amount outstanding interest rate swaps third parties varying maturities june 2015 foreign currency exchange rate risk substantial portion operations conducted subsidiaries outside us currencies us dollar primary currencies operate addition us dollar argentine peso australian dollar brazilian real british pound canadian dollar chinese yuan colombian peso euro indian rupee japanese yen mexican peso singapore dollar swedish krona venezuelan bolivar almost nonus subsidiaries conduct business primarily local currencies also functional currencies foreign currency exposures arise translation foreigndenominated assets liabilities us dollars transactions including firm commitments anticipated transactions denominated currency nonus subsidiary’s functional currency generally view investments foreign subsidiaries longterm perspective therefore hedge investments use capital structuring techniques manage investment foreign subsidiaries deemed necessary realized net losses gains associated foreign currency translation 289 million 182 million 568 million years ended december 31 2013 2012 2011 respectively included comprehensive income loss employ foreign currency risk management strategy minimize potential changes cash flows unfavorable foreign currency exchange rate movements available use forward exchange contracts allows us mitigate transactional exposure exchange rate fluctuations gains losses incurred forward exchange contracts offset whole part losses gains underlying foreign currency exposure policy allows foreign currency coverage identifiable foreign currency exposures beginning fourth quarter 2013 instruments meet certain criteria designated hedge accounting december 31 2013 us dollar equivalent 6169 million aggregate notional amount outstanding forward exchange contracts third parties compared 6089 million december 31 2012 transactional currency gains losses arising transactions outside sites’ functional currencies changes fair value nondesignated forward exchange contracts included consolidated results operations recognized foreign currency net losses gains 126 million 213 million 37 million years ended december 31 2013 2012 2011 respectively included expense income net accompanying consolidated statements income see discussion impact 2013 devaluation venezuelan bolivar note 1 consolidated financial statements included item 8 item 8 financial statements supplementary data consolidated statement shareholders equity dollars thousands except share data notes consolidated financial statements dollars presented tables thousands except per share data 1 significant accounting policies principles consolidation consolidated financial statements include accounts company wholly owned subsidiaries significant intercompany transactions eliminated cash equivalents cash equivalents represent shortterm investments highly liquid principal values subject significant risk change due interest rate fluctuations accounts receivable accounts receivable stated net allowance doubtful accounts 881000 597000 december 31 1994 1993 respectively inventories stated lowerofcost market cost determined domestic inventories lastin firstout lifo method foreign inventories firstin firstout fifo method financial instruments gains losses hedges existing assets liabilities included carrying amounts assets liabilities ultimately recognized income part carrying amounts gains losses related hedges anticipated transactions recognized income transactions occur carrying amounts companys financial instruments approximate fair value defined sfas 107 fair value estimated reference quoted prices financial institutions well valuation techniques retirement benefit costs defined benefit pension expense postretirement benefit expense based independent actuarial valuations assuming current prior service costs recognized employees expected service periods property plant equipment depreciation amortization property plant equipment computed straightline method based estimated useful lives depreciable assets intangibles assets excess cost fair value net assets acquired goodwill generally amortized straightline basis 1540 years carrying value goodwill reviewed facts circumstances suggest may impaired review indicates goodwill recoverable determined based undiscounted cash flows entity acquired remaining amortization period companys carrying value goodwill reduced estimated shortfall cash flows 2 acquisitions april 28 1994 company purchased sereg vannes sa automatic control valve company headquartered thiers france acquisition funded combination internal cash external borrowings january 5 1994 company purchased valve actuator business mecair spa milan italy associated mecair companies limburg germany alton hampshire england gennevilliers france acquisition funded utilization internal cash 1994 acquisitions material either individually aggregate thus pro forma information presented acquisitions september 23 1992 company purchased issued outstanding stock kammer ventile gmbh essen germany associated kammer companies pittsburgh pennsylvania paris france la chauxdefonds switzerland simultaneously company acquired fixed assets sole proprietorship owned mr eckhard kammer leased otherwise used kammer ventile gmbh assets 18079000 acquired liabilities 4942000 assumed 1992 result acquisition companys acquisition kammer required aggregate payment dm 42000000 approximately 28500000 exchange rate september 23 1992 acquisition funded combination deutsche mark denominated longterm debt totalling 25000000 exchange rate september 23 1992 company cash resources balance following reflects certain unaudited condensed consolidated pro forma financial data year ended december 31 1992 assuming purchase consummated beginning period presented 3 restructuring fourth quarter 1992 company initiated restructuring program resulted onetime pretax expense approximately 6000000 20 per share program covered closing writedown certain underutilized assets resulting companys continued cost reduction productivity improvements efforts inventory writeoff product lines discontinued due new product introductions expenses associated reassignment relocation personnel throughout global organization 4 inventories lifo inventories current cost 26770000 26341000 higher reported december 31 1994 1993 respectively 1993 certain inventory quantities reduced resulted liquidation lifo inventory quantities carried lower costs prevailing prior years effect 1993 liquidation increase net earnings 2792000 5 property plant equipment property plant equipment december 31 1994 1993 follows 6 intangibles assets intangibles assets december 31 1994 1993 follows 7 accrued liabilities accrued liabilities december 31 1994 1993 follows 8 longterm debt dividend restrictions longterm debt including capital lease obligations december 31 1994 1993 follows interest paid amounted 3858000 3839000 2463000 1994 1993 1992 respectively maturities longterm debt including capital lease obligations four years subsequent 1995 follows 1992 company incurred longterm debt finance kammer acquisition us dollar denominated debt effectively converted deutsche mark obligation currency swap agreement currency swap hedge net investment subsidiary unrealized gains losses hedge recognized income shown cumulative translation adjustment account included shareholders equity related amounts due counterparty included longterm debt maturity repayment terms swap match precisely maturity repayment terms underlying debt longterm debt agreements require company maintain specified levels tangible net worth restrict payment cash dividends approximately 16246000 15442000 consolidated retained earnings available payment dividends december 31 1994 1993 respectively dividends limited 15000000 plus 50 defined net earnings subsequent january 1 1992 december 31 1994 1993 company credit facilities available banks could borrow rate exceed prime local market rates 22940000 8200000 respectively facilities company 2251000 339000 borrowings outstanding december 31 1994 1993 weighted average interest rate shortterm borrowings december 31 1994 1993 88 72 respectively years borrowings used primarily support operations foreign subsidiaries additionally company available 12188000 revolving credit agreements domestic banks 9 postretirement benefits deferred items deferred postretirement benefits deferred items december 31 1994 1993 follows 10 leases rentals assets subject capitalized leases included property plant equipment cost amounted 7706000 1994 7727000 1993 accumulated amortization capitalized leases amounted 6216000 1994 6003000 1993 minimum rental commitments december 31 1994 noncancelable leases follows 11 contingencies company received notification alleging potential involvement six former public waste disposal sites may subject remediation sites various stages evaluation federal state environmental authorities projected cost remediating sites well companys alleged fair share allocation uncertain speculative studies completed parties either negotiated amicable resolution matter judicially resolved site many parties similarly identified identification location additional parties continuing applicable federal state law many parties identified financially strong solvent companies appear able pay share remediation costs based companys preliminary information waste disposal practices sites environmental regulatory process general company believes likely ultimate remediation liability costs site apportioned among liable parties including site owners waste transporters according volumes andor toxicity wastes shown disposed sites company also owns formerly operated captive spent foundry sand disposal site near dayton foundry pursuant consent decree state ohio independent consultant selected state engaged determine extent environmental contamination site consultant completed investigation submitted report state concludes general environmental contamination attributable company found site company currently working state resolve remaining issues informal basis involving limited voluntary remediation site return terminating consent decree company also defendant number products liability lawsuits insured subject applicable deductibles company fully accrued estimated loss reserve lawsuit company additionally accrued limited general reserve possible increases companys liability exposure adverse facts develop lawsuits given inherent volatility uncertainty products liability litigation possibility increases costs resolving claims although company current reason believe increase probable quantifiable although none aforementioned gives rise additional liability reasonably estimated possible company could incur additional costs range 100000 500000 upcoming five years fully resolve matters company accrued minimum end range determining estimated range contingent liability company discounted present value offset insurance recoveries range company continue evaluate contingent loss exposures develop recognize expense soon losses reasonably estimated 12 shareholders equity march 25 1994 company distributed stock dividend effect threefortwo stock split per share data appropriate restated reflect stock split december 31 1994 1993 company 30000000 shares common stock 125 par value 1000000 shares 100 par value preferred stock authorized share companys common stock contains preferred stock purchase right rights currently exercisable trade tandem common stock rights general become exercisable trade separately event certain significant changes common stock ownership commencement certain tender offers either case may lead change control company upon becoming exercisable rights provide shareholders opportunity acquire new series company preferred stock automatically issued preestablished price event certain forms acquisition company rights also provide company shareholders opportunity purchase shares acquiring companys common stock acquirer 50 discount current market value rights redeemable 022 per right company time prior becoming exercisable expire august 1996 december 31 1994 approximately 1347000 shares common stock reserved exercise stock options grants restricted stock 13 stock plans company two stock option plans restricted stock plan 1979 stock option plan approved shareholders 1979 expired april 15 1989 stock option plan approved shareholders april 26 1989 expire december 31 1998 plans options granted officers employees purchase shares companys common stock price less fair market value date grant generally options become exercisable staggered periods may exercised 10 years date grant 1989 plan authorized grant options purchase 1125000 shares companys common stock option portion thereof granted plan may include stock appreciation right stock appreciation right permit optionees elect surrender option portion thereof receive exchange therefor cash amount equal excess current fair market value option price option surrendered impact earnings three years ending december 31 1994 significant december 31 1994 1993 1992 aggregate number options exercisable plans 384576 355108 387421 respectively information respect stock option plans follows 1994 options 110916 shares became exercisable average price 1372 per share 1989 restricted stock plan approved shareholders april 26 1989 plan authorized grant 337500 shares companys common stock restricted shares directors employees company general shares cannot sold transferred pledged assigned period less one ten years subject forfeiture restriction period market value shares awarded plan amortized compensation expense periods restrictions lapse restricted stock grants 2400 19686 1410 shares made 1994 1993 1992 respectively average market value 1518 per share 14 income taxes effective january 1 1993 company changed method accounting income taxes required sfas 109 accounting income taxes permitted new rules prior years financial statements restated cumulative effect adopting sfas 109 material deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes significant components companys deferred tax assets liabilities december 31 1994 1993 follows earnings income taxes consist following components significant components provision income taxes attributable continuing operations follows components provision deferred income taxes years ended december 31 1994 1993 1992 follows income taxes paid amounted 9226000 11942000 10454000 1994 1993 1992 respectively reasons differences effective tax rate us federal income tax rate follows 15 research development research development expense amounted 6351000 6020000 5521000 1994 1993 1992 respectively 16 retirement benefits company sponsors several noncontributory defined benefit pension plans covering approximately 60 domestic employees provide benefits based years service compensation retirement benefits employees provided defined contribution pension plans government sponsored retirement programs defined benefit pension plans funded based independent actuarial valuations provide current service amount sufficient amortize unfunded prior service periods exceed thirty years net defined benefit pension income 1994 1993 1992 included following components following table presents defined benefit pension plan funded status amounts recognized companys consolidated balance sheet december 31 1994 1993 average discount rate assumed rate increase future compensation levels used determining actuarial present value benefit obligations 75 50 respectively plan amendments effect increasing projected benefit obligations 2293000 1993 expected longterm rate return plan assets 80 plan assets include marketable equity securities corporate government debt securities insurance company contracts real estate company sponsors several defined contribution pension plans covering substantially domestic canadian employees may contribute plans contributions matched varying amounts company may also make additional contributions eligible employees defined contribution pension expense company 2182000 2130000 1994 1993 1992 respectively 16 retirement benefits continued previous page company also sponsors several defined benefit postretirement health care plans covering approximately 60 future retirees current retirees united states medical dental benefits provided insurance companies health maintenance organizations include participant contributions deductibles coinsurance provisions limitations integrated medicare group plans funded insured benefits health maintenance organization premiums incurred 1992 company adopted effective january 1 1992 principles sfas 106 employers accounting postretirement benefits pensions company elected recognize 32912000 cumulative effect change accounting principle represents accumulated postretirement benefit obligations january 1 1992 effect net earnings shareholders equity net income tax effect 21063000 110 per share adoption sfas 106 increased postretirement benefit expense approximately 1508000 1992 net postretirement benefit expense 1994 1993 1992 included following components following table presents postretirement benefit amounts recognized companys consolidated balance sheet december 31 1994 1993 average discount rate used determining accumulated postretirement benefit obligations 75 assumed annual rates increase per capita costs periods prior medicare 10 1994 95 1995 gradual decrease 6 2002 future years periods medicare 8 1994 75 1995 gradual decrease 5 2000 future years increasing assumed rate increase postretirement benefit costs 1 year would increase net postretirement benefit expense approximately 323000 accumulated postretirement benefit obligations 2941000 17 postemployment benefits sfas 112 effective january 1 1993 company early adopted sfas 112 employers accounting postemployment benefits accounting workers compensation health care continuation benefits cumulative effect january 1 1993 change accounting principle decrease pretax income 616000 02 per share prior january 1 1993 company recognized cost providing benefits cash basis new method accounting company accrues benefits becomes probable benefits paid sufficient information exists make reasonable estimates amounts paid required statement prior year financial statements restated reflect change accounting principle effect change 1994 1993 income cumulative effect change material 18 foreign currency translation foreign currency translation equity decreases consist following 19 operations identified geographic area company operates predominantly one business segment fluid movement control equipment pumps valves related equipment transfers geographic areas accounted primarily cost plus profit margin operating profit consists revenues less certain costs expenses determining operating profit none following items added deducted unallocated general corporate expense interest expense income taxes identifiable assets company identifiable operations geographic area unallocated general corporate assets principally reflect future tax benefits financial information geographic area follows 1994 1993 1992 foreign currency transaction lossesgains approximately 996000 420000 70000 respectively included earnings income taxes 20 financial instruments company enters various types foreign exchange contracts managing foreign exchange risk table summarizes currency notional amounts companys forward exchange option contracts company enters forward exchange contracts hedge certain assets liabilities purchases currency options hedge anticipated foreign currency transactions term contracts generally less three months deferred gains losses material period end purpose companys foreign currency hedging activities protect company transaction losses arising foreign currency assets liabilities protect cash flows adversely affected foreign currency sales purchases company exposed credit loss event nonperformance counterparties foreign currency contracts classes however counterparties predominantly aa rated institutions company anticipate nonperformance counterparties report independent auditors board directors shareholders duriron company inc audited accompanying consolidated balance sheet duriron company inc december 31 1994 1993 related consolidated statements operations shareholders equity cash flows three years period ended december 31 1994 audits also included financial statement schedule listed index item 14a financial statements schedule responsibility companys management responsibility express opinion financial statements schedule based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position duriron company inc december 31 1994 1993 consolidated results operations cash flows three years period ended december 31 1994 conformity generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein discussed notes 14 16 17 consolidated financial statements effective january 1 1992 company changed method accounting postretirement benefits pensions effective january 1 1993 company changed method accounting income taxes postemployment benefits ernst young llp dayton ohio february 23 1995 unaudited quarterly financial data dollars thousands except per share data 1993 per share data restated reflect march 25 1994 stock dividend effect threefortwo stock split effective january 1 1993 company early adopted sfas 112 cumulative effect change accounting principle decreased net earnings 04 million 02 per share item 9nanitem 8 financial statements supplementary data financial statements appearing pages 21 38 1998 annual report shareholders together report thereon ernst young llp dated february 9 1999 appearing page 13 1998 annual report shareholders supplementary data appearing page 38 1998 annual report shareholders incorporated herein reference item 9item 8 financial statements supplementary data financial statements appearing pages 31 48 1999 annual report shareholders together report thereon ernst young llp dated february 10 2000 appearing page 23 1999 annual report shareholders supplementary data appearing page 47 1999 annual report shareholders incorporated herein reference item 9item 8 financial statements supplementary data financial statements accompanying notes appearing pages 33 60 2000 annual report shareholders together reports thereon pricewaterhousecoopers llp dated february 5 2001 ernst young llp dated february 10 2000 appearing page 24 2000 annual report shareholders selected quarterly financial data appearing page 60 2000 annual report shareholders incorporated herein reference item 9item 8 financial statements supplementary data financial statements accompanying notes appearing pages 32 60 2001 annual report shareholders together reports thereon pricewaterhousecoopers llp dated february 5 2002 ernst young llp dated february 10 2000 except note 8 date july 14 2000 appearing page 22 2001 annual report shareholders selected quarterly financial data appearing page 60 2001 annual report shareholders incorporated herein reference item 9item 8 financial statements supplementary data financial statements accompanying notes appearing pages 42 80 2002 annual report shareholders together reports thereon pricewaterhousecoopers llp dated february 3 2003 appearing page 26 2002 annual report shareholders incorporated herein reference item 9item 8 financial statements supplementary data report independent auditors board directors shareholders flowserve corporation opinion accompanying consolidated balance sheets related consolidated statements operations comprehensive incomeloss shareholders equity cash flows present fairly material respects financial position flowserve corporation subsidiaries december 31 2003 2002 results operations cash flows three years period ended december 31 2003 conformity accounting principles generally accepted united states america financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion discussed note 1 consolidated financial statements company adopted statement financial accounting standards 141 business combinations 142 goodwill intangible assets january 1 2002 adopted statement financial accounting standards 145 recission fasb statements 4 44 64 amendment fasb statement 13 technical corrections january 1 2003 pricewaterhousecoopers llp dallas texas april 26 2004 consolidated statements operations consolidated statements comprehensive incomeloss see accompanying notes consolidated financial statements consolidated balance sheets see accompanying notes consolidated financial statements consolidated statements shareholders equity see accompanying notes consolidated financial statements consolidated statements cash flows see accompanying notes consolidated financial statements notes consolidated financial statements unless otherwise indicated dollar amounts thousands except per share data note 1 significant accounting policies accounting developments produce engineered industrial pumps industrial valves control valves nuclear valves valve actuation precision mechanical seals provide range related flow management services worldwide primarily process industries equipment manufactured serviced us predominantly used industries deal difficulttohandle corrosive fluids well environments extreme temperatures pressure horsepower speed businesses affected economic conditions us countries products sold serviced cyclical nature petroleum chemical power water industries served relationship us dollar currencies demand pricing customers products principles consolidation consolidated financial statements include accounts company wholly majorityowned subsidiaries intercompany profits transactions balances eliminated investments unconsolidated affiliated companies represent nonmajority ownership interests carried equity basis approximates equity interest underlying net book value basis comparison certain amounts 2002 2001 reclassified conform 2003 presentation use estimates process preparing financial statements conformity accounting principles generally accepted us requires use estimates assumptions determine reported amounts certain assets liabilities revenues expenses significant estimates made management include •revenue recognition longterm contracts •allowance doubtful accounts •reserve excess obsolete inventories •deferred tax asset valuation allowances tax reserves •restructuring integration expense •legal environmental accruals •warranty accruals •pension postretirement benefit obligations •valuation goodwill indefinitelived intangible assets longlived assets revenue recognition revenues recognized based shipping terms agreed customer fulfillment inconsequential perfunctory actions required point title transfer unless customer order requires formal acceptance circumstances revenue recognized formal acceptance received revenue service contracts recognized services rendered accepted customer addition policy requires prior shipment persuasive evidence arrangement fixed determinable sales price reasonable assurance collectibility revenue longerterm contracts defined contracts longer ninemonths duration contract values 750000 progress billings customer recorded percentage completion method calculated costtocost basis percentage completion represents approximately 510 consolidated revenues generated fixed fee service repair contracts represent approximately 1 consolidated revenues recognized ratably term contract ranges 25 years allowance doubtful accounts credit risk accounts receivable stated net allowance doubtful accounts 18572 21010 20800 december 31 2003 2002 2001 respectively allowance doubtful accounts established based estimates amount uncollectible accounts receivable amount allowance determined based upon aging receivable customer credit history industry market segment information economic trends conditions credit reports customer financial condition customer credit issues customer bankruptcies general economic conditions also affect estimates credit risk may mitigated large number customers customer base across many different geographic regions analysis creditworthiness customers additionally currently credit insurance policy european subsidiaries policy generally receive funds third party insurer net deductible instances customers covered policy unable pay december 31 2003 2002 2001 believe significant concentrations credit risk inventories stated lowerofcost market cost determined us inventories lastin firstout lifo method inventories firstin firstout fifo method reserves excess obsolete inventories based upon assessment market conditions products determined historical usage estimated future demand estimates generally subject significant volatility except product rationalizations generally associated acquisition integration programs due relatively long life cycle products income taxes deferred taxes tax valuation allowances account income taxes asset liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases operating loss tax credit carryforwards deferred tax assets liabilities calculated using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized period includes enactment date valuation allowances reflect likelihood recoverability assets record valuation allowances reflect estimated amount deferred tax assets may realized based upon analysis existing net operating losses tax credits jurisdiction expectations ability utilize tax attributes review past current estimated future taxable income establishment tax strategies estimates could impacted changes future taxable income results tax strategies restructuring integration expense restructuring integration expenses generally recognized conjunction acquisition expenses reflect many estimates including costs pertaining employee separation settlements contractual obligations matters associated exiting facility restructuring costs related facilities employees acquired business generally become component goodwill whereas nonacquisition related restructuring costs recorded restructuring expense statement operations integration costs always recognized reduction results operations reserves created restructuring plan assessed quarterly susceptible adjustment due revisions cost estimates changes planned restructuring activities prior january 1 2003 recognized restructuring expenses related restructuring plans approved communicated affected employees subsequent january 1 2003 record restructuring reserves related liability incurred required statement financial accounting standards sfas 146 adopted january 1 2003 integration expenses recognized incurred periods presented warranty accruals warranty obligations based upon product failure rates materials usage service delivery costs estimate warranty provisions based upon analysis identified expected claims estimate cost resolve claims estimates expected claims generally factor historical claims changes claim rates differences actual expected warranty costs facility rationalization activities could impact warranty obligation estimates insurance accruals insurance accruals recorded based upon analysis claim loss history insurance deductibles policy limits factors estimates based upon information received insurance company adjusters changes claims differences actual expected claim losses could impact accrual future pension postretirement benefits obligations determination value pension postretirement benefits liabilities based estimates made management consultation independent actuaries inherent valuations key assumptions including discount rates expected return plan assets life expectancy assumed rate increase wages health care costs current market conditions including changes rates returns interest rates medical inflation rates considered selecting assumptions changes related pension postretirement benefit costs may occur future due changes assumptions used changes resulting fluctuations relative headcount valuation goodwill indefinitelived intangible assets longlived assets value goodwill indefinitelived intangible assets tested impairment annually fourth quarter whenever events circumstances indicate assets may impaired test involves significant judgment estimating projections fair value generated future performance reporting units correlate operating segments consider operating segments constitute business discrete financial information management regularly reviews net realizable value longlived assets including property plant equipment reviewed periodically indicators potential impairments present based upon assessment estimated future cash flows related assets due uncertain market conditions potential changes strategy product portfolio possible forecasts used support asset carrying values may change future could result noncash charges would adversely affect results operations financial condition adopted sfas 142 january 1 2002 result ceased amortizing goodwill see note 2 analysis impact adopting sfas 142 reported results operations 2001 foreign currency translation assets liabilities foreign affiliates translated current exchange rates income expenses translated average rates period translation gains losses generally reported component accumulated comprehensive income loss transaction translation gains losses arising intercompany balances reported component accumulated comprehensive income loss underlying transaction stems longterm equity investment debt designated due foreseeable future otherwise recognize transaction gains losses arising intercompany transactions component income intercompany balances longterm investment related designated due beyond foreseeable future mitigate risk associated transaction gains losses entering forward exchange contracts see note 8 discussion contracts stockbased compensation december 31 2003 several stockbased employee compensation plans account plans recognition measurement principles accounting principles board opinion 25 accounting stock issued employees related interpretations currently stockbased employee compensation cost reflected net earnings stock option grants options granted plans exercise price equal excess market value underlying common stock date grant awards restricted stock generally valued market price common stock grant date recorded unearned compensation within shareholders equity unearned compensation amortized compensation expense vesting period restricted stock following table illustrates effect net earnings per share applied fair value recognition provisions sfas 123 accounting stockbased compensation stockbased employee compensation calculated using blackscholes optionpricing model determination fair value stock options granted includes expected volatility factor additional option grants expected made year pro forma disclosures representative pro forma effects future years see note 7 additional discussion assumptions inherent calculation stockbased employee compensation expense table business combinations business combinations referred financial statements used purchase method accounting allocate purchase price identifiable tangible intangible assets recognizing goodwill purchase price exceeds fair value identifiable assets net assets companies acquired recorded fair value date acquisition excess purchase price fair value identifiable net assets recorded goodwill sfas 141 requires use purchase method business combinations completed june 30 2001 shortterm investments place temporary cash investments financial institutions policy invest institutions instruments minimal credit risk market risk investments original maturity three months less purchased classified cash equivalents highly liquid principal values subject significant risk change due interest rate fluctuations property plant equipment depreciation property plant equipment stated basis cost depreciation computed straightline method based estimated useful lives depreciable assets financial statement purposes accelerated methods income tax purposes estimated useful lives assets intangible assets intangible assets excluding trademarks considered indefinite life consist primarily engineering drawings distribution networks software patents items amortized useful lives generally ranging 9 40 years assets reviewed impairment whenever events circumstances indicate impairment may occurred legal environmental accruals legal environmental reserves recorded based upon casebycase analysis facts circumstances related costs relating legal environmental liabilities estimated recorded probable loss incurred loss estimable assessments legal environmental costs based information obtained independent inhouse experts loss experience similar situations estimates may vary future due new developments regarding facts circumstances matter derivatives hedging activities enter forward contracts purposes hedging certain transactions denominated foreign currencies part risk management strategy also enter interest rate swap agreements purpose hedging exposure floating interest rates certain portions debt riskmanagement derivatives policy statement outlining conditions enter hedging forward transactions employ foreign currency hedging strategy minimize potential losses earnings cash flows unfavorable foreign currency exchange rate movements strategies also minimize potential gains favorable exchange rate movements foreign currency exposures arise transactions including firm commitments anticipated transactions denominated currency entitys functional currency foreigndenominated revenues profits translated us dollars primary currencies exposure euro british pound canadian dollar mexican peso japanese yen singapore dollar brazilian real australian dollar argentinean peso venezuelan bolivar derivatives recognized balance sheet fair value date enter derivative contract designate derivative 1 hedge forecasted transaction b variability cash flows received paid connection recognized asset liability cash flow hedge 2 foreign currency fair value cash flow hedge foreign currency hedge changes fair value derivative highly effective designated qualified cash flow hedge extent hedge effective recorded comprehensive income earnings affected variability cash flows hedged transaction changes fair value foreign currency hedges recorded comprehensive income since satisfy criteria cash flow hedge ineffectiveness represents amount changes fair value derivative mirror change cash flow forecasted transaction recorded current period earnings formally document relationships hedging instruments hedged items well risk management objective strategy undertaking various hedge transactions process includes linking derivatives designated fair value cash flow foreign currency hedges 1 specific assets liabilities balance sheet 2 specific firm commitments forecasted transactions also formally assess inception hedge ongoing basis whether derivatives used hedging transactions highly effective offsetting changes fair value cash flows hedged items whether derivatives may expected remain highly effective future periods discontinue hedge accounting prospectively •the derivative longer effectively offsets changes fair value cash flows hedged item firm commitments forecasted transactions •the derivative expires terminates sold •the forecasted transaction probable occur •we determine designating derivative hedging instrument longer appropriate discontinue hedge accounting longer probable forecasted transaction occur originally expected period gain loss derivative remaining accumulated comprehensive income reclassified earnings situations hedge accounting discontinued derivative remains outstanding carry derivative fair value balance sheet recognizing changes fair value current period earnings research development expense research development costs charged expense incurred aggregate research development costs 253 million 244 million 234 million 2003 2002 2001 respectively fair values financial instruments carrying amounts financial instruments approximate fair value december 31 2003 except debt carrying value 946 million estimated fair value 990 million debt carrying value 1094 million estimated fair value 1119 million december 31 2002 determine fair value fixed rate debt applying open market discount premium principal outstanding consider variable rate debt fair values approximate carrying value based upon assessment underlying borrowing spreads earnings per share basic diluted earnings per share calculated follows 1the 2001 computation diluted net loss per ordinary share antidilutive therefore amounts reported basic diluted net loss per ordinary share options outstanding exercise price greater average market price common stock included computation diluted earnings per share weighted average number options totaled 2578638 1171411 2003 2002 respectively accounting developments pronouncements implemented august 2001 financial accounting standards board fasb issued sfas 143 accounting asset retirement obligations sfas 143 addresses financial accounting reporting obligations associated retirement tangible longlived assets associated asset retirement costs generally pronouncement requires companies recognize fair value liabilities retiring facilities point legal obligations associated retirement incurred offsetting increase carrying value facility expense associated retirement becomes component facilitys depreciation recognized useful life adopted sfas 143 january 1 2003 however adoption significant effect consolidated financial position results operations due limited abandonment retirement obligations associated facilities april 2002 fasb issued sfas 145 rescission fasb statements 4 44 64 amendment fasb statement 13 technical corrections significant impact sfas 145 eliminate requirement gains losses extinguishment debt classified extraordinary items unless infrequent unusual nature adopted sfas 145 january 1 2003 reclassified previously reported extraordinary items 2002 2001 relate early extinguishment debt become component earnings income taxes july 2002 fasb issued sfas 146 accounting costs associated exit disposal activities sfas 146 requires liability cost associated exit disposal activity recognized initially fair value liability incurred previous accounting rules costs exit dispose activity generally recognized date exit disposal plan committed communicated adopted sfas 146 january 1 2003 account exit disposal activities arising date see note 6 detailed discussion current exit disposal activities december 2002 fasb issued sfas 148 accounting stockbased compensation became effective us upon issuance sfas 148 provides three transition options companies account stockbased compensation stock options intrinsicvalue method convert fair value method sfas 148 also revised prominence character disclosures related companies stockbased compensation complying new reporting requirements sfas 148 elected continue using intrinsicvalue method account qualifying stockbased compensation permitted sfas 148 however included disclosures prescribed sfas 148 within consolidated financial statements november 2002 fasb issued fasb interpretation fin 45 guarantors accounting disclosure requirements guarantees including indirect guarantees indebtedness others fin 45 generally requires guarantor recognize liability obligations arising guarantees fin 45 also requires new disclosures guarantees meeting certain criteria outlined pronouncement disclosure requirements fin 45 became effective us december 31 2002 implemented date recognition measurement provisions fin 45 became effective january 1 2003 implemented guarantees issued date april 2003 fasb issued sfas 149 amendment statement 133 derivative instruments hedging activities sfas 149 amends clarifies accounting reporting derivative contracts including hedges amendments clarifications sfas 149 generally serve codify conclusions reached derivatives implementation group incorporate fasb projects financial instruments clarify implementation issues sfas 149 became effective prospectively us derivative contracts entered modified june 30 2003 adoption material effect consolidated financial position results operations may 2003 fasb issued sfas 150 accounting certain financial instruments characteristics liabilities equity sfas 150 generally requires recognition liabilities balance sheet obligations financial instruments possessing liability equity characteristics mandatorily redeemable instruments obligations repurchase equity shares transferring assets obligations issue variable number shares sfas 150 became effective us beginning july 1 2003 time instruments governed pronouncement incorporated liabilities thus implementation sfas 150 material effect consolidated financial position results operations december 2003 fasb revised sfas 132 employers disclosures pensions postretirement benefits revised pronouncement requires substantially disclosures pension postretirement benefits including information plan assets estimated prospective contribution levels estimated prospective benefit payment levels items fasb believes provide clarity readers financial statements except information regarding anticipated future benefit payments revision allows deferral made disclosures specified sfas 132 revised pronouncements yet implemented december 2003 fasb issued fin 46 consolidation variable interest entities addresses consolidation variable interest entities vies business enterprises primary beneficiaries vie entity sufficient equity investment risk permit finance activities without additional subordinated financial support whose equity investors lack characteristics controlling financial interest primary beneficiary vie enterprise majority risks rewards associated vie believe interests vies require disclosure consolidation fin 46 therefore expect implementation significant effect results operation financial position december 2003 medicare prescription drug improvement modernization act 2003 act enacted us act generally permits plan sponsors provide retiree prescription drug benefits actuarially equivalent benefits medicare part eligible nontaxable federal subsidy permitted fasb staff position fsp 1061 accounting disclosure requirements related medicare prescription drug improvement modernization act 2003 elected defer accounting effects act december 31 2004 evaluating impact act including emergence specific authoritative guidance regarding accounting treatment afforded provisions act could require us change information previously reported although final pronouncements recently issued adopted expect impact reported financial information disclosures accounting promulgating bodies number pending projects may directly impact us continue evaluate status projects become final provide disclosures regarding likelihood magnitude impact note 2 goodwill intangible assets january 1 2002 adopted sfas 142 goodwill intangible assets primarily addresses accounting goodwill intangible assets subsequent acquisition sfas 142 requires cessation systematic amortization goodwill indefinitelived intangible assets instead requiring impairment testing least annual basis additionally amortization period intangible assets longer limited forty years sfas 142 impairment goodwill indefinitelived intangibles assessed reporting unit level annually whenever events circumstances indicate impairment may exist consider three operating segments constitute distinct reporting units therefore assess impairment operating segment level second quarter 2002 completed required transitional impairment tests goodwill indefinitelived intangible assets determined assets impaired similar test conducted fourth quarters 2003 2002 also revealed impairment assets amortization goodwill workforce intangible assets reclassified goodwill upon adoption sfas 142 trademark intangible assets indefinite useful lives totaled 197 million pretax basis 2001 following table reflects consolidated results years ended december 31 2001 adjusted though implementation sfas 142 occurred january 1 2001 following tables provide information intangible assets 1we recorded changes trademarks goodwill resulting refinements purchase price allocation ifc acquisition allocation period transaction 2engineering drawings represent estimated value associated specific product component schematics assets recognized result acquisitions ifc idp valued based upon independent third party appraisals result acquisition ifc may 2002 acquired approximately 704 million intangible assets amounts assigned acquired intangible assets arising acquisition based valuation studies prepared third party experts summarized following schedule outlines actual amortization recognized 2003 estimate future amortization based upon intangible assets owned december 31 2003 amortization expense thousands changes carrying amount goodwill years ending december 31 2003 2002 follows reclassifications include allocation previously unallocated goodwill reporting units reclassifications intangible assets connection implementation sfas 142 note 3 acquisitions operating results invensys plcs flow control division ingersolldresser pump company included consolidated statement operations date acquisition purchase price acquisition allocated assets acquired liabilities assumed based estimated fair value date acquisition invensys flow control may 2 2002 completed acquisition invensys plcs flow control division ifc contractual purchase price 535 million subject adjustment pursuant terms purchase sale agreement reduction 22 million agreed settled fourth quarter 2003 yielded final contractual purchase price 5328 million reduction related finalization balances date acquisition cash related party activity tax payments addition incurred 61 million costs associated consummation acquisition including investment banking legal actuarial accounting fees total purchase price including costs 5389 million ifc manufactures valves actuators associated flow control products provides us balanced mix revenue among pumps valves seals well diversified geographic end market mix financed acquisition associated transaction costs combination bank financing fully described note 10 net proceeds approximately 276 million received issuance 92 million common shares april 2002 table reflects unaudited pro forma results ifc acquisition taken place beginning 2002 2001 including estimated purchase accounting adjustments financing costs nonrecurring 52 million purchase accounting adjustment associated required writeup subsequent sale ifc inventory acquisition also presented pro forma information 2001 reflect theoretical acquisition date january 1 2001 pro forma information purport represent results operations actually would transactions events occurred dates specified project results operations future period following table summarizes estimated fair value assets acquired liabilities assumed ifc acquisition 1includes 1235 million consider deductible income tax purposes 2represents 95 million current liabilities reduced 61 million transaction costs incurred completed purchase accounting allocation second quarter 2003 ingersolldresser pump company august 2000 completed 7857 million cash acquisition ingersolldresser pump company idp leading manufacturer pumps diverse mix pump products customers operations 30 countries contractual purchase price 775 million increased 107 million acquisition costs including investment banking legal actuarial accounting costs acquisition financed combination senior secured term loans issuance senior subordinated notes upon closing transaction existing debt refinanced new senior credit facility note 4 factoring accounts receivable certain european subsidiaries engage nonrecourse factoring certain accounts receivable various agreements different terms including options renewal none extend beyond december 2005 senior credit facility factoring generally limited 50 million based due date factored receivables december 31 2003 2002 respectively received using end period exchange rates us dollar equivalent approximately 24 million 17 million respectively cash factor significant factoring program represents factors purchase 30 million 21 million receivables respectively dates established receivable factor 6 million 4 million respectively recouped upon payment customer 2003 recognized selling general administrative expense approximately 09 million loss factoring receivables compares total loss 03 2002 additionally maintain numerous individually less significant factoring programs aggregate total cash received factoring receivables agreements totaled 29 million 17 december 31 2003 2002 respectively note 5 inventories stated lower cost market cost determined us inventories lastin firstout lifo method inventories firstin firstout fifo method inventories method determining costs inventory balances impacted currency translation effect increasing inventory 32 million december 31 2003 compared comparable 2002 balance note 6 restructuring acquisition related charges restructuring costsifc conjunction ifc acquisition 2002 initiated restructuring program designed reduce costs eliminate excess capacity closing 18 valve facilities including 10 service facilities reducing sales related support personnel actions approved committed 2002 remaining actions approved committed 2003 expected result gross reduction approximately 889 positions net reduction approximately 662 positions net position eliminations represent gross positions eliminated closed facilities offset positions added receiving facilities required produce products transferred receiving facilities established restructuring program reserve 110 million upon acquisition ifc increased reserve total 96 million latter half 2002 recognized additional accruals 45 million 2003 program primarily related closure certain valve service facilities related reductions workforce cash expenditures accrual 42 million 2002 116 million 2003 remaining accrual 93 million reflects payments made 2004 beyond severance obligations due terminated personnel europe 57 million well lease contract termination exit costs 36 million cumulative costs associated closure flowserve facilities 72 million december 31 2003 recognized restructuring expense operating results whereas cumulative costs associated closure ifc facilities 179 million including related deferred taxes 62 million became part purchase price allocation transaction effect closure costs increased amount goodwill otherwise recognizable result ifc acquisition following illustrates activity related ifc restructuring reserve integration costsifc 2003 2002 also incurred acquisitionrelated integration expense conjunction ifc summarized acquisitionrelated activities resulted integration costs categorized defined follows personnel related costs include payroll benefits consulting fees retention integration performance bonuses paid employees contractors development management execution integration plan transfer product lines includes costs associated transfer product lines well realignment required receiving facilities asset impairments reflect loss disposal property plant equipment facilities closed disposal inventory discontinued product lines facilities combined category includes costs associated information technology integration legal entity consolidations legal entity name changes signage new product literature none items individually amounted greater 05 million remaining restructuring integration costsifc largely completed restructuring integration activities related ifc except certain european activities expect incur additional restructuring integration costs payments restructuring accrual continue 2004 2005 due timing severance obligations europe restructuring costsidp august 2000 conjunction idp acquisition initiated integration program designed reduce costs eliminate excess capacity closing significantly downsizing eight pump manufacturing facilities eight service repair facilities closing idps former headquarters reducing redundant sales administrative related support personnel actions approved committed 2000 resulted gross reduction 1500 positions net reduction 1100 positions net positions reflect gross positions eliminated closed facilities offset positions added receiving facilities required produce products transferred receiving facilities completed idprelated integration restructuring activities 2001 substantially completed expenditures thereunder december 31 2002 recognized 65 million restructuring costs comprised 42 million related idp operations acquired 23 million related flowserve operations 42 million related idp operations reduced deferred tax effects 16 million resulted recognition 26 million incremental goodwill 23 million related flowserve operations recognized restructuring expense consolidated statement operations 2000 2001 following illustrates activity related idp restructuring reserve majority funding restructuring activities completed 2002 revisions accrual recorded 2000 2001 reflect actual results changes estimates including incremental accrual 2000 required based upon updated actuarial information postretirement pension expense relating finalization union negotiations closed facilities final adjustment 29 million 2001 12 million related facilities reflected negative restructuring expense remaining 17 million related idp facilities recorded reduction goodwill noncash reductions reflect reclassification restructuring accrual postretirement benefits pension liabilities 2000 accrued liabilities 2001 2002 severance costs include costs associated involuntary termination benefits including enhancements certain severed employees longterm retirement benefits 164 million costs related exiting facilities would provide future benefit exit costs 126 million included 51 million payroll consulting costs execute closure program 25 million facility cleanup costs including environmental 21 million relocation costs idp personnel 17 million cost physically dispose patterns equipment 12 million costs including lease termination legal costs integration costsidp 2001 incurred integration expense follows acquisitionrelated activities resulted integration costs categorized defined follows personnel related costs include payroll benefits consulting fees severances retention integration performance bonuses paid employees contractors development management execution integration plan transfer product lines includes costs associated transfer product lines well realignment required receiving facilities asset impairments reflect loss disposal property plant equipment facilities closed disposal inventory product lines discontinued facilities combined category includes costs associated information technology legal entity consolidations legal entity name changes signage new product literature none items individually amounted greater 05 million note 7 stock plans stock option plans maintain several shareholderapproved stock option plans purchase shares common stock december 31 2003 approximately 186177 options available grant various plans options granted officers employees directors allow purchase common shares fair value date grant generally options whether granted current prior plans become exercisable staggered periods ranging one year five years expire ten years date grant information concerning stock options issued officers employees directors presented following table weighted average remaining contractual life options outstanding december 31 2003 59 years additional information relating ranges options outstanding december 31 2003 follows disclosure pro forma information regarding net earnings per share accounted stock options granted subsequent december 31 1994 fair value method presented note 1 fair value options date grant estimated using blackscholes option pricing model assumptions used calculating expense stock option awards follows options granted weighted average fair value per share grant date 900 2003 1170 2002 1240 2001 purposes pro forma disclosure estimated fair value options amortized expense options vesting periods see note 1 analysis pro forma income including per share amounts recognized expense related stock option grants since determination fair value options granted includes expected volatility factor additional option grants expected year pro forma disclosures representative pro forma effects future years restricted stock plans also restricted stock plans authorize us grant 4218 additional shares common stock units rights commensurate restricted stock employees nonemployee directors general restrictions shares units expire minimum one year maximum ten years subject forfeiture restriction period intrinsic value shares units typically product share price date grant number shares units granted amortized straightline basis compensation expense periods restrictions lapse cumulative recognized expense related restricted stock units forfeited reversed period forfeiture following table summarizes information regarding restricted stock plans note 8 derivatives hedging activities enter forward contracts hedge risks associated transactions denominated foreign currencies risk management derivatives policy specifies conditions may enter derivative contracts december 31 2003 2002 approximately 751 million 486 million respectively notional amount outstanding contracts third parties december 31 2003 maximum length forward contract currently place 17 months fair value outstanding forward contracts december 31 2003 2002 asset 54 million 33 million respectively also part risk management program enter interest rate swap agreements hedge exposure floating interest rates certain portions debt december 31 2003 2002 2150 million 1250 million respectively notional amount outstanding interest rate swaps third parties december 31 2003 maximum length interest rate contract currently place approximately three years december 31 2003 2002 fair value interest rate swap agreements liability 76 million 98 million respectively exposed risk creditrelated losses resulting nonperformance counterparties financial instruments perform credit evaluations counterparties forward contracts interest rate swap agreements expect counterparties meet obligations experienced credit losses counterparties adopted sfas 133 accounting derivative instruments hedging activities amended january 1 2001 accordance transition provisions sfas 133 recorded net 08 million cumulativeeffect adjustment comprehensive income representing fair value hedging instruments january 1 2001 deferred tax 05 million hedging related transactions recorded comprehensive income expense net deferred taxes summarized 1utilizing income tax rate approximately 37 comprised effective rates taxing jurisdiction following amounts net deferred taxes represent expected recognition earnings hedging contracts note 9 details certain consolidated balance sheet captions following tables present financial information certain consolidated balance sheet captions property plant equipment property plant equipment assets accrued liabilities accrued liabilities 1other accrued liabilities includes insurance state local taxes rent freight items none individually exceed 5 current liabilities retirement benefits liabilities retirement benefits liabilities note 10 debt lease obligations debt including capital lease obligations consisted maturities debt including capital lease obligations next five years beyond senior credit facility december 31 2003 2002 senior credit facility composed tranche c term loans tranche consists us dollar denominated tranche euro denominated tranche latter term note due 2006 2003 made scheduled debt payments 09 million optional debt prepayments 1631 million including 39 million fourth quarter 2002 made 338 million mandatory 170 million optional prepayments term loans scheduled tranche principal payments 80 million first quarter 2004 195 million remaining quarters 2004 however result optional prepayments made 2002 2003 scheduled payments tranche c due march 31 2005 07 million due following summarizes repayment obligations senior credit facility 2001 senior subordinated notes senior credit facility collateralized substantially us assets pledge 65 stock certain foreign subsidiaries tranche c loans amended restated connection ifc acquisition final maturities june 2006 june 2009 respectively senior credit facility amended june 2003 among things delay stepdowns maximum leverage ratio stepups minimum interest coverage ratio term loans bear floating interest rates based libor plus borrowing spread prime rate plus borrowing spread option borrowing spread senior credit facilities increase decrease based leverage ratio defined senior credit facility public debt ratings part senior credit facility 300 million revolving credit facility expires june 2006 revolving credit facility allows us issue 200 million letters credit december 31 2003 2002 amounts outstanding revolving credit facility however issued 427 million letters credit facility reduced borrowing capacity 2573 million december 31 2003 compares borrowing capacity 2482 million december 31 2002 required certain circumstances defined credit facility use percentage excess cash generated operations reduce outstanding principal term loans following year based upon annual calculations performed december 31 2003 2002 2001 additional principal payments became due 2004 2003 2002 provision senior subordinated notes december 31 2003 1885 million eur 65 million equivalent 818 million face value senior subordinated notes outstanding senior subordinated notes originally issued 2000 discount yield 125 coupon 1225 approximately onethird senior subordinated notes repurchased premium 2001 utilizing proceeds equity offering accordance provisions indenture beginning august 2005 remaining senior subordinated notes outstanding become callable us 106125 face value otherwise due 2010 interest senior subordinated notes payable semiannually february august debt covenants matters provisions senior credit facility require us meet exceed specified defined financial covenants including leverage ratio interest coverage ratio fixed charge coverage ratio provisions debt agreements generally limit restrict indebtedness liens sale leaseback transactions asset sales payment dividends capital expenditures activities senior credit facility requires us submit audited financial statements lenders within 100 days year end consequence delays stemming restatement financial information 2002 2001 2000 unable provide audited financial statements within specified period time accordingly obtained waiver lenders regarding covenant accordingly present scheduled maturities facility due 2005 beyond noncurrent consolidated balance sheet determined september 30 2001 december 31 2001 march 31 2002 comply 25 basis points less two financial covenants applicable credit agreement longer effect believe could undertaken readily available actions maintain compliance obtained waiver amendment existing credit agreement known situation except periods complied covenants debt facilities believe matter impact existing debt agreements debt properly classified consolidated balance sheet maximum leverage ratio reduces 375 september 30 2004 minimum interest coverage increased 30 march 31 2004 currently estimate comply interest coverage covenant march 31 2004 small margin estimated earnings change may comply interest coverage covenant may seek waiver amendment senior credit facility order remain compliance believe waiver amendment needed would approved requisite number lenders however assurance waiver amendment would granted presently able ascertain cost andor conditions associated receipt waiver amendment particularly adverse circumstances could forced divest portion business issue equity operating leases noncancelable operating leases certain offices service quick response centers certain manufacturing operating facilities machinery equipment automobiles rental expense relating operating leases 22017 2003 22964 2002 14041 2001 future minimum lease payments due noncancelable operating leases note 11 retirement postretirement benefits sponsor several noncontributory defined benefit pension plans covering substantially us employees certain nonus employees provide benefits based years service compensation retirement benefits employees provided contributory pension plans cash balance pension plans governmentsponsored retirement programs funded defined benefit pension plans receive funding based independent actuarial valuations provide current service amount sufficient amortize unfunded prior service periods exceed thirty years also maintain unfunded defined benefit plans permitted local regulations receive funding benefits become due use measurement date december 31 worldwide pension plans postretirement medical plans us defined benefit plans maintain qualified nonqualified defined benefit pension plans us qualified plan provides coverage substantially fulltime us employees receive benefits qualified plan design commonly referred cash balance arrangement accumulated benefit obligation equivalent projected benefit obligation nonqualified plans primarily cover current former members senior management providing benefit levels equivalent participants otherwise limited us department labor rules net defined benefit pension expense us pension plans including qualified nonqualified plans following table reconciles us plans funded status amounts recognized consolidated balance sheets following assumptions related us defined benefit pension plans expected longterm rate return assets determined assessing rates return targeted asset class return premiums generated active portfolio management comparison rates utilized companies 2003 reduced minimum pension liability 23 million net tax component comprehensive income decrease liability primarily resulted improved plan asset returns 2003 recognition previously unrecognized net losses prior service benefits 2002 increased additional minimum liability 323 million net tax component comprehensive expense additional liability resulted lower expected market performance assets 2002 increase number plan participants resulting ifc idp invatec acquisitions increased additional minimum liability 162 million 2001 similar acquisitionrelated asset performance reasons based results pension plan asset returns 2003 anticipated future return reduced assumed rate return assets 90 875 2003 based results pension plan asset returns 2002 likely return intermediate future reduced assumed rate return assets 95 90 2002 also reduced discount rate 675 625 2003 70 675 2002 reflect current interest rate environment regularly evaluate assumptions asset returns discount rates based variety factors additionally anticipate contributing 12 17 million qualified us pension plan 2004 although could contribute much 67 million following summary changes us plans defined benefit pension obligations 1represents liability assumed acquisition idp reclassified restructuring reserve following reconciliation us plans defined benefit pension assets 2003 contributed 27 million us defined benefit pension plans payment exceeded minimum funding requirements mandated us department labor rules 2003 benefited higher anticipated returns plan assets although still working actuaries determine estimated funding 2005 beyond following table summarizes expected cash activity us defined benefit pension plans future millions asset allocation us defined benefit pension plans end 2003 2002 target allocation 2004 asset category follows none common stock directly held plans investment strategy invest various securities order pay retirement benefits plan participants minimizing cash contributions life plan accomplished preserving capital diversified investments high quality instruments earning longterm rate return consistent acceptable degree risk taking account liquidity needs plan investment policy invest approximately 65 plan assets equity securities 35 fixed income securities within investment category assets allocated various investment styles professional money management firms manage assets engage consultant assist evaluating activities periodically review investment policy generally conjunction assetliability study also regularly rebalance actual allocation target investment allocation nonus defined benefit plans net defined benefit pension expense nonus pension plans following table reconciles nonus plans funded status amounts recognized consolidated balance sheets following assumptions related nonus defined benefit pension plans many nonus defined benefit plans unfunded permitted local regulation expected longterm rate return assets funded plans determined assessing rates return asset class return premiums generated active investment management 2003 reduced nonus minimum pension liability 54 million net deferred tax component comprehensive income decrease liability resulted improved plan asset returns 2003 increase benefit obligations 2002 predominately reflects obligations assumed ifc acquisition 2002 increased additional minimum liability 106 million net deferred tax component comprehensive expense additional liability resulted market performance assets 2002 increase number employees participating plans resulting ifc acquisition following reconciliation nonus plans defined benefit pension obligations following reconciliation nonus plans defined benefit pension assets expect contribute approximately 8 million nonus defined benefit pension plans 2004 based prevailing exchange rates december 31 2003 asset allocation nonus defined benefit pension plans end 2003 follows believe common stock held directly plans nonus funded defined benefit pension plans principally located canada united kingdom cases investment strategy plans invest various securities order pay retirement benefits plan participants minimizing required cash contributions life plan accomplished preserving capital diversification high quality investments earning longterm rate return consistent acceptable degree risk legal requirements particular country taking account liquidity needs plan asset allocation differs plan based upon plans projected benefit obligation participants well results assetliability studies conducted plan professional money management firms manage assets engage consultants country assist evaluation activities defined benefit plans accumulated benefit obligations excess plan assets following summarizes key pension plan information regarding plans whose accumulated benefit obligations exceed fair value plan assets postretirement medical plans also sponsor several defined benefit postretirement health care plans covering current retirees limited number future retirees us plans provide medical dental benefits administered insurance companies health maintenance organizations plans include participant contributions deductibles coinsurance provisions limitations integrated medicare group plans fund plans insured benefits paid incur health maintenance organization premiums plans hold assets period presented accordingly investment strategy targeted allocations plan assets benefits longer available new employees existing employees net postretirement benefit expense comprised following reconciliation accumulated postretirement benefits obligations 2002 renegotiated certain union contracts limited obligation postretirement medical costs effect change generally reduced expenses related affected union contracts beginning 2003 following table presents components postretirement benefit amounts recognized consolidated balance sheets assumed ranges annual rates increase per capita costs periods prior medicare 90 2003 100 2002 2001 gradual decrease 50 2007 future years assumed heath care costs trend rates significant effect amounts reported postretirement medical plans onepercentage point change assumed health care cost trend rates would following effect 2003 reported amounts made contributions defined benefit postretirement medical plans 8259 2003 7960 2002 8428 2001 defined benefit postretirement medical plans unfunded make contributions covered individuals claims approved payment accordingly contributions period directly correlated benefits paid defined contribution plans sponsor several defined contribution plans covering substantially us canadian employees certain nonus employees may contribute plans contributions matched varying amounts us including opportunities discretionary matching contributions defined contribution plan expense 6614 2003 6633 2002 9421 2001 participants us defined contribution plan option invest common stock therefore plans assets include holdings common stock note 12 contingencies involved potentially responsible party prp former public waste disposal sites may subject remediation pending government procedures sites various stages evaluation federal state environmental authorities projected cost remediating sites well alleged fair share allocation uncertain speculative studies completed parties either negotiated amicable resolution matter judicially resolved site many parties similarly identified identification location additional parties continuing applicable federal state law many parties identified financially strong solvent companies appear able pay share remediation costs based preliminary information waste disposal practices sites environmental regulatory process general believe likely ultimate remediation liability costs site apportioned among liable parties including site owners waste transporters according volumes andor toxicity wastes shown disposed sites defendant large number pending lawsuits include many cases multiple claimants seek recover damages personal injury allegedly caused exposure asbestoscontaining products manufactured andor distributed us past products selfcontained used components process equipment believe emission respirable asbestoscontaining fiber occurred use equipment believe high percentage applicable claims covered applicable insurance indemnities companies june 2002 sued ruhrpumpen inc alleged antitrust violations conspiracy fraud breach contract claims arising december 2000 sale ruhrpumpen plant tulsa oklahoma license eight defined pump lines sale agreement purchase price approximately 54 million plus material terms including ruhrpumpens assumption certain liabilities ruhrpumpen subsequently amended complaint add mr ronald f shuff vice president secretary general counsel two employees individual defendants sale ruhrpumpen result divestiture agreement reached us department justice doj july 2000 connection acquisition idp agreement doj gives authority make inquiries otherwise monitor divestiture may 13 2003 received letter doj making inquiry issues raised ruhrpumpen lawsuit seeking information divestiture ruhrpumpens lawsuit doj continues monitor lawsuit divestiture march 2004 case tried us district court northern district texas trial ruhrpumpen sought recovery 100 million actual exemplary damages vigorously contested ruhrpumpens allegations purported damages close trial ruhrpumpen voluntarily dismissed claims mr shuff two employees currently awaiting ruling court remaining claims company quarter ended september 30 2003 related lawsuits filed federal court northern district texas alleging violated federal securities laws period beginning october 23 2001 ending september 27 2002 cases consolidated lead plaintiff appointed court consolidated amended complaint filed february 5 2004 consolidated amended complaint like earlier individual complaints also names individual defendants mr c scott greer chairman president chief executive officer ms renée j hornbaker vice president chief financial officer seeks unspecified compensatory damages recovery costs march 11 2004 court granted lead plaintiff leave file amended complaint within 15 days filing finalized restatement financial results strongly believe lawsuit without merit plan vigorously defend case february 4 2004 received informal inquiry sec requesting voluntary production documents information related february 3 2004 announcement would restate financial results nine months ended september 30 2003 full years 2002 2001 2000 separate informal inquiry sec requested supplied documents information relating whether form 8k filed november 21 2002 adequately fulfilled obligations may arisen regulation fd intend continue cooperate sec inquiries also defendant several lawsuits including product liability claims insured subject applicable deductibles arising ordinary course business believe adequately accrued estimated losses lawsuits although none aforementioned potential liabilities quantified absolute certainty established reserves covering exposures believe reasonable based past experience available facts additional exposures beyond reserves could exist none gives rise additional liability reasonably estimated believe costs material adverse impact results operations financial position continue evaluate potential contingent loss exposures develop recognize expense soon losses become probable reasonably estimated also involved ordinary routine litigation incidental business none believe material business operations overall financial condition however resolutions dispositions claims lawsuits settlement otherwise could significant impact operating results reporting period resolution disposition occurs note 13 warranty reserve recorded reserves warranty claims included current noncurrent liabilities following summary activity warranty reserve note 14 shareholders equity share common stock contains preferred stock purchase right rights currently exercisable trade tandem common stock rights become exercisable trade separately event certain significant changes common stock ownership commencement certain tender offers either case may lead change control upon becoming exercisable rights provide shareholders opportunity acquire new series preferred stock automatically issued preestablished price event certain forms acquisition rights also provide shareholders opportunity purchase shares acquirers common stock acquirer 50 discount current market value rights redeemable 0022 per right us time prior becoming exercisable expire august 2006 note 15 income taxes provision benefit income taxes consisted following provision benefit income taxes different statutory corporate rate due following deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes significant components consolidated deferred tax assets liabilities recorded valuation allowances reflect estimated amount deferred tax assets may realized due expiration net operating loss foreign tax credit carryforwards decrease valuation allowances 2002 primarily attributable ability use foreign tax credit carryforwards changes estimates foreign net operating loss carryforwards approximately 72 million net operating loss carryforwards december 31 2003 approximately 91 generated outside us net operating losses generated us unused begin expire 2017 whereas majority nonus net operating losses carry forward without expiration additionally approximately 225 million foreign tax credit carryforwards december 31 2003 expire 2004 2007 unused earnings loss income taxes comprised undistributed earnings nonus subsidiaries amounted approximately 213 million december 31 2003 earnings considered indefinitely reinvested accordingly additional us income taxes nonus withholding taxes provided determination amount additional taxes would payable earnings considered indefinitely reinvested practical note 16 business segment information principally engaged worldwide design manufacture distribution service industrial flow management equipment provide pumps valves mechanical seals primarily petroleum industry chemicalprocessing industry powergeneration industry water industry general industry industries requiring flow management products following three divisions constitutes business segment •flowserve pump division •flow solutions division •flow control division manufactures different products defined type products services provided division president reports directly chief executive officer division controller reports directly chief financial officer decisionmaking purposes chief executive officer members senior executive management use financial information generated reported division level corporate headquarters constitute separate division business segment evaluate segment performance based operating income excluding special items believe special items indicative efforts integrate ifc idp business reflect ongoing business results earnings special items recognized measure generally accepted accounting principles gaap viewed alternative gaap measures performance amounts classified include corporate headquarters costs minor entities constitute separate segments intersegment sales transfers recorded cost plus profit margin sales eliminated consolidation effective january 1 2003 realigned certain small sites segments accordingly segment information periods presented herein reported new organizational structure following summary financial information reportable segments reconciled amounts reported consolidated financial statements 1special items reflect costs associated ifc acquisition including integration expense 198 million restructuring expense 29 million 2special items reflect costs associated ifc acquisition including 52 million negative purchase accounting adjustment associated required writeup sale inventory recorded cost sales integration expense 162 million restructuring expense 43 million 3special items reflect integration expense 630 million restructuring expense 12 million associated acquisition integration idp segment operating income assets reconciled consolidated amounts follows geographic information attribute revenues different geographic areas based facilities location longlived assets classified based geographic area assets located exclude deferred tax assets categorized noncurrent sales related investments identifiable assets geographic area follows 1includes canada latin america asia pacific individual geographic segment within group represents 10 consolidated totals net sales international customers including export sales united states represented 610 560 481 2003 2002 2001 respectively major customer information revenues individual customer represent 10 consolidated revenues years presented note 17 accumulated comprehensive income loss following presents components accumulated comprehensive income loss net related tax effects note 18 guarantor financial information pursuant disclosure requirements arising senior subordinated notes following consolidating financial information presents consolidating balance sheet december 31 2003 2002 related statements operations cash flows three years period ended december 31 2003 •flowserve corporation parent •flowserve finance bv •the guarantor subsidiaries •the nonguarantor subsidiaries •the company consolidated basis information includes elimination entries necessary consolidate flowserve corporation parent flowserve finance bv guarantor nonguarantor subsidiaries although accurate absolute terms generally us subsidiaries constitute guarantor subsidiaries whereas nonus subsidiaries constitute nonguarantor subsidiaries parents investments subsidiaries accounted using equity method accounting guarantor nonguarantor subsidiaries presented combined basis principal elimination entries eliminate investments subsidiaries intercompany balances transactions separate financial statements guarantor subsidiaries nonguarantor subsidiaries omitted immateriality consolidating statement operations consolidating statement operations consolidating statement operations consolidating balance sheet consolidating balance sheet consolidating statement cash flows consolidating statement cash flows consolidating statement cash flows note 19 quarterly financial data unaudited february 3 2004 announced intention restate unaudited financial results nine months ended september 30 2003 full years related unaudited quarterly data 2002 2001 2000 result identifying certain adjustments required properly state periods restated consolidated financial information reflects adjustments made previously reported financial statements years ended december 31 2002 2001 2000 previously filed amendment 1 2002 annual report form 10ka restatement effects 2003 primarily affect pump valve segments principally relate correcting inventory amounts related cost sales various noninventory account balances classification various balance sheet accounts restatement increased reduced reported earnings income taxes 12 million 32 million 01 million first second third quarters 2003 respectively inventory cost sales adjustments inventory cost sales adjustments primarily resulted reconciliation issues two reporting locations due difficulties associated converting new computer systems difficulties executing conversions related reconciliation issues resulted inventory amounts properly charged cost sales appropriate periods adjustments increased reported earnings income taxes 01 million 52 million 03 million first second third quarters 2003 respectively additionally restated adjustments cost sales resulting inventory related account reconciliations limited number locations reduced reported earnings income taxes 11 million 37 million 05 million first second third quarters 2003 respectively adjustments restatement increased reduced reported earnings income taxes 02 17 03 first second third quarters 2003 respectively adjustments identified reconciliation cash intercompany transactions investments affiliates equipment accrued liabilities well foreign exchange transactions tax adjustments restatement includes tax effects aforementioned adjustments additionally tax provision third quarter 2003 restated give discrete recognition tax refund related historical foreign sales corporation activity effect reducing third quarter effective tax rate 130 previously reported 345 effective tax rate fourth quarter 322 based upon final determination income tax provision balance sheet adjustments restated amounts within balance sheet accounts appropriately classify tax assets liabilities including establishment deferred taxes related cumulative translation adjustment account aggregate amount 311 million future filings intend restate file securities exchange commission quarterly operating results first three quarters 2003 present financial information giving recognition restatement described herein following presents summary unaudited quarterly data 2003 restated give effect aforementioned adjustments anet earnings 2003 include ifc integration expense 198 million restructuring expense 29 million resulting reduction net earnings 160 million following presents summary unaudited quarterly financial data 2002 anet earnings 2002 include ifc integration expense 162 million restructuring expense 43 million 52 million purchase accounting adjustment associated required writeup subsequent sale acquired inventory loss debt repayment extinguishment 112 million resulting reduction net earnings 243 million item 9item 8 financial statements supplementary data report independent registered public accounting firm board directors shareholders flowserve corporation completed integrated audit flowserve corporation’s 2004 consolidated financial statements internal control financial reporting december 31 2004 audits 2003 2002 consolidated financial statements accordance standards public company accounting oversight board united states opinions based audits presented consolidated financial statements financial statement schedule opinion consolidated financial statements listed index appearing item 15a1 present fairly material respects financial position flowserve corporation subsidiaries company december 31 2004 2003 results operations cash flows three years period ended december 31 2004 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed index appearing item 15a2 presents fairly material respects information set forth therein read conjunction related consolidated financial statements financial statements financial statement schedule responsibility company’s management responsibility express opinion financial statements financial statement schedule based audits conducted audits statements accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit financial statements includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion discussed note 2 consolidated financial statements company restated 2003 2002 consolidated financial statements internal control financial reporting also audited management’s assessment included management’s report internal control financial reporting appearing item 9a flowserve corporation maintain effective internal control financial reporting december 31 2004 company maintain 1 effective control environment 2 effective monitoring controls determine adequacy internal control financial reporting related policies procedures 3 effective controls certain periodend financial close reporting processes 4 effective segregation duties automated manual transaction processes 5 effective controls preparation review approval account reconciliations 6 effective controls complete accurate recording monitoring intercompany accounts 7 effective controls recording journal entries recurring nonrecurring 8 effective controls existence completeness accuracy fixed assets related depreciation amortization expense 9 effective controls completeness accuracy revenue deferred revenue accounts receivable accrued liabilities 10 effective controls completeness accuracy valuation existence inventory related cost sales accounts 11 effective controls completeness accuracy reporting certain nonus pension plans 12 effective controls complete accurate recording rights obligations associated accounts receivable factoring securitization transactions 13 effective controls accounting certain derivative transactions 14 effective controls accounting equity investments 15 effective controls accounting income taxes including income taxes payable deferred income tax assets liabilities related income tax provision 16 effective controls accounting mergers acquisitions 17 effective controls completeness accuracy certain accrued liabilities related operating expense accounts 18 effective controls completeness accuracy validity payroll accounts payable disbursements ensure adequately reviewed approved prior recorded reported 19 effective controls completeness accuracy validity spreadsheets used financial reporting process ensure access restricted appropriate personnel unauthorized modification data formulas within spreadsheets prevented 20 effective controls accuracy valuation disclosure goodwill intangible asset accounts related amortization impairment expense accounts based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso company’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinions management’s assessment effectiveness company’s internal control financial reporting based audit conducted audit internal control financial reporting accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit internal control financial reporting includes obtaining understanding internal control financial reporting evaluating management’s assessment testing evaluating design operating effectiveness internal control performing procedures consider necessary circumstances believe audit provides reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate material weakness control deficiency combination control deficiencies results remote likelihood material misstatement annual interim financial statements prevented detected following material weaknesses identified included management’s assessment december 31 2004 1 company maintain effective control environment following material weaknesses company effectively communicate importance controls throughout company set adequate tone around control consciousness b company maintain sufficient complement personnel appropriate level accounting tax knowledge experience training application gaap commensurate financial reporting requirements c company failed implement adequate assignment authority responsibility necessary lines communication operations accounting financial staff personnel specifically inadequate sharing financial information within across corporate divisional offices operating facilities adequately raise issues appropriate level accounting financial reporting personnel company maintain effective antifraud program designed detect prevent fraud relating effective whistleblower program ii consistent background checks personnel positions responsibility iii ongoing program manage identified fraud risks e company maintain adequate level control consciousness relates establishment update policies procedures respect primary components information technology general controls resulted either adequate controls designed place achieving operating effectiveness controls systems development software change management computer operations security company refers “information technology general controls” contributed material weakness discussed item 4 control environment sets tone organization influences control consciousness people foundation components internal control financial reporting control environment material weaknesses contributed material weaknesses discussed items 2 20 2 company maintain effective monitoring controls determine adequacy internal control financial reporting related policies procedures following material weaknesses company’s policies procedures respect review supervision monitoring accounting operations throughout organization either designed place operating effectively b company maintain effective internal audit function specifically insufficient complement personnel appropriate level experience training lines reporting allow internal audit function effectively determining adequacy internal control financial reporting monitoring ongoing effectiveness thereof material weaknesses relating monitoring company’s internal control financial reporting contributed material weaknesses discussed items 3 20 3 company maintain effective controls certain periodend financial close reporting processes specifically company maintain effective controls preparation review interim annual consolidated financial statements resulted following material weaknesses company maintain effective controls periodend consolidation process specifically company maintain effective controls ensure identified accumulated required supporting information ensure completeness accuracy consolidated financial statements balances disclosures reported consolidated financial statements reconciled underlying supporting schedules accounting records control deficiency affects substantially financial statement accounts resulted misstatements company’s annual 2002 consolidated financial statements interim annual 2003 consolidated financial statements interim consolidated financial statements first quarter 2004 corrected restatement company’s consolidated financial statements periods restatement annual 2002 annual interim 2003 2004 first quarter consolidated financial statements collectively referred “2004 restatement” ii adjustments including audit adjustments 2004 annual second third fourth quarters consolidated financial statements collectively referred “2004 adjustments” b company maintain effective controls translation subsidiary financial statements denominated currencies us dollars control deficiency affects substantially financial statement accounts resulted misstatements consolidated financial statements corrected 2004 restatement ii 2004 adjustments 4 company maintain effective segregation duties automated manual transaction processes specifically company maintain effective controls granting maintenance monitoring access financial systems data certain information technology personnel unrestricted access financial applications programs data beyond needed perform individual job responsibilities without independent monitoring addition certain financial personnel company’s purchasing payables production inventory control departments incompatible duties allowed creation review processing certain financial data without independent review authorization control deficiency affects substantially financial statement accounts control deficiency result adjustments company’s consolidated financial statements 5 company maintain effective controls preparation review approval account reconciliations specifically company effective controls completeness accuracy supporting schedules substantially financial statement account reconciliations control deficiency resulted misstatements company’s consolidated financial statements corrected 2004 restatement ii 2004 adjustments 6 company maintain effective controls complete accurate recording monitoring intercompany accounts specifically effective controls designed place ensure intercompany balances completely accurately classified reported company’s underlying accounting records ensure proper elimination part consolidation process control deficiency affects substantially financial statement accounts resulted misstatements company’s consolidated financial statements corrected 2004 restatement ii 2004 adjustments 7 company maintain effective controls recording journal entries recurring nonrecurring specifically effective controls designed place ensure journal entries properly prepared sufficient support documentation reviewed approved ensure accuracy completeness journal entries recorded control deficiency affects substantially financial statement accounts resulted misstatements company’s consolidated financial statements corrected 2004 restatement ii 2004 adjustments 8 company maintain effective controls existence completeness accuracy fixed assets related depreciation amortization expense specifically effective controls designed place periodic physical verification fixed assets selection appropriate useful lives plant equipment amortization periods leasehold improvements control deficiency resulted misstatements company’s consolidated financial statements corrected 2004 restatement ii 2004 adjustments 9 company maintain effective controls completeness accuracy revenue deferred revenue accounts receivable accrued liabilities specifically company failed recognize revenue using percentageofcompletion method certain longterm contracts accordance gaap also effective controls designed place ensure sales orders authorized complete accurate recorded timely basis furthermore review approval procedures effective ensure invoices customer credit memoranda adjustments completely timely accurately applied customer receivable accounts unapplied cash receipts properly identified unclaimed third party property control deficiency resulted misstatements company’s consolidated financial statements corrected 2004 restatement ii 2004 adjustments 10 company maintain effective controls completeness accuracy valuation existence inventory related cost sales accounts specifically company’s controls respect accuracy product costing job order closeout accounting cost accumulation longterm contracts certain inventory management processes including obsolete slowmoving inventory identification lowerofcostormarket lifo inventory valuation effective also company maintain effective controls accurate timely recording inventory receipts shipments furthermore company maintain effective controls accuracy completeness periodic physical counts inventory quantities control deficiency resulted misstatements company’s consolidated financial statements corrected 2004 restatement ii 2004 adjustments 11 company maintain effective controls completeness accuracy reporting certain nonus pension plans specifically company failed obtain actuarial valuations certain nonus pension plans ensure properly accounted reported pension expense related obligations certain nonus pension plans accordance gaap control deficiency resulted misstatements company’s consolidated financial statements corrected 2004 restatement ii 2004 adjustments 12 company maintain effective controls complete accurate recording rights obligations associated accounts receivable factoring securitization transactions specifically effective controls designed place ensure gain loss receivable sale receivable balance associated accretion interest recording fees associated securitization facility accurate complete control deficiency primarily affected accounts receivable debt due within one year interest expense net control deficiency resulted misstatements company’s fourth quarter annual consolidated financial statements 2003 corrected restatement consolidated financial statements periods ii adjustments including audit adjustments fourth quarter annual consolidated financial statements 2004 13 company maintain effective controls accounting certain derivative transactions specifically company adequately document criteria measuring hedge effectiveness inception certain derivative transactions subsequently evaluate document ongoing effectiveness certain foreign currency forward contracts order qualify hedge accounting treatment control deficiency affected accounts receivable longterm debt expense comprehensive income accumulated comprehensive income control deficiency resulted misstatements company’s consolidated financial statements corrected 2004 restatement ii 2004 adjustments 14 company maintain effective controls accounting equity investments specifically company maintain effective controls respect adjusting differences gaap accounting standards used certain foreign countries control deficiency affected assets net selling general administrative expense control deficiency resulted misstatements company’s consolidated financial statements corrected 2004 restatement ii 2004 adjustments 15 company maintain effective controls accounting income taxes including income taxes payable deferred income tax assets liabilities related income tax provision specifically company maintain effective controls accuracy completeness components income tax provision calculations related deferred income taxes income taxes payable monitoring differences income tax basis financial reporting basis assets liabilities effectively reconcile differences reported deferred income tax balances control deficiency resulted misstatements company’s consolidated financial statements corrected 2004 restatement ii 2004 adjustments 16 company maintain effective controls accounting mergers acquisitions specifically controls respect application purchase accounting including establishment deferred taxes ineffective resulted errors allocation purchase price underlying assets acquired including goodwill liabilities assumed primarily affected property plant equipment deferred income tax assets liabilities goodwill longterm liabilities control deficiency resulted misstatements company’s consolidated financial statements corrected 2004 restatement ii 2004 adjustments 17 company maintain effective controls completeness accuracy certain accrued liabilities related operating expense accounts specifically effective controls designed place ensure completeness accuracy timeliness recording accrued liabilities related expenses period end control deficiency primarily affected accrued warranty obligations nonus litigation contingencies sales tax liabilities selfinsurance reserves liabilities goods received invoiced related operating expenses control deficiency resulted misstatements company’s consolidated financial statements corrected 2004 restatement ii 2004 adjustments 18 company maintain effective controls completeness accuracy validity payroll accounts payable disbursements ensure adequately reviewed approved prior recorded reported control deficiency primarily affected accounts payable accrued liabilities control deficiency result adjustments company’s consolidated financial statements 19 company maintain effective controls completeness accuracy validity spreadsheets used financial reporting process ensure access restricted appropriate personnel unauthorized modification data formulas within spreadsheets prevented control deficiency affects substantially financial statement accounts resulted misstatements company’s consolidated financial statements corrected 2004 restatement ii 2004 adjustments 20 company maintain effective controls accuracy valuation disclosure goodwill intangible asset accounts related amortization impairment expense accounts specifically effective controls designed place ensure adequate periodic impairment analysis conducted reviewed approved order identify record impairments required gaap periodic amortization expense accurately completely recorded reported control deficiency resulted misstatements company’s consolidated financial statements corrected 2004 restatement ii 2004 adjustments additionally control deficiencies described items 1 20 could result misstatement aforementioned account balances disclosures would result material misstatement annual interim consolidated financial statements would prevented detected management determined control deficiencies items 1 20 constitutes material weakness material weaknesses considered determining nature timing extent audit tests applied audit 2004 consolidated financial statements opinion regarding effectiveness company’s internal control financial reporting affect opinion consolidated financial statements opinion management’s assessment flowserve corporation maintain effective internal control financial reporting december 31 2004 fairly stated material respects based criteria established internal control integrated framework issued coso also opinion effects material weaknesses described achievement objectives control criteria flowserve corporation maintained effective internal control financial reporting december 31 2004 based criteria established internal control integrated framework issued coso pricewaterhousecoopers llp pricewaterhousecoopers llp dallas texas february 13 2006 flowserve consolidated balance sheets see accompanying notes consolidated financial statements flowserve consolidated statements operations see accompanying notes consolidated financial statements flowserve consolidated statements comprehensive income see accompanying notes consolidated financial statements flowserve consolidated statements shareholders’ equity see accompanying notes consolidated financial statements flowserve consolidated statements cash flows see accompanying notes consolidated financial statements flowserve notes consolidated financial statements december 31 2004 2003 three years ended december 31 2004 1 significant accounting policies accounting developments produce engineered industrial pumps industrial valves control valves nuclear valves valve actuators precision mechanical seals provide range related flow management services worldwide primarily process industries equipment manufactured serviced us predominantly used industries deal difficulttohandle corrosive fluids well environments extreme temperatures pressure horsepower speed businesses affected economic conditions us countries products sold serviced cyclical nature petroleum chemical power water industries served relationship us dollar currencies demand pricing customers’ products certain reclassifications made prior period amounts conform current period presentation principles consolidation consolidated financial statements include accounts company wholly majorityowned subsidiaries minority interests recognized majorityowned consolidated subsidiaries intercompany profits transactions balances among consolidated entities eliminated investments unconsolidated affiliated companies represent noncontrolling ownership interests 20 50 accounted using equitymethod basis approximates equity interest underlying equivalent net book value accounting principles generally accepted united states america “gaap” investments interests owned less 20 investee accounted cost method whereby income recognized event dividend receipt investments accounted cost method tested annually impairment use estimates process preparing financial statements conformity gaap requires management make estimates assumptions affect reported amounts certain assets liabilities revenues expenses management believes estimates assumptions reasonable however actual results may differ materially estimates significant estimates assumptions made management used determining • revenue net liquidated damages delivery penalties • allowance doubtful accounts • reserve excess obsolete inventories • deferred tax asset valuation allowances tax reserves • restructuring reserves • legal environmental accruals • warranty accruals • insurance reserves • pension postretirement benefit obligations • valuation goodwill indefinitelived intangible assets longlived assets revenue recognition revenues recognized based shipping terms agreed customer fulfillment inconsequential perfunctory actions required generally point title transfer customer order requires formal acceptance revenue recognized formal acceptance received contracts containing multiple products separable value generally recognize revenue individual product shipments equal shipped products’ pro rata share contract’s fair value upon fulfillment inconsequential perfunctory actions individual product shipment multiple deliverables single contract arrangement product delivery flowserve notes consolidated financial statements continued installation separate fair value product installation recognize revenue element independently upon fulfillment inconsequential perfunctory actions estimates mainly relate fair value determination underlying services products shipping charges billed customers included sales related shipping costs included cost sales consolidated statements operations revenue service contracts recognized services rendered accepted customer addition policy requires prior shipment persuasive evidence arrangement fixed determinable sales price reasonable assurance collectibility revenue longterm contracts define contracts longer ninemonths duration contract values 750000 progress billings customer recorded percentage completion method calculated costtocost basis percentage completion revenue represents less 5 consolidated revenues year presented revenues generated fixed fee service repair contracts recognized straightline basis term contract contracts range duration generally extend five years fixed fee service repair contracts represent less 5 consolidated revenue year presented certain instances provide guaranteed completion dates terms contracts failure meet schedule agreed upon delivery dates result unrealized incentive fees nonrecoverable costs instances payments costs likely perform project profitability analysis using costs reduce revenues realizable could cause estimated project costs exceed projected revenues realized project instances would record reserves cover excesses period determined would adversely affect results operations financial position instances reduced revenues still exceed costs incurrence costs generally reduces profitability project time subsequent revenue recognition reported results would change different estimates used contract costs different estimates used contractual contingencies allowance doubtful accounts credit risk accounts receivable stated net allowance doubtful accounts 87 million 186 million december 31 2004 2003 respectively 2004 32 million reclassified assets net along underlying longterm receivable also 2004 35 million allowance doubtful accounts included accounts receivable sold securitization program fully described note 12 allowance doubtful accounts established based estimates amount uncollectible accounts receivable determined principally based upon aging receivable also customer credit history industry market segment information economic trends conditions credit reports customer financial condition customer credit issues customer bankruptcies general economic conditions also affect estimates credit risks mitigated diversity customers customer base across many different geographic regions performing creditworthiness analyses customers additionally maintained late 2004 credit insurance policy european subsidiaries policy generally received funds third party insurer net deductible instances customer receivables covered policy went unpaid terminated policy 2004 due minimal claims sought december 31 2004 2003 believe significant concentrations credit risk inventories stated lowerofcost market cost determined principally us inventories lastin firstout “lifo” method nonus inventories firstin firstout “fifo” method reserves excess obsolete inventories based upon assessment market conditions products determined historical usage estimated future demand due long life cycle products carry spare parts inventories historically low usage rates provide reserves inventory based demonstrated usage flowserve notes consolidated financial statements continued income taxes deferred taxes tax valuation allowances account income taxes asset liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases operating loss tax credit carryforwards deferred tax assets liabilities calculated using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized period includes enactment date valuation allowances reflect likelihood recoverability assets record valuation allowances reflect estimated amount deferred tax assets may realized based upon analysis existing deferred tax assets net operating losses tax credits jurisdiction expectations ability utilize tax attributes review past current estimated future taxable income establishment tax strategies estimates could impacted changes amount geographical source future income results implementation alteration tax planning strategies statement financial accounting standards “sfas” 109 “accounting income taxes” requires us provide deferred taxes temporary differences associated investment foreign subsidiaries financial reporting basis exceeds tax basis unless assert permanent reinvestment foreign jurisdictions pursuant accounting principles board opinion “apb” 23 “accounting income taxes special areas” financial reporting basis tax basis differences investments foreign subsidiaries consist unremitted earnings losses well foreign currency translation adjustments year ended december 31 2001 ceased ability make apb 23 permanent reinvestment assertion 2001 three years reported period ended december 31 2004 recognized net deferred tax assets attributable unremitted earnings foreign currency translation adjustments foreign subsidiaries excess financial reporting basis due estimated excess foreign tax credits attributes october 22 2004 american jobs creation act 2004 “2004 act” signed law creating temporary incentive us multinationals repatriate accumulated income earned outside us effective tax rate 525 versus us federal statutory rate 35 although repatriated dividends 2004 pursuant dividend reinvestment plan recognized lower tax rate dividends financial statements due uncertainties surrounding realizability benefit extent uncertainty favorably resolved future reporting period benefit associated dividends recognized period tax reserves amount income taxes pay subject ongoing audits federal state foreign tax authorities often result proposed assessments significant judgment required determining income tax provisions evaluating tax positions establish reserves open tax years certain positions subject challenge various tax authorities consolidated tax provision related accruals include impact reasonably estimable losses related interest deemed appropriate believe adequately provided reasonably foreseeable outcome related matters extent likely tax outcome matters changes estimate impact income tax provision period determination made restructuring integration expense restructuring integration expenses generally recognized conjunction acquisitions expenses reflect many estimates including costs pertaining employee severance payments fulfillment outstanding contractual obligations flowserve notes consolidated financial statements continued matters associated exiting facility restructuring costs related facilities employees acquired businesses generally become component goodwill whereas nonacquisition related restructuring costs recorded restructuring expense consolidated statements operations integration costs recognized reduction results operations component current earnings reserves created restructuring plan assessed quarterly adjusted revisions cost estimates changes planned restructuring activities prior january 1 2003 recognized restructuring reserves related restructuring plans approved communicated affected employees conjunction adopting sfas 146 “accounting costs associated exit disposal activities” january 1 2003 record restructuring reserves related liability incurred warranty accruals warranty obligations based upon product failure rates materials usage service delivery costs analysis identified expected claims estimate cost resolve claims estimates expected claims generally factor historical claims known product issues warranty obligations based factors adjusted based historical sales trends preceding 24 months changes claim rates differences actual expected warranty costs sales trends facility rationalization activities could impact warranty obligation estimates might adverse effects consolidated results operations financial position insurance accruals insurance accruals recorded wholly partially selfinsured risks medical benefits workers’ compensation based upon analysis claim loss history insurance deductibles policy limits factors estimates based upon information received actuaries insurance company adjusters independent claims administrators independent sources changes claims differences actual expected claim losses could impact future accruals pension postretirement benefits obligations determination pension postretirement benefits obligations based estimates made management consultation independent actuaries investment advisors inherent valuations key assumptions including discount rates expected return plan assets life expectancy assumed rate increase wages health care costs current market conditions including changes rates returns interest rates medical inflation rates considered selecting assumptions changes related pension postretirement benefit costs may occur future due changes assumptions used changes resulting fluctuations relative plan participants valuation goodwill indefinitelived intangible assets longlived assets value goodwill indefinitelived intangible assets tested impairment december 31 whenever events circumstances indicate assets may impaired test goodwill impairment involves significant judgment estimating projections fair value using present value expected future cash flows generated future performance reporting units correlate operating segments consider operating segments constitute business discrete financial information management regularly reviews test impairment indefinitelived intangibles involves estimating projections future sales levels 2004 due declining sales levels selected product families acquired invensys plc included flow control division recorded trademark impairment charge approximately 10 million included selling general administrative expense accompanying consolidated statements operations net realizable value longlived assets including property plant equipment reviewed periodically indicators potential impairments present based upon assessment estimated future cash flows related assets due uncertain market conditions potential changes strategy product portfolio possible forecasts used support asset carrying values may change future could result noncash charges would adversely affect consolidated results operations financial condition flowserve notes consolidated financial statements continued foreign currency translation assets liabilities foreign affiliates translated us dollars exchange rates prevailing balance sheet date income expenses translated average rates month translation gains losses generally reported component accumulated comprehensive loss transaction translation gains losses arising intercompany balances reported component accumulated comprehensive loss underlying transaction stems longterm equity investment debt designated due foreseeable future otherwise recognize transaction gains losses arising intercompany transactions component income intercompany balances longterm investment related designated due beyond foreseeable future may mitigate risk associated foreign currency fluctuations entering forward exchange contracts see note 10 discussion forward exchange contracts transactional currency gains losses arising transactions outside sites’ functional currencies changes fair value forward contracts qualify hedge accounting included consolidated results operations years ended december 31 2004 2003 2002 recognized approximately 113 million 20 million 10 million amounts expense income net accompanying consolidated statements operations stockbased compensation december 31 2004 several stockbased employee compensation plans account recognition measurement principles apb 25 “accounting stock issued employees” related interpretations 2004 prior years stockbased employee compensation cost reflected net earnings stock option grants options granted plans exercise price equal excess market value underlying common stock date grant elect modify existing stock option awards apb 25 interpreted financial accounting standards board “fasb” financial interpretation “fin” 44 “accounting certain transactions involving stock compensation” requires us recognize intrinsic value underlying options date modification becomes effective modifications could include accelerated vesting reduction exercise prices extension exercise period awards restricted stock valued market price common stock grant date recorded unearned compensation within shareholders equity unearned compensation amortized compensation expense vesting period restricted stock unearned compensation 52 million 09 million 11 million december 31 2004 2003 2002 respectively amounts recognized net earnings prospective periods flowserve notes consolidated financial statements continued following table illustrates effect net earnings per share applied fair value recognition provisions sfas 123 “accounting stockbased compensation” stockbased employee compensation calculated using blackscholes optionpricing model pro forma disclosures may representative effects future years since determination fair value stock options granted includes expected volatility factor additional option grants expected made year see note 9 additional discussion assumptions inherent calculation stockbased employee compensation expense table business combinations business combinations referred financial statements used purchase method accounting allocate purchase price identifiable tangible intangible assets recognizing goodwill purchase price exceeds fair value identifiable assets shortterm investments place temporary cash investments financial institutions policy invest institutions instruments minimal credit risk market risk investments original maturity three months less purchased classified cash equivalents highly liquid principal values subject significant risk change due interest rate fluctuations property plant equipment depreciation property plant equipment stated historical cost less accumulated depreciation useful lives leasehold improvements lesser remaining lease term useful life improvement assets retired otherwise disposed costs related accumulated depreciation removed accounts resulting gains losses included operations period depreciation computed straightline method based estimated useful lives depreciable assets estimated useful lives assets costs related repairs maintenance expensed incurred intangible assets intangible assets excluding trademarks considered indefinite life consist primarily engineering drawings distribution networks software patents items flowserve notes consolidated financial statements continued amortized estimated useful lives generally ranging 3 40 years assets reviewed impairment whenever events circumstances indicate impairment may occurred deferred loan costs deferred loan costs consisting fees expenses associated debt financing amortized term related debt using straightline method approximates effective interest method additional amortization recorded periods optional mandatory repayments debt made legal environmental accruals legal environmental reserves recorded based upon casebycase analysis facts circumstances legal obligations related costs relating legal environmental liabilities estimated recorded probable loss incurred loss estimable assessments legal environmental costs based information obtained independent inhouse experts loss experience similar situations estimates may change future due new developments regarding facts circumstances matter derivatives hedging activities enter forward contracts purposes hedging certain transactions denominated foreign currencies part risk management strategy also enter interest rate swap agreements purpose hedging exposure floating interest rates certain portions debt also enter compound interest rate foreign currency financial derivatives mitigate risk associated interest rate foreign exchange volatility riskmanagement derivatives policy outlining conditions enter financial derivative transactions employ foreign currency hedging strategy minimize potential losses earnings cash flows unfavorable foreign currency exchange rate movements strategies also minimize potential gains favorable exchange rate movements foreign currency exposures arise transactions including firm commitments anticipated transactions denominated currency entity’s functional currency foreigndenominated income expense translated us dollars primary currencies exposure euro british pound canadian dollar mexican peso japanese yen singapore dollar brazilian real australian dollar argentinean peso venezuelan bolivar derivatives recognized balance sheet fair value inception new derivative contract policy requires us designate derivative 1 hedge forecasted transaction b variability cash flows received paid connection recognized asset liability “cash flow” hedge 2 foreign currency fair value cash flow hedge “foreign currency” hedge changes fair value derivative highly effective documented designated qualified cash flow hedge extent hedge effective recorded comprehensive loss earnings affected variability cash flows hedged transaction changes fair value foreign currency hedges recorded comprehensive loss since satisfy accounting criteria cash flow hedge ineffectiveness represents amount changes fair value derivative mirror change cash flow forecasted transaction recorded current period earnings certain financial derivatives qualify hedge accounting accordingly deemed ineffective changes fair values recognized expense income net consolidated statements operations periods presented effective hedges changes value hedged item also recorded component comprehensive loss underlying recognized balance sheet upon settlement realized gains losses recognized expense income net consolidated statements operations policy requires us document relationships hedging instruments hedged items well risk management objective strategy undertaking various hedge transactions process includes linking derivatives designated fair value cash flow foreign currency hedges 1 specific assets liabilities balance sheet 2 specific firm commitments forecasted transactions also assess inception hedge ongoing basis whether flowserve notes consolidated financial statements continued derivatives used hedging transactions highly effective offsetting changes fair value cash flows hedged items whether derivatives may expected remain highly effective future periods failure adequately document relationships objectives inception hedge would prevent us applying hedge accounting failure demonstrate effectiveness offsetting exposures retroactively prospectively would cause us deem hedge ineffective discontinue hedge accounting • deem hedge ineffective determine designation derivative hedging instrument longer appropriate • derivative longer effectively offsets changes cash flows hedged item firm commitments contracts • derivative expires terminates sold • occurrence contracted committed transaction longer probable occur originally expected period hedge accounting discontinued derivative remains outstanding carry derivative estimated fair value balance sheet recognizing changes fair value current period earnings cash flow hedge becomes ineffective deferred gains losses cash flow hedge remain accumulated comprehensive loss exposure relating item underlying hedge recognized becomes probable hedged forecasted transaction occur deferred gains losses hedging instrument recognized earnings immediately research development expense research development costs charged expense incurred aggregate research development costs included selling general administrative expenses 252 million 249 million 239 million 2004 2003 2002 respectively costs incurred research development primarily include salaries benefits consumable supplies well rent professional fees utilities depreciation property equipment used research development activities fair values financial instruments carrying amounts financial instruments approximate fair value december 31 2004 except debt carrying value 702 million estimated fair value 736 million debt carrying value 951 million estimated fair value 995 million december 31 2003 determine fair value fixed rate debt applying open market discount premium principal outstanding consider variable rate debt fair values approximate carrying value based upon assessment underlying borrowing spreads flowserve notes consolidated financial statements continued earnings per share basic diluted earnings per share calculated follows options outstanding exercise price greater average market price common stock included computation diluted earnings per share weighted average number options totaled 1102818 2578638 1171411 2004 2003 2002 respectively accounting developments pronouncements implemented december 2003 fasb issued fin 46r “consolidation variable interest entities” addresses consolidation variable interest entities “vies” business enterprises primary beneficiaries vie entity 1 sufficient equity investment risk permit finance activities without additional subordinated financial support 2 whose equity investors lack characteristics controlling financial interest 3 whose equity investors voting rights proportionate economic interests activities entity involve conducted behalf investor disproportionately small voting interest primary beneficiary vie enterprise majority risks rewards associated vie believe interests vies require disclosure consolidation fin 46r therefore implementation significant effect consolidated results operations financial position may 2004 fasb issued fasb staff position “fsp” 1062 “accounting disclosure requirements related medicare prescription drug improvement modernization act 2003” “medicare act” medicare act provides certain federal subsidies drug benefits provided retiree health plans third quarter fiscal 2004 adopted fsp 1062 retroactive december 8 2003 date enactment medicare act expected subsidy reduced accumulated postretirement benefit obligation approximately 45 million recognized reduction unrecognized net actuarial loss amortized average remaining service life employees eligible postretirement benefits adoption fsp 1062 reduced net periodic postretirement cost approximately 07 million year ended december 31 2004 flowserve notes consolidated financial statements continued pronouncements yet implemented december 2004 fasb issued sfas 123r “sharebased payment” sfas 123r requires compensation costs related sharebased payment transactions recognized financial statements limited exceptions amount compensation cost measured based grantdate fair value equity liability instruments issued addition liability awards remeasured reporting period compensation cost recognized period employee provides service exchange award sfas 123r revision sfas 123 “accounting stockbased compensation” amended sfas 148 “accounting stockbased compensation transition disclosure” supersedes apb 25 sfas 123r effective public companies first interim annual reporting period first fiscal year beginning june 15 2005 adopt sfas 123r first quarter 2006 using modified prospective transition method adoption sfas 123r’s fair value method could material impact future consolidated results operations although impact overall financial position adopted sfas 123r prior periods impact would approximated impact sfas 123 described pro forma net earnings per share disclosure ultimate amount expense associated adoption pronouncement based among things grants stock options vested date adoption fair value date grant still evaluating impact adopting sfas 123r results operations 2006 november 2004 fasb issued sfas 151 “inventory costs amendment accounting research bulletin 43 chapter 4” sfas 151 amends accounting research bulletin “arb” 43 chapter 4 seeks clarify accounting abnormal amounts idle facility expense freight handling costs wasted materials requiring items recognized current period charges additionally sfas 151 requires fixed production overheads allocated conversion costs based normal capacity production facilities sfas 151 effective prospectively inventory costs incurred fiscal years beginning june 15 2005 expect adoption sfas 151 material effect consolidated financial position results operations december 2004 fasb issued sfas 153 “exchanges nonmonetary assets” addresses measurement exchanges nonmonetary assets sfas 153 eliminates exception fair value measurement nonmonetary exchanges similar productive assets previously provided apb 29 “accounting nonmonetary transactions” replaces exception exchanges commercial substance sfas 153 specifies nonmonetary exchange commercial substance future cash flows entity expected change significantly result exchange sfas 153 effective nonmonetary asset exchanges occurring fiscal periods beginning june 15 2005 expect adoption sfas 153 material effect consolidated financial position results operations may 2005 fasb issued sfas 154 “accounting changes error corrections” sfas 154 establishes new standards accounting changes accounting principles changes must accounted retrospective application financial statements prior periods unless impracticable sfas 154 replaces apb 20 “accounting changes” sfas 3 “reporting accounting changes interim periods” however carries forward guidance pronouncements respect accounting changes estimates changes reporting entity correction errors sfas 154 effective accounting changes error corrections made fiscal years beginning december 15 2005 early adoption permitted changes corrections made years beginning june 1 2005 application sfas 154 affect transition provisions existing pronouncements including transition phase effective date sfas 154 expect adoption sfas 154 material effect consolidated financial position results operations flowserve notes consolidated financial statements continued april 2005 fasb issued fin 47 “accounting conditional asset retirement obligations” fin 47 clarifies term conditional asset retirement obligation used sfas 143 “accounting asset retirement obligations” requiring companies recognize liability fair value asset retirement obligation may conditional future event fair value liability reasonably estimated fin 47 effective end fiscal years ending december 15 2005 expect adoption fin 47 material impact consolidated financial position results operations although final pronouncements recently issued adopted expect impact reported financial information disclosures accounting promulgating bodies number pending projects may directly impact us continue evaluate status projects become final provide disclosures regarding likelihood magnitude impact 2 restatement errors discussed restated consolidated financial statements december 31 2003 years ended december 31 2003 2002 presented herein since impact restatement also affected periods prior 2002 restated prior periods impact reflected adjustment beginning retained earnings january 1 2002 addition errors impacted first quarter 2004 quarterly periods 2003 restated amounts quarters presented note 20 certain errors identified relate periods prior 2002 recorded aggregate adjustment 137 million beginning retained earnings january 1 2002 amount mainly consists corrections resulting intercompany reconciliations tax matters described following table sets forth nature significant restatement errors impact previously reported net earnings summary restatement issues affecting net earnings years ended december 31 inventory valuation corrected financial statements inconsistencies application accounting policy obsolete slow moving inventory errors lifo calculations errors adjusting lowerofcostormarket considerations inconsistencies related obsolete slow flowserve notes consolidated financial statements continued moving inventory mainly resulting limitations systems processes effectively identify excess inventory quantities ii inventories acquired businesses identification slow moving items performed timely errors lifo lowerofcostormarket resulted inaccurate calculations longterm contract accounting identified one longterm contract accounted using percentage completion method include estimated cost work performed subcontractors part total estimated costs determining percentage completion accounting overall contract also identified longterm contract costs related contracts recorded appropriate periods resulted corrections cost sales prior periods intercompany reconciliations accounting intercompany transactions adversely affected information technology system conversions acquisitions changes corporate processes recording intercompany transactions initial analysis intercompany transactions expanded include assessment intercompany balance differences reporting dates certain reconciling items identified assessment required adjustment consolidated statements operations pension expense part comprehensive review pension plans identified errors accounting nonus pension plans certain plan obligations measured actuarially determined present value resulted errors annual pension expense related liabilities fixed assets intangibles part comprehensive physical observation assessment fixed assets identified errors fixed asset processes related disposals abandonments recorded accounting records necessitating adjustments report gains losses disposal appropriate periods also identified errors resulted adjusting impact purchase accounting within general ledgers certain locations recently acquired businesses amortization leasehold improvements periods excess related lease terms errors amortization intangible assets errors affected amounts reported fixed assets goodwill intangible assets depreciation amortization loss disposals foreign currency translation accounts financial derivatives identified errors accounting financial derivatives related foreign currency forward exchange contracts consisted incorrectly recording unrealized gains losses comprehensive loss certain contracts meet criteria hedge accounting also identified errors related recording balances underlying financial derivatives unclaimed property identified errors accounting unclaimed property primarily unapplied cash customer credits related accounts receivable checks issued vendors payees presented payment previously recorded items income removed amounts balance sheet accounts correction reinstates amounts within accrued liabilities began process filing various states voluntary disclosure agreements identified errors part restatement individual impact net earnings significant resulted following • errors original allocation purchase price acquired businesses property plant equipment goodwill accrued liabilities deferred income taxes • errors reconciliations account balances • errors accounting equity investments based foreign accounting standards rather us gaap • errors deemed individually significant separate disclosure tax matters due significant employee turnover information technology system limitations corporate legal restructurings several multinational acquisitions inadequate reconciliations identified flowserve notes consolidated financial statements continued errors amounts recorded current deferred income taxes undertook process identify tax basis amounts domestic international locations performed comprehensive review purchase accounting recent acquisitions process included detailed compilation book tax differences reporting dates well reconciliations income tax payable accounts tax returns filed amended also identified errors occurred applying purchase accounting businesses acquired including income tax liabilities arising years prior acquisitions corrected related balance sheet accounts also identified errors us federal income tax returns filed 1999 2001 result internal revenue service examination years amended tax returns years reflected impact amendments within current deferred domestic income tax balance sheet accounts reporting dates december 31 2004 tax impact restatement corrections restatement corrections analyzed determine amounts corresponding impact provision income taxes result reflected tax impact restatement corrections following table presents impact restatement adjustments described business classified discontinued operations 2004 described note 3 consolidated statements operations years ended december 31 2003 2002 consolidated statements operations information years ended december 31 flowserve notes consolidated financial statements continued restatement corrects consolidated statements operations following errors • sales decreased 74 million year ended december 31 2003 increased 26 million year ended december 31 2002 primarily due error application percentage completion accounting one longterm contract includes subcontractors 42 million decrease 2003 errors reported sales period later determined accordance gaap 28 million decrease 2003 26 million increase 2002 errors account reconciliations 04 million decrease 2003 • cost sales increased years ended december 31 2003 2002 primarily due errors following thousands • selling general administrative expense increased years ended december 31 2003 2002 primarily due errors following thousands flowserve notes consolidated financial statements continued • expense income net decreased 22 million year ended december 31 2002 primarily due errors accounting foreign currency forward contracts meet criteria hedge accounting 29 million 2002 individually insignificant errors • provision income taxes decreased 74 million increased 41 million years ended december 31 2003 2002 respectively primarily due corrections deferred tax accounts income tax effect errors described included 54 million 20 million years 2003 2002 respectively due tax impact restatement items addition 20 million 61 million years 2003 2002 respectively due tax matters primarily correction deferred tax accounts following table presents impact restatement adjustments consolidated statements comprehensive income years ended december 31 2003 2002 errors identified relating periods prior january 1 2002 reflected beginning retained earnings accompanying consolidated statements shareholders’ equity consist errors similar described effect correcting errors decreased beginning retained earnings january 1 2002 137 million net tax errors identified balance sheet december 31 2003 described mainly resulted misapplication purchase accounting businesses acquired ii recording adjustments resulting reconciling intercompany balances iii actuarially determining nonus pension obligations accounting accordance gaap iv incorrect deferred tax asset liability balances v recording liabilities including liabilities purchased intellectual property litigation tax penalties vi recording effect foreign currency translations relating restatement vii recording adjustments consolidated statements operations set forth errors applying purchase accounting resulted incorrectly accounting deferred taxes acquisitions ingersoll dresser pump co “idp” 2000 flow control division invensys plc “ifc” 2002 accounting foreign currency translations relating idp acquisition 2000 fair value stepups property plant equipment pushed local entity impacted recording subsequent asset disposals depreciation related foreign currency translation effects flowserve notes consolidated financial statements continued following table presents impact restatement adjustments described business classified discontinued operations described note 3 consolidated balance sheet december 31 2003 consolidated balance sheet information december 31 restatement consolidated balance sheet corrects following errors • accounts receivable net increased 100 million december 31 2003 primarily recording accounts receivable factoring arrangement one foreign location previously reported sale secured borrowing 45 million errors accounting one longterm contract 40 million errors account reconciliations individually insignificant items 15 million flowserve notes consolidated financial statements continued • inventories net decreased 179 million december 31 2003 primarily due errors following thousands • prepaid expenses decreased 61 million primarily due reclassification tax matters 64 million partially offset reconciling items 03 million • current noncurrent deferred tax assets decreased 145 million 1063 million december 31 2003 respectively correct errors recording deferred taxes purchase accounting tax effects restatement errors tax effects errors accumulated comprehensive loss noncurrent deferred tax assets primarily restated properly net assets liabilities see also decrease noncurrent deferred tax liability • property plant equipment net increased 51 million december 31 2003 correct accounting foreign currency translations relating idp acquisition fair value pushed local entities’ general ledgers disposals abandonment assets depreciation amortization due disposals excessive amortization periods leasehold improvements errors account reconciliations corrections due errors following thousands • goodwill increased 05 million december 31 2003 primarily correct purchase accounting related acquisitions idp 2000 ifc 2002 corrections due errors following thousands • intangibles net increased 18 million december 31 2003 primarily correct accounting purchased intellectual property • assets net increased 73 million december 31 2003 reclassify overfunded pension plans assets 115 million partially offset write value equity investments based gaap conforming adjustments 36 million reconciling items 06 million • accounts payable decreased 86 million december 31 2003 record adjustments resulting intercompany account reconciliations 101 million reconciling items 02 million partially offset accrual longterm contract costs 17 million flowserve notes consolidated financial statements continued • accrued liabilities decreased 04 million december 31 2003 correct errors following thousands • debt due within one year increased 45 million december 31 2003 correct accounts receivable factoring arrangement secured borrowing rather sale • current noncurrent deferred tax liabilities decreased 201 million 1019 million respectively december 31 2003 correct errors deferred taxes tax effects errors restatement tax effects errors accumulated comprehensive loss noncurrent deferred tax liabilities primarily restated properly net assets liabilities see also decrease noncurrent deferred tax assets • retirement obligations liabilities increased 46 million december 31 2003 excluding decrease 1019 million noncurrent deferred tax liabilities discussed primarily reclassify overfunded pension plans assets net described 115 million offset correcting actuarially determined obligations accounting several nonus pension plans accordance gaap related liabilities meet criteria defined benefit plan 58 million reconciling items 11 million consolidated statements cash flows years ended december 31 2003 2002 also restated items discussed following table presents major subtotals 2003 2002 consolidated statements cash flows related impact restatement adjustments discussed condensed consolidated statements cash flows information years ended december 31 2003 2002 flowserve notes consolidated financial statements continued footnotes contained consolidated financial statements also reflect impact restatement discussed footnote 3 discontinued operations november 2004 sold government marine business unit “gmbu” business within flowserve pump division “fpd” curtisswright electromechanical corporation approximately 28 million generating pretax gain 74 million allocation approximately 8 million fpd goodwill 1 million intangible assets gmbu provided pump technology service us navy submarines aircraft carriers serve core market represented small part total pump business used net proceeds disposition gmbu reduce outstanding indebtedness result sale presented assets liabilities results operations gmbu discontinued operations periods included gmbu generated following results operations gmbu’s assets liabilities reclassified prepaid expenses property plant equipment net accounts payable accrued liabilities reflect discontinued operations december 31 2003 gmbu’s assets liabilities consisted following flowserve notes consolidated financial statements continued 4 acquisitions acquired remaining 75 interest thompsons kelly lewis pty ltd “tkl” australian manufacturer supplier pumps march 2004 incremental interests acquired accounted step acquisition tkl’s results operations consolidated since date acquisition estimated fair value net assets acquired including approximately 22 million cash acquired exceeded cash paid 12 million accordingly goodwill recognized 2004 consolidated statement operations includes 2004 tkl sales 35 million 2004 consolidated balance sheet includes tkl assets approximately 31 million december 31 2004 invensys flow control may 2 2002 completed acquisition invensys plc’s flow control division ifc contractual purchase price 535 million subject adjustment pursuant terms purchase sale agreement purchase price subsequently reduced 22 million fourth quarter 2003 yielded final contractual purchase price 5328 million reduction related finalization balances date acquisition cash related party activity tax payments addition incurred 61 million costs associated consummation acquisition including fees investment banking legal actuarial accounting services aggregate purchase price ifc including fees 5389 million operating results ifc included consolidated statements operations since date acquisition purchase price allocated assets acquired liabilities assumed based estimated fair value date acquisition ifc manufactures valves actuators associated flow control products provides us balanced mix sales among pumps valves seals well diversified geographic end market mix table reflects unaudited pro forma results ifc acquisition taken place beginning 2002 including estimated purchase accounting adjustments financing costs pro forma information purport represent consolidated results operations actually would transactions events occurred dates specified project consolidated results operations future period flowserve notes consolidated financial statements continued following table summarizes estimated fair value assets acquired liabilities assumed ifc acquisition 1 includes 1512 million consider deductible income tax purposes 2 represents 90 million current liabilities reduced 61 million transaction costs incurred 5 goodwill intangible assets goodwill indefinitelived intangible assets tested impairment december 31 whenever events circumstances indicate impairment may exist impairment goodwill indefinitelived intangibles assessed reporting unit level consider three operating segments constitute distinct reporting units therefore assess impairment operating segment level following table provides information changes 2004 intangible assets flowserve notes consolidated financial statements continued following table provides information changes 2003 intangible assets 1 recorded 33 million adjustments trademarks goodwill resulting refinements purchase price allocation ifc acquisition allocation period transaction 2 engineering drawings represent estimated fair value associated specific product component schematics assets recognized result acquisitions ifc idp valued based upon independent third party appraisals 3 accumulated amortization indefinitelived intangible assets relates amounts recorded prior implementation date sfas 142 “goodwill intangible assets” 4 2004 evaluated fair value trademarks recorded impairment charge 979000 related one trademarks acquired ifc charge included selling general administrative expense accompanying consolidated statement operations following schedule outlines actual amortization recognized 2004 estimate future amortization based upon finitelived intangible assets owned december 31 2004 flowserve notes consolidated financial statements continued changes carrying amount goodwill years ended december 31 2004 2003 follows 6 factoring accounts receivable european subsidiaries engage nonrecourse factoring certain accounts receivable various agreements different terms including options renewal mutual termination clauses 2000 credit facilities described note 12 factoring generally limited 50 million based due date factored receivables limit factoring raised 75 million new credit facilities entered august 2005 fully described note 12 december 31 2004 2003 respectively received using end period exchange rates us dollar equivalent approximately 26 million 24 million respectively cash significant factoring agreement represents factor’s purchase 32 million 30 million receivables respectively additionally maintain numerous individually less significant factoring agreements aggregate total cash received factoring receivables agreements totaled 20 million 25 million december 31 2004 2003 respectively one agreements determined represent leveraged borrowing opposed sale receivables accordingly reported aggregate cash received facility component shortterm debt amount 64 million 45 million december 31 2004 2003 respectively 2004 factoring agreements worldwide recognized using yearend exchange rates losses approximately 20 million factoring receivables compares total loss 16 million 02 million 2003 2002 respectively 7 inventories stated lower cost market cost determined principally us inventories lifo method nonus inventories fifo method flowserve notes consolidated financial statements continued inventories method determining costs 2004 2003 2002 recognized expenses 260 million 225 million 135 million respectively obsolete excess inventory expenses included cost sales consolidated statements operations 8 restructuring acquisition related charges restructuring costs ifc conjunction ifc acquisition 2002 initiated restructuring program designed reduce costs eliminate excess capacity closing 18 valve facilities including 10 service facilities reducing sales related support personnel actions approved committed 2002 remaining actions approved committed 2003 resulted gross reduction 847 positions net reduction 633 positions net position eliminations represent gross positions eliminated closed facilities offset positions added receiving facilities required produce products transferred receiving facilities established restructuring program reserve 110 million upon acquisition ifc increased reserve total 96 million latter half 2002 recognized additional accruals 45 million 2003 program primarily related closure certain valve service facilities related reductions workforce based upon revised forecasts costs incurred recognized reduction 23 million ifc restructuring reserve 2004 since portion reserve affected estimate created goodwill recognition reduction reserve recorded via decrease goodwill cash expenditures accrual 34 million 2004 116 million 2003 42 million 2002 remaining accrual 36 million reflects payments made 2005 payments expected thereafter severance obligations due terminated personnel europe 21 million well lease contract termination exit costs 15 million cumulative costs 72 million associated closure facilities december 31 2003 recognized restructuring expense operating results whereas cumulative costs associated closure ifc facilities 179 million including related deferred taxes 62 million became part purchase price allocation transaction effect closure costs increased amount goodwill otherwise recognizable result ifc acquisition flowserve notes consolidated financial statements continued following illustrates activity related ifc restructuring reserve integration costs ifc also incurred acquisitionrelated integration expense 2003 2002 conjunction ifc summarized acquisitionrelated activities resulted integration costs categorized defined follows personnel related costs include payroll benefits consulting fees retention integration performance bonuses paid employees contractors development management execution integration plan transfer product lines includes costs associated transfer product lines well realignment required receiving facilities asset impairments reflect loss disposal property plant equipment ifc facilities closed disposal inventory discontinued product lines remaining facilities combined category includes costs associated information technology integration legal entity consolidations legal entity name changes signage new product literature none integration expense items individually exceeded 05 million remaining restructuring integration costs ifc largely completed restructuring integration programs related ifc except payments certain outstanding european activities expect incur additional restructuring integration expenses connection programs payments restructuring accrual continue 2005 beyond due timing severance obligations committed europe flowserve notes consolidated financial statements continued 9 stockbased compensation plans restricted stock option plans flowserve corporation 2004 stock compensation plan “2004 plan” established april 21 2004 authorized issuance 3500000 shares common stock grants restricted stock options equitybased awards 3500000 shares common stock authorized 2004 plan 3217653 remain available issuance addition 2004 plan maintain shareholderapproved plans permit issuance common stock grants various equitybased awards december 31 2004 approximately 111611 shares common stock remained available stock option grants plans options granted officers employees directors allow purchase common shares fair market value stock date options granted although options granted fair market value generally options whether granted 2004 plan one previously approved plans become exercisable staggered period ranging one five years typically one three years options generally expire ten years date grant within short period time following termination employment cessation services option holder however described greater detail expiration provisions relating certain outstanding option awards modified 2005 information concerning stock options issued officers employees directors plans presented following table flowserve notes consolidated financial statements continued weighted average remaining contractual life options outstanding december 31 2004 40 years additional information relating ranges options outstanding december 31 2004 follows disclosure pro forma information regarding net earnings per share accounted stock options granted subsequent december 31 1994 fair value method presented note 1 options granted weighted average fair value per share grant date 1083 2004 893 2003 1170 2002 purposes pro forma disclosure estimated fair value options amortized expense options’ vesting periods “fair value” options date grant estimated using blackscholes option pricing model assumptions used calculating expense stock option awards follows since determination fair value options granted includes expected volatility factor additional option grants expected year pro forma disclosures may representative effects future years restricted stock plans addition 2004 plan also restricted stock plans authorize us grant 5569 additional shares common stock units rights commensurate restricted stock employees nonemployee directors general restrictions shares units expire minimum one year maximum ten years subject forfeiture restriction period typically restricted share grants staggered vesting periods one three years grant date intrinsic value shares units typically product share price date grant number shares units granted amortized straightline basis compensation expense periods restrictions lapse cumulative recognized expense related restricted stock units forfeited reversed upon forfeiture time forfeited grant recorded treasury stock flowserve notes consolidated financial statements continued following table summarizes information regarding restricted stock plans modifications 2005 made number modifications stock plans including acceleration certain restricted stock grants outstanding options well extension exercise period associated certain outstanding options modifications resulted severance agreements former executives decision temporarily suspend option exercises result modifications primarily associated severance agreements former executives recorded additional stockbased compensation expense 2005 approximately 7 million based upon intrinsic values awards dates modifications made june 1 2005 took action extend december 31 2006 regular term certain options granted employees including executive officers qualified retirees directors scheduled expire 2005 subsequently took action november 4 2005 extend exercise date options expiring 2006 january 1 2009 thereafter concluded however recent regulatory guidance issued section 409a internal revenue code might cause recipients extended options become subject unintended adverse tax consequences section 409a accordingly effective december 14 2005 organization compensation committee board directors partially rescinded accordance regulations extensions regular term options provide follows regular term options otherwise expiring 2005 expire 30 days options first become exercisable sec filings become current effective sec form s8 registration statement filed sec ii regular term options otherwise expiring 2006 expire later 1 75 days regular term option originally granted expires 2 december 31 2006 assuming options become exercisable 2006 reasons included extensions subject shareholders approving certain applicable plan amendments next annual shareholder’s meeting tentatively scheduled april 2006 shareholders approve plan amendments currently posed proxy statement extension actions become void plan amendments approved next annual shareholder meeting extensions considered stock modification financial reporting purposes subject recognition noncash compensation charge accordance sfas 123r earlier extension actions also extended option exercise period available following separation employment reasons death disability termination cause certain voluntary separations separate extensions partially rescinded december 14 2005 meeting organization compensation committee board directors revised currently effective subject shareholder approval exercise period available following employment separations extended later 30 days options first became exercisable sec filings flowserve notes consolidated financial statements continued become current effective sec form s8 registration statement filed sec ii period available exercise following separation employment terms option originally granted extension considered financial reporting purposes stock modification subject recognition noncash compensation charge accordance apb 25 approximately 1 million 2005 extension exercise period following separation employment apply option exercise periods governed separate separation contract agreement 10 derivatives hedging activities enter forward contracts hedge risks associated transactions denominated currencies local currency operation engaging transaction risk management derivatives policy specifies conditions may enter derivative contracts december 31 2004 2003 approximately 1393 million 751 million respectively notional amount outstanding forward contracts third parties december 31 2004 maximum length forward contract currently place 17 months certain forward contracts qualify hedge accounting fair value outstanding forward contracts december 31 2004 2003 asset 34 million 47 million respectively unrealized gains losses changes fair value forward contracts approximately 25 million 16 million 29 million net tax years ended december 31 2004 2003 2002 respectively included expense income net consolidated statements operations fair value outstanding forward contracts qualifying hedge accounting liability 23 million december 31 2004 2003 unrealized gains losses changes fair value qualifying forward contracts associated underlying exposures 02 million 05 million 24000 net tax december 31 2004 2003 2002 respectively included comprehensive income expense consolidated statements shareholders’ equity also part risk management program enter interest rate swap agreements hedge exposure floating interest rates certain portions debt december 31 2004 2003 1250 million 2150 million respectively notional amount outstanding interest rate swaps third parties december 31 2004 maximum length interest rate contract currently place approximately two years december 31 2004 2003 fair value interest rate swap agreements liability 34 million 76 million respectively 2004 entered compound derivative contract hedge exposure currency translation interest rate risks associated european investment bank “eib” loan notional amount derivative 85 million served convert floating rate interest rate risk fixed rate well us dollar currency risk euros derivative matures 2011 december 31 2004 fair value derivative liability 159 million derivative contract qualify hedge accounting unrealized loss derivative offset foreign translation gain underlying loan aggregate 51 million included expense income net consolidated statements operations exposed risk creditrelated losses resulting nonperformance counterparties financial instruments perform credit evaluations counterparties forward contracts interest rate swap agreements expect counterparties meet obligations experienced credit losses counterparties additionally exposed risk derivative contracts qualifying hedge accounting flowserve notes consolidated financial statements continued hedging related transactions recorded comprehensive income expense net deferred taxes summarized following amounts net deferred taxes represent expected recognition earnings hedging contracts based fair values december 31 2004 11 details certain consolidated balance sheet captions following tables present financial information certain consolidated balance sheet captions accounts receivable net accounts receivable net 2004 61 million receivables reclassified assets net including related reserve 32 million also 2004 35 million allowance doubtful accounts included accounts receivable sold securitization program fully described note 12 flowserve notes consolidated financial statements continued property plant equipment net property plant equipment net depreciation expense continuing operations amount 474 million 453 million 414 million years ended december 31 2004 2003 2002 respectively included cost sales consolidated statements operations remaining depreciation expense included selling general administrative expense assets net assets net accrued liabilities accrued liabilities flowserve notes consolidated financial statements continued accrued liabilities includes insurance state local taxes lease obligations freight items none individually exceed 5 current liabilities retirement obligations liabilities retirement obligations liabilities noncurrent liabilities includes minority interest reserves legal environmental matters reserves uncertain tax positions items none individually exceed 5 noncurrent liabilities 12 debt lease obligations debt including capital lease obligations consisted flowserve notes consolidated financial statements continued scheduled maturities 2000 credit facilities described including capital lease obligations next five years beyond giving effect refinancing termination accounts receivable securitization agreement optional prepayment approximately 20 million made end 2005 mandatory repayment 109 million made january 2006 using net proceeds sale gsg scheduled longterm debt obligations 15 million due 2005 0 due 2006 57 million per year due 2007 2008 2009 6354 million due thereafter 2000 credit facilities december 31 2004 2003 credit facilities comprised 300 million revolving line credit tranche c term loans tranche consisted us dollar denominated tranche euro denominated tranche latter term note due 2006 refer credit facilities collectively 2000 credit facilities 2004 made scheduled principal payments 275 million mandatory principal repayments 1679 million optional principal prepayments 1600 million 2003 made scheduled principal payments 09 million optional principal prepayments 1631 million since typically result payments advance scheduled payments mandatory repayments optional prepayments cause us recognize loss early writeoff prepaid financing costs following summarizes repayment obligations 2000 credit facilities borrowings 2000 credit facilities bore interest rate equal option either 1 base rate based prime rate recently announced administrative agent 2000 credit facilities federal funds rate plus 050 2 london interbank offered rate “libor” plus case tranche term loan loans revolving line credit applicable margin determined reference ratio total debt consolidated earnings interest taxes depreciation amortization “ebitda” case tranche c term loan applicable margin based longterm debt ratings addition paid lenders revolving line credit commitment fee 050 per annum unutilized portion revolving line credit letter credit fees respect standby letter credit outstanding 2000 credit facilities equal spread based applicable margin effect libor borrowings revolving line credit december 31 2004 2003 amounts outstanding revolving line flowserve notes consolidated financial statements continued credit outstanding letters credit 513 million 427 million december 31 2004 2003 respectively reduced borrowing capacity 2487 million 2573 million respectively 2000 credit facilities collateralized substantially us assets pledge 65 stock certain foreign subsidiaries tranche c loans amended restated connection ifc acquisition final maturities june 2006 june 2009 respectively senior subordinated notes december 31 2004 1885 million 650 million equivalent approximately 88 million december 31 2004 exchange rates face value senior subordinated notes outstanding senior subordinated notes originally issued 2000 discount yield 1250 coupon rate 1225 interest notes payable semiannually february august 2005 remaining senior subordinated notes outstanding called us 106125 face value specified loan agreement repaid along accrued interest new credit facilities august 12 2005 entered new credit facilities comprised 600 million term loan expiring august 10 2012 400 million revolving line credit utilized provide 300 million letters credit expiring august 12 2010 refer credit facilities collectively new credit facilities proceeds borrowings new credit facilities used call 1225 senior subordinated notes retire indebtedness outstanding 2000 credit facilities also replaced letter credit agreement guaranteeing obligations eib credit facility described letter credit issued new revolving line credit incurred 93 million fees related new facilities 03 million expensed 2005 prior refinancing 118 million unamortized deferred loan costs related 2000 credit facilities senior subordinated notes based upon final syndicate financial institutions new credit facilities expensed 105 million unamortized deferred loan costs 2005 addition total loan costs 108 million expensed recorded charge 165 million premiums paid call senior subordinated notes total loss extinguishment 273 million recorded 2005 remaining 90 million fees related new facilities capitalized combined remaining 13 million previously unamortized deferred loan costs total 103 million deferred loan costs included assets net costs amortized term new credit facilities borrowings new credit facilities bear interest rate equal option either 1 base rate based greater prime rate recently announced administrative agent new credit facilities federal funds rate plus 050 2 libor plus applicable margin determined reference ratio total debt consolidated ebitda september 30 2005 175 libor borrowings addition pay lenders new credit facilities commitment fee equal percentage determined reference ratio total debt consolidated ebitda unutilized portion revolving line credit letter credit fees respect financial standby letter credit outstanding new credit facilities equal percentage based applicable margin effect libor borrowings new revolving line credit fee performance standby letters credit 05 lower fee financial standby letters credit connection new credit facilities 2005 entered 275 million notional amount interest rate swaps hedge exposure floating interest rates total notional amount 275 million 130 million carried start date september 30 2005 145 million carried start date december 30 2005 swaps combined 135 million interest rates swaps held us time refinancing total 410 million notional amount interest rate swaps outstanding december 31 2005 flowserve notes consolidated financial statements continued obligations new credit facilities unconditionally guaranteed jointly severally substantially existing subsequently acquired organized domestic subsidiaries addition prior obtaining maintaining investment grade credit ratings guarantors’ obligations new credit facilities collateralized substantially guarantors’ assets loans new credit facilities subject mandatory repayment general • 100 net cash proceeds asset sales • unless attain maintain investment grade credit ratings • 75 excess cash flow subject reduction based ratio total debt consolidated ebitda • 50 proceeds equity offerings • 100 proceeds debt issuances subject certain exceptions may prepay loans new credit facilities whole part without premium penalty new credit facilities contain among things covenants restricting subsidiaries’ ability dispose assets merge pay dividends repurchase redeem capital stock indebtedness incur indebtedness guarantees create liens enter agreements negative pledge clauses make certain investments acquisitions enter sale leaseback transactions enter transactions affiliates make capital expenditures engage business activity existing business new credit facilities also contain covenants requiring us deliver lenders audited annual unaudited quarterly financial statements leverage interest coverage financial covenants new credit facilities require delivery december 31 2004 audited financial statements december 31 2005 delivery december 31 2005 audited annual financial statements may 30 2006 received waiver lenders deliver december 31 2004 audited annual financial statements february 28 2006 required furnish within 50 days end interim quarter year unaudited consolidated balance sheet related statements operations shareholders’ equity cash flows leverage covenant maximum permitted leverage ratio steps beginning fourth quarter 2006 stepdown beginning fourth quarter 2007 interest coverage covenant minimum required interest coverage ratio steps beginning fourth quarter 2006 stepup beginning fourth quarter 2007 compliance financial covenants new credit facilities tested quarterly complied covenants september 30 2005 new credit facilities include events default usual types credit facilities including nonpayment principal interest violation covenants incorrectness representations warranties cross defaults cross acceleration bankruptcy material judgments erisa events actual asserted invalidity guarantees security documents certain changes control company occurrence event default could result acceleration guarantors’ obligations new credit facilities eib credit facility april 14 2004 one european subsidiaries flowserve bv entered agreement eib pursuant eib agreed loan us 70 million ability draw funds multiple currencies finance part specified research development projects undertaken us europe borrowings eib credit facility bear interest fixed floating rate interest agreed us eib respect borrowing facility loans eib credit facility subject mandatory repayment eib’s discretion upon occurrence certain events including change control prepayment certain indebtedness addition eib credit facility contains covenants among things limit ability dispose assets related financed project require us deliver eib audited annual financial statements within 30 days publication flowserve notes consolidated financial statements continued obligations eib credit facility guaranteed letter credit outstanding new credit facilities august 2004 borrowed 85 million floating interest rate based 3month us libor resets quarterly december 31 2004 interest rate 239 maturity amount drawn june 15 2011 may repaid time without penalty concurrent borrowing 85 million entered derivative contract third party financial institution swapped principal amount 706 million fixed libor portion interest rate fixed interest rate 419 scheduled repayment date applied hedge accounting derivative contract change fair value approximately 51 million included expense income net consolidated statements operations accounts receivable securitization october 2004 flowserve us inc one wholly owned subsidiaries flowserve receivables corporation “frc” wholly owned subsidiary flowserve us inc entered receivables purchase agreement “rpa” jupiter securitization corporation “jupiter” jpmorgan chase bank na successor merger bank one na whereby frc could obtain 75 million financing revolving basis securitizing certain usbased trade receivables obtain financing flowserve us inc transferred certain receivables frc formed solely accounts receivable securitization program pursuant rpa frc sold undivided purchaser interests receivables jupiter pooled interests unrelated interests issued shortterm commercial paper repaid cash flows generated collections receivables flowserve us inc continued service receivables servicing fee 05 average net receivable balance servicing liability recognized december 31 2004 amount immaterial due shortterm average collection period securitized receivables frc recourse flowserve us inc failure debtors pay due december 31 2004 frc secured 60 million financing program proceeds used repay 16 million 44 million tranche c bank term loans respectively outstanding 2000 credit facilities account transaction accordance sfas 140 “accounting transfers servicing financial assets extinguishment liabilitiesa replacement fasb statement 125” guidance conjunction initial transaction flowserve us inc transferred 1214 million receivables net allowance doubtful accounts 60 million included 29 million longterm receivables net allowance doubtful accounts 32 million frc incurred loss 02 million subsequent sale purchaser interests jupiter time purchaser interests sold jupiter 487 million receivables transferred frc removed frc’s financial statements frc recorded shortterm debt 113 million borrowings facility excess 113 million excluded debt balance consolidated balance sheets included purposes covenant calculations 2000 credit facilities frc retains subordinate interest receivables represents amount excess purchaser interests transferred jupiter shortterm portion 806 million subordinate interest included accounts receivable net consolidated balance sheet longterm portion 29 million subordinate interest included assets net consolidated balance sheet frc’s subordinate interest receivables time initial transaction 616 million 29 million classified longterm retained interest receivables recorded present value estimated net realizable value calculation retained interest receivables time initial transaction december 31 2004 based assumed days sales outstanding “dso” 60 days discount rate 47 based borrowing rate 2000 credit facilities flowserve notes consolidated financial statements continued 2004 flowserve us inc transferred 3762 million net allowance doubtful accounts 67 million receivables frc sold undivided purchaser interests receivables jupiter 2004 frc collected 2325 million cash used purchase additional receivables flowserve us inc return invested capital flowserve us inc losses sales purchaser interests totaled 06 million 2004 frc also recorded interest expense 01 million 2004 related 113 million debt recognized pursuant sfas 140 varying dso assumption discount rate assumption 20 resulted immaterial change retained interest loss sale october 31 2005 terminated rpa connection borrowed approximately 48 million new credit facilities repurchased outstanding receivable interests jupiter frc recorded loss 20 million purchaser interests sold 2005 recognized interest expense 03 million related 113 million debt recorded pursuant sfas 140 accounts receivable factoring one manufacturing plants europe maintains receivable factoring program local bank factoring program structured whereby ownership underlying receivable transferred bank thus amounts advanced us program treated shortterm debt eurodenominated amounts total 64 million 45 million december 31 2004 2003 respectively paid interest rates 233 272 respectively description receivables factoring agreements fully presented note 6 debt covenants matters provisions new credit facilities require us meet exceed specified defined financial covenants including leverage ratio interest coverage ratio provisions debt agreements generally limit restrict indebtedness liens sale leaseback transactions asset sales payment dividends capital expenditures activities new credit facilities require delivery december 31 2004 audited annual financial statements december 31 2005 delivery december 31 2005 audited annual financial statements may 30 2006 received waiver lenders deliver december 31 2004 audited financial statements february 28 2006 required furnish within 50 days end first three quarters year consolidated balance sheet related statements operations shareholders’ equity cash flows 2000 credit facilities required us submit audited annual financial statements lenders within 100 days yearend consequence delays stemming restatement consolidated financial statements unable provide audited financial statements within specified period time determined multiple occasions utilizing restated financial information comply financial covenants 2000 credit facilities believe could undertaken readily available actions maintain compliance obtained waiver amendment 2000 credit facilities new restated results known scheduled maturities 2000 credit facilities due 2006 beyond properly classified noncurrent liabilities consolidated balance sheet demonstrated ability intent obtain new longterm credit facilities august 2005 operating leases noncancelable operating leases certain offices service quick response centers certain manufacturing operating facilities machinery equipment automobiles rental expense relating operating leases 197 million 2004 220 million 2003 230 million 2002 flowserve notes consolidated financial statements continued future minimum lease payments due noncancelable operating leases 13 retirement postretirement benefits sponsor several noncontributory defined benefit pension plans covering substantially us employees certain nonus employees provide benefits based years service job grade levels type compensation retirement benefits covered employees provided contributory pension plans cash balance pension plans governmentsponsored retirement programs funded defined benefit pension plans receive funding based independent actuarial valuations provide current service amount sufficient amortize unfunded prior service periods exceed 30 years funding falling within legal limits proscribed prevailing regulation also maintain unfunded defined benefit plans permitted local regulations receive funding benefits become due use measurement date december 31 worldwide pension plans postretirement medical plans us defined benefit plans maintain qualified nonqualified defined benefit pension plans us qualified plan provides coverage substantially fulltime us employees receive benefits earnings threshold specified us department labor qualified plan designed operate “cash balance” arrangement accumulated benefit obligation equivalent projected benefit obligation nonqualified plans primarily cover small number employees including current former members senior management providing benefit levels equivalent participants otherwise limited us department labor rules net defined benefit pension expense us defined benefit pension plans including qualified nonqualified plans flowserve notes consolidated financial statements continued settlement curtailment expense 2004 associated number employees eligible nonqualified plan leaving company following table reconciles us defined benefit plans’ funded status amounts recognized consolidated balance sheets following assumptions related us defined benefit pension plans expected longterm rate return assets determined assessing rates return targeted asset class return premiums generated active portfolio management comparison rates utilized companies 2004 increased minimum pension liability 54 million net tax compared reduction 2003 23 million net tax component comprehensive income expense increase liability primarily resulted increase accumulated benefit obligations due lower discount rates along lower anticipated plan asset returns 2004 based results pension plan asset returns 2004 anticipated future return retained assumed rate return assets 875 2004 also reduced discount rate 625 december 31 2003 575 december 31 2004 reflect current interest rate environment expected benefit payment streams regularly evaluate assumptions asset returns discount rates based variety factors flowserve notes consolidated financial statements continued following summary changes us defined benefit plans’ pension obligations following reconciliation us defined benefit pension plans’ assets 2004 contributed 15 million us defined benefit pension plans payment exceeded minimum funding requirements mandated us department labor rules 2004 returns pension plan assets less anticipated although still working actuaries determine estimated funding beyond 2005 following table summarizes expected cash activity us defined benefit pension plans future millions flowserve notes consolidated financial statements continued asset allocation us defined benefit pension plans end 2004 2003 target allocation 2005 asset category follows believe common stock directly held plans investment strategy invest various securities order pay retirement benefits plan participants minimizing cash contributions life plan accomplished preserving capital diversified investments high quality instruments earning longterm rate return consistent acceptable degree risk taking account liquidity needs plan investment policy invest approximately 65 plan assets equity securities 30 fixed income securities 5 assets within investment category assets allocated various investment styles professional money management firms manage assets engage consultant assist evaluating activities periodically review investment policy generally conjunction asset liability study also regularly rebalance actual allocation target investment allocation nonus defined benefit plans maintain defined benefit pension plans cover employees following countries austria canada france germany india japan mexico netherlands sweden united kingdom net defined benefit pension expense nonus pension plans flowserve notes consolidated financial statements continued following summarizes net pension liability nonus plans following table reconciles nonus pension plans’ funded status amounts recognized consolidated balance sheets following assumptions related nonus defined benefit pension plans 1 assumptions nonus plans adjusted reflect weighted average effects assumptions plans included restatement fully described note 2 many nonus defined benefit plans unfunded permitted local regulation expected longterm rate return assets funded plans determined assessing rates return asset class return premiums generated active investment management 2004 increased nonus minimum pension liability 28 million net deferred tax compared 62 million net deferred tax decrease 2003 component comprehensive income expense increase liability resulted primarily increase accumulated benefit obligation due lower discount rates 2004 flowserve notes consolidated financial statements continued following reconciliation nonus plans’ defined benefit pension obligations 1 acquisitions represent obligations transfers former ifc employees flowserve plans formally occurred 2004 following reconciliation nonus plans’ defined benefit pension assets 1 acquisitions represent obligations transfers former ifc employees flowserve plans formally occurred 2004 flowserve notes consolidated financial statements continued following table summarizes expected cash activity nonus defined benefit plans future millions asset allocation nonus defined benefit pension plans end 2004 follows believe common stock held directly plans funded nonus defined benefit pension plans principally located canada united kingdom cases investment strategy plans invest various securities order pay retirement benefits plan participants minimizing required cash contributions life plan accomplished preserving capital diversification high quality investments earning longterm rate return consistent acceptable degree risk legal requirements particular country taking account liquidity needs plan asset allocation differs plan based upon plan’s projected benefit obligation participants well results asset liability studies conducted plan professional money management firms manage plan assets engage consultants country assist evaluation activities defined benefit plans accumulated benefit obligations excess plan assets following summarizes key pension plan information regarding plans whose accumulated benefit obligations exceed fair value respective plan assets postretirement medical plans sponsor several defined benefit postretirement health care plans covering current retirees limited number future retirees us plans provide medical dental benefits administered insurance companies health maintenance organizations plans include participant contributions deductibles coinsurance provisions limitations integrated medicare group plans fund plans benefits paid flowserve notes consolidated financial statements continued incur health maintenance organization premiums plans hold assets period presented accordingly investment strategy targeted allocations plan assets benefits postretirement medical plans available new employees existing employees net postretirement benefit expense comprised following reconciliation accumulated postretirement benefits obligations 2002 renegotiated certain union contracts limited obligation postretirement medical costs reduction postretirement medical costs affected union contracts began 2003 following table presents components postretirement benefit amounts recognized consolidated balance sheets flowserve notes consolidated financial statements continued following presents expected benefit payments future periods following assumptions related postretirement benefits assumed ranges annual rates increase per capita costs periods prior medicare 80 2004 90 2003 100 2002 gradual decrease 50 2007 future years assumed heath care cost trend rates effect amounts reported postretirement medical plans onepercentage point change assumed health care cost trend rates would following effect 2004 reported amounts made contributions postretirement medical plans pay benefits 86 million 2004 83 million 2003 80 million 2002 postretirement medical plans unfunded make contributions covered individuals’ claims approved payment accordingly contributions period directly correlated benefits paid defined contribution plans sponsor several defined contribution plans covering substantially us canadian employees certain nonus employees may contribute plans contributions matched varying amounts us including opportunities discretionary matching contributions us defined contribution plan expense 68 million 2004 36 million 2003 40 million 2002 participants us defined contribution plan option invest common stock discretionary contributions us typically funded common stock therefore plans assets include holdings common stock 14 legal matters contingencies defendant large number pending lawsuits include many cases multiple claimants seek recover damages personal injury allegedly caused exposure asbestoscontaining products manufactured andor distributed us past products encapsulated flowserve notes consolidated financial statements continued used components process equipment believe emission respirable asbestos fibers occurred use equipment believe high percentage applicable claims covered applicable insurance indemnities companies june 2002 sued ruhrpumpen inc “ruhrpumpen” alleged antitrust violations conspiracy fraud breach contract claims arising december 2000 sale ruhrpumpen plant tulsa oklahoma license eight defined pump lines ruhrpumpen subsequently amended complaint add mr ronald f shuff vice president secretary general counsel two employees individual defendants trial held matter march 2004 end trial mr shuff two employees dismissed lawsuit may 26 2004 receiving ruling court remaining claims parties entered confidential settlement agreement resolving pending disputes february 4 2004 received informal inquiry securities exchange commission “sec” requesting voluntary production documents information related february 3 2004 announcement would restate financial results nine months ended september 30 2003 full years 2002 2001 2000 june 2 2004 advised sec issued formal order private investigation issues regarding restatement issues arise investigation continue cooperate sec matter quarter ended september 30 2003 related lawsuits filed federal court northern district texas “court” alleging violated federal securities laws since filing cases consolidated lead plaintiff amended complaint several times lead plaintiff’s current pleading fifth consolidated amended complaint “complaint” complaint alleges federal securities violations occurred february 6 2001 september 27 2002 names defendants mr c scott greer former chairman president chief executive officer ms renée j hornbaker former vice president chief financial officer pricewaterhousecoopers llp independent registered public accounting firm banc america securities llc credit suisse first boston llc served underwriters two public stock offerings relevant period complaint asserts claims sections 10b 20a securities exchange act 1934 rule 10b5 thereunder sections 11 15 securities exchange act 1933 lead plaintiff seeks unspecified compensatory damages forfeiture mr greer ms hornbaker unspecified incentivebased equitybased compensation profits stock sales recovery costs november 22 2005 court entered order denying defendants’ motions dismiss complaint pleadings entirety case currently set trial march 27 2007 continue believe lawsuit without merit vigorously defending case october 6 2005 shareholder derivative lawsuit filed purportedly behalf 193rd judicial district dallas county texas lawsuit names defendants mr greer ms hornbaker current board members hugh k coble george haymaker jr william c rusnack michael f johnston charles rampacek kevin e sheehan diane c harris james rollans christopher bartlett named nominal defendant based primarily purported misstatements alleged abovedescribed federal securities case plaintiff asserts claims defendants breach fiduciary duty abuse control gross mismanagement waste corporate assets unjust enrichment plaintiff alleges purported violations state law occurred april 2000 date suit plaintiff seeks behalf unspecified amount damages injunctive relief andor imposition constructive trust defendants’ assets disgorgement compensation profits benefits received defendants us recovery attorneys’ fees costs strongly believe suit improperly filed motion seeking dismissal case flowserve notes consolidated financial statements continued february 7 2006 received subpoena sec regarding goods services delivered iraq 1996 2003 united nations oilforfood program process reviewing responding subpoena intend cooperate sec believe companies industry well industries received similar subpoenas requests information involved potentially responsible party “prp” former public waste disposal sites may subject remediation pending government procedures sites various stages evaluation federal state environmental authorities projected cost remediation sites well alleged “fair share” allocation uncertain speculative studies completed parties either negotiated amicable resolution matter judicially resolved site many parties similarly identified identification location additional parties continuing applicable federal state law many parties identified financially strong solvent companies appear able pay share remediation costs based information waste disposal practices sites environmental regulatory process general believe likely ultimate remediation liability costs site apportioned among liable parties including site owners waste transporters according volumes andor toxicity wastes shown disposed sites believe exposure existing disposal sites less 100000 also defendant several lawsuits including product liability claims insured subject applicable deductibles arising ordinary course business based currently available information believe adequately accrued estimated probable losses lawsuits also involved substantial number labor claims including one case confidential settlement reflected 2004 results although none aforementioned potential liabilities quantified absolute certainty established reserves covering exposures believe reasonable based past experience available facts additional exposures beyond reserves could exist currently cannot estimated continue evaluate potential contingent loss exposures develop recognize expense soon losses become probable reasonably estimated also involved ordinary routine litigation incidental business none believe material business operations overall financial condition however resolutions dispositions claims lawsuits settlement otherwise could significant impact operating results reporting period resolution disposition occurs consequence legal matters including settlements publicly disclosed litigation otherwise recognized expense approximately 17 million 2004 25 million 2003 4 million 2002 flowserve notes consolidated financial statements continued 15 warranty reserve recorded reserves product warranty claims included current noncurrent liabilities following summary activity warranty reserve 16 shareholders’ equity share common stock contains preferred stock purchase right rights currently exercisable trade tandem common stock rights become exercisable trade separately event certain significant changes common stock ownership commencement certain tender offers either case may lead change control upon becoming exercisable rights provide shareholders opportunity acquire new series preferred stock automatically issued preestablished price event certain forms acquisition rights also provide shareholders opportunity purchase shares acquirer’s common stock acquirer 50 discount current market value rights redeemable 0022 per right us time prior becoming exercisable expire august 2006 17 income taxes provision benefit income taxes consists following flowserve notes consolidated financial statements continued provision benefit income taxes differs statutory corporate rate due following 2004 effective tax rate differed federal statutory rate 35 primarily due extraterritorial income “eti” exclusion benefits 49 million 233 million net tax impact foreign operations resulting approximately 85 million foreign earnings repatriation pay us debt increases worldwide tax reserves 2003 effective tax rate differed federal statutory rate 35 primarily due eti exclusion benefits 25 million changes valuation allowances 55 million primarily relating foreign tax credits net impact nonus operations 22 million 2002 effective tax rate differed federal statutory rate 35 primarily due eti exclusion benefits 47 million higher nonus statutory tax rates sfas 109 requires us provide deferred taxes temporary differences associated investment foreign subsidiaries financial reporting basis exceeds tax basis unless assert permanent reinvestment foreign jurisdictions pursuant apb 23 financial reporting basis tax basis differences investments foreign subsidiaries consist unremitted earnings losses well foreign currency translation adjustments year ended december 31 2001 ceased ability make apb 23 permanent reinvestment assertion 2001 three years reported period ended december 31 2004 recognized net deferred tax assets attributable unremitted earnings foreign currency translation adjustments foreign subsidiaries excess financial reporting basis due estimated excess foreign tax credits attributes cash deemed dividend distributions foreign subsidiaries resulted recognition approximately 20 million 8 million income tax expense years ended december 31 2004 2003 respectively recorded benefit excess foreign tax credits associated deemed repatriation unremitted earnings credits available offset liability associated dividends october 22 2004 american jobs creation act 2004 “2004 act” signed law creating temporary incentive us multinationals repatriate accumulated income earned outside us pursuant qualified dividend reinvestment plans effective tax rate 525 versus us federal statutory rate 35 2004 repatriated approximately 46 million part 85 million discussed pursuant dividend reinvestment plan recognized lower tax rate dividends financial statements due uncertainties surrounding realization benefit flowserve notes consolidated financial statements continued interpretation 2004 act extent uncertainty favorably resolved future reporting period benefit associated dividends recognized period 2004 act also provides phase existing eti exclusion foreign export sales viewed inconsistent international trade protocols set european union phase provides benefit otherwise qualifying export sales 2005 2006 limited approximately 80 60 respectively replacement loss eti export incentive 2004 act provides deduction income qualified domestic production activities phased 2005 2010 impact internal revenue code section 199 manufacturing deduction future tax rate yet quantified guidance fsp fas 1091 “application fasb statement 109 tax deduction qualified production activities provided american jobs creation act 2004” tax deduction qualified production activities treated special deduction described sfas 109 special deduction reported period deduction claimed tax return establish reserves open tax years certain positions subject challenge various tax authorities based events occurring 2004 increased total reserves approximately 11 million nonus tax exposures primarily related debt equity structures transfer pricing record valuation allowances reflect estimated amount deferred tax assets may realized based upon analysis existing deferred tax assets net operating losses tax credits jurisdiction expectations ability utilize tax attributes review past current estimated future taxable income establishment tax strategies net increase state valuation allowances 46 million reflected net state impacts rate reconciliation similarly changes valuation allowances related foreign net operating losses deferred tax assets reported portion net foreign impact overall effective tax rate 2004 significant changes foreign valuation allowances decreased valuation allowances 20 million foreign tax credit carryforwards result utilization credits 2004 due extension carryover period 10 years pursuant 2004 act deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes significant components consolidated deferred tax assets liabilities flowserve notes consolidated financial statements continued approximately 254 million us foreign net operating loss carryforwards december 31 2004 total 148 million state net operating losses reserved valuation allowance net operating losses generated us unused begin expire 2005 majority expiring 2016 majority nonus net operating losses carry forward without expiration additionally approximately 10 million foreign tax credit carryforwards december 31 2004 expiring 2010 2012 valuation allowance reserves recorded earnings loss income taxes comprised 18 business segment information principally engaged worldwide design manufacture distribution service industrial flow management equipment provide pumps valves mechanical seals primarily petroleum industry chemicalprocessing industry powergeneration industry water industry general industry industries requiring flow management products following three divisions constitutes business segment • flowserve pump division • flow solutions division • flow control division manufactures different products defined type products services provided division president reports directly chief executive officer division controller reports directly chief accounting officer decisionmaking purposes chief executive officer members senior executive management use financial information flowserve notes consolidated financial statements continued generated reported division level corporate headquarters constitute separate division business segment evaluate segment performance allocate resources based segment’s operating income excluding special items restructuring integration costs related ifc acquisition believe special items indicative efforts integrate acquired companies ifc idp business reflect ongoing business results believe investors users financial statements better evaluate analyze historical future business trends special items excluded segment’s operating income operating income special items recognized measure gaap viewed alternative better indicator gaap measures performance amounts classified include corporate headquarters costs minor entities constitute separate segments intersegment sales transfers recorded cost plus profit margin sales eliminated consolidation effective january 1 2004 realigned certain small sites segments accordingly segment information periods presented herein reported revised organizational structure following summary financial information reportable segments reconciled amounts reported consolidated financial statements flowserve notes consolidated financial statements continued 1 special items 2004 2 special items reflect costs incurred flow control division association ifc acquisition including integration expense 198 million restructuring expense 29 million 3 special items reflect costs incurred flow control division association ifc acquisition including 52 million negative purchase accounting adjustment associated required writeup sale inventory recorded cost sales integration expense 162 million restructuring expense 43 million segment operating income special items reconciled consolidated amounts follows geographic information attribute sales different geographic areas based facilities’ locations longlived assets classified based geographic area assets located flowserve notes consolidated financial statements continued exclude deferred tax assets categorized noncurrent sales longlived assets geographic area follows 1 includes canada south america asia pacific individual geographic segment within group represents 10 consolidated totals 2 net sales international customers including export sales united states represented 63 60 55 2004 2003 2002 respectively major customer information large number customers across large number manufacturing service facilities believe sales individual customer represent 10 consolidated sales years presented flowserve notes consolidated financial statements continued 19 accumulated comprehensive loss following presents components accumulated comprehensive loss net related tax effects following tables present summary changes accumulated comprehensive loss years ended december 31 2004 2003 2002 flowserve notes consolidated financial statements continued 20 quarterly financial data unaudited following presents summary unaudited quarterly data 2004 2003 restated give effect adjustments described note 2 flowserve notes consolidated financial statements continued significant fourth quarter adjustments 2004 pretax record litigation accrual 48 million ii unclaimed property 40 million iii sales tax reserve 36 million iv charge cost sales increase inventory reserves 139 million v annual bonus reserve finalization increase 55 million significant fourth quarter adjustment 2003 pretax record charge cost sales increase inventory reserves 25 million 21 subsequent events march 2005 obtained consents major lenders enhanced flexibility 2000 credit facilities among things permit august 2005 refinancing 2000 credit facilities repurchase 1225 senior subordinated notes see note 12 discussion new credit facilities retirement 2000 credit facilities senior subordinated notes including discussion cash paid expenses recognized pursuant refinancing promote continuity senior management march 2005 board directors approved transitional executive security plan provides cash stockbased incentives key management personnel remain employed us near term result plan recorded additional compensation expenses 2005 approximately 3 million see “transitional executive security plan” item 11 annual report detailed discussion plan 2005 made number modifications stock plans including acceleration certain restricted stock grants outstanding options well extension exercise period associated certain outstanding options modifications resulted severance agreements former executives decision temporarily suspend option exercises see note 9 result severance executive search payments related management changes approximately 2 million expenses transitional executive security plan described stock compensation expense resulting modification stock option plans described recorded total incremental compensation expense approximately 12 million 2005 first quarter 2005 made definitive decision sell certain noncore service operations collectively called general services group “gsg” engaged investment banking firm commence marketing result reclassified operation discontinued operations first quarter 2005 sales gsg 116 million 2004 total assets december 31 2004 ascribed gsg approximately 63 million performed impairment analysis longlived assets held used basis concluded impairment warranted december 31 2004 gsg sold december 31 2005 approximately 16 million gross cash proceeds subject final working capital adjustments retaining approximately 12 million net accounts receivable used approximately 11 million net cash proceeds reduce indebtedness 2005 recorded impairment loss approximately 31 million related gsg item 9item 8 financial statements supplementary data report independent registered public accounting firm board directors shareholders flowserve corporation completed integrated audits flowserve corporation’s consolidated financial statements internal control financial reporting december 31 2006 accordance standards public company accounting oversight board united states opinions based audits presented consolidated financial statements financial statement schedule opinion consolidated financial statements listed index appearing item 15a1 present fairly material respects financial position flowserve corporation subsidiaries company december 31 2006 2005 results operations cash flows three years period ended december 31 2006 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed index appearing item 15a2 presents fairly material respects information set forth therein read conjunction related consolidated financial statements financial statements financial statement schedule responsibility company’s management responsibility express opinion financial statements financial statement schedule based audits conducted audits statements accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit financial statements includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion discussed note 1 consolidated financial statements company changed method accounting us inventories 2006 changed manner accounts share based compensation 2006 changed manner accounts defined benefit pension postretirement plans december 31 2006 internal control financial reporting also opinion management’s assessment included management’s report internal control financial reporting appearing item 9a company maintained effective internal control financial reporting december 31 2006 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso fairly stated material respects based criteria furthermore opinion company maintained material respects effective internal control financial reporting december 31 2006 based criteria established internal control integrated framework issued coso company’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinions management’s assessment effectiveness company’s internal control financial reporting based audit conducted audit internal control financial reporting accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit internal control financial reporting includes obtaining understanding internal control financial reporting evaluating management’s assessment testing evaluating design operating effectiveness internal control performing procedures consider necessary circumstances believe audit provides reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp dallas texas march 1 2007 flowserve corporation consolidated balance sheets see accompanying notes consolidated financial statements flowserve corporation consolidated statements income see accompanying notes consolidated financial statements flowserve corporation consolidated statements comprehensive income loss see accompanying notes consolidated financial statements flowserve corporation consolidated statements shareholders’ equity see accompanying notes consolidated financial statements flowserve corporation consolidated statements cash flows see accompanying notes consolidated financial statements flowserve corporation notes consolidated financial statements december 31 2006 2005 three years ended december 31 2006 1 significant accounting policies accounting developments produce engineered industrial pumps industrial valves control valves nuclear valves valve actuators precision mechanical seals provide range related flow management services worldwide primarily process industries equipment manufactured serviced us predominantly used industries deal difficulttohandle corrosive fluids well environments extreme temperatures pressure horsepower speed businesses affected economic conditions united states “us” countries products sold serviced cyclical nature petroleum chemical power water industries served relationship us dollar currencies demand pricing customers’ products basis presentation prior december 31 2006 inventory cost determined us inventories lastin firstout “lifo” method nonus inventories firstin firstout “fifo” method effective december 31 2006 changed method accounting us inventories lifo method fifo method inventory reflected lower cost market cost determined fifo method fifo preferable method accounting us inventories following reasons provides comparability industry peers many use fifo method accounting inventories results inventories worldwide accounted consistent basis method consistent view business decisionmaking produces results operations consistent contemporaneous economic conditions eliminating disproportionate effects liquidations prior years’ inventory accordance statement financial accounting standards “sfas” 154 “accounting changes error corrections” change accounting retrospectively applied prior periods presented herein impact change accounting method increased net earnings years ended december 31 2006 2005 2004 60 million 52 million 29 million respectively 010 009 006 per diluted share respectively increased total assets total shareholders’ equity december 31 2005 216 million see additional detail note 6 impact change accounting also affects periods prior 2004 accordingly retrospectively adjusted periods cumulative effect aggregate increase retained earnings january 1 2004 135 million certain reclassifications made prior period amounts conform current period presentation principles consolidation consolidated financial statements include accounts company wholly majorityowned subsidiaries addition consolidate variable interest entities deemed primary beneficiary minority interests recognized majorityowned consolidated subsidiaries intercompany profits transactions balances among consolidated entities eliminated consolidated financial statements investments unconsolidated affiliated companies represent noncontrolling ownership interests 20 50 accounted using equitymethod basis approximates equity interest underlying equivalent net book value accounting principles generally accepted united states america “gaap” investments interests less 20 investee accounted cost method whereby income recognized event dividend receipt investments accounted cost method tested annually impairment use estimates process preparing financial statements conformity gaap requires management make estimates assumptions affect reported amounts certain assets liabilities revenues expenses management believes estimates assumptions reasonable however actual results may differ materially estimates significant estimates assumptions made management used determining • revenue recognition net liquidated damages delivery penalties flowserve corporation notes consolidated financial statements continued • income taxes deferred taxes tax valuation allowances tax reserves • reserves contingencies • retirement postretirement benefits • valuation goodwill indefinitelived intangible assets longlived assets revenue recognition revenues product sales recognized risks rewards ownership transferred customers based contractual delivery terms agreed customer fulfillment inconsequential perfunctory actions addition policy requires persuasive evidence arrangement fixed determinable sales price reasonable assurance collectibility contracts containing multiple elements determinable fair value recognize revenue amount equal elements’ pro rata share contract’s fair value accordance contractual delivery terms element customer arrangement requires formal acceptance revenue recognized formal acceptance received freight charges billed customers included sales related shipping costs included cost sales consolidated statements income revenues longterm contracts include contracts exceed certain internal thresholds regarding size duration project provide receipt progress billings customer recorded percentage completion method progress measured costtocost basis percentage completion revenue represents less 7 consolidated sales year presented revenue service repair contracts recognized services agreed customer rendered revenues generated fixed fee service repair contracts recognized ratable basis term contract contracts range duration generally extend five years fixed fee service contracts represent less 1 consolidated sales year presented certain instances provide guaranteed completion dates terms contracts failure meet contractual delivery dates result unrealized incentive fees nonrecoverable costs instances payment costs deemed probable perform project profitability analysis accounting costs reduction realizable revenues could potentially cause estimated total project costs exceed projected total revenues realized project instances would record reserves cover excesses period determined would adversely affect results operations financial position circumstances total projected reduced revenues still exceed total projected costs incurrence unrealized incentive fees nonrecoverable costs generally reduces profitability project time subsequent revenue recognition reported results would change different estimates used contract costs different estimates used contractual contingencies cash equivalents place temporary cash investments financial institutions policy invest institutions instruments minimal credit risk market risk investments original maturity three months less purchased classified cash equivalents highly liquid principal values subject significant risk change due interest rate fluctuations restricted cash represents cash restricted factoring agreements certain contracts small portion payments received progress bills available use project reaches completion allowance doubtful accounts credit risk allowance doubtful accounts established based estimates amount uncollectible accounts receivable determined principally based upon aging receivable also customer credit history industry market segment information economic trends conditions credit reports customer financial condition customer credit issues customer bankruptcies general economic conditions may also impact estimates flowserve corporation notes consolidated financial statements continued credit risks mitigated diversity customers customer base across many different geographic regions performing creditworthiness analyses customers december 31 2006 2005 believe significant concentrations credit risk inventories related reserves inventories stated lowerofcost market cost determined fifo method reserves excess obsolete inventories based upon assessment market conditions products determined historical usage estimated future demand due long life cycle products carry spare parts inventories historically low usage rates provide reserves inventory based demonstrated usage aging criteria income taxes deferred taxes tax valuation allowances tax reserves account income taxes asset liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases operating loss tax credit carryforwards deferred tax assets liabilities calculated using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized period includes enactment date valuation allowances reflect likelihood recoverability assets record valuation allowances reflect estimated amount deferred tax assets may realized based upon analysis existing deferred tax assets net operating losses tax credits jurisdiction expectations ability utilize tax attributes review past current estimated future taxable income establishment tax strategies estimates could impacted changes amount geographical source future income results implementation alteration tax planning strategies sfas 109 “accounting income taxes” requires us provide deferred taxes temporary differences associated investment foreign subsidiaries financial reporting basis exceeds tax basis unless assert permanent reinvestment foreign jurisdictions pursuant accounting principles board opinion “apb” 23 “accounting income taxes special areas” financial reporting basis tax basis differences investments foreign subsidiaries consist unremitted earnings losses well foreign currency translation adjustments assert permanent reinvestment apb 23 basis differences three years reported period ended december 31 2006 recognized net deferred tax assets attributable unremitted earnings foreign currency translation adjustments foreign subsidiaries due estimated excess foreign tax credits attributes october 22 2004 american jobs creation act 2004 “2004 act” signed law creating temporary incentive us multinationals repatriate accumulated income earned outside us effective tax rate 525 versus us federal statutory rate 35 although repatriated dividends 2004 pursuant dividend reinvestment plan recognized lower tax rate dividends financial statements due uncertainties surrounding realizability benefit extent uncertainty favorably resolved future reporting period benefit associated dividends recognized period amount income taxes pay subject ongoing audits federal state foreign tax authorities often result proposed assessments significant judgment required determining income tax provisions evaluating tax positions establish reserves open tax years certain positions subject challenge various tax authorities consolidated tax provision related accruals include impact reasonably estimable losses related interest deemed appropriate believe adequately provided reasonably foreseeable outcome related matters extent likely tax outcome matters changes estimate impact income tax provision period determination made flowserve corporation notes consolidated financial statements continued legal environmental accruals legal environmental reserves recorded based upon casebycase analysis relevant facts circumstances assessment potential legal obligations costs amounts relating legal environmental liabilities recorded probable loss incurred loss estimable assessments legal environmental costs based information obtained independent inhouse experts loss experience similar situations estimates may change future due new developments regarding facts circumstances matter warranty accruals warranty obligations based upon product failure rates materials usage service delivery costs analysis identified expected claims estimate cost resolve claims estimates expected claims generally factor historical claims known product issues warranty obligations based factors adjusted based historical sales trends preceding 24 months changes claim rates differences actual expected warranty costs sales trends facility rationalization activities could impact warranty obligation estimates might adverse effects consolidated results operations financial position insurance accruals insurance accruals recorded wholly partially selfinsured risks medical benefits workers’ compensation based upon analysis claim loss history insurance deductibles policy limits relevant factors estimates based upon information received actuaries insurance company adjusters independent claims administrators independent sources changes claims differences actual expected claim losses could impact future accruals retirement obligations determination retirement postretirement benefits obligations based estimates made management consultation independent actuaries investment advisors inherent valuations key assumptions including discount rates expected return plan assets life expectancy assumed rate increase wages health care costs current market conditions including changes rates returns interest rates medical inflation rates considered selecting assumptions valuation goodwill indefinitelived intangible assets longlived assets value goodwill indefinitelived intangible assets tested annually impairment december 31 whenever events circumstances indicate assets may impaired impairment goodwill indefinitelived intangibles assessed reporting unit level correlates operating segments consider operating segments constitute business discrete financial information management regularly reviews net realizable value longlived assets including property plant equipment reviewed periodically indicators potential impairments present based upon assessment estimated future cash flows related assets property plant equipment depreciation property plant equipment stated historical cost less accumulated depreciation asset retirement obligations exist capitalized part carrying amount asset depreciated remaining useful life asset useful lives leasehold improvements lesser remaining lease term useful life improvement assets retired otherwise disposed costs related accumulated depreciation removed accounts resulting gains losses included operations period depreciation computed straightline method based estimated useful lives depreciable assets generally estimated useful lives assets flowserve corporation notes consolidated financial statements continued costs related routine repairs maintenance expensed incurred internally developed software capitalize certain costs associated development internaluse software generally costs related significant software development projects amortized estimated useful life upon implementation software intangible assets intangible assets excluding trademarks considered indefinite life consist primarily engineering drawings distribution networks software patents items amortized estimated useful lives generally ranging 3 40 years assets reviewed impairment whenever events circumstances indicate impairment may occurred deferred loan costs deferred loan costs consisting fees expenses associated debt financing amortized term associated debt using effective interest method additional amortization recorded periods optional mandatory repayments debt made fair values financial instruments carrying amounts financial instruments approximate fair value december 31 2006 2005 derivatives hedging activities part risk management strategy enter derivative contracts mitigate certain financial risks related foreign currencies interest rates riskmanagement derivatives policy outlining conditions enter financial derivative transactions employ foreign currency economic hedging strategy minimize potential losses earnings cash flows unfavorable foreign currency exchange rate movements strategy also minimizes potential gains favorable exchange rate movements foreign currency exposures arise transactions including firm commitments anticipated transactions denominated currency entity’s functional currency translation foreigndenominated assets liabilities us dollars primary currencies exposure euro british pound indian rupee swiss franc singapore dollar mexican peso canadian dollar enter interest rate swap agreements purpose hedging exposure floating interest rates certain portions debt policy requires us document relationships hedging instruments hedged items well risk management objective strategy entering economic hedges process includes linking derivatives designated fair value cash flow foreign currency hedges 1 specific assets liabilities balance sheet 2 specific firm commitments forecasted transactions also assess inception hedge ongoing basis whether derivatives used hedging transactions highly effective offsetting changes fair value cash flows hedged items whether derivatives may expected remain highly effective future periods failure demonstrate effectiveness offsetting exposures retroactively prospectively would cause us deem hedge ineffective derivatives recognized balance sheet fair values inception new derivative contract policy requires us designate derivative 1 hedge forecasted transaction b variability cash flows received paid connection recognized asset liability “cash flow” hedge 2 foreign currency fair value “foreign currency” hedge changes fair value derivative highly effective documented designated qualified cash flow hedge extent hedge effective recorded comprehensive income loss earnings affected variability cash flows hedged transaction changes fair value foreign currency hedges recorded comprehensive income loss since satisfy accounting criteria cash flow hedge ineffectiveness represents amount changes fair value derivative mirror change cash flow forecasted transaction recorded current period earnings effective hedges changes value hedged item also recorded component comprehensive income loss underlying recognized balance sheet upon settlement realized gains flowserve corporation notes consolidated financial statements continued losses recognized income expense net consolidated statements income financial derivatives qualify hedge accounting elected apply hedge accounting includes substantially forward exchange contracts changes fair values derivatives recognized income expense net consolidated statements income periods presented discontinue hedge accounting • deem hedge ineffective determine designation derivative hedging instrument longer appropriate • derivative longer effectively offsets changes cash flows hedged item firm commitments contracts • derivative expires terminates sold • occurrence contracted committed transaction longer probable occur originally expected period hedge accounting discontinued derivative remains outstanding carry derivative estimated fair value balance sheet recognizing changes fair value current period earnings cash flow hedge becomes ineffective deferred gains losses cash flow hedge remain accumulated comprehensive loss exposure relating item underlying hedge recognized becomes probable hedged forecasted transaction occur deferred gains losses hedging instrument recognized earnings immediately foreign currency translation assets liabilities foreign subsidiaries translated us dollars exchange rates prevailing balance sheet date income expenses translated average rates month translation gains losses generally reported component accumulated comprehensive loss transaction translation gains losses arising intercompany balances reported component accumulated comprehensive loss underlying transaction stems longterm equity investment debt designated due foreseeable future otherwise recognize transaction gains losses arising intercompany transactions component income intercompany balances longterm investment related designated due beyond foreseeable future may mitigate risk associated foreign currency fluctuations entering forward exchange contracts see note 8 discussion forward exchange contracts transactional currency gains losses arising transactions currencies sites’ functional currencies changes fair value forward exchange contracts qualify hedge accounting included consolidated results operations years ended december 31 2006 2005 2004 recognized gains losses 75 million 70 million 110 million amounts income expense net accompanying consolidated statements income stockbased compensation effective january 1 2006 adopted fair value recognition provisions sfas 123r “share based payment” using modified prospective application method therefore retrospectively adjusted results prior periods method stockbased compensation expense periods presented include compensation expense stockbased compensation awards granted prior yet vested date adoption based grant date fair value estimated accordance original provisions sfas 123 “accounting stockbased compensation” stockbased compensation expense stockbased compensation awards granted date adoption based grantdate fair value estimated accordance provisions sfas 123r policy set exercise price stock options closing price common stock new york stock exchange date grant date grants authorized board directors options expensed using graded vesting model flowserve corporation notes consolidated financial statements continued whereby recognize compensation cost requisite service period separately vesting tranche award accordance sfas 123r adjust sharebased compensation least annually changes estimate expected equity award forfeitures based actual forfeiture experience conjunction adoption sfas 123r selected alternative transition method determine net excess tax benefits would qualified january 1 2006 see note 7 discussion stockbased compensation earnings per share basic diluted earnings per share calculated follows options outstanding exercise price greater average market price common stock included computation diluted earnings per share weighted average number options totaled 0 02 million 11 million 2006 2005 2004 respectively research development expense research development costs charged expense incurred aggregate research development costs included selling general administrative expenses 297 million 243 million 252 million 2006 2005 2004 respectively costs incurred research development primarily include salaries benefits consumable supplies well rent professional fees utilities depreciation property equipment used research development activities business combinations business combinations referred financial statements used purchase method accounting allocate purchase price identifiable tangible intangible assets recognizing goodwill purchase price exceeds fair value identifiable assets accounting developments pronouncements implemented december 2004 financial accounting standards board “fasb” issued sfas 123r adopted sfas 123r january 1 2006 utilizing modified prospective application method see note 7 additional information regarding adoption sfas 123r flowserve corporation notes consolidated financial statements continued november 2004 fasb issued sfas 151 “inventory costs amendment accounting research bulletin 43 chapter 4” sfas 151 amends accounting research bulletin 43 chapter 4 seeks clarify accounting abnormal amounts idle facility expense freight handling costs wasted materials requiring items recognized current period charges additionally sfas 151 requires fixed production overheads allocated conversion costs based normal capacity production facilities adoption sfas 151 first quarter 2006 material impact consolidated financial condition results operations may 2005 fasb issued sfas 154 “accounting changes error corrections” sfas 154 establishes new standards accounting changes accounting principles changes must accounted retrospective application financial statements prior periods unless impracticable sfas 154 apb 20 “accounting changes” sfas 3 “reporting accounting changes interim periods” however carries forward guidance pronouncements respect accounting changes estimates changes reporting entity correction errors see note 6 additional information regarding retrospective adjustment prior periods change accounting inventories september 2006 fasb issued sfas 158 “employers’ accounting defined benefit pension postretirement plans amendment fasb statements 87 88 106 132r” sfas 158 requires employer recognize overfunded underfunded status defined benefit postretirement plan multiemployer plan asset liability statement financial position recognize changes funded status year changes occur comprehensive income sfas 158 also requires employer measure funded status plan date yearend statement financial position sfas 158 amends sfas 87 “employers’ accounting pensions” sfas 88 “employers’ accounting settlements curtailments defined benefit pension plans termination benefits” sfas 106 “employer’s accounting postretirement benefits pensions” sfas 132r “employers’ disclosures pensions postretirement benefits” related accounting literature sfas 158 requires expanded disclosures certain effects net periodic benefit cost next fiscal year arise delayed recognition gains losses prior service costs credits transition asset obligation employer publicly traded equity securities required initially recognize funded status defined benefit postretirement plan provide required disclosures end fiscal year ending december 15 2006 adoption sfas 158 material impact consolidated financial condition results operations see additional discussion impact adoption sfas 158 note 12 pronouncements yet implemented february 2006 fasb issued sfas 155 “accounting certain hybrid financial instruments” amends sfas 133 “accounting derivative instruments hedging activities” sfas 140 “accounting transfers servicing financial assets extinguishments liabilities” sfas 155 improves financial reporting certain hybrid financial instruments simplifies accounting instruments particular sfas 155 • permits fair value remeasurement hybrid financial instrument contains embedded derivative otherwise would require bifurcation • clarifies interestonly principalonly strips subject requirements sfas 133 • establishes requirement evaluate interests securitized financial assets identify interests freestanding derivatives hybrid financial instruments contain embedded derivative requiring bifurcation • clarifies concentrations credit risk form subordination embedded derivatives flowserve corporation notes consolidated financial statements continued • amends sfas 140 eliminate prohibition qualifying specialpurpose entity holding derivative financial instrument pertains beneficial interest another derivative financial instrument sfas 155 effective financial instruments acquired issued beginning entity’s fiscal year begins september 15 2006 expect adoption sfas 155 material impact consolidated financial position results operations march 2006 fasb issued sfas 156 “accounting servicing financial assets amendment statement 140” sfas 156 clarifies obligation service financial assets separately recognized servicing asset servicing liability requires separately recognized servicing asset servicing liability initially measured fair value permits entity separately recognized servicing asset servicing liability choose either amortization method fair value method subsequent measurement sfas 156 effective separately recognized servicing assets liabilities acquired issued beginning entity’s fiscal year begins september 15 2006 expect adoption sfas 156 material impact consolidated financial position results operations march 2006 emerging issues task force “eitf” issued eitf issue 0603 “how taxes collected customers remitted governmental authorities presented income statement gross versus net presentation” eitf 0603 requires presentation taxes assessed governmental authority directly imposed revenueproducing transaction seller customer either gross included revenues costs net excluded revenues basis accounting policy decision disclosed pursuant apb 22 “disclosure accounting policies” addition taxes reported gross basis company disclose aggregated basis amounts taxes interim annual financial statements period income statement presented amounts significant eitf issue 0603 effective interim annual reporting periods beginning december 31 2006 historically presented taxes net basis within results operations accordingly expect adoption eitf issue 0603 material impact consolidated financial position results operations july 2006 fasb issued financial interpretation “fin” 48 “accounting uncertainty income taxes interpretation fasb statement 109” fin 48 clarifies accounting uncertainty income taxes recognized enterprise’s financial statements accordance sfas 109 “accounting income taxes” fin 48 also prescribes recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return well guidance derecognition classification interest penalties accounting interim periods disclosure transition evaluation tax position accordance fin 48 twostep process first step recognition process whereby enterprise determines whether morelikelythannot tax position sustained upon examination including resolution related appeals litigation processes based technical merits position second step measurement process whereby tax position meets morelikelythannot recognition threshold calculated determine amount benefit recognize financial statements provisions fin 48 effective fiscal years beginning december 15 2006 still evaluating impact fin 48 consolidated financial condition results operations september 2006 fasb issued sfas 157 “fair value measurements” sfas 157 establishes single definition fair value framework measuring fair value gaap expands disclosures fair value measurements sfas 157 applies accounting pronouncements require permit fair value measurements however require new fair value measurements sfas 157 effective financial statements issued fiscal years beginning november 15 2007 interim periods within fiscal years still evaluating impact sfas 157 consolidated financial condition results operations flowserve corporation notes consolidated financial statements continued february 2007 fasb issued sfas 159 “the fair value option financial assets financial liabilities including amendment fasb statement 115” sfas 159 permits entities choose measure many financial instruments certain items fair value currently required measured fair value provides entities opportunity mitigate volatility reported earnings caused measuring related assets liabilities differently without apply complex hedge accounting provisions sfas 159 effective fiscal years beginning november 15 2007 interim periods within fiscal years still evaluating impact sfas 159 consolidated financial condition results operations although final pronouncements recently issued adopted expect impact reported financial information disclosures accounting promulgating bodies number pending projects may directly impact us continue evaluate status projects become final provide disclosures regarding likelihood magnitude impact 2 discontinued operations general services group first quarter 2005 committed plan divest certain noncore service operations collectively called general services group “gsg” accordingly evaluated impairment pursuant heldforsale concept opposed previously heldandused concept part decision sell allocated 123 million goodwill gsg based relative fair value division’s estimated fair value recognized impairment charges goodwill property plant equipment 2005 aggregating 301 million relating gsg number potential buyers diminished one purchaser bidding process business underperformed year due part pending sale december 31 2005 sold gsg furmanite unit dallasbased xanser corporation contingent sales price 155 million gross cash proceeds including 20 million held escrow pending final settlement excluding approximately 12 million net accounts receivable utilizing 155 million contingent sales price sale resulted loss 25 million 38 million pretax recognized fourth quarter 2005 third quarter 2006 recognized 08 million 11 million pretax reduction loss independent arbitrator issued binding decision respect valuation inventory resolved one element contingent sales price fourth quarter 2006 negotiated final sales price 171 million whereby recognized additional reduction loss sale 02 million 05 million pretax bringing aggregate loss sale recognized 2006 2005 15 million 22 million pretax remaining amounts due us terms sale collected december 2006 used 109 million initial net cash proceeds reduce indebtedness january 2006 additional 35 million december 2006 using final proceeds collected pursuant sale transaction allocated estimated interest expense related repayment discontinued operations period presented based upon prevailing interest rates result sale presented results operations gsg discontinued operations flowserve corporation notes consolidated financial statements continued gsg generated following results operations government marine business unit november 2004 sold government marine business unit “gmbu” business within flowserve pump division “fpd” curtisswright electromechanical corporation approximately 28 million generating gain 30 million 74 million pretax allocation approximately 8 million goodwill 1 million intangible assets gmbu provided pump technology service us navy submarines aircraft carriers serve core market represented small part total pump business used net proceeds disposition gmbu reduce outstanding indebtedness result sale presented results operations gmbu discontinued operations gmbu generated following results operations year ended december 31 2004 millions 3 acquisitions regularly evaluate acquisition opportunities various sizes 2006 completed four small asset acquisitions aggregate purchase price 80 million assets acquired primarily include inventory fixed assets intangible assets acquisitions immaterial individually aggregate thus pro forma financial information presented acquired remaining 75 interest thompsons kelly lewis pty ltd “tkl” australian manufacturer supplier pumps march 2004 incremental interests acquired accounted step acquisition tkl’s results operations consolidated since date acquisition estimated fair value net assets acquired including approximately 22 million cash acquired exceeded cash paid 12 million accordingly goodwill recognized 2004 consolidated statement income includes 2004 tkl sales 35 million flowserve corporation notes consolidated financial statements continued 4 goodwill intangible assets following table provides information changes 2006 intangible assets following table provides information changes 2005 intangible assets 1 engineering drawings represent estimated fair value associated specific product component schematics assets recognized result acquisitions invensys’ flow control division “ifc” idp valued based upon management analysis independent third party appraisals 2 accumulated amortization indefinitelived intangible assets relates amounts recorded prior implementation date sfas 142 “goodwill intangible assets” 3 2006 2005 flow solutions division acquired certain intangible assets flowserve corporation notes consolidated financial statements continued following schedule outlines actual amortization recognized 2006 estimate future amortization based upon finitelived intangible assets owned december 31 2006 changes carrying amount goodwill years ended december 31 2006 2005 follows 5 factoring accounts receivable european subsidiaries engage nonrecourse factoring certain accounts receivable various agreements different terms including options renewal mutual termination clauses credit facilities fully described note 11 limit factoring volume 750 million given point time defined credit facilities aggregate cash received factored receivables outstanding december 31 2006 2005 totaled 691 million 461 million respectively represent factor’s purchase 767 million 493 million receivables respectively 2006 factoring agreements worldwide recognized losses approximately 28 million factoring receivables compares total loss 23 million 20 million 2005 2004 respectively flowserve corporation notes consolidated financial statements continued 6 inventories net consisted following 2006 2005 2004 recognized expenses 63 million 91 million 250 million respectively obsolete excess inventory expenses included cost sales consolidated statements income discussed note 1 effective december 31 2006 changed lifo method accounting us inventories fifo method retrospectively adjusted prior periods reflect results balances would reported applied fifo method accounting inventories periods presented column labeled “as computed lifo” represents financial position results operations year ended december 31 2006 assuming continued use lifo method us inventories effects change relates consolidated financial statements periods presented follows statement income year ended december 31 2006 flowserve corporation notes consolidated financial statements continued statement income year ended december 31 2005 statement income year ended december 31 2004 flowserve corporation notes consolidated financial statements continued balance sheet december 31 2006 balance sheet december 31 2005 change accounting inventories impact overall cash flows operating activities flowserve corporation notes consolidated financial statements continued 7 stockbased compensation plans restricted stock option plans flowserve corporation 2004 stock compensation plan “2004 plan” established april 21 2004 authorized issuance 3500000 shares common stock grants restricted stock options equitybased awards 3500000 shares common stock authorized 2004 plan 1856112 remain available issuance addition 2004 plan maintain shareholderapproved plans permit issuance common stock grants various equitybased awards december 31 2006 approximately 131374 shares common stock remained available stock option grants plans options granted officers employees directors allow purchase common shares fair market value stock date options granted although options granted fair market value generally options whether granted 2004 plan one previously approved plans become exercisable staggered period ranging one five years typically one three years options generally expire ten years date grant within short period time following termination employment cessation services option holder however described greater detail “modifications” expiration provisions relating certain outstanding option awards modified adopted sfas 123r january 1 2006 prior january 1 2006 accounted stockbased compensation using intrinsic value method set forth apb 25 “accounting stock issued employees” related interpretations permitted sfas 123 accordingly recognized compensation expense restricted stock equity awards applicable vesting period however recognize compensation expense stock options years ended december 31 2005 2004 options granted market value date grant following tables illustrate effect stockbased compensation net earnings per share years ended december 31 2005 2004 applied fair value recognition provisions sfas 123 stockbased employee compensation calculated using blackscholes optionpricing model adopted sfas 123r modified prospective application method recorded stockbased compensation expense 182 million 251 million pretax year ended december 31 2006 awards granted date adoption unvested portion previously granted flowserve corporation notes consolidated financial statements continued awards january 1 2006 includes 56 million charge discussed “modifications” accordingly prior period amounts retrospectively adjusted stock options information related stock options issued officers employees directors plans presented following table 1 options originally expiring 2005 expiration dates extended contingent upon shareholder approval obtained august 24 2006 discussed “modifications” weighted average fair value per share options granted 2484 1462 1083 years ended december 31 2006 2005 2004 respectively purposes pro forma disclosure estimated fair value options amortized expense options’ vesting periods “fair value” options date grant estimated using blackscholes option pricing model weighted average remaining contractual life options outstanding december 31 2006 2005 68 years 42 years respectively additional information relating ranges options outstanding december 31 2006 follows fair value option award estimated date grant using blackscholes option pricing model using assumptions noted following table riskfree rate periods within contractual life flowserve corporation notes consolidated financial statements continued option based us treasury yield curve effect time grant dividend yield zero historically declared dividends stock volatility determined based historical price fluctuations stock expected life stock options granted based 10year history timing stock option exercises forfeiture rate based unvested options forfeited compared original total options granted rolling 10year period excluding significant forfeiture events expected recur december 31 2006 58 million unrecognized compensation cost related outstanding unvested stock option awards expected recognized weightedaverage period approximately 16 years total intrinsic value stock options exercised years ended december 31 2006 2005 2004 547 million 03 million 17 million respectively total fair value stock options vested years ended december 31 2006 2005 2004 01 million 23 million 12 million respectively incremental stockbased compensation expense related solely stock options recognized year ended december 31 2006 result modified prospective adoption sfas 123r follows 1 excludes 56 million modification charge recorded august 2006 discussed “modifications” since charge would recognized accordance fin 44 “accounting certain transactions involving stock compensation interpretation apb opinion 25” would approximated charge recognized accordance sfas 123r restricted stock addition 2004 plan also restricted stock plans authorize us grant 2351 additional shares common stock units rights commensurate restricted stock employees nonemployee directors general restrictions shares units expire minimum one year maximum ten years subject forfeiture restriction period typically restricted share grants staggered vesting periods one three years grant date intrinsic value shares units typically product share price date grant number shares units granted amortized straightline basis compensation expense periods restrictions lapse forfeiture rate based unvested restricted shares units forfeited compared original total restricted shares units granted rolling 10year period excluding significant forfeiture events expected recur flowserve corporation notes consolidated financial statements continued awards restricted stock valued closing market price common stock date grant unearned compensation amortized compensation expense vesting period restricted stock prior adoption sfas 123r unrecognized portion unearned compensation associated unvested restricted stock recognized reclassification within equity resulting net impact shareholders’ equity effective january 1 2006 amounts reversed net impact shareholders’ equity december 31 2006 2005 150 million 91 million respectively unearned compensation cost related unvested restricted stock expected recognized weightedaverage period approximately 16 years amounts recognized net earnings prospective periods awards vest total fair value restricted shares units vested years ended december 31 2006 2005 2004 37 million 22 million 05 million respectively stockbased compensation expense related restricted stock recognized 89 million 128 million pretax year ended december 31 2006 42 million 66 million pretax year ended december 31 2005 12 million 18 million pretax year ended december 31 2004 following tables summarize information regarding restricted stock plans modifications 2005 made number modifications stock plans including acceleration vesting certain restricted stock grants outstanding options well extension exercise period associated certain outstanding options modifications resulted severance agreements former executives decision temporarily suspend option exercises result modifications primarily associated severance agreements former executives recorded additional stockbased compensation expense 2005 72 million based upon intrinsic values awards dates modifications made june 1 2005 took action extend december 31 2006 regular term certain options granted employees including executive officers qualified retirees directors scheduled expire 2005 november 4 2005 took subsequent action extend exercise date options expiring 2006 january 1 2009 thereafter concluded however recent regulatory guidance issued section 409a internal revenue code might cause recipients extended options become subject unintended adverse tax consequences section 409a accordingly effective december 14 2005 organization compensation committee board directors partially rescinded accordance regulations extensions regular term options provide follows regular term options otherwise expiring 2005 expired october 29 2006 ii regular term options otherwise expiring 2006 expire later 1 75 days regular term option originally granted expires 2 december 31 2006 flowserve corporation notes consolidated financial statements continued extensions subject shareholder approval applicable plan amendments obtained annual shareholders’ meeting held august 24 2006 approval plan amendments considered stock modification financial reporting purposes subject recognition noncash compensation charge accordance sfas 123r recorded charge 56 million 2006 earlier extension actions also extended option exercise period available following separation employment reasons death disability termination cause certain voluntary separations separate extensions partially rescinded december 14 2005 meeting organization compensation committee board directors revised currently effective subject shareholder approval exercise period available following employment separations extended later 30 days options first became exercisable sec filings first became current effective sec form s8 registration statement filed sec occurred september 29 2006 ii period available exercise following separation employment terms option originally granted extension considered financial reporting purposes stock modification subject recognition noncash compensation charge accordance apb 25 10 million 2005 extension exercise period following separation employment apply option exercise periods governed separate separation contract agreement 8 derivatives hedging activities enter forward exchange contracts hedge risks associated transactions denominated currencies local currency operation engaging transaction risk management derivatives policy specifies conditions may enter derivative contracts december 31 2006 2005 4337 million 2871 million respectively notional amount outstanding forward contracts third parties december 31 2006 length forward contracts currently place two days 17 months fair market value adjustments substantial portion forward contracts recognized directly results operations fair value outstanding forward contracts december 31 2006 2005 net asset 34 million net liability 23 million respectively unrealized gains losses changes fair value forward contracts 58 million 52 million 25 million years ended december 31 2006 2005 2004 respectively included expense income net consolidated statements income fair value certain outstanding forward contracts qualify hedge accounting net liability 0 7000 december 31 2006 2005 respectively unrealized losses changes fair value qualifying forward contracts associated underlying exposures 0 35000 02 million net tax years ended december 31 2006 2005 2004 respectively included comprehensive income loss also part risk management program enter interest rate swap agreements hedge exposure floating interest rates certain portions debt december 31 2006 2005 4350 million 3250 million respectively notional amount outstanding interest rate swaps third parties december 31 2006 maximum remaining length interest rate contract place approximately 36 months fair value interest rate swap agreements net asset 19 million 09 million december 31 2006 2005 respectively unrealized gains changes fair value interest rate swap agreements net reclassifications 07 million 28 million net tax years ended december 31 2006 2005 respectively included comprehensive income loss 2004 entered compound derivative contract hedge exposure currency translation interest rate risks associated european investment bank “eib” credit facility notional amount derivative 850 million served convert floating rate interest rate risk fixed rate well us dollar currency risk euros described fully note 11 repaid amounts outstanding facility december 15 2006 realized foreign transaction gain 85 million also settled derivative flowserve corporation notes consolidated financial statements continued loss 99 million december 31 2005 fair value derivative net liability 28 million gain loss derivative offset foreign transaction gain underlying loan aggregate 33 million 02 million 51 million years ended december 31 2006 2005 2004 respectively included expense income net consolidated statements income exposed risk creditrelated losses resulting nonperformance counterparties financial instruments perform credit evaluations counterparties forward contracts interest rate swap agreements expect counterparties meet obligations experienced credit losses counterparties hedging related transactions recorded comprehensive income expense net deferred taxes summarized expect recognize 12 million net deferred taxes earnings 2007 related interest rate swap agreements based fair values december 31 2006 9 details certain consolidated balance sheet captions following tables present financial information certain consolidated balance sheet captions accounts receivable net accounts receivable net flowserve corporation notes consolidated financial statements continued property plant equipment net property plant equipment net depreciation expense continuing operations amount 467 million 469 million 447 million years ended december 31 2006 2005 2004 respectively included cost sales consolidated statements income remaining depreciation expense included selling general administrative expense assets net assets net accrued liabilities accrued liabilities accrued liabilities include professional fees derivative liabilities lease obligations freight items none individually exceed 5 current liabilities flowserve corporation notes consolidated financial statements continued retirement obligations liabilities retirement obligations liabilities noncurrent liabilities includes minority interest reserves legal environmental matters reserves uncertain tax positions items none individually exceed 5 total liabilities 10 equity method investments summarized combined balance sheet income statement information based recent financial information investments entities account using equity method unaudited provision income taxes based tax laws rates countries investees operate taxation regimes vary nominal rates also allowability deductions credits benefits flowserve corporation notes consolidated financial statements continued reconciliation net income per combined income statement information equity income investees per consolidated statements income follows 11 debt lease obligations debt including capital lease obligations consisted scheduled maturities credit facilities described well capital lease obligations next five years beyond credit facilities august 12 2005 entered credit facilities comprised 6000 million term loan expiring august 10 2012 4000 million revolving line credit utilized provide 3000 million letters credit expiring august 12 2010 refer credit facilities collectively credit facilities proceeds borrowings credit facilities used call 1225 senior subordinated notes retire indebtedness outstanding previous credit facilities also replaced letter credit agreement guaranteeing obligations eib credit facility described letter credit issued new revolving line credit 2006 made scheduled repayments optional prepayments 50 million made mandatory repayments 144 million using net cash proceeds sale gsg 09 million using excess cash flows defined credit facilities flowserve corporation notes consolidated financial statements continued borrowings credit facilities bear interest rate equal option either 1 base rate based greater prime rate recently announced administrative agent credit facilities federal funds rate plus 050 2 london interbank offered rate “libor” plus applicable margin determined reference ratio total debt consolidated earnings interest taxes depreciation amortization “ebitda” december 31 2006 15 libor borrowings addition pay lenders credit facilities commitment fee equal percentage determined reference ratio total debt consolidated ebitda unutilized portion revolving line credit letter credit fees respect financial standby letter credit outstanding credit facilities equal percentage based applicable margin effect libor borrowings new revolving line credit fee performance standby letters credit 05 lower fee financial standby letters credit december 31 2006 amounts outstanding revolving line credit outstanding letters credit 839 million 1658 million december 31 2006 2005 respectively reduced borrowing capacity 3161 million 2342 million respectively connection credit facilities entered 4350 million notional amount interest rate swaps hedge exposure floating interest rates incurred 93 million fees related credit facilities 08 million expensed 2005 based upon final syndicate financial institutions credit facilities expensed 105 million unamortized deferred loan costs 2005 addition total loan costs 113 million expensed recorded charge 164 million premiums paid call senior subordinated notes total loss extinguishment 277 million recorded 2005 remaining 85 million fees related credit facilities capitalized combined remaining 13 million previously unamortized deferred loan costs total 98 million deferred loan costs included assets net costs amortized term credit facilities obligations credit facilities unconditionally guaranteed jointly severally substantially existing subsequently acquired organized domestic subsidiaries 65 capital stock certain foreign subsidiaries addition prior obtaining maintaining investment grade credit ratings guarantors’ obligations credit facilities collateralized substantially guarantors’ assets loans credit facilities subject mandatory repayment general • 100 net cash proceeds asset sales • unless attain maintain investment grade credit ratings • 50 proceeds equity offerings • 100 proceeds debt issuances subject certain exceptions may prepay loans credit facilities whole part without premium penalty credit facilities contain among things covenants restricting subsidiaries’ ability dispose assets merge pay dividends repurchase redeem capital stock indebtedness incur indebtedness guarantees create liens enter agreements negative pledge clauses make certain investments acquisitions enter sale leaseback transactions enter transactions affiliates make capital expenditures engage business activity existing business credit facilities also contain covenants requiring us deliver lenders audited annual unaudited quarterly financial statements leverage interest coverage financial covenants leverage covenant maximum permitted leverage ratio stepped beginning fourth quarter 2006 stepdown beginning fourth quarter 2007 interest coverage covenant minimum required interest coverage ratio stepped beginning fourth quarter 2006 stepup beginning fourth quarter 2007 flowserve corporation notes consolidated financial statements continued compliance financial covenants credit facilities tested quarterly complied covenants december 31 2006 credit facilities include events default usual types credit facilities including nonpayment principal interest violation covenants incorrectness representations warranties cross defaults cross acceleration bankruptcy material judgments erisa events actual asserted invalidity guarantees security documents certain changes control company occurrence event default could result acceleration guarantors’ obligations credit facilities eib credit facility april 14 2004 one european subsidiaries flowserve bv entered agreement eib pursuant eib agreed loan us 700 million ability draw funds multiple currencies finance part specified research development projects undertaken us europe borrowings eib credit facility bore interest fixed floating rate interest agreed us eib respect borrowing facility august 2004 borrowed 850 million floating interest rate based 3month us libor reset quarterly repaid outstanding principal balance terminated facility december 15 2006 using cash generated operations result repayment incurred expenses 05 million related writeoff unamortized deferred financing costs concurrent borrowing 850 million entered derivative contract third party financial institution swapped principal amount 706 million fixed libor portion interest rate fixed interest rate 419 scheduled repayment date apply hedge accounting derivative contract unrealized gain loss derivative offset foreign currency translation gain underlying loan included expense income net consolidated statements income discussed fully note 8 settled derivative concurrent repayment underlying loan following summarizes repayment obligations various credit facilities 1 optional prepayment 2005 excludes proceeds credit facilities used repay outstanding obligations previous credit facilities 1225 senior subordinated notes accounts receivable factoring european subsidiaries engage nonrecourse factoring certain accounts receivable various agreements different terms including options renewal mutual termination clauses limit factoring 750 million given point time defined credit facilities entered august 2005 fully described aggregate cash received factored receivables outstanding december 31 2006 2005 totaled 691 million 461 million respectively represent factor’s purchase 767 million 493 million receivables respectively operating leases noncancelable operating leases certain offices service quick response centers certain manufacturing operating facilities machinery equipment automobiles rental expense relating operating leases 293 million 2006 221 million 2005 197 million 2004 flowserve corporation notes consolidated financial statements continued future minimum lease payments due noncancelable operating leases 12 retirement postretirement benefits sponsor several noncontributory defined benefit pension plans covering substantially us employees certain nonus employees provide benefits based years service job grade levels type compensation retirement benefits covered employees provided contributory pension plans cash balance pension plans governmentsponsored retirement programs funded defined benefit pension plans receive funding based independent actuarial valuations provide current service amount sufficient amortize unfunded prior service periods exceed 30 years funding falling within legal limits proscribed prevailing regulation also maintain unfunded defined benefit plans permitted local regulations receive funding benefits become due periods presented used measurement date december 31 worldwide pension plans postretirement medical plans discussed note 1 adopted sfas 158 effective december 31 2006 impact adoption summarized us defined benefit plans maintain qualified nonqualified defined benefit pension plans us qualified plan provides coverage substantially fulltime us employees receive benefits earnings threshold specified us department labor qualified plan designed operate “cash balance” arrangement accumulated benefit obligation equivalent projected benefit obligation nonqualified plans primarily cover small number employees including current former members senior management providing benefit levels equivalent participants otherwise limited us department labor rules flowserve corporation notes consolidated financial statements continued net defined benefit pension expense us defined benefit pension plans including qualified nonqualified plans settlement curtailment expense 2005 associated sale gsg discussed note 2 partially offset departure former executives estimated prior service benefit defined benefit pension plans amortized accumulated comprehensive loss us pension expense 2007 14 million estimated net loss defined benefit pension plans amortized accumulated comprehensive loss us pension expense 2007 59 million following summarizes net pension liability us plans december 31 2006 following summarizes amounts recognized balance sheet us plans december 31 2006 flowserve corporation notes consolidated financial statements continued following summarizes net pension liability us plans december 31 2005 following assumptions related us defined benefit pension plans also increased discount rate 550 december 31 2005 575 december 31 2006 reflect current interest rate environment expected benefit payment streams regularly evaluate assumptions asset returns discount rates based variety factors based results pension plan asset returns 2005 anticipated future return decreased assumed rate return assets 825 2005 75 2006 expected longterm rate return assets determined assessing rates return targeted asset class return premiums generated active portfolio management comparison rates utilized companies 2005 increased minimum pension liability “mpl” 120 million net tax increase primarily resulted increase accumulated benefit obligations due lower discount rates along lower anticipated plan asset returns 2005 flowserve corporation notes consolidated financial statements continued following summary changes us defined benefit plans’ pension obligations following reconciliation us defined benefit pension plans’ assets contributed 363 million 448 million us defined benefit pension plans 2006 2005 respectively payments exceeded minimum funding requirements mandated us department labor rules 2006 returns pension plan assets greater anticipated 2005 returns pension plan assets less anticipated although still working actuaries determine estimated funding beyond 2006 following table summarizes expected cash activity us defined benefit pension plans future millions flowserve corporation notes consolidated financial statements continued asset allocation us defined benefit pension plans end 2006 2005 target allocation 2007 asset category follows believe common stock directly held plans investment strategy invest various securities order pay retirement benefits plan participants minimizing cash contributions life plan accomplished preserving capital diversified investments high quality instruments earning longterm rate return consistent acceptable degree risk taking account liquidity needs plan investment policy invest approximately 65 plan assets equity securities 25 fixed income securities 10 assets within investment category assets allocated various investment styles professional money management firms manage assets engage consultant assist evaluating activities periodically review investment policy generally conjunction asset liability study also regularly rebalance actual allocation target investment allocation nonus defined benefit plans maintain defined benefit pension plans cover employees following countries austria canada france germany india japan mexico netherlands sweden united kingdom net defined benefit pension expense nonus pension plans 1 increase settlement curtailment benefits 2006 due conversion defined benefit plan canada defined contribution plan estimated net loss defined benefit pension plans amortized accumulated comprehensive loss nonus expense 2007 17 million flowserve corporation notes consolidated financial statements continued following summarizes net pension liability nonus plans december 31 2006 following summarizes amounts recognized balance sheet nonus plans december 31 2006 following summarizes net pension liability nonus plans december 31 2005 following assumptions related nonus defined benefit pension plans flowserve corporation notes consolidated financial statements continued many nonus defined benefit plans unfunded permitted local regulation expected longterm rate return assets funded plans determined assessing rates return asset class return premiums generated active investment management 2005 increased nonus mpl 191 million net tax component comprehensive income expense increase liability 2005 primarily resulted increase accumulated benefit obligation due lower discount rates 2005 following reconciliation nonus plans’ defined benefit pension obligations following reconciliation nonus plans’ defined benefit pension assets flowserve corporation notes consolidated financial statements continued following table summarizes expected cash activity nonus defined benefit plans future millions asset allocations nonus defined benefit pension plans end 2006 2005 follows believe common stock held directly plans cases investment strategy plans invest various securities order pay retirement benefits plan participants minimizing required cash contributions life plan accomplished preserving capital diversification high quality investments earning longterm rate return consistent acceptable degree risk legal requirements particular country taking account liquidity needs plan asset allocation differs plan based upon plan’s projected benefit obligation participants well results asset liability studies conducted plan professional money management firms manage plan assets engage consultants country assist evaluation activities defined benefit plans accumulated benefit obligations excess plan assets following summarizes key pension plan information regarding plans whose accumulated benefit obligations exceed fair value respective plan assets postretirement medical plans sponsor several defined benefit postretirement health care plans covering current retirees limited number future retirees us plans provide medical dental benefits administered insurance companies health maintenance organizations plans include participant contributions deductibles coinsurance provisions limitations integrated medicare group plans fund plans benefits paid incur health maintenance organization premiums plans hold assets period presented accordingly investment strategy targeted allocations plan assets benefits postretirement medical plans available new employees existing employees flowserve corporation notes consolidated financial statements continued net postretirement benefit expense postretirement medical plans estimated prior service benefit postretirement medical plans amortized accumulated comprehensive loss us pension expense 2007 43 million estimated net loss postretirement medical plans amortized accumulated comprehensive loss us expense 2007 10 million following summarizes accrued postretirement benefits postretirement medical plans december 31 2006 following summarizes amounts recognized balance sheet postretirement benefits december 31 2006 following summarizes accrued postretirement benefits postretirement medical plans december 31 2005 flowserve corporation notes consolidated financial statements continued following reconciliation accumulated postretirement benefits obligation 1 plan amendment 2005 represents decrease full coverage capped amount two facilities 2 decrease actuarial gain 2006 compared 2005 primarily reflects higher expected decrease plan participants 2005 following presents expected benefit payments future periods following assumptions related postretirement benefits assumed ranges annual rates increase per capita costs periods prior medicare 90 2006 80 2005 90 2004 gradual decrease 50 2010 future years flowserve corporation notes consolidated financial statements continued assumed heath care cost trend rates effect amounts reported postretirement medical plans onepercentage point change assumed health care cost trend rates would following effect 2005 reported amounts made contributions postretirement medical plans pay benefits 64 million 2006 82 million 2005 86 million 2004 postretirement medical plans unfunded make contributions covered individuals’ claims approved payment accordingly contributions period directly correlated benefits paid defined contribution plans sponsor several defined contribution plans covering substantially us canadian employees certain nonus employees may contribute plans contributions matched varying amounts us including opportunities discretionary matching contributions us defined contribution plan expense 68 million 2006 76 million 2005 68 million 2004 participants us defined contribution plan option invest common stock discretionary contributions us typically funded common stock therefore plans assets include holdings common stock 13 legal matters contingencies defendant large number pending lawsuits include many cases multiple claimants seek recover damages personal injury allegedly caused exposure asbestoscontaining products manufactured andor distributed us past products encapsulated used components process equipment believe emission respirable asbestos fibers occurred use equipment believe high percentage applicable claims covered applicable insurance indemnities companies 2003 related lawsuits filed federal court northern district texas “court” alleging violated federal securities laws since filing cases consolidated lead plaintiff amended complaint several times lead plaintiff’s current pleading fifth consolidated amended complaint “complaint” complaint alleges federal securities violations occurred february 6 2001 september 27 2002 names defendants company c scott greer former chairman president chief executive officer renee j hornbaker former vice president chief financial officer pricewaterhousecoopers llp independent registered public accounting firm banc america securities llc credit suisse first boston llc served underwriters two public stock offerings relevant period complaint asserts claims sections 10b 20a securities exchange act 1934 rule 10b5 thereunder sections 11 15 securities act 1933 lead plaintiff seeks unspecified compensatory damages forfeiture mr greer ms hornbaker unspecified incentivebased equitybased compensation profits stock sales recovery costs november 22 2005 court entered order denying defendants’ motions dismiss complaint case currently set trial october 1 2007 continue believe lawsuit without merit vigorously defending case 2005 shareholder derivative lawsuit filed purportedly behalf 193rd judicial district dallas county texas lawsuit names defendants mr greer ms hornbaker current board members hugh k coble george haymaker jr william c rusnack michael f johnston charles rampacek kevin e sheehan diane c harris james rollans christopher bartlett named nominal flowserve corporation notes consolidated financial statements continued defendant based primarily purported misstatements alleged abovedescribed federal securities case plaintiff asserts claims defendants breach fiduciary duty abuse control gross mismanagement waste corporate assets unjust enrichment plaintiff alleges purported violations state law occurred april 2000 date suit plaintiff seeks behalf unspecified amount damages injunctive relief andor imposition constructive trust defendants’ assets disgorgement compensation profits benefits received defendants us recovery attorneys’ fees costs strongly believe suit improperly filed motion seeking dismissal case court since ordered plaintiffs replead trial currently set march 2007 although parties submitted agreed motion continue trial date march 14 2006 shareholder derivative lawsuit filed purportedly behalf federal court northern district texas lawsuit names defendants mr greer ms hornbaker following board members mr coble mr haymaker mr kling mr rusnack mr johnston mr rampacek mr sheehan ms harris mr rollans mr bartlett named nominal defendant based primarily certain purported misstatements alleged abovedescribed federal securities case plaintiff asserts claims defendants breaches fiduciary duty plaintiff alleges purported breaches fiduciary duty occurred 2000 2004 plaintiff seeks behalf unspecified amount damages disgorgement mr greer ms hornbaker salaries bonuses restricted stock options recovery attorneys’ fees costs strongly believe suit improperly filed motion seeking dismissal case february 7 2006 received subpoena sec seeking documents information relating primarily products two foreign subsidiaries delivered iraq 1996 2003 united nations oilforfood program believe sec’s investigation focused primarily whether inappropriate payments made iraqi officials violation federal securities laws investigation includes periods prior well subsequent acquisition foreign operations involved investigation may subject certain liabilities violations found regardless whether relate periods subsequent acquisition addition two foreign subsidiaries contacted governmental authorities respective countries concerning involvement united nations oilforfood program unable predict foreign governmental authorities pursue either matters future believe sec foreign governmental authorities also investigating companies connection united nations oilforfood program engaged outside counsel february 2006 conduct investigation foreign subsidiaries’ participation united nations oilforfood program audit committee board directors regularly monitoring situation since receipt sec subpoena assumed direct oversight investigation january 2007 currently expect investigation completed second quarter 2007 investigation included among things detailed review contracts iraqi government united nations oilforfood program 1996 2003 forensic review accounting records associated contracts interviews persons knowledge events question investigation found evidence date years 2001 2003 certain nonus personnel two foreign subsidiaries authorized payments connection certain product sales united nations oilforfood program totaling approximately 06 million subsequently deposited third party iraqicontrolled bank accounts payments authorized united nations oilforfood program properly documented subsidiaries’ accounting records expensed paid course investigation certain potential issues involving nonus personnel identified one foreign subsidiaries currently review flowserve corporation notes consolidated financial statements continued taken certain disciplinary actions persons engaged wrongful conduct violated ethics policies failed cooperate fully investigation including terminating employment certain nonus senior management personnel one foreign subsidiaries certain nonus senior management personnel facility involved conduct previously separated company reasons continue fully cooperate sec foreign investigations progress point incomplete accordingly sec andor foreign authorities take enforcement action regard investigations may required pay fines disgorge profits consent injunctions future conduct suffer penalties could potentially materially impact business financial condition results operations cash flows march 2006 initiated process determine compliance posture respect us export control laws regulations upon initial investigation appeared product transactions technology transfers necessarily full compliance us export control laws regulations result conjunction outside counsel currently involved systematic process conduct review validation voluntary disclosure certain apparent export violations discovered part review process currently believe process substantially complete first quarter 2008 given complexity export laws current scope investigation violations us export control laws regulations identified disclosed us government may result civil criminal penalties including fines andor penalties review issue ongoing currently unable determine full extent confirmed violations determine nature total amount potential penalties might subject future given resolution matter uncertain time able reasonably estimate maximum amount liability could result final resolution matter cannot currently predict whether ultimate resolution matter material adverse effect business including ability business outside us financial condition may 1 2005 september 29 2006 “relevant period” due noncurrent status filings sec accordance securities exchange act 1934 registration statement form s8 available cover offers sales securities employees persons result acquisition securities 401k plan behalf participants 401k plan relevant period comply registration requirements securities act relevant period units interest “units” representing total 464033 shares common stock purchased behalf participants 401k plan application salary reduction contributions employees ii fixed matching source funds flowserve iii intraplan transfers funds participants investments 401k plan units failure maintain effectiveness registration statement form s8 gave participants directed 401k plan purchase units relevant period right rescind purchases recover damages sold units one year federal law following purchase units order address compliance issue conducted rescission offering expired january 8 2007 terms rescission offering made payments participants accepted offer sold shares acquired relevant period loss also acquired shares accepting participants acquired shares relevant period price together interest applicable state rate exceeded closing price share common stock january 8 2007 4898 participants acquired shares rescission offering received acquisition price paid shares together interest paid total 38675059 accepting participants included 1555795 shares sold loss 37119264 acquisition price ie participant’s actual cost interest 6766 shares acquired participants pursuant rescission offering unclear however whether participants 401k plan continue rescission rights federal securities laws following expiration rescission offering view sec staff right rescission created securities act may survive rescission offer however federal courts flowserve corporation notes consolidated financial statements continued past ruled person rejects fails accept rescission offer precluded later seeking similar relief remedies statute limitations state securities laws vary depend upon state shares purchased believe however acquisitions units made behalf participants relevant period exempt state registration requirements based upon current stock price believe current potential liability rescission claims material financial condition results operations however potential liability could become material future stock price fall participants’ acquisition prices interest stock fund oneyear period following unregistered acquisitions determined competent legal authorities rescission offering effectively terminate rights participants seek rescission involved potentially responsible party “prp” former public waste disposal sites may subject remediation pending government procedures sites various stages evaluation federal state environmental authorities projected cost remediation sites well alleged “fair share” allocation uncertain speculative studies completed parties either negotiated amicable resolution matter judicially resolved site many parties similarly identified identification location additional parties continuing applicable federal state law many parties identified financially strong solvent companies appear able pay share remediation costs based information waste disposal practices sites environmental regulatory process general believe likely ultimate remediation liability costs site apportioned among liable parties including site owners waste transporters according volumes andor toxicity wastes shown disposed sites believe exposure existing disposal sites less 100000 also defendant several lawsuits including product liability claims insured subject applicable deductibles arising ordinary course business based currently available information believe adequately accrued estimated probable losses lawsuits also involved substantial number labor claims including one case confidential settlement reflected 2004 results although none aforementioned potential liabilities quantified absolute certainty except otherwise indicated established reserves covering exposures relating probable contingencies extent believed reasonably estimable probable believe reasonable based past experience available facts additional exposures beyond reserves could exist currently cannot estimated continue evaluate potential contingent loss exposures develop recognize expense soon losses become probable reasonably estimated also involved ordinary routine litigation incidental business none believe material business operations overall financial condition however resolutions dispositions claims lawsuits settlement otherwise could significant impact operating results reporting period resolution disposition occurs consequence legal matters including settlements publicly disclosed litigation otherwise recognized expenses approximately 8 million 7 million 17 million 2006 2005 2004 respectively total legal fees expenses including amounts approximately 27 million 16 million 31 million 2006 2005 2004 respectively flowserve corporation notes consolidated financial statements continued 14 warranty reserve recorded reserves product warranty claims included current noncurrent liabilities following summary activity warranty reserve 15 shareholders’ equity shareholder rights plan series preferred stock expired august 2006 expiration date issued shares series preferred stock result expiration amended certificate incorporation new york stock exchange delisted series preferred stock september 29 2006 board directors authorized program repurchase two million shares outstanding common stock shares may repurchased offset potentially dilutive effects stock options issued equitybased compensation programs commenced program october 2006 repurchased 13 million shares 684 million fourth quarter 2006 expect conclude program end second quarter 2007 16 income taxes provision benefit income taxes consists following expected cash payments current federal income tax expense 2006 2005 2004 reduced approximately 188 million 01 million 06 million respectively result tax deductions related exercise nonqualified employee stock options vesting restricted stock income tax benefit resulting stockbased compensation plans increased capital excess par value flowserve corporation notes consolidated financial statements continued provision benefit income taxes differs statutory corporate rate due following 2006 effective tax rate differed federal statutory rate 35 primarily due net impact foreign operations certain us nondeductible expenses 2005 effective tax rate differed federal statutory rate 35 primarily due extraterritorial income “eti” exclusion benefits 19 million state income tax benefits 27 million resulting primarily net reductions valuation allowances 127 million net tax impact foreign operations 2004 effective tax rate differed federal statutory rate 35 primarily due eti exclusion benefits 49 million 220 million net tax impact foreign operations resulting approximately 85 million foreign earnings repatriation pay us debt net tax impact foreign operations lower 2006 compared prior years due decreased levels actual deemed dividend repatriations increased foreign tax credits associated 2006 repatriations additionally may 17 2006 tax increase prevention reconciliation act 2005 signed law new legislation created exclusion us taxable income certain types foreign related party payments dividends interest rents royalties prior 2006 subject us taxation exclusion applies certain 2006 payments foreign subsidiaries sfas 109 requires us provide deferred taxes temporary differences associated investment foreign subsidiaries financial reporting basis exceeds tax basis unless assert permanent reinvestment foreign jurisdictions pursuant apb 23 financial reporting basis tax basis differences investments foreign subsidiaries consist unremitted earnings losses well foreign currency translation adjustments assert permanent reinvestment apb 23 three years reported period ended december 31 2006 recognized net deferred tax assets attributable excess foreign tax credits unremitted earnings foreign currency translation adjustments foreign subsidiaries excess financial reporting basis cash deemed dividend distributions foreign subsidiaries resulted recognition approximately 9 million 22 million income tax expense years ended december 31 2006 2005 respectively recorded benefit excess foreign tax credits associated deemed repatriation unremitted earnings credits available offset liability associated dividends october 22 2004 american jobs creation act 2004 “2004 act” signed law creating temporary incentive us multinationals repatriate accumulated income earned outside us pursuant qualified dividend reinvestment plans effective tax rate 525 versus us federal statutory rate 35 flowserve corporation notes consolidated financial statements continued 2004 repatriated approximately 46 million part 85 million discussed respectively pursuant dividend reinvestment plan recognized lower tax rate dividends financial statements due uncertainties surrounding realization benefit interpretation 2004 act extent uncertainty favorably resolved future reporting period benefit associated dividends recognized period 2004 act also provides phase existing eti exclusion foreign export sales viewed inconsistent international trade protocols set european union phase provides benefit otherwise qualifying export sales 2005 2006 limited approximately 80 60 respectively replacement loss eti export incentive 2004 act provides deduction income qualified domestic production activities phased 2005 2010 realized benefit internal revenue code section 199 manufacturing deduction 2006 2005 impact future tax rate yet quantified guidance fsp fas 1091 “application fasb statement 109 tax deduction qualified production activities provided american jobs creation act 2004” tax deduction qualified production activities treated special deduction described sfas 109 special deduction reported period deduction claimed tax return record valuation allowances reflect estimated amount deferred tax assets may realized based upon analysis existing deferred tax assets net operating losses tax credits jurisdiction expectations ability utilize tax attributes review past current estimated future taxable income establishment tax strategies net decrease state valuation allowances 11 million december 31 2006 net decrease 26 million december 31 2005 reflected net state impacts rate reconciliations similarly changes valuation allowances related foreign net operating losses deferred tax assets reported portion net foreign impact overall effective tax rate 2006 2005 significant changes foreign valuation allowances decreased valuation allowances 20 million foreign tax credit carryforwards result utilization credits 2004 due extension carryover period 10 years pursuant 2004 act flowserve corporation notes consolidated financial statements continued deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes significant components consolidated deferred tax assets liabilities approximately 3283 million us foreign net operating loss carryforwards december 31 2006 total 1882 million state net operating losses reserved valuation allowance net operating losses generated us unused begin expire 2007 majority expiring 2021 majority nonus net operating losses carry forward without expiration additionally approximately 214 million foreign tax credit carryforwards december 31 2006 expiring 2010 2016 05 million valuation allowance reserves recorded 68 million alternative minimum tax credit carryforwards expiration date earnings loss income taxes comprised flowserve corporation notes consolidated financial statements continued 17 business segment information principally engaged worldwide design manufacture distribution service industrial flow management equipment provide pumps valves mechanical seals primarily petroleum industry chemicalprocessing industry powergeneration industry water industry general industry industries requiring flow management products following three divisions constitutes business segment • flowserve pump division • flow control division • flow solutions division manufactures different products defined type products services provided division president reports directly chief executive officer division vice president finance reports directly chief accounting officer decisionmaking purposes chief executive officer members senior executive management use financial information generated reported division level corporate headquarters constitute separate division business segment evaluate segment performance allocate resources based segment’s operating income amounts classified include corporate headquarters costs minor entities constitute separate segments intersegment sales transfers recorded cost plus profit margin sales eliminated consolidation following summary financial information reportable segments reconciled amounts reported consolidated financial statements flowserve corporation notes consolidated financial statements continued 1 depreciation amortization 2004 exclude 31 million depreciation amortization expense included discontinued operations consolidated statements income geographic information attribute sales different geographic areas based facilities’ locations longlived assets classified based geographic area assets located exclude deferred tax assets categorized noncurrent sales longlived assets geographic area follows 1 2006 germany accounted 10 consolidated sales individual country within group represents 10 consolidated sales 2005 2004 10 consolidated longlived assets period presented flowserve corporation notes consolidated financial statements continued 2 includes canada south america asia pacific individual geographic segment within group represents 10 consolidated totals net sales international customers including export sales united states represented 67 65 68 total sales 2006 2005 2004 respectively major customer information large number customers across large number manufacturing service facilities believe sales individual customer represent 10 consolidated sales years presented 18 accumulated comprehensive loss following presents components accumulated comprehensive loss net related tax effects 1 increase foreign currency translation adjustments 2006 due primarily weakening us dollar exchange rate versus euro british pound 2006 2 decrease pension postretirement 2006 primarily result increased discount rate 3 increase foreign currency translation adjustments 2005 due primarily strengthening us dollar exchange rate versus euro british pound 2005 4 increase pension postretirement 2005 primarily result decreased discount rate following tables present summary changes accumulated comprehensive loss years ended december 31 2006 2005 2004 flowserve corporation notes consolidated financial statements continued 19 quarterly financial data unaudited first second third quarters 2006 quarters 2005 retrospectively adjusted reflect change accounting us inventories lifo method fifo method see detail regarding change note 6 following presents summary unaudited quarterly data 2006 2005 flowserve corporation notes consolidated financial statements continued significant fourth quarter adjustments 2006 significant fourth quarter adjustments 2005 pretax record asset impairment related sale gsg 65 million included discontinued operations ii annual bonus accrual finalization increase 107 million 20 subsequent events updates legal matters existence december 31 2006 new legal matters arisen since december 31 2006 discussed note 13 february 28 2007 board directors authorized payment quarterly cash dividend 015 per share payable april 11 2007 shareholders record march 28 2007 item 9item 8 financial statements supplementary data report independent registered public accounting firm board directors shareholders flowserve corporation opinion consolidated financial statements financial statement schedule listed index appearing item 15a1 present fairly material respects financial position flowserve corporation subsidiaries company december 31 2007 2006 results operations cash flows three years period ended december 31 2007 conformity accounting principles generally accepted united states america also opinion company maintained material respects effective internal control financial reporting december 31 2007 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso company’s management responsible financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report internal control financial reporting appearing item 9a responsibility express opinions financial statements company’s internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions discussed note 1 consolidated financial statements company changed manner accounts uncertain tax positions 2007 changed manner accounts sharebased compensation 2006 changed manner accounts defined benefit pension postretirement plans december 31 2006 company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp dallas texas february 27 2008 flowserve corporation consolidated balance sheets see accompanying notes consolidated financial statements flowserve corporation consolidated statements income see accompanying notes consolidated financial statements flowserve corporation consolidated statements comprehensive income loss see accompanying notes consolidated financial statements flowserve corporation consolidated statements shareholders’ equity see accompanying notes consolidated financial statements flowserve corporation consolidated statements cash flows see accompanying notes consolidated financial statements flowserve corporation notes consolidated financial statements december 31 2007 2006 three years ended december 31 2007 1 significant accounting policies accounting developments produce engineered industrial pump systems engineered industrial valves control valves actuators controls mechanical seals auxiliary systems provide range related flow management services worldwide primarily process industries equipment manufactured serviced us predominantly used industries deal difficulttohandle corrosive fluids well environments extreme temperatures pressure horsepower speed business affected economic conditions united states “us” countries products sold serviced cyclical nature oil gas chemical power water industries served relationship us dollar currencies demand pricing customers’ end products certain reclassifications made prior period amounts conform current period presentation principles consolidation consolidated financial statements include accounts company wholly majorityowned subsidiaries addition consolidate variable interest entities deemed primary beneficiary minority interests nonaffiliated parties recognized majorityowned consolidated subsidiaries intercompany profits transactions balances among consolidated entities eliminated consolidated financial statements investments unconsolidated affiliated companies represent noncontrolling ownership interests 20 50 accounted using equity method approximates equity interest underlying equivalent net book value accounting principles generally accepted united states america “gaap” investments interests less 20 investee accounted cost method whereby income recognized event dividend receipt investments accounted cost method tested annually impairment use estimates process preparing financial statements conformity gaap requires management make estimates assumptions affect reported amounts certain assets liabilities revenues expenses management believes estimates assumptions reasonable however actual results may differ materially estimates significant estimates assumptions made management used determining • revenue recognition net liquidated damages delivery penalties • income taxes deferred taxes tax valuation allowances tax reserves • reserves contingencies • retirement postretirement benefits • valuation goodwill indefinitelived intangible assets longlived assets revenue recognition revenues product sales recognized risks rewards ownership transferred customers based contractual delivery terms agreed customer fulfillment inconsequential perfunctory actions addition policy requires persuasive evidence arrangement fixed determinable sales price reasonable assurance collectibility contracts containing multiple elements determinable fair value recognize revenue amount equal element’s pro rata share contract’s fair value accordance contractual delivery terms element freight charges billed customers included sales related shipping costs included cost sales consolidated statements income revenues longterm contracts include contracts exceed certain internal thresholds regarding size duration project provide receipt progress billings customer recorded percentage completion method progress measured costtocost basis percentage completion revenue represents less 14 consolidated sales year presented flowserve corporation notes consolidated financial statements continued revenue service repair contracts recognized services agreed customer rendered revenues generated fixed fee service repair contracts recognized ratable basis term contract contracts range duration generally extend five years fixed fee service contracts represent less 1 consolidated sales year presented certain instances provide guaranteed completion dates terms contracts failure meet contractual delivery dates result late delivery penalties nonrecoverable costs instances payment costs deemed probable perform project profitability analysis accounting costs reduction realizable revenues could potentially cause estimated total project costs exceed projected total revenues realized project instances would record reserves cover excesses period determined would adversely affect results operations financial position circumstances total projected reduced revenues still exceed total projected costs incurrence unrealized incentive fees nonrecoverable costs generally reduces profitability project time subsequent revenue recognition reported results would change different estimates used contract costs different estimates used contractual contingencies cash equivalents place temporary cash investments financial institutions policy invest institutions instruments minimal credit risk market risk investments original maturity three months less purchased classified cash equivalents highly liquid principal values subject significant risk change due interest rate fluctuations restricted cash represents cash restricted factoring agreements certain contracts small portion payments received progress billings available use project reaches completion allowance doubtful accounts credit risk allowance doubtful accounts established based estimates amount uncollectible accounts receivable determined principally based upon aging accounts receivable also customer credit history industry market segment information economic trends conditions credit reports customer financial condition customer credit issues customer bankruptcies general economic conditions may also impact estimates credit risks mitigated diversity customer base across many different geographic regions performing creditworthiness analyses customers december 31 2007 2006 believe significant concentrations credit risk inventories related reserves inventories stated lowerofcost market cost determined firstin firstout method reserves excess obsolete inventories based upon assessment market conditions products determined historical usage estimated future demand due long life cycles products carry spare parts inventories historically low usage rates provide reserves inventory based demonstrated usage aging criteria income taxes deferred taxes tax valuation allowances tax reserves account income taxes asset liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases operating loss tax credit carryforwards deferred tax assets liabilities calculated using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized period includes enactment date record valuation allowances reflect estimated amount deferred tax assets may realized based upon analysis existing deferred tax assets net operating losses tax credits jurisdiction expectations ability utilize tax attributes review past current estimated future taxable income establishment tax strategies estimates could impacted changes amount geographical source future income results implementation alteration tax planning strategies statement financial accounting standards “sfas” 109 “accounting income taxes” requires us provide deferred taxes temporary differences associated investment foreign subsidiaries flowserve corporation notes consolidated financial statements continued financial reporting basis exceeds tax basis unless assert permanent reinvestment foreign jurisdictions pursuant accounting principles board opinion “apb” 23 “accounting income taxes special areas” financial reporting basis tax basis differences investments foreign subsidiaries consist unremitted earnings losses well foreign currency translation adjustments assert permanent reinvestment apb 23 basis differences three years reported period ended december 31 2007 recognized net deferred tax assets attributable unremitted earnings foreign currency translation adjustments foreign subsidiaries due estimated excess foreign tax credits attributes amount income taxes pay subject ongoing audits federal state foreign tax authorities often result proposed assessments significant judgment required determining income tax provisions evaluating tax positions establish reserves open tax years uncertain tax positions may subject challenge various tax authorities consolidated tax provision related accruals include impact reasonably estimable losses related interest penalties deemed appropriate january 1 2007 adopted financial accounting standards board “fasb” financial interpretation “fin” 48 “accounting uncertainty income taxes interpretation fasb statement 109” addresses determination whether tax benefits claimed expected claimed tax return recorded financial statements fin 48 may recognize tax benefit uncertain tax position likely tax position sustained examination taxing authorities determination based technical merits position presumes uncertain tax position examined relevant taxing authority full knowledge relevant information tax benefits recognized financial statements position measured based largest benefit greater fifty percent likelihood realized upon ultimate settlement fin 48 also provides guidance derecognition classification interest penalties income taxes accounting interim periods requires increased disclosures believe adequately provided reasonably foreseeable outcome related matters future results may include favorable unfavorable adjustments estimated tax liabilities extent expected tax outcome matters changes estimate impact income tax provision period determination made legal environmental accruals legal environmental reserves recorded based upon casebycase analysis relevant facts circumstances assessment potential legal obligations costs amounts relating legal environmental liabilities recorded probable loss incurred loss estimable assessments legal environmental costs based information obtained independent inhouse experts loss experience similar situations estimates may change future due new developments regarding facts circumstances matter warranty accruals warranty obligations based upon product failure rates materials usage service delivery costs analysis identified expected claims estimate cost resolve claims estimates expected claims generally factor historical claims known product issues warranty obligations based factors adjusted based historical sales trends preceding 24 months changes claim rates differences actual expected warranty costs sales trends facility rationalization activities could impact warranty obligation estimates might adverse effects consolidated results operations financial position insurance accruals insurance accruals recorded wholly partially selfinsured risks medical benefits workers’ compensation based upon analysis claim loss history insurance deductibles policy limits relevant factors estimates based upon information received actuaries insurance company adjusters independent claims administrators independent sources changes claims differences actual expected claim losses could impact future accruals flowserve corporation notes consolidated financial statements continued retirement obligations determination retirement postretirement benefits obligations based estimates made management consultation independent actuaries investment advisors inherent valuations key assumptions including discount rates expected return plan assets life expectancy assumed rates increase wages health care costs current market conditions including changes rates return interest rates medical inflation rates considered selecting assumptions prior december 31 2006 actuarial gains losses prior service costs disclosed recognized consolidated balance sheets upon adoption sfas 158 “employers’ accounting defined benefit pension postretirement plans amendment fasb statements 87 88 106 132r” effective december 31 2006 began recognizing costs consolidated balance sheets adjustment accumulated comprehensive loss effective january 1 2007 recognize actuarial gains losses prior service costs accumulated comprehensive loss arise valuation goodwill indefinitelived intangible assets longlived assets value goodwill indefinitelived intangible assets tested annually impairment december 31 whenever events circumstances indicate assets may impaired impairment goodwill indefinitelived intangibles assessed reporting unit level correlates operating segments consider operating segments constitute business discrete financial information management regularly reviews net realizable value longlived assets including property plant equipment reviewed periodically indicators potential impairment conditions present based upon assessment estimated future cash flows related assets property plant equipment depreciation property plant equipment stated historical cost less accumulated depreciation asset retirement obligations exist capitalized part carrying amount asset depreciated remaining useful life asset useful lives leasehold improvements lesser remaining lease term useful life improvement assets retired otherwise disposed costs related accumulated depreciation removed accounts resulting gains losses included operations period depreciation computed straightline method based estimated useful lives depreciable assets generally estimated useful lives assets costs related routine repairs maintenance expensed incurred internally developed software capitalize certain costs associated development internaluse software generally costs related significant software development projects amortized estimated useful life typically three five years upon implementation software intangible assets intangible assets excluding trademarks considered indefinite life consist primarily engineering drawings distribution networks software patents items amortized estimated useful lives generally ranging 3 40 years assets reviewed impairment whenever events circumstances indicate impairment may occurred deferred loan costs deferred loan costs consisting fees expenses associated debt financing amortized term associated debt using effective interest method additional amortization recorded periods optional prepayments debt made fair values financial instruments carrying amounts financial instruments approximate fair value december 31 2007 2006 derivatives hedging activities part risk management strategy enter derivative contracts mitigate certain financial risks related foreign currencies interest rates risk flowserve corporation notes consolidated financial statements continued management derivatives policy outlining conditions enter financial derivative transactions employ foreign currency economic hedging strategy minimize potential losses earnings cash flows unfavorable foreign currency exchange rate movements strategy also minimizes potential gains favorable exchange rate movements foreign currency exposures arise transactions including firm commitments anticipated transactions denominated currency entity’s functional currency translation foreigndenominated assets liabilities us dollars primary currencies operate addition us dollar euro british pound australian dollar canadian dollar brazilian real singapore dollar swedish krona indian rupee colombian peso enter interest rate swap agreements purpose hedging exposure floating interest rates certain portions debt policy achieve hedge accounting treatment requires us document relationships hedging instruments hedged items risk management objective strategy entering hedges whether intend designate formal hedge accounting relationship process includes linking derivatives designated formal hedge accounting relationship fair value cash flow foreign currency hedges 1 specific assets liabilities balance sheet 2 specific firm commitments forecasted transactions cases designate hedge assess inception hedge ongoing basis whether derivatives highly effective offsetting changes fair value cash flows hedged items whether derivatives may expected remain highly effective future periods failure demonstrate effectiveness offsetting exposures retroactively prospectively would cause us deem hedge ineffective derivatives recognized balance sheet fair values derivatives qualify hedge accounting elected apply hedge accounting includes substantially forward exchange contracts changes fair values derivatives recognized income expense net consolidated statements income inception new derivative contract formal hedge accounting elected policy requires us designate derivative 1 hedge forecasted transaction b variability cash flows received paid connection recognized asset liability “cash flow” hedge 2 foreign currency fair value “foreign currency” hedge changes fair value derivative highly effective documented designated qualified cash flow hedge extent hedge effective recorded comprehensive income loss earnings affected variability cash flows hedged transaction changes fair value foreign currency hedges recorded comprehensive income loss since satisfy accounting criteria cash flow hedge ineffectiveness represents amount changes fair value derivative mirror change cash flow forecasted transaction recorded current period earnings effective hedges changes value hedged item also recorded component comprehensive income loss underlying recognized balance sheet upon settlement realized gains losses recognized income expense net consolidated statements income discontinue hedge accounting • deem hedge ineffective determine designation derivative hedging instrument longer appropriate • derivative longer effectively offsets changes cash flows hedged item firm commitments contracts • derivative expires terminates sold • occurrence contracted committed transaction longer probable occur originally expected period hedge accounting discontinued derivative remains outstanding carry derivative estimated fair value balance sheet recognizing changes fair value current period earnings cash flowserve corporation notes consolidated financial statements continued flow hedge becomes ineffective deferred gains losses cash flow hedge remain accumulated comprehensive loss exposure relating item underlying hedge recognized becomes probable hedged forecasted transaction occur deferred gains losses hedging instrument recognized earnings immediately foreign currency translation assets liabilities foreign subsidiaries translated us dollars exchange rates prevailing balance sheet date income expenses translated average rates month translation gains losses generally reported component accumulated comprehensive loss transaction translation gains losses arising intercompany balances reported component accumulated comprehensive loss underlying transaction stems longterm equity investment debt designated due foreseeable future otherwise recognize transaction gains losses arising intercompany transactions component income intercompany balances longterm investment related designated due beyond foreseeable future may mitigate risk associated foreign currency fluctuations entering forward exchange contracts see note 8 discussion forward exchange contracts transactional currency gains losses arising transactions currencies sites’ functional currencies changes fair value forward exchange contracts qualify hedge accounting included consolidated results operations years ended december 31 2007 2006 2005 recognized gains losses 63 million 75 million 70 million amounts income expense net accompanying consolidated statements income stockbased compensation effective january 1 2006 adopted fair value recognition provisions sfas 123r “sharebased payment” using modified prospective application method therefore retrospectively adjusted results prior periods method stockbased compensation expense periods presented include compensation expense stockbased compensation awards granted prior yet vested date adoption based grant date fair value estimated accordance original provisions sfas 123 “accounting stockbased compensation” stockbased compensation expense stockbased compensation awards granted date adoption based grantdate fair value estimated accordance provisions sfas 123r policy set exercise price stock options closing price common stock new york stock exchange date grant date grants authorized board directors options expensed using graded vesting model whereby recognize compensation cost requisite service period separately vesting tranche award accordance sfas 123r adjust sharebased compensation least annually changes estimate expected equity award forfeitures based actual forfeiture experience conjunction adoption sfas 123r selected alternative transition method determine net excess tax benefits would qualified january 1 2006 see note 7 discussion stockbased compensation flowserve corporation notes consolidated financial statements continued earnings per share basic diluted earnings per share calculated follows options outstanding exercise price greater average market price common stock included computation diluted earnings per share weighted average number options totaled 0 02 million 2007 2006 2005 respectively research development expense research development costs charged expense incurred aggregate research development costs included selling general administrative expenses 400 million 297 million 243 million 2007 2006 2005 respectively costs incurred research development primarily include salaries benefits consumable supplies well rent professional fees utilities depreciation property equipment used research development activities business combinations business combinations referred financial statements used purchase method accounting allocate purchase price identifiable tangible intangible assets liabilities recognizing goodwill purchase price exceeds fair value identifiable assets net liabilities assumed accounting developments pronouncements implemented february 2006 fasb issued sfas 155 “accounting certain hybrid financial instruments” amends sfas 133 “accounting derivative instruments hedging activities” sfas 140 “accounting transfers servicing financial assets extinguishments liabilities” sfas 155 improves financial reporting certain hybrid financial instruments simplifies accounting instruments particular sfas 155 • permits fair value remeasurement hybrid financial instrument contains embedded derivative otherwise would require bifurcation • clarifies interestonly principalonly strips subject requirements sfas 133 flowserve corporation notes consolidated financial statements continued • establishes requirement evaluate interests securitized financial assets identify interests freestanding derivatives hybrid financial instruments contain embedded derivative requiring bifurcation • clarifies concentrations credit risk form subordination embedded derivatives • amends sfas 140 eliminate prohibition qualifying specialpurpose entity holding derivative financial instrument pertains beneficial interest another derivative financial instrument sfas 155 effective financial instruments acquired issued beginning entity’s fiscal year begins september 15 2006 adoption sfas 155 effective january 1 2007 impact consolidated financial condition results operations march 2006 fasb issued sfas 156 “accounting servicing financial assets amendment statement 140” sfas 156 clarifies obligation service financial assets separately recognized servicing asset servicing liability requires separately recognized servicing asset servicing liability initially measured fair value permits entity separately recognized servicing asset servicing liability choose either amortization method fair value method subsequent measurement sfas 156 effective separately recognized servicing assets liabilities acquired issued beginning entity’s fiscal year begins september 15 2006 adoption sfas 156 effective january 1 2007 impact consolidated financial condition results operations march 2006 emerging issues task force “eitf” issued eitf issue 0603 “how taxes collected customers remitted governmental authorities presented income statement gross versus net presentation” eitf 0603 requires presentation taxes assessed governmental authority directly imposed revenueproducing transaction seller customer either gross included revenues costs net excluded revenues basis accounting policy decision disclosed pursuant accounting principles board opinion “apb” 22 “disclosure accounting policies” addition taxes reported gross basis company disclose aggregated basis amounts taxes interim annual financial statements period income statement presented amounts significant eitf issue 0603 effective interim annual reporting periods beginning december 31 2006 historically presented taxes net basis within results operations adoption eitf issue 0603 effective january 1 2007 material impact consolidated financial position results operations july 2006 fasb issued fin 48 clarifies accounting uncertainty income taxes recognized enterprise’s financial statements accordance sfas 109 fin 48 also prescribes recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return well guidance derecognition classification interest penalties accounting interim periods disclosure transition evaluation tax position accordance fin 48 twostep process first step recognition process whereby enterprise determines whether morelikelythannot tax position sustained upon examination including resolution related appeals litigation processes based technical merits position second step measurement process whereby tax position meets morelikelythannot recognition threshold calculated determine amount benefit recognize financial statements provisions fin 48 effective fiscal years beginning december 15 2006 impact consolidated financial condition results operations adopting fin 48 effective january 1 2007 presented note 16 pronouncements yet implemented september 2006 fasb issued sfas 157 “fair value measurements” sfas 157 establishes single definition fair value framework measuring fair value accounting principles generally flowserve corporation notes consolidated financial statements continued accepted united states “gaap” expands disclosures fair value measurements sfas 157 applies accounting pronouncements require permit fair value measurements however require new fair value measurements sfas 157 effective financial statements issued fiscal years beginning november 15 2007 february 2007 fasb issued fasb staff position fas 1752 “effective date fasb statement 157” delays effective date sfas 157 nonfinancial assets liabilities fiscal years beginning november 15 2008 expect adoption sfas 157 amended material impact consolidated financial condition results operations february 2007 fasb issued sfas 159 “the fair value option financial assets financial liabilities including amendment fasb statement 115” sfas 159 permits entities choose measure many financial instruments certain items fair value currently required measured fair value provides entities opportunity mitigate volatility reported earnings caused measuring related assets liabilities differently without apply complex hedge accounting provisions sfas 159 effective fiscal years beginning november 15 2007 expect adoption sfas 159 material impact consolidated financial condition results operations currently invest types instruments within scope pronouncement december 2007 fasb issued sfas 141r “business combinations” sfas 141r establishes principles requirements acquirer business combination recognizes measures identifiable assets acquired liabilities assumed noncontrolling interest acquiree goodwill acquired expands disclosures business combinations sfas 141r requires acquirer recognize changes valuation allowances acquired deferred tax assets recognized operations changes deferred tax benefits previously recognized corresponding reduction goodwill exception provisions regarding acquired deferred taxes applicable business combinations sfas 141r applies prospectively business combinations acquisition date beginning first annual reporting period beginning december 15 2008 early adoption permitted still evaluating impact sfas 141r consolidated financial condition results operations december 2007 fasb issued sfas 160 “noncontrolling interests consolidated financial statements amendment arb 51” sfas 160 establishes accounting reporting standards require • ownership interests subsidiaries held parties parent clearly identified labeled presented consolidated balance sheet within equity separate parent’s equity • amount consolidated net income attributable parent noncontrolling interest clearly identified presented face consolidated statement income • changes parent’s ownership interest parent retains controlling financial interest subsidiary accounted consistently • subsidiary deconsolidated retained noncontrolling equity investment former subsidiary initially measured fair value • entities provide sufficient disclosures clearly identify distinguish interests parent interests noncontrolling owners sfas 160 effective fiscal years interim periods within fiscal years beginning december 15 2008 early adoption permitted sfas 160 shall applied prospectively beginning fiscal year initially applied except presentation disclosure requirements presentation disclosure requirements shall applied retrospectively periods presented still evaluating impact sfas 160 consolidated financial condition results operations although final pronouncements recently issued adopted expect impact reported financial information disclosures accounting promulgating bodies number pending flowserve corporation notes consolidated financial statements continued projects may directly impact us continue evaluate status projects become final provide disclosures regarding likelihood magnitude impact 2 dispositions 2007 sold certain noncore assets aggregate sales proceeds 134 million largest sale occurred december 2007 sold noncore assets related rail operations wholly owned australian subsidiary thompsons kelly lewis pty ltd “tkl” 129 million recorded pretax gain 59 million allocation 21 million flowserve pump division goodwill gain included reduction selling general administrative expense consolidated statement income rail assets meet definition discontinued operation tkl rail operations part larger australian pump business rail assets material consolidated financial condition results operations pump assets tkl retained remain core part business general services group first quarter 2005 committed plan divest certain noncore service operations collectively called general services group “gsg” accordingly evaluated impairment pursuant heldforsale concept opposed previously heldandused concept part decision sell allocated 123 million goodwill gsg based relative fair value division’s estimated fair value recognized impairment charges goodwill property plant equipment 2005 aggregating 301 million relating gsg number potential buyers diminished one purchaser bidding process business underperformed year due part pending sale december 31 2005 sold gsg furmanite unit dallasbased xanser corporation contingent sales price 155 million gross cash proceeds including 20 million held escrow pending final settlement excluding approximately 12 million net accounts receivable utilizing 155 million contingent sales price sale resulted loss 25 million 38 million pretax recognized fourth quarter 2005 third quarter 2006 recognized 08 million 11 million pretax reduction loss independent arbitrator issued binding decision respect valuation inventory resolved one element contingent sales price fourth quarter 2006 negotiated final sales price 171 million whereby recognized additional reduction loss sale 02 million 05 million pretax bringing aggregate loss sale recognized 2006 2005 15 million 22 million pretax remaining amounts due us terms sale collected december 2006 used 109 million initial net cash proceeds reduce indebtedness january 2006 additional 35 million december 2006 using final proceeds collected pursuant sale transaction allocated estimated interest expense related repayment discontinued operations 2005 based upon prevailing interest rates result sale presented results operations gsg discontinued operations gsg generated following results operations year ended december 31 2005 flowserve corporation notes consolidated financial statements continued 3 acquisitions regularly evaluate acquisition opportunities various sizes 2007 completed one small acquisition 23 million 2006 completed four small asset acquisitions aggregate purchase price 80 million assets acquired primarily include inventory fixed assets intangible assets acquisitions immaterial individually aggregate thus pro forma financial information presented 4 goodwill intangible assets following table provides information changes 2007 intangible assets following table provides information changes 2006 intangible assets 1 engineering drawings represent estimated fair value associated specific acquired product component schematics 2 accumulated amortization indefinitelived intangible assets relates amounts recorded prior implementation date sfas 142 “goodwill intangible assets” 3 2007 flow control division wroteoff expired fully amortized noncompete agreement 4 2006 flow solutions division acquired certain intangible assets flowserve corporation notes consolidated financial statements continued following schedule outlines actual amortization recognized 2007 estimate future amortization based upon finitelived intangible assets owned december 31 2007 changes carrying amount goodwill years ended december 31 2007 2006 follows 5 factoring accounts receivable european subsidiaries engage nonrecourse factoring certain accounts receivable various agreements different terms including options renewal mutual termination clauses credit facilities fully described note 11 limit factoring volume 750 million given point time defined credit facilities aggregate cash received factored receivables outstanding december 31 2007 2006 totaled 639 million 691 million respectively represent factor’s purchase 684 million 767 million receivables respectively 2007 factoring agreements worldwide recognized losses approximately 45 million factoring receivables compares total loss 28 million 23 million 2006 2005 respectively flowserve corporation notes consolidated financial statements continued 6 inventories net consisted following 2007 2006 2005 recognized expenses 89 million 63 million 91 million respectively obsolete excess inventory expenses included cost sales consolidated statements income 7 stockbased compensation plans restricted stock option plans flowserve corporation 2004 stock compensation plan “2004 plan” established april 21 2004 authorized issuance 3500000 shares common stock grants restricted stock options equitybased awards 3500000 shares common stock authorized 2004 plan 1445653 remain available issuance addition 2004 plan maintain shareholderapproved plans permit issuance common stock grants various equitybased awards december 31 2007 138690 shares common stock remained available stock option grants plans options granted officers employees directors allow purchase common shares market value stock date options granted although options granted market value generally options whether granted 2004 plan previously approved plans become exercisable staggered period ranging one five years typically one three years options generally expire ten years date grant within short period time following termination employment cessation services option holder however described greater detail “modifications” expiration provisions relating certain outstanding option awards modified 2006 adopted sfas 123r january 1 2006 prior january 1 2006 accounted stockbased compensation using intrinsic value method set forth apb 25 “accounting stock issued employees” related interpretations permitted sfas 123 accordingly recognized compensation expense restricted stock equity awards applicable vesting period however recognize compensation expense stock options year ended december 31 2005 options granted market value date grant subsequent adoption sfas 123r january 1 2006 modified prospective method recorded stockbased compensation follows flowserve corporation notes consolidated financial statements continued 1 includes 38 million 56 million pretax modification charge recorded august 2006 discussed “modifications” since charge would recognized accordance fin 44 “accounting certain transactions involving stock compensation interpretation apb opinion 25” would approximated charge recognized accordance sfas 123r following table illustrates effect stockbased compensation net earnings per share applied fair value recognition provisions sfas 123 stockbased employee compensation calculated using blackscholes optionpricing model year ended december 31 2005 stock options information related stock options issued officers employees directors plans presented following table 1 options originally expiring 2005 expiration dates extended contingent upon shareholder approval obtained august 24 2006 discussed “modifications” options granted 2007 weighted average fair value per share options granted 2484 1462 years ended december 31 2006 2005 respectively purposes pro forma disclosure estimated fair value options amortized expense options’ vesting periods “fair value” options date grant estimated using blackscholes option pricing model flowserve corporation notes consolidated financial statements continued additional information relating ranges options outstanding december 31 2007 follows options granted 2007 fair value option awarded 2006 2005 estimated date grant using blackscholes option pricing model using assumptions noted following table riskfree rate periods within contractual life option based us treasury yield curve effect time grant dividend yield zero declare dividends 2006 2005 stock volatility determined based historical price fluctuations stock expected life stock options granted based 10year history timing stock option exercises forfeiture rate based unvested options forfeited compared original total options granted rolling 10year period excluding significant forfeiture events expected recur december 31 2007 18 million unrecognized compensation cost related outstanding unvested stock option awards expected recognized weightedaverage period approximately 09 years weighted average remaining contractual life options outstanding december 31 2007 2006 72 years 68 years respectively total intrinsic value stock options exercised years ended december 31 2007 2006 2005 321 million 547 million 03 million respectively total fair value stock options vested years ended december 31 2007 2006 2005 55 million 34 million 23 million respectively incremental stockbased compensation expense related solely stock options recognized year ended december 31 2006 result modified prospective adoption sfas 123r 55 million 69 million pretax 010 per share excludes 56 million modification charge recorded august 2006 discussed “modifications” since charge would recognized accordance fin 44 would approximated charge recognized accordance sfas 123r restricted stock addition 2004 plan also restricted stock plans authorize us grant 2384 additional shares common stock units rights commensurate restricted stock employees flowserve corporation notes consolidated financial statements continued nonemployee directors general restrictions shares units expire minimum one year maximum ten years subject forfeiture restriction period typically restricted share grants staggered vesting periods one three years grant date intrinsic value shares units typically product share price date grant number shares units granted amortized straightline basis compensation expense periods restrictions lapse forfeiture rate based unvested restricted shares units forfeited compared original total restricted shares units granted 5year period excluding significant forfeiture events expected recur awards restricted stock valued closing market price common stock date grant unearned compensation amortized compensation expense vesting period restricted stock prior adoption sfas 123r unrecognized portion unearned compensation associated unvested restricted stock recognized reclassification within equity resulting net impact shareholders’ equity effective january 1 2006 amounts reversed net impact shareholders’ equity december 31 2007 2006 259 million 150 million respectively unearned compensation cost related unvested restricted stock expected recognized weightedaverage period approximately 17 years amounts recognized net earnings prospective periods awards vest total market value restricted shares units vested years ended december 31 2007 2006 2005 112 million 37 million 22 million respectively following tables summarize information regarding restricted stock plans unvested restricted stock outstanding december 31 2007 includes 360000 shares performancebased vesting provisions range 0 360000 shares based predefined performance targets performancebased restricted stock earned upon achievement performance targets issuable common shares compensation expense recognized 36month cliff vesting period based market value common stock date grant adjusted anticipated forfeitures performance period earned unearned compensation expense adjusted based changes expected achievement performance targets modifications 2005 made number modifications stock plans including acceleration vesting certain restricted stock grants outstanding options well extension exercise period associated certain outstanding options modifications resulted severance agreements former executives decision temporarily suspend option exercises result modifications primarily associated severance agreements former executives recorded additional stockbased compensation expense 2005 72 million based upon intrinsic values awards dates modifications made june 1 2005 took action extend december 31 2006 regular term certain options granted employees including executive officers qualified retirees directors scheduled expire 2005 november 4 2005 took subsequent action extend exercise date options expiring 2006 january 1 2009 thereafter concluded however recent regulatory guidance issued flowserve corporation notes consolidated financial statements continued section 409a internal revenue code might cause recipients extended options become subject unintended adverse tax consequences section 409a accordingly effective december 14 2005 organization compensation committee board directors partially rescinded accordance regulations extensions regular term options provide follows regular term options otherwise expiring 2005 expired october 29 2006 ii regular term options otherwise expiring 2006 expired later 1 75 days regular term option originally granted expires 2 december 31 2006 extensions subject shareholder approval applicable plan amendments obtained annual shareholders’ meeting held august 24 2006 approval plan amendments considered stock modification financial reporting purposes subject recognition noncash compensation charge accordance sfas 123r recorded charge 56 million 2006 earlier extension actions also extended option exercise period available following separation employment reasons death disability termination cause certain voluntary separations separate extensions partially rescinded december 14 2005 meeting organization compensation committee board directors revised currently effective subject shareholder approval exercise period available following employment separations extended later 30 days options first became exercisable sec filings first became current effective sec form s8 registration statement filed sec occurred september 29 2006 ii period available exercise following separation employment terms option originally granted extension considered financial reporting purposes stock modification subject recognition noncash compensation charge accordance apb 25 10 million 2005 extension exercise period following separation employment apply option exercise periods governed separate separation contract agreement 8 derivatives hedging activities enter forward exchange contracts hedge risks associated transactions denominated currencies local currency operation engaging transaction risk management derivatives policy specifies conditions may enter derivative contracts december 31 2007 2006 4649 million 4337 million respectively notional amount outstanding forward contracts third parties december 31 2007 length forward exchange contracts currently place ranged 2 days 20 months fair market value adjustments forward contracts recognized directly current period earnings fair value outstanding forward contracts december 31 2007 2006 net asset 66 million 34 million respectively realized unrealized gains losses changes fair value forward contracts 57 million 58 million 52 million years ended december 31 2007 2006 2005 respectively included income expense net consolidated statements income also part risk management program enter interest rate swap agreements hedge exposure floating interest rates certain portions debt december 31 2007 2006 3950 million 4350 million respectively notional amount outstanding interest rate swaps third parties december 31 2007 maximum remaining length interest rate contract place approximately 33 months fair value interest rate swap agreements net liability 41 million net asset 19 million december 31 2007 2006 respectively unrealized losses gains changes fair value interest rate swap agreements net reclassifications 39 million 07 million net tax years ended december 31 2007 2006 respectively included comprehensive income loss flowserve corporation notes consolidated financial statements continued 2004 entered compound derivative contract hedge exposure currency translation interest rate risks associated eib credit facility notional amount derivative 850 million served convert floating rate interest rate risk fixed rate well us dollar currency risk euros repaid amounts outstanding facility december 15 2006 realized foreign transaction gain 85 million also settled derivative loss 99 million gain derivative along foreign transaction gain underlying loan aggregate 33 million 02 million years ended december 31 2006 2005 respectively included income expense net consolidated statements income exposed risk creditrelated losses resulting nonperformance counterparties financial instruments perform credit evaluations counterparties forward contracts interest rate swap agreements expect counterparties meet obligations experienced credit losses counterparties hedging related transactions recorded comprehensive income expense net deferred taxes summarized expect recognize 15 million 10 million 01 million net deferred taxes earnings 2008 2009 2010 respectively related interest rate swap agreements based fair values december 31 2007 9 details certain consolidated balance sheet captions following tables present financial information certain consolidated balance sheet captions accounts receivable net accounts receivable net flowserve corporation notes consolidated financial statements continued property plant equipment net property plant equipment net depreciation expense continuing operations amount 495 million 467 million 469 million years ended december 31 2007 2006 2005 respectively included cost sales consolidated statements income remaining depreciation expense included selling general administrative expense assets net assets net accrued liabilities accrued liabilities accrued liabilities include professional fees derivative liabilities lease obligations freight items none individually exceed 5 current liabilities flowserve corporation notes consolidated financial statements continued retirement obligations liabilities retirement obligations liabilities noncurrent liabilities includes reserves legal environmental matters reserves uncertain tax positions items none individually exceed 5 total liabilities see note 16 discussion uncertain tax positions 10 equity method investments summarized combined balance sheet income statement information based recent financial information investments entities account using equity method unaudited provision income taxes based tax laws rates countries investees operate taxation regimes vary nominal rates also allowability deductions credits benefits flowserve corporation notes consolidated financial statements continued reconciliation net income per combined income statement information equity income investees per consolidated statements income follows 11 debt lease obligations debt including capital lease obligations consisted scheduled maturities credit facilities described well capital lease obligations next five years beyond credit facilities august 12 2005 entered credit facilities comprised 6000 million term loan maturing august 10 2012 4000 million revolving line credit utilized provide 3000 million letters credit expiring august 12 2010 refer credit facilities collectively credit facilities used proceeds borrowings credit facilities refinance 1225 senior subordinated notes indebtedness outstanding previous credit facilities replaced letter credit agreement guaranteed eib credit facility described letter credit issued part credit facilities august 6 2007 amended credit facilities among things reduce applicable margin applied borrowings revolving line credit well extend maturity date revolving line credit two years august 12 2012 amendment also eliminates mandatory debt repayment requirements restriction capital expenditures amendment replaces dollar limitation flowserve corporation notes consolidated financial statements continued acquisitions certain restricted payments limitation based pro forma compliance required leverage ratio cases borrowings credit facilities bear interest rate equal option either 1 base rate based greater prime rate recently announced administrative agent credit facilities federal funds rate plus 050 2 london interbank offered rate “libor” plus applicable margin determined reference ratio total debt consolidated earnings interest taxes depreciation amortization “ebitda” december 31 2007 100 150 borrowings revolving line credit term loan respectively addition pay lenders credit facilities commitment fee equal percentage determined reference ratio total debt consolidated ebitda unutilized portion revolving line credit letter credit fees respect financial standby letter credit outstanding credit facilities equal percentage based applicable margin effect libor borrowings new revolving line credit fee performance standby letters credit 05 lower fee financial standby letters credit december 31 2007 2006 amounts outstanding revolving line credit outstanding letters credit 1151 million 839 million december 31 2007 2006 respectively reduced borrowing capacity 2849 million 3161 million respectively connection credit facilities entered 3950 million notional amount interest rate swaps december 31 2007 hedge exposure floating interest rates incurred 93 million fees related credit facilities 08 million expensed 2005 based upon final syndicate financial institutions credit facilities expensed 105 million unamortized deferred loan costs 2005 addition total loan costs 113 million expensed recorded charge 164 million premiums paid call senior subordinated notes total loss extinguishment 277 million recorded 2005 remaining 85 million fees related credit facilities capitalized combined remaining 13 million previously unamortized deferred loan costs total 98 million deferred loan costs included assets net costs amortized term credit facilities obligations credit facilities unconditionally guaranteed jointly severally substantially existing subsequently acquired organized domestic subsidiaries 65 capital stock certain foreign subsidiaries addition prior obtaining maintaining investment grade credit ratings guarantors’ obligations credit facilities collateralized substantially guarantors’ assets may prepay loans credit facilities whole part without premium penalty credit facilities contain among things covenants restricting subsidiaries’ ability dispose assets merge pay dividends repurchase redeem capital stock indebtedness incur indebtedness guarantees create liens enter agreements negative pledge clauses make certain investments acquisitions enter sale leaseback transactions enter transactions affiliates make capital expenditures engage business activity existing business credit facilities also contain covenants requiring us deliver lenders audited annual unaudited quarterly financial statements leverage interest coverage financial covenants leverage covenant maximum permitted leverage ratio stepped fourth quarter 2006 august 7 2007 credit facilities amended among things permit maximum leverage ratio 325 times debt ebitda reductions interest coverage covenant minimum required interest coverage ratio stepped fourth quarter 2006 stepup beginning fourth quarter 2007 compliance financial covenants credit facilities tested quarterly credit facilities include events default usual types credit facilities including nonpayment principal interest violation covenants incorrectness representations warranties cross defaults cross acceleration bankruptcy material judgments employee retirement income security act 1974 flowserve corporation notes consolidated financial statements continued amended “erisa” events actual asserted invalidity guarantees security documents certain changes control company occurrence event default could result acceleration guarantors’ obligations credit facilities complied covenants december 31 2007 european letter credit facility september 14 2007 entered unsecured european loc issue letters credit aggregate face amount exceed 1500 million time initial commitment 800 million aggregate commitment european loc may increased 1500 million may agreed among parties may decreased us option without premium fee penalty european loc used contingent obligations solely respect surety performance bonds bank guarantees similar obligations outstanding letters credit drawn european loc 350 million december 31 2007 pay certain fees letters credit written european loc based upon ratio total debt consolidated ebitda december 31 2007 annual fees equaled 05 plus fronting fee 01 eib credit facility august 2004 borrowed 850 million floating interest rate based 3month us libor reset quarterly repaid outstanding principal balance terminated facility december 15 2006 using cash generated operations result repayment incurred expenses 05 million related writeoff unamortized deferred financing costs concurrent borrowing 850 million entered derivative contract third party financial institution swapped principal amount 706 million fixed libor portion interest rate fixed interest rate 419 scheduled repayment date apply hedge accounting derivative contract unrealized gain loss derivative foreign currency transaction gain underlying loan included income expense net consolidated statements income discussed fully note 8 settled derivative concurrent repayment underlying loan repayment obligations made scheduled repayments 28 million 0 15 million 2007 2006 2005 respectively made mandatory repayments 0 153 million 0 2007 2006 2005 respectively mandatory repayments 2006 consisted 144 million using net cash proceeds sale gsg 09 million using excess cash flows defined credit facilities made optional prepayments 2007 2006 made optional prepayments 50 million credit facilities terminated eib credit facility repaid outstanding principle balance 850 million 2005 made optional prepayments 200 million credit facilities optional payments 184 million financing arrangements operating leases noncancelable operating leases certain offices service quick response centers certain manufacturing operating facilities machinery equipment automobiles rental expense relating operating leases 393 million 2007 293 million 2006 221 million 2005 future minimum lease payments due noncancelable operating leases flowserve corporation notes consolidated financial statements continued 12 retirement postretirement benefits sponsor several noncontributory defined benefit pension plans covering substantially us employees certain nonus employees provide benefits based years service job grade levels type compensation retirement benefits covered employees provided contributory pension plans cash balance pension plans governmentsponsored retirement programs funded defined benefit pension plans receive funding based independent actuarial valuations provide current service amount sufficient amortize unfunded prior service periods exceed 30 years funding falling within legal limits proscribed prevailing regulation also maintain unfunded defined benefit plans permitted local regulations receive funding benefits become due periods presented used measurement date december 31 worldwide pension plans postretirement medical plans us defined benefit plans maintain qualified nonqualified defined benefit pension plans us qualified plan provides coverage substantially fulltime us employees receive benefits earnings threshold specified us department labor qualified plan designed operate “cash balance” arrangement accumulated benefit obligation equivalent projected benefit obligation nonqualified plans primarily cover small number employees including current former members senior management providing benefit levels equivalent participants otherwise limited us department labor rules net defined benefit pension expense us defined benefit pension plans including qualified nonqualified plans settlement curtailment expense 2005 associated sale gsg discussed note 2 partially offset departure former executives estimated prior service benefit defined benefit pension plans amortized accumulated comprehensive loss us pension expense 2008 13 million estimated net loss defined benefit pension plans amortized accumulated comprehensive loss us pension expense 2008 43 million flowserve corporation notes consolidated financial statements continued following summarizes net pension liability us plans following summarizes amounts recognized balance sheet us plans following table shows change accumulated comprehensive loss attributable components net cost change benefit obligations us plans flowserve corporation notes consolidated financial statements continued following assumptions related us defined benefit pension plans increased discount rate 575 december 31 2006 625 december 31 2007 reflect current interest rate environment expected benefit payment streams regularly evaluate assumptions asset returns discount rates based variety factors based results pension plan asset returns 2006 anticipated future return increased assumed rate return assets 750 2006 775 2007 expected longterm rate return assets determined assessing rates return targeted asset class return premiums generated active portfolio management following summary changes us defined benefit plans’ pension obligations 1 increase plan amendments 2007 represents accelerated vesting schedule adopted year 2 increase actuarial gain 2007 primarily reflects increase discount rate partially offset unfavorable change demographics following reconciliation us defined benefit pension plans’ assets contributed 161 million 363 million us defined benefit pension plans 2007 2006 respectively payments exceeded minimum funding requirements mandated us department labor rules 2007 returns pension plan assets slightly lower anticipated 2006 returns pension plan assets greater anticipated flowserve corporation notes consolidated financial statements continued although still working actuaries determine estimated funding beyond 2007 following table summarizes expected cash activity us defined benefit pension plans future millions asset allocation us defined benefit pension plans end 2007 2006 target allocation 2008 asset category follows believe common stock directly held plans investment strategy invest various securities order pay retirement benefits plan participants minimizing cash contributions life plan accomplished preserving capital diversified investments high quality instruments earning longterm rate return consistent acceptable degree risk taking account liquidity needs plan investment policy invest approximately 65 plan assets equity securities 25 fixed income securities 10 assets within investment category assets allocated various investment styles professional money management firms manage assets engage consultant assist evaluating activities periodically review investment policy generally conjunction asset liability study also regularly rebalance actual allocation target investment allocation nonus defined benefit plans maintain defined benefit pension plans cover employees following countries austria canada france germany india indonesia italy japan mexico netherlands sweden united kingdom net defined benefit pension expense nonus pension plans 1 increase settlement curtailment benefits 2006 due conversion defined benefit plan canada defined contribution plan flowserve corporation notes consolidated financial statements continued estimated net loss defined benefit pension plans amortized accumulated comprehensive loss nonus expense 2008 04 million following summarizes net pension liability nonus plans following summarizes amounts recognized balance sheet nonus plans following table shows change accumulated comprehensive loss attributable components net cost change benefit obligations nonus plans flowserve corporation notes consolidated financial statements continued following assumptions related nonus defined benefit pension plans many nonus defined benefit plans unfunded permitted local regulation expected longterm rate return assets funded plans determined assessing rates return asset class return premiums generated active investment management following reconciliation nonus plans’ defined benefit pension obligations 1 plan settlement 2006 represents conversion defined benefit plan canada defined contribution plan 2 increase actuarial gain 2007 primarily reflects increase discount rate flowserve corporation notes consolidated financial statements continued following reconciliation nonus plans’ defined benefit pension assets 1 plan settlement 2006 represents conversion defined benefit plan canada defined contribution plan following table summarizes expected cash activity nonus defined benefit plans future millions asset allocations nonus defined benefit pension plans end 2007 2006 follows believe common stock held directly plans cases investment strategy plans invest various securities order pay retirement benefits plan participants minimizing required cash contributions life plan accomplished preserving capital diversification high quality investments earning longterm rate return consistent acceptable degree risk legal requirements particular country taking account liquidity needs plan asset allocation differs plan based upon plan’s projected benefit obligation participants well results asset liability studies conducted plan professional money management firms manage plan assets engage consultants country assist evaluation activities flowserve corporation notes consolidated financial statements continued defined benefit plans accumulated benefit obligations excess plan assets following summarizes key pension plan information regarding plans whose accumulated benefit obligations exceed fair value respective plan assets postretirement medical plans sponsor several defined benefit postretirement health care plans covering current retirees limited number future retirees us plans provide medical dental benefits administered insurance companies health maintenance organizations plans include participant contributions deductibles coinsurance provisions limitations integrated medicare group plans fund plans benefits paid incur health maintenance organization premiums plans hold assets period presented accordingly investment strategy targeted allocations plan assets benefits postretirement medical plans available new employees existing employees net postretirement benefit expense postretirement medical plans estimated prior service benefit postretirement medical plans amortized accumulated comprehensive loss us pension expense 2008 25 million estimated net loss postretirement medical plans amortized accumulated comprehensive loss us expense 2008 01 million following summarizes accrued postretirement benefits postretirement medical plans flowserve corporation notes consolidated financial statements continued following summarizes amounts recognized balance sheet postretirement benefits following table shows change accumulated comprehensive loss attributable components net cost change benefit obligations postretirement benefits following reconciliation accumulated postretirement benefits obligation 1 increase actuarial gain 2007 compared 2006 primarily reflects increase discount rate favorable demographic experience following presents expected benefit payments future periods flowserve corporation notes consolidated financial statements continued following assumptions related postretirement benefits assumed ranges annual rates increase per capita costs periods prior medicare 88 2007 90 2006 80 2005 gradual decrease 50 2012 future years assumed heath care cost trend rates effect amounts reported postretirement medical plans onepercentage point change assumed health care cost trend rates would following effect 2007 reported amounts made contributions postretirement medical plans pay benefits 66 million 2007 64 million 2006 82 million 2005 postretirement medical plans unfunded make contributions covered individuals’ claims approved payment accordingly contributions period directly correlated benefits paid defined contribution plans sponsor several defined contribution plans covering substantially us canadian employees certain nonus employees may contribute plans contributions matched varying amounts us including opportunities discretionary matching contributions us defined contribution plan expense 80 million 2007 68 million 2006 76 million 2005 participants us defined contribution plan option invest common stock discretionary contributions us typically funded common stock therefore plans assets include holdings common stock 13 legal matters contingencies asbestos related claims defendant large number pending lawsuits include many cases multiple claimants seek recover damages personal injury allegedly caused exposure asbestoscontaining products manufactured andor distributed us past aggregate number asbestosrelated claims us declined recent years assurance trend continue asbestos associated products encapsulated used components process equipment believe significant emission asbestos fibers occurred use equipment believe high percentage claims covered applicable insurance indemnities companies shareholder litigation appeal dismissed class action derivative cases 2003 related lawsuits filed federal court northern district texas “court” alleging violated federal securities laws cases consolidated lead plaintiff amended complaint several times lead plaintiff’s last pleading fifth consolidated amended complaint “complaint” complaint alleged federal securities violations occurred february 6 2001 flowserve corporation notes consolidated financial statements continued september 27 2002 named defendants company c scott greer former chairman president chief executive officer renee j hornbaker former vice president chief financial officer pricewaterhousecoopers llp independent registered public accounting firm banc america securities llc credit suisse first boston llc served underwriters two public stock offerings relevant period complaint asserted claims sections 10b 20a securities exchange act 1934 “exchange act” rule 10b5 thereunder sections 11 15 securities act 1933 “securities act” lead plaintiff sought unspecified compensatory damages forfeiture mr greer ms hornbaker unspecified incentivebased equitybased compensation profits stock sales recovery costs orders dated november 13 2007 january 4 2008 court denied plaintiffs’ motion class certification granted summary judgment favor defendants claims plaintiffs appealed rulings defend vigorously appeal effort plaintiffs overturn court’s denial class certification entry judgment favor defendants 2005 shareholder derivative lawsuit filed purportedly behalf 193rd judicial district dallas county texas lawsuit originally named defendants mr greer ms hornbaker former current board members hugh k coble george haymaker jr william c rusnack michael f johnston charles rampacek kevin e sheehan diane c harris james rollans christopher bartlett named nominal defendant based primarily purported misstatements alleged abovedescribed federal securities case original lawsuit action asserted claims defendants breach fiduciary duty abuse control gross mismanagement waste corporate assets unjust enrichment plaintiff alleged purported violations state law occurred april 2000 date suit plaintiff seeks behalf unspecified amount damages injunctive relief andor imposition constructive trust defendants’ assets disgorgement compensation profits benefits received defendants us recovery attorneys’ fees costs filed motion seeking dismissal case court thereafter ordered plaintiffs replead october 11 2007 plaintiffs filed amended petition adding new claims following additional defendants kathy giddings former vicepresident corporate controller bernard g rethore former chairman chief executive officer banc america securities llc credit suisse first boston llc served underwriters public stock offerings november 2001 april 2002 pricewaterhousecoopers llp independent registered public accounting firm continue strongly believe case improperly filed motion seeking dismissal case march 14 2006 shareholder derivative lawsuit filed purportedly behalf federal court northern district texas lawsuit named defendants mr greer ms hornbaker former current board members mr coble mr haymaker mr lewis kling mr rusnack mr johnston mr rampacek mr sheehan ms harris mr rollans mr bartlett named nominal defendant based primarily certain purported misstatements alleged abovedescribed federal securities case plaintiff asserted claims defendants breaches fiduciary duty plaintiff alleged purported breaches fiduciary duty occurred 2000 2004 plaintiff sought behalf unspecified amount damages disgorgement mr greer ms hornbaker salaries bonuses restricted stock options recovery attorneys’ fees costs pursuant motion filed us federal court dismissed case march 14 2007 primarily basis case properly filed federal court march 27 2007 plaintiff refiled essentially lawsuit naming defendants supreme court state new york strongly believed new lawsuit improperly filed supreme court state new york filed motion seeking dismissal case january 2 2008 court entered order granting motion dismiss claims allowed plaintiffs opportunity replead notice entry dismissal order served plaintiffs january 15 2008 united nations oilforfood program resolved investigations securities exchange commission “sec” department justice “doj” relating products two foreign subsidiaries delivered iraq 1996 2003 united nations oilforfood program two foreign subsidiaries also contacted flowserve corporation notes consolidated financial statements continued governmental authorities respective countries concerning involvement united nations oilforfood program engaged outside counsel february 2006 conduct investigation foreign subsidiaries’ participation united nations oilforfood program outside counsel’s investigation found evidence years 2001 2003 certain nonus personnel two foreign subsidiaries authorized payments connection certain product sales united nations oilforfood program totaling approximately 600000 subsequently deposited third parties iraqicontrolled bank accounts payments authorized united nations oilforfood program properly documented foreign subsidiaries’ accounting records expensed paid negotiated settlement sec without admitting denying sec’s allegations agreed stipulated judgment enjoining us future violations internal control recordkeeping provisions federal securities laws ii pay disgorgement 2720861 plus prejudgment interest 853364 iii pay civil money penalty 3 million separately negotiated resolution doj resolution results deferred prosecution agreement pay monetary penalty 4000000 also believe dutch investigation effectively concluded resolved dutch subsidiary paying penalty approximately 265000 understand french investigation ongoing accordingly cannot predict outcome french investigation time french authorities take enforcement action regard investigation may subject additional monetary nonmonetary penalties recorded expenses approximately 11 million 2007 case resolution costs related legal fees foregoing “oilforfood” cases currently expect incur case resolution costs matter improved implemented new internal controls taken certain disciplinary actions persons engaged misconduct violated ethics policies failed cooperate fully investigation including terminating employment certain nonus senior management personnel one french subsidiaries nonus senior management personnel certain french dutch facilities involved conduct previously separated us reasons export compliance march 2006 initiated voluntary process determine compliance posture respect us export control economic sanctions laws regulations upon initial investigation appeared product transactions technology transfers handled full compliance us export control laws regulations result conjunction outside counsel currently involved voluntary systematic process conduct review validation voluntary disclosure apparent export violations discovered part review process completed approximately threefourths site visits scheduled part voluntary disclosure process currently believe process substantially complete results site visits fully analyzed end 2008 given complexity export laws current global scope investigation apparent violations us export control laws regulations identified confirmed disclosed us government may result civil criminal penalties including fines andor penalties although companies making voluntary export disclosures historically received reduced penalties certain mitigating credits legislation enacted october 16 2007 increased maximum civil penalty certain export control violations assessed pershipment basis greater 250000 twice value transaction department commerce stated companies initiated voluntary selfdisclosures prior enactment legislation generally would subjected enhanced penalties retroactively unable determine time us government agencies apply enhanced penalty legislation review issue ongoing currently unable definitively determine full extent apparent violations nature total amount penalties might subject future given resolution matter uncertain flowserve corporation notes consolidated financial statements continued time cannot currently predict whether final resolution matter material adverse effect business including ability business outside us financial condition results operations currently involved potentially responsible party four former public waste disposal sites may subject remediation pending government procedures sites various stages evaluation federal state environmental authorities projected cost remediation sites well alleged “fair share” allocation uncertain studies completed parties either negotiated amicable resolution matter judicially resolved site many parties similarly identified identification location additional parties continuing applicable federal state law many parties identified financially strong solvent companies appear able pay share remediation costs based information waste disposal practices sites environmental regulatory process general believe likely ultimate remediation liability costs site apportioned among liable parties including site owners waste transporters according volumes andor toxicity wastes shown disposed sites believe exposure existing disposal sites less 100000 addition public disposal sites received clean notice september 17 2007 respect site australia site used disposal spent foundry sand risk assessment site currently underway several months assessment completed currently believed additional remediation costs site material also defendant several lawsuits including product liability claims insured subject applicable deductibles arising ordinary course business based currently available information believe adequately accrued estimated probable losses lawsuits also involved ordinary routine litigation incidental business none believe material business operations overall financial condition however resolutions dispositions claims lawsuits settlement otherwise could significant impact operating results reporting period resolution disposition occurs although none aforementioned potential liabilities quantified absolute certainty except otherwise indicated established reserves covering exposures relating contingencies extent believed reasonably estimable probable based past experience available facts consequence legal matters including settlements publicly disclosed litigation otherwise well revisions prior estimates recognized net expenses approximately 9 million 8 million 7 million 2007 2006 2005 respectively additional exposures beyond reserves could exist currently cannot estimated continue evaluate potential contingent loss exposures develop recognize expense soon losses become probable reasonably estimated 14 warranty reserve recorded reserves product warranty claims included current noncurrent liabilities following summary activity warranty reserve flowserve corporation notes consolidated financial statements continued 15 shareholders’ equity cash dividends declared paid 060 045 respectively per share 2007 cash dividends declared paid 2006 2005 september 29 2006 board directors authorized program repurchase 20 million shares outstanding common stock end second quarter 2007 shares repurchased offset potentially dilutive effects stock options issued equitybased compensation programs repurchased total 20 million shares concluded program second quarter 2007 16 income taxes provision benefit income taxes consists following expected cash payments current federal income tax expense 2007 2006 2005 reduced approximately 134 million 188 million 01 million respectively result tax deductions related exercise nonqualified employee stock options vesting restricted stock income tax benefit resulting stockbased compensation plans increased capital excess par value provision benefit income taxes differs statutory corporate rate due following flowserve corporation notes consolidated financial statements continued 2007 effective tax rate differed federal statutory rate 35 primarily due net impact foreign operations includes impacts lower foreign tax rates net favorable results various tax audits changes valuation allowance estimates improvements partially offset additional reserves established uncertain tax positions pursuant adoption fin 48 discussed 2006 effective tax rate differed federal statutory rate 35 primarily due net impact foreign operations certain us nondeductible expenses 2005 effective tax rate differed federal statutory rate 35 primarily due extraterritorial income “eti” exclusion benefits 19 million state income tax benefits 17 million resulting primarily net reductions valuation allowances 115 million net tax impact foreign operations net tax impact foreign operations lower 2006 compared prior years due decreased levels actual deemed dividend repatriations increased foreign tax credits associated 2006 repatriations additionally may 17 2006 tax increase prevention reconciliation act 2005 signed law new legislation created exclusion us taxable income certain types foreign related party payments dividends interest rents royalties prior 2006 subject us taxation exclusion applied certain 2006 payments made foreign subsidiaries 2007 2006 sfas 109 requires us provide deferred taxes temporary differences associated investment foreign subsidiaries financial reporting basis exceeds tax basis unless assert permanent reinvestment foreign jurisdictions pursuant apb 23 financial reporting basis tax basis differences investments foreign subsidiaries consist unremitted earnings losses well foreign currency translation adjustments assert permanent reinvestment apb 23 three years reported period ended december 31 2007 recognized net deferred tax assets attributable excess foreign tax credits unremitted earnings foreign currency translation adjustments foreign subsidiaries excess financial reporting basis cash deemed dividend distributions foreign subsidiaries resulted recognition approximately 75 million 9 million income tax expense years ended december 31 2007 2006 respectively recorded benefit excess foreign tax credits associated deemed repatriation unremitted earnings credits available offset liability associated dividends october 22 2004 american jobs creation act 2004 “2004 act” signed law providing phase existing eti exclusion foreign export sales viewed inconsistent international trade protocols set european union phase provides benefit otherwise qualifying export sales 2005 2006 limited approximately 80 60 respectively replacement loss eti export incentive 2004 act provides deduction income qualified domestic production activities phased 2005 2010 manufacturing deduction impact 2006 2005 tax rates minor impact 2007 tax rate effect future tax rates yet quantified guidance fasb staff position fas 1091 “application fasb statement 109 tax deduction qualified production activities provided american jobs creation act 2004” tax deduction qualified production activities treated special deduction described sfas 109 special deduction reported period deduction claimed tax return record valuation allowances reflect estimated amount deferred tax assets may realized based upon analysis existing deferred tax assets net operating losses tax credits jurisdiction expectations ability utilize tax attributes review past current estimated future taxable income establishment tax strategies net decrease valuation allowances rate reconciliation includes net reduction state valuation allowances 85 million net reduction foreign valuation allowances 22 million flowserve corporation notes consolidated financial statements continued deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes significant components consolidated deferred tax assets liabilities approximately 1823 million us foreign net operating loss carryforwards december 31 2007 total 585 million state net operating losses net operating losses generated us unused begin expire 2007 majority expiring 2021 majority nonus net operating losses carry forward without expiration additionally approximately 166 million foreign tax credit carryforwards december 31 2007 expiring 2010 2016 03 million valuation allowance reserves recorded earnings loss income taxes comprised january 1 2007 adopted fin 48 addresses determination whether tax benefits claimed expected claimed tax return recorded financial statements fin 48 may recognize tax benefit uncertain tax position likely tax position sustained examination taxing authorities determination based technical merits flowserve corporation notes consolidated financial statements continued position presumes uncertain tax position examined relevant taxing authority full knowledge relevant information tax benefits recognized financial statements position measured based largest benefit greater fifty percent likelihood realized upon ultimate settlement fin 48 also provides guidance derecognition classification interest penalties income taxes accounting interim periods requires increased disclosures cumulative effect adopting fin 48 increase tax reserves decrease 298 million opening retained earnings january 1 2007 upon adoption amount gross unrecognized tax benefits january 1 2007 approximately 129 million amount 849 million recognized would favorably impact effective tax rate interest penalties related income tax liabilities included income tax expense balance accrued interest penalties recorded balance sheet part fin 48 liability january 1 2007 approximately 14 million tabular reconciliation total gross amount unrecognized tax benefits excluding interest penalties beginning year ending year follows millions amount gross unrecognized tax benefits december 31 2007 1634 million includes 184 million accrued interest penalties amount 1053 million recognized would favorably impact effective tax rate interest penalties related income tax liabilities included income tax expense total amount interest penalties recognized statement income year ended december 31 2007 44 million limited exception longer subject us federal state local income tax audits years 2002 nonus income tax audits years 2001 currently examination various years germany italy canada venezuela argentina reasonably possible within next 12 months effective tax rate impacted resolution matters audited various taxing authorities including previously unrecognized tax benefit associated onetime repatriation foreign profits 2004 also reasonably possible statute limitations close various taxing jurisdictions within next 12 months estimate could record reduction tax expense approximately 17 million 32 million within next 12 months 17 business segment information principally engaged worldwide design manufacture distribution service industrial flow management equipment provide pumps valves mechanical seals primarily oil gas industry chemical power water industries requiring flow management products flowserve corporation notes consolidated financial statements continued following three divisions constitutes business segment • flowserve pump division • flow control division • flow solutions division manufactures different products defined type products services provided division president reports directly chief executive officer division vice president finance reports directly chief accounting officer decisionmaking purposes chief executive officer members senior executive management use financial information generated reported division level corporate headquarters constitute separate division business segment evaluate segment performance allocate resources based segment’s operating income amounts classified “all other” include corporate headquarters costs minor entities constitute separate segments intersegment sales transfers recorded cost plus profit margin sales eliminated consolidation following summary financial information reportable segments reconciled amounts reported consolidated financial statements flowserve corporation notes consolidated financial statements continued 1 increase “all other” 2007 primarily represents increased cash balances accounts held corporate headquarters geographic information attribute sales different geographic areas based facilities’ locations longlived assets classified based geographic area assets located exclude deferred tax assets categorized noncurrent sales longlived assets geographic area follows 1 2007 2006 germany accounted 10 consolidated sales individual country within group represents 10 consolidated sales 2005 10 consolidated longlived assets period presented 2 includes canada latin america asia pacific individual geographic segment within group represents 10 consolidated totals flowserve corporation notes consolidated financial statements continued net sales international customers including export sales united states represented 66 67 65 total sales 2007 2006 2005 respectively major customer information large number customers across large number manufacturing service facilities believe sales individual customer represent 10 consolidated sales years presented 18 accumulated comprehensive loss following presents components accumulated comprehensive loss net related tax effects 1 increase foreign currency translation adjustments 2007 2006 due primarily weakening us dollar exchange rate versus euro 2 decrease pension postretirement effects 2006 primarily result increased discount rate following tables present summary comprehensive income expense years ended december 31 2007 2006 2005 flowserve corporation notes consolidated financial statements continued 19 quarterly financial data unaudited following presents summary unaudited quarterly data 2007 2006 amounts millions except per share data flowserve corporation notes consolidated financial statements continued significant fourth quarter adjustments 2007 net earnings record net gains approximately 9 million pretax certain legal matters ii reversal deferred tax valuation allowances approximately 8 million significant fourth quarter adjustments 2006 20 subsequent events updates legal matters existence december 31 2007 new legal matters arisen since december 31 2007 discussed note 13 february 26 2008 board directors authorized program repurchase 3000 million outstanding common stock unspecified time period program expected commence second quarter 2008 february 26 2008 board directors authorized increase quarterly cash dividend 015 per share 025 per share payable quarterly beginning april 9 2008 item 9item 8 financial statements supplementary data report independent registered public accounting firm board directors shareholders flowserve corporation opinion consolidated financial statements listed index appearing item 15a1 present fairly material respects financial position flowserve corporation subsidiaries december 31 2008 2007 results operations cash flows three years period ended december 31 2008 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed accompanying index appearing item 15a2 presents fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintained material respects effective internal control financial reporting december 31 2008 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso company’s management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report internal control financial reporting appearing item 9a responsibility express opinions financial statements financial statement schedule company’s internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions discussed note 1 consolidated financial statements company changed manner accounts uncertain tax positions 2007 changed manner accounts defined benefit pension postretirement plans december 31 2006 company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp pricewaterhousecoopers llp dallas texas february 25 2009 flowserve corporation consolidated balance sheets see accompanying notes consolidated financial statements flowserve corporation consolidated statements income see accompanying notes consolidated financial statements flowserve corporation consolidated statements comprehensive income see accompanying notes consolidated financial statements flowserve corporation consolidated statements shareholders’ equity see accompanying notes consolidated financial statements flowserve corporation consolidated statements cash flows see accompanying notes consolidated financial statements flowserve corporation notes consolidated financial statements december 31 2008 2007 three years ended december 31 2008 1 significant accounting policies accounting developments produce engineered industrial pump systems engineered industrial valves control valves actuators controls mechanical seals auxiliary systems provide range related flow management services worldwide primarily process industries equipment manufactured serviced us predominantly used industries deal difficulttohandle corrosive fluids well environments extreme temperatures pressure horsepower speed business affected economic conditions united states “us” countries products sold serviced cyclical nature oil gas chemical power water industries served relationship us dollar currencies demand pricing customers’ end products certain reclassifications made prior period amounts conform current period presentation principles consolidation consolidated financial statements include accounts company wholly majorityowned subsidiaries addition consolidate variable interest entities deemed primary beneficiary minority interests nonaffiliated parties recognized majorityowned consolidated subsidiaries intercompany profits transactions balances among consolidated entities eliminated consolidated financial statements investments unconsolidated affiliated companies represent noncontrolling ownership interests 20 50 accounted using equity method approximates equity interest underlying equivalent net book value accounting principles generally accepted united states america “gaap” investments interests less 20 investee accounted cost method whereby income recognized event dividend receipt investments accounted cost method tested annually impairment use estimates process preparing financial statements conformity gaap requires management make estimates assumptions affect reported amounts certain assets liabilities revenues expenses management believes estimates assumptions reasonable however actual results may differ materially estimates significant estimates assumptions made management used determining • revenue recognition net liquidated damages delivery penalties • income taxes deferred taxes tax valuation allowances tax reserves • reserves contingent loss • retirement postretirement benefits • valuation goodwill indefinitelived intangible assets longlived assets revenue recognition revenues product sales recognized risks rewards ownership transferred customers based contractual delivery terms agreed customer fulfillment inconsequential perfunctory actions addition policy requires persuasive evidence arrangement fixed determinable sales price reasonable assurance collectibility contracts containing multiple elements determinable fair value recognize revenue amount equal element’s pro rata share contract’s fair value accordance contractual delivery terms element freight charges billed customers included sales related shipping costs included cost sales consolidated statements income revenues longterm contracts include contracts exceed certain internal thresholds regarding size duration project provide receipt progress billings customer recorded flowserve corporation notes consolidated financial statements continued percentage completion method progress measured costtocost basis percentage completion revenue represents less 10 consolidated sales year presented revenue service repair contracts recognized services agreed customer rendered revenues generated fixed fee service repair contracts recognized ratable basis term contract contracts range duration generally extend five years fixed fee service contracts represent less 1 consolidated sales year presented certain instances provide guaranteed completion dates terms contracts failure meet contractual delivery dates result late delivery penalties nonrecoverable costs instances payment costs deemed probable perform project profitability analysis accounting costs reduction realizable revenues could potentially cause estimated total project costs exceed projected total revenues realized project instances would record reserves cover excesses period determined would adversely affect results operations financial position circumstances total projected reduced revenues still exceed total projected costs incurrence unrealized incentive fees nonrecoverable costs generally reduces profitability project time subsequent revenue recognition reported results would change different estimates used contract costs different estimates used contractual contingencies cash equivalents place temporary cash investments financial institutions policy invest institutions instruments minimal credit risk market risk investments original maturity three months less purchased classified cash equivalents highly liquid principal values subject significant risk change due interest rate fluctuations restricted cash represents cash restricted factoring agreements 2007 certain contracts small portion payments received progress billings available use project reaches completion allowance doubtful accounts credit risk allowance doubtful accounts established based estimates amount uncollectible accounts receivable determined principally based upon aging accounts receivable also customer credit history industry market segment information economic trends conditions credit reports customer financial condition customer credit issues customer bankruptcies general economic conditions may also impact estimates credit risks mitigated diversity customer base across many different geographic regions performing creditworthiness analyses customers december 31 2008 2007 believe significant concentrations credit risk inventories related reserves inventories stated lowerofcost market cost determined firstin firstout method reserves excess obsolete inventories based upon assessment market conditions products determined historical usage estimated future demand due long life cycles products carry spare parts inventories historically low usage rates provide reserves inventory based demonstrated usage aging criteria income taxes deferred taxes tax valuation allowances tax reserves account income taxes asset liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases operating loss tax credit carryforwards deferred tax assets liabilities calculated using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized period includes enactment date record valuation allowances reflect estimated amount deferred tax assets may realized based upon analysis existing deferred tax assets net operating losses tax credits jurisdiction expectations ability utilize flowserve corporation notes consolidated financial statements continued tax attributes review past current estimated future taxable income establishment tax strategies estimates could impacted changes amount geographical source future income results implementation alteration tax planning strategies provide deferred taxes temporary differences associated investment foreign subsidiaries financial reporting basis exceeds tax basis unless assert permanent reinvestment foreign jurisdictions financial reporting basis tax basis differences investments foreign subsidiaries consist unremitted earnings losses well foreign currency translation adjustments assert permanent reinvestment unremitted foreign earnings however assert permanent reinvestment certain portions initial invested capital various foreign subsidiaries three years reported period ended december 31 2008 recognized net deferred tax assets attributable unremitted earnings foreign currency translation adjustments foreign subsidiaries due estimated excess foreign tax credits attributes amount income taxes pay subject ongoing audits federal state foreign tax authorities often result proposed assessments significant judgment required determining income tax provisions evaluating tax positions establish reserves open tax years uncertain tax positions may subject challenge various tax authorities consolidated tax provision related accruals include impact reasonably estimable losses related interest penalties deemed appropriate january 1 2007 adopted financial accounting standards board “fasb” financial interpretation “fin” 48 “accounting uncertainty income taxes interpretation fasb statement 109” addresses determination whether tax benefits claimed expected claimed tax return recorded financial statements fin 48 may recognize tax benefit uncertain tax position likely tax position sustained examination taxing authorities determination based technical merits position presumes uncertain tax position examined relevant taxing authority full knowledge relevant information tax benefits recognized financial statements position measured based largest benefit greater fifty percent likelihood realized upon ultimate settlement fin 48 also provides guidance derecognition classification interest penalties income taxes accounting interim periods believe adequately provided reasonably foreseeable outcome related matters future results may include favorable unfavorable adjustments estimated tax liabilities extent expected tax outcome matters changes estimate impact income tax provision period determination made legal environmental accruals legal environmental reserves recorded based upon casebycase analysis relevant facts circumstances assessment potential legal obligations costs amounts relating legal environmental liabilities recorded probable loss incurred loss estimable assessments legal environmental costs based information obtained independent inhouse experts loss experience similar situations estimates may change future due new developments regarding facts circumstances matter estimates liabilities unsettled asbestosrelated claims based known claims experience preceding two years claims filed settled dismissed included retirement obligations liabilities consolidated balance sheets substantial majority asbestosrelated claims covered insurance indemnities estimated receivables insurance carriers unsettled claims receivables settlements legal fees paid us asbestosrelated claims estimated using historical experience insurance recovery rates estimates future recoveries include estimates coverage financial viability insurance carriers estimated receivables included assets net consolidated flowserve corporation notes consolidated financial statements continued balance sheets changes claims filed settled dismissed differences actual estimated settlement costs insurance indemnity recoveries could impact future expense warranty accruals warranty obligations based upon product failure rates materials usage service delivery costs analysis identified expected claims estimate cost resolve claims estimates expected claims generally factor historical claims known product issues warranty obligations based factors adjusted based historical sales trends preceding 24 months changes claim rates differences actual expected warranty costs sales trends could impact warranty obligation estimates might adverse effects consolidated results operations financial position insurance accruals insurance accruals recorded wholly partially selfinsured risks medical benefits workers’ compensation based upon analysis claim loss history insurance deductibles policy limits relevant factors included accrued liabilities consolidated balance sheets estimates based upon information received actuaries insurance company adjusters independent claims administrators independent sources changes claims differences actual expected claim losses could impact future accruals receivables insurance carriers estimated using historical experience insurance recovery rates estimates future recoveries include estimates coverage financial viability insurance carriers estimated receivables included accounts receivable net assets net applicable consolidated balance sheets pension postretirement obligations determination retirement postretirement benefits obligations based estimates made management consultation independent actuaries investment advisors inherent valuations key assumptions including discount rates expected rates return plan assets retirement rates mortality rates compensation increase factors current market conditions including changes rates return interest rates medical inflation rates considered selecting assumptions prior december 31 2006 actuarial gains losses prior service costs disclosed recognized consolidated balance sheets upon adoption statement financial accounting standards “sfas” 158 “employers’ accounting defined benefit pension postretirement plans amendment fasb statements 87 88 106 132r” effective december 31 2006 began recognizing costs consolidated balance sheets adjustment accumulated comprehensive loss effective january 1 2007 recognize actuarial gains losses prior service costs accumulated comprehensive loss arise valuation goodwill indefinitelived intangible assets longlived assets value goodwill indefinitelived intangible assets tested annually impairment december 31 whenever events circumstances indicate assets may impaired impairment goodwill indefinitelived intangibles assessed reporting unit level correlates operating segments consider operating segments constitute business discrete financial information management regularly reviews net realizable value longlived assets including property plant equipment reviewed periodically indicators potential impairment conditions present based upon assessment estimated future cash flows related assets property plant equipment depreciation property plant equipment stated historical cost less accumulated depreciation asset retirement obligations exist capitalized part carrying amount asset depreciated remaining useful life asset useful lives leasehold improvements lesser remaining lease term useful life improvement assets retired otherwise disposed costs related accumulated depreciation removed accounts resulting gains losses included income operations period depreciation computed flowserve corporation notes consolidated financial statements continued straightline method based estimated useful lives depreciable assets generally estimated useful lives assets costs related routine repairs maintenance expensed incurred internally developed software capitalize certain costs associated development internaluse software generally costs related significant software development projects amortized estimated useful life typically three five years upon implementation software intangible assets intangible assets excluding trademarks considered indefinite life consist primarily engineering drawings distribution networks software patents items amortized estimated useful lives generally ranging 3 40 years assets reviewed impairment whenever events circumstances indicate impairment may occurred deferred loan costs deferred loan costs consisting fees expenses associated debt financing amortized term associated debt using effective interest method additional amortization recorded periods optional prepayments debt made fair values financial instruments carrying amounts financial instruments approximate fair value december 31 2008 except term loan interbank market term loan implied fair value approximately 495 million december 31 2008 compared carrying value 5497 million believe reflective general global economic conditions december 31 2008 although fair value term loan less carrying value settlement reported fair value may possible may prudent consideration intended uses cash balances future cash flows carrying amounts financial instruments approximated fair value december 31 2007 derivatives hedging activities part risk management strategy enter derivative contracts mitigate certain financial risks related foreign currencies interest rates riskmanagement derivatives policy outlining conditions enter financial derivative transactions employ foreign currency economic hedging strategy minimize potential losses earnings cash flows unfavorable foreign currency exchange rate movements strategy also minimizes potential gains favorable exchange rate movements foreign currency exposures arise transactions including firm commitments anticipated transactions denominated currency entity’s functional currency translation foreigndenominated assets liabilities us dollars primary currencies operate addition us dollar argentina peso australian dollar brazilian real british pound canadian dollar chinese yuan colombian peso euro indian rupee japanese yen mexican peso singapore dollar swedish krona enter interest rate swap agreements purpose hedging exposure floating interest rates certain portions debt policy achieve hedge accounting treatment requires us document relationships hedging instruments hedged items risk management objective strategy entering hedges whether intend designate formal hedge accounting relationship process includes linking derivatives designated formal hedge accounting relationship fair value cash flow foreign currency hedges 1 specific assets liabilities balance sheet 2 specific firm commitments forecasted transactions cases designate hedge assess inception hedge ongoing basis whether derivatives highly effective offsetting changes fair value cash flows hedged items flowserve corporation notes consolidated financial statements continued whether derivatives may expected remain highly effective future periods failure demonstrate effectiveness offsetting exposures retroactively prospectively would cause us deem hedge ineffective derivatives recognized balance sheet fair values derivatives qualify hedge accounting elected apply hedge accounting includes substantially forward exchange contracts changes fair values derivatives recognized income consolidated statements income inception new derivative contract formal hedge accounting elected policy requires us designate derivative 1 hedge forecasted transaction b variability cash flows received paid connection recognized asset liability “cash flow” hedge 2 foreign currency fair value “foreign currency” hedge changes fair value derivative highly effective documented designated qualified cash flow hedge extent hedge effective recorded comprehensive income loss earnings affected variability cash flows hedged transaction changes fair value foreign currency hedges recorded comprehensive income loss since satisfy accounting criteria cash flow hedge ineffectiveness represents amount changes fair value derivative mirror change cash flow forecasted transaction recorded current period earnings effective hedges changes value hedged item also recorded component comprehensive income loss underlying recognized balance sheet upon settlement realized gains losses recognized income consolidated statements income discontinue hedge accounting • deem hedge ineffective determine designation derivative hedging instrument longer appropriate • derivative longer effectively offsets changes cash flows hedged item firm commitments contracts • derivative expires terminates sold • occurrence contracted committed transaction longer probable occur originally expected period hedge accounting discontinued derivative remains outstanding carry derivative estimated fair value balance sheet recognizing changes fair value current period earnings cash flow hedge becomes ineffective deferred gains losses cash flow hedge remain accumulated comprehensive loss exposure relating item underlying hedge recognized becomes probable hedged forecasted transaction occur deferred gains losses hedging instrument recognized earnings immediately foreign currency translation assets liabilities foreign subsidiaries translated us dollars exchange rates prevailing balance sheet date income expenses translated average rates month translation gains losses generally reported component accumulated comprehensive loss transaction translation gains losses arising intercompany balances reported component accumulated comprehensive loss underlying transaction stems longterm equity investment debt designated due foreseeable future otherwise recognize transaction gains losses arising intercompany transactions component income intercompany balances longterm investment related designated due beyond foreseeable future may mitigate risk associated foreign currency fluctuations entering forward exchange contracts see note 8 discussion forward exchange contracts flowserve corporation notes consolidated financial statements continued transactional currency gains losses arising transactions currencies sites’ functional currencies changes fair value forward exchange contracts qualify hedge accounting included consolidated results operations years ended december 31 2008 2007 2006 recognized gains 166 million 63 million 75 million amounts income net accompanying consolidated statements income stockbased compensation stockbased compensation measured grant date fair value policy set exercise price stock option awards value restricted share restricted share unit performancebased unit awards collectively referred “restricted shares” closing price common stock new york stock exchange date grant date grants authorized board directors restricted share units performancebased units refer restricted awards voting rights accrue dividends forfeited vesting occur options expensed using graded vesting model whereby recognize compensation cost requisite service period separately vesting tranche award adjust sharebased compensation least annually changes estimate expected equity award forfeitures based actual forfeiture experience intrinsic value restricted shares typically product share price date grant number restricted shares granted amortized straightline basis compensation expense periods restrictions lapse based expected number shares vest forfeiture rate based unvested restricted shares forfeited compared original total restricted shares granted 4year period excluding significant forfeiture events expected recur earnings per share basic diluted earnings per share calculated follows three years ended december 31 2008 2007 2006 options purchase common stock excluded computations potentially dilutive securities research development expense research development costs charged expense incurred aggregate research development costs included selling general administrative expenses flowserve corporation notes consolidated financial statements continued 340 million 291 million 178 million 2008 2007 2006 respectively costs incurred research development primarily include salaries benefits consumable supplies well rent professional fees utilities depreciation property equipment used research development activities business combinations business combinations referred financial statements used purchase method accounting allocate purchase price identifiable tangible intangible assets liabilities recognizing goodwill purchase price exceeds fair value identifiable assets net liabilities assumed accounting developments pronouncements implemented september 2006 financial accounting standards board “fasb” issued sfas 157 “fair value measurements” sfas 157 establishes single definition fair value framework measuring fair value accounting principles generally accepted united states “gaap” expands disclosures fair value measurements sfas 157 applies accounting pronouncements require permit fair value measurements however require new fair value measurements february 2008 fasb issued staff position “fsp” 1572 “effective date fasb statement 157” amends sfas 157 delaying adoption sfas 157 nonfinancial assets nonfinancial liabilities except items recognized disclosed fair value annual frequently recurring basis january 1 2009 adoption sfas 157 amended effective january 1 2008 material impact consolidated financial condition results operations expect adoption sfas 157 2009 nonfinancial assets nonfinancial liabilities material impact consolidated financial condition results operations february 2007 fasb issued sfas 159 “the fair value option financial assets financial liabilities including amendment fasb statement 115” sfas 159 permits entities choose measure many financial instruments certain items fair value currently required measured fair value provides entities opportunity mitigate volatility reported earnings caused measuring related assets liabilities differently without apply complex hedge accounting provisions adoption sfas 159 effective january 1 2008 impact consolidated financial condition results operations currently invest types instruments within scope pronouncement pronouncements yet implemented december 2007 fasb issued sfas 141r “business combinations” sfas 141r establishes principles requirements acquirer business combination recognizes measures identifiable assets acquired liabilities assumed noncontrolling interest acquiree goodwill acquired expands disclosures business combinations sfas 141r requires acquirer recognize changes valuation allowances acquired deferred tax assets operations changes deferred tax benefits previously recognized corresponding reduction goodwill exception provisions regarding acquired deferred taxes tax contingencies applicable business combinations sfas 141r applies prospectively business combinations acquisition date beginning first annual reporting period beginning december 15 2008 early adoption permitted expect adoption sfas 141r material impact consolidated financial condition results operations flowserve corporation notes consolidated financial statements continued december 2007 fasb issued sfas 160 “noncontrolling interests consolidated financial statements amendment arb 51” sfas 160 establishes accounting reporting standards require • ownership interests subsidiaries held parties parent clearly identified labeled presented consolidated balance sheet within equity separate parent’s equity • amount consolidated net income attributable parent noncontrolling interest clearly identified presented face consolidated statement income • changes parent’s ownership interest parent retains controlling financial interest subsidiary accounted consistently • subsidiary deconsolidated retained noncontrolling equity investment former subsidiary initially measured fair value • entities provide sufficient disclosures clearly identify distinguish interests parent interests noncontrolling owners sfas 160 effective fiscal years interim periods within fiscal years beginning december 15 2008 early adoption permitted sfas 160 shall applied prospectively beginning fiscal year initially applied except presentation disclosure requirements presentation disclosure requirements shall applied retrospectively periods presented expect adoption sfas 160 material impact consolidated financial condition results operations march 2008 fasb issued sfas 161 “disclosures derivative instruments hedging activities amendment fasb statement 133” sfas 161 enhances current disclosure framework sfas 133 “accounting derivative instruments hedging activities” requiring entities provide detailed disclosures entity uses derivative instruments derivative instruments related hedged items accounted sfas 133 related interpretations derivative instruments related hedged items affect entity’s financial condition results operations cash flows sfas 161 effective financial statements issued fiscal years beginning november 15 2008 expect adoption sfas 161 material impact consolidated financial condition results operations april 2008 fasb issued fsp sfas 1423 “determination useful life intangible assets” fsp sfas 1423 amends factors considered developing renewal extension assumptions used determine useful life recognized intangible asset sfas 142 “goodwill intangible assets” fsp sfas 1423 intended improve consistency useful life recognized intangible asset sfas 142 period expected cash flows used measure fair value asset sfas 141r gaap fsp sfas 1423 effective fiscal years interim periods within years beginning december 15 2008 expect adoption fsp sfas 1423 material impact consolidated financial condition results operations may 2008 fasb issued sfas 162 “the hierarchy generally accepted accounting principles” sfas 162 identifies sources accounting principles framework selecting principles used preparation financial statements presented conformity gaap sfas 162 effective 60 days following approval securities exchange commission “sec” public company accounting oversight board amendments au section 411 “the meaning ‘present fairly conformity generally accepted accounting principles’” expect adoption sfas 162 material impact consolidated financial condition results operations flowserve corporation notes consolidated financial statements continued may 2008 fasb issued sfas 163 “accounting financial guarantee insurance contracts” sfas 163 requires insurance enterprise recognize claim liability prior event default clarifies sfas 60 “accounting reporting insurance enterprises” applies financial guarantee insurance contracts sfas 163 effective financial statements issued fiscal years interim periods within fiscal years beginning december 15 2008 except disclosures insurance enterprise’s riskmanagement activities expect adoption sfas 163 material impact consolidated financial condition results operations june 2008 fasb issued fsp eitf 0361 “determining whether instruments granted sharebased payment transactions participating securities” fsp eitf 0361 concluded outstanding unvested sharebased payment awards contain rights nonforfeitable dividends participate undistributed earnings common shareholders therefore considered participating securities purposes computing earnings per share entities participating securities convertible common stock required use “twoclass” method computing earnings per share twoclass method earnings allocation formula determines earnings per share class common stock participating security according dividends declared accumulated participation rights undistributed earnings fsp eitf 0361 effective fiscal years interim periods within years beginning december 15 2008 prior period earnings per share data presented retrospectively adjusted expect adoption fsp eitf 0361 material impact consolidated financial condition results operations december 2008 fasb issued fsp sfas 132r1 “employers’ disclosures postretirement benefit plan assets” fsp sfas 132r1 amends sfas 132r “employers’ disclosures pensions postretirement benefits” provide guidance employer’s disclosures plan assets defined benefit pension postretirement plan disclosure requirements fsp sfas 132r1 effective fiscal years ending december 15 2009 expect adoption fsp sfas 132r1 material impact consolidated financial condition results operations although final pronouncements recently issued adopted expect impact reported financial information disclosures accounting promulgating bodies number pending projects may directly impact us continue evaluate status projects become final provide disclosures regarding likelihood magnitude impact 2 dispositions 2007 sold certain noncore assets aggregate sales proceeds 134 million largest sale occurred december 2007 sold noncore assets related rail operations wholly owned australian subsidiary thompsons kelly lewis pty ltd “tkl” 129 million recorded pretax gain 59 million allocation 21 million flowserve pump division goodwill gain included reduction selling general administrative expense consolidated statement income rail assets meet definition discontinued operation tkl rail operations part larger australian pump business rail assets material consolidated financial condition results operations pump assets tkl retained remain core part business december 31 2005 sold certain noncore service operations collectively called general services group “gsg” furmanite unit dallasbased xanser corporation contingent sales price 155 million gross cash proceeds including 20 million held escrow pending final settlement excluding approximately 12 million net accounts receivable utilizing 155 million contingent sales price sale resulted loss 25 million 38 million pretax recognized fourth quarter 2005 third quarter 2006 recognized 08 million 11 million pretax reduction loss independent arbitrator issued binding decision respect valuation inventory resolved one element contingent sales price fourth quarter 2006 negotiated final sales price flowserve corporation notes consolidated financial statements continued 171 million whereby recognized additional reduction loss sale 02 million 05 million pretax bringing aggregate loss sale recognized 2006 2005 15 million 22 million pretax remaining amounts due us terms sale collected december 2006 used 109 million initial net cash proceeds reduce indebtedness january 2006 additional 35 million december 2006 using final proceeds collected pursuant sale transaction result sale presented resolution contingent sales price gsg discontinued operations 3 acquisitions flowserve pump division acquired remaining 50 interest niigata worthington company ltd “niigata” japanese manufacturer pumps rotating equipment effective march 1 2008 24 million cash incremental interest acquired accounted step acquisition niigata’s results operations consolidated since date acquisition prior transaction 50 interest niigata recorded using equity method accounting upon consolidation effective date acquisition remaining 50 interest niigata balance sheet reflected increase cash debt 57 million 58 million respectively purchase price allocated assets acquired liabilities assumed based estimates fair values date acquisition estimate fair value net assets acquired exceeded cash paid accordingly goodwill recognized acquisition accounted bargain purchase resulting gain 34 million recorded first quarter 2008 reduced 06 million 28 million fourth quarter 2008 purchase accounting finalized gain included income net consolidated statement income due immateriality pro forma information provided due immateriality 2008 2007 2006 completed small acquisitions 06 million 23 million 80 million respectively assets acquired primarily include inventory fixed assets intangible assets acquisitions immaterial individually aggregate thus pro forma financial information presented 4 goodwill intangible assets following table provides information changes intangible assets 2008 flowserve corporation notes consolidated financial statements continued following table provides information changes intangible assets 2007 1 engineering drawings represent estimated fair value associated specific acquired product component schematics 2 accumulated amortization indefinitelived intangible assets relates amounts recorded prior implementation date sfas 142 3 2007 flow control division wroteoff expired fully amortized noncompete agreement following schedule outlines actual amortization recognized 2008 estimate future amortization based upon finitelived intangible assets owned december 31 2008 flowserve corporation notes consolidated financial statements continued changes carrying amount goodwill years ended december 31 2008 2007 follows 1 currency impact flow control 2008 primarily related goodwill recorded united kingdom 5 factoring accounts receivable european subsidiaries engaged nonrecourse factoring certain accounts receivable various agreements different terms including options renewal mutual termination clauses credit facilities fully described note 12 limited factoring volume 750 million given point time defined credit facilities fourth quarter 2007 gave notice intent terminate major factoring agreements 2008 factoring agreements terminated end third quarter 2008 aggregate cash received factored receivables outstanding december 31 2008 2007 totaled 0 639 million respectively represent factors’ purchase 0 684 million receivables respectively 2008 factoring agreements worldwide recognized losses 09 million factoring receivables compares total losses 45 million 28 million 2007 2006 respectively 6 inventories net consisted following flowserve corporation notes consolidated financial statements continued 2008 2007 2006 recognized expenses 118 million 89 million 63 million respectively obsolete excess inventory expenses included cost sales consolidated statements income 7 stockbased compensation plans flowserve corporation 2004 stock compensation plan “2004 plan” established april 21 2004 authorized issuance 3500000 shares common stock grants stock options restricted shares equitybased awards 3500000 shares common stock authorized 2004 plan 1182016 remain available issuance addition 2004 plan maintain another shareholderapproved plan permits issuance common stock grants various equitybased awards december 31 2008 41374 shares common stock remained available stock option grants plan recorded stockbased compensation follows 1 includes 38 million 56 million pretax modification charge recorded august 2006 discussed “modifications” since charge would recognized accordance fin 44 “accounting certain transactions involving stock compensation interpretation apb opinion 25” would approximated charge recognized accordance sfas 123r “sharebased payment” stock options granted officers employees directors allow purchase common shares market value stock date options granted although options granted market value generally options whether granted 2004 plan previously approved plans become exercisable staggered period ranging one five years typically one three years options generally expire ten years date grant within short period time following termination employment cessation services option holder however described greater detail “modifications” expiration provisions relating certain outstanding option awards modified flowserve corporation notes consolidated financial statements continued 2006 information related stock options issued officers employees directors plans presented following table 1 options originally expiring 2005 expiration dates extended contingent upon shareholder approval obtained august 24 2006 discussed “modifications” additional information relating ranges options outstanding december 31 2008 follows options granted 2008 2007 weighted average fair value per share options granted 2484 year ended december 31 2006 fair value option awarded 2006 estimated date grant using blackscholes option pricing model using following assumptions riskfree interest rate 47 periods within contractual life option based us treasury yield curve effect time grant dividend yield zero declare dividends 2006 stock volatility 414 determined based historical price fluctuations stock average expected life stock options granted 58 years based 10year history timing stock option exercises forfeiture rate 103 based unvested options forfeited compared original total options granted rolling 10year period excluding significant forfeiture events expected recur december 31 2008 03 million unrecognized compensation cost related outstanding unvested stock option awards expected recognized weightedaverage period approximately 04 years flowserve corporation notes consolidated financial statements continued weighted average remaining contractual life options outstanding december 31 2008 2007 63 years 72 years respectively total intrinsic value stock options exercised years ended december 31 2008 2007 2006 274 million 321 million 547 million respectively total fair value stock options vested years ended december 31 2008 2007 2006 41 million 55 million 34 million respectively incremental stockbased compensation expense related solely stock options recognized year ended december 31 2006 result modified prospective adoption sfas 123r 55 million 69 million pretax 010 per share excludes 56 million modification charge recorded august 2006 discussed “modifications” since charge would recognized accordance fin 44 would approximated charge recognized accordance sfas 123r restricted shares general restrictions restricted shares expire minimum one year maximum five years subject forfeiture restriction period typically restricted share grants staggered vesting periods one three years grant date intrinsic value restricted shares typically product share price date grant number restricted shares granted amortized straightline basis compensation expense periods restrictions lapse forfeiture rate based unvested restricted shares forfeited compared original total restricted shares granted 4year period excluding significant forfeiture events expected recur unearned compensation amortized compensation expense vesting period restricted shares december 31 2008 2007 341 million 259 million respectively unearned compensation cost related unvested restricted shares expected recognized weightedaverage period approximately 13 years amounts recognized net earnings prospective periods awards vest total market value restricted shares vested years ended december 31 2008 2007 2006 153 million 112 million 37 million respectively following tables summarize information regarding restricted shares unvested restricted shares outstanding december 31 2008 includes 285000 units performancebased vesting provisions performancebased units vest upon achievement performance targets issuable common shares performance targets based average annual return net assets rolling threeyear period compared measure defined peer group period compensation expense recognized 36month cliff vesting period based fair market value common stock date grant adjusted anticipated forfeitures performance period earned unearned compensation expense adjusted based changes expected achievement performance targets vesting provisions range 0 570000 shares based predefined performance targets december 31 2008 estimate vesting 570000 shares based expected achievement performance targets modifications june 1 2005 took action extend december 31 2006 regular term certain options granted employees including executive officers qualified retirees directors scheduled flowserve corporation notes consolidated financial statements continued expire 2005 november 4 2005 took subsequent action extend exercise date options expiring 2006 january 1 2009 thereafter concluded however recent regulatory guidance issued section 409a internal revenue code might cause recipients extended options become subject unintended adverse tax consequences section 409a accordingly effective december 14 2005 organization compensation committee board directors partially rescinded accordance regulations extensions regular term options provide follows regular term options otherwise expiring 2005 expired october 29 2006 ii regular term options otherwise expiring 2006 expired later 1 75 days regular term option originally granted expires 2 december 31 2006 extensions subject shareholder approval applicable plan amendments obtained annual shareholders’ meeting held august 24 2006 approval plan amendments considered stock modification financial reporting purposes subject recognition noncash compensation charge accordance sfas 123r recorded charge 56 million 2006 8 derivatives hedging activities enter forward exchange contracts hedge risks associated transactions denominated currencies local currency operation engaging transaction risk management derivatives policy specifies conditions may enter derivative contracts december 31 2008 2007 5557 million 4649 million respectively notional amount outstanding forward contracts third parties december 31 2008 length forward exchange contracts currently place ranged 2 days 24 months fair market value adjustments forward contracts recognized directly current period earnings fair value outstanding forward contracts december 31 2008 2007 net liability 32 million net asset 66 million respectively realized unrealized net gains changes fair value forward contracts 149 million 57 million 58 million years ended december 31 2008 2007 2006 respectively included income consolidated statements income also part risk management program enter interest rate swap agreements hedge exposure floating interest rates certain portions debt december 31 2008 2007 3850 million 3950 million respectively notional amount outstanding interest rate swaps third parties december 31 2008 maximum remaining length interest rate contract place approximately 30 months fair value interest rate swap agreements net liability 106 million net liability 41 million december 31 2008 2007 respectively unrealized losses changes fair value interest rate swap agreements net reclassifications 41 million 39 million net tax years ended december 31 2008 2007 respectively included comprehensive expense income 2004 entered compound derivative contract hedge exposure currency translation interest rate risks associated european investment bank credit facility notional amount derivative 850 million served convert floating rate interest rate risk fixed rate well us dollar currency risk euros repaid amounts outstanding facility december 15 2006 realized foreign currency transaction gain 85 million also settled derivative loss 99 million gain derivative along foreign currency transaction gain underlying loan aggregate 33 million year ended december 31 2006 included income net consolidated statements income flowserve corporation notes consolidated financial statements continued exposed risk creditrelated losses resulting nonperformance counterparties financial instruments perform credit evaluations counterparties forward contracts interest rate swap agreements expect counterparties meet obligations experienced credit losses counterparties interest rate swap transactions recorded comprehensive expense income net deferred taxes summarized expect recognize losses gains 53 million 18 million 01 million net deferred taxes earnings 2009 2010 2011 respectively related interest rate swap agreements based fair values december 31 2008 9 fair value financial instruments financial instruments shown presented fair value fair value defined price would received sell asset paid transfer liability orderly transaction market participants measurement date available fair value based observable market prices parameters derived prices parameters observable prices inputs available valuation models may applied beginning january 1 2008 assets liabilities recorded fair value consolidated balance sheet categorized based upon level judgment associated inputs used measure fair values hierarchical levels defined sfas 157 directly related amount subjectivity associated inputs fair valuation assets liabilities follows level inputs unadjusted quoted prices active markets identical assets liabilities measurement date level ii inputs quoted prices included level either directly indirectly observable asset liability correlation market data measurement date duration instrument’s anticipated life level iii inputs reflect management’s best estimate market participants would use pricing asset liability measurement date consideration given risk inherent valuation technique risk inherent inputs model asset liability’s categorization within fair value hierarchy based lowest level significant input valuation flowserve corporation notes consolidated financial statements continued fair values financial instruments december 31 2008 level iii assets liabilities relate investments certain deferred compensation arrangements quoted market prices unavailable varying valuation techniques used reflect best estimates assumptions used market participants common inputs valuing assets include securities trade prices recently reported trades broker quotes value level iii assets 78 million 99 million december 31 2008 2007 respectively value level iii liabilities 31 million 44 million december 31 2008 2007 respectively changes assets liabilities related impact consolidated statements income year ended december 31 2008 immaterial 10 details certain consolidated balance sheet captions following tables present financial information certain consolidated balance sheet captions accounts receivable net accounts receivable net property plant equipment net property plant equipment net flowserve corporation notes consolidated financial statements continued depreciation expense amount 526 million 495 million 467 million years ended december 31 2008 2007 2006 respectively included cost sales consolidated statements income remaining depreciation expense included selling general administrative expense assets net assets net assets include longterm tax receivables deferred loan costs items none individually exceed 5 total assets accrued liabilities accrued liabilities accrued liabilities include professional fees lease obligations insurance interest freight items none individually exceed 5 current liabilities flowserve corporation notes consolidated financial statements continued retirement obligations liabilities retirement obligations liabilities noncurrent liabilities include reserves uncertain tax positions reserves legal environmental matters items none individually exceed 5 total liabilities see note 17 discussion uncertain tax positions 11 equity method investments summarized combined balance sheet income statement information based recent financial information investments entities account using equity method unaudited flowserve corporation notes consolidated financial statements continued reconciliation net income per combined income statement information equity income investees per consolidated statements income follows 1 discussed note 3 effective march 1 2008 purchased remaining 50 interest niigata resulting full consolidation niigata date prior transaction 50 interest recorded using equity method accounting result niigata’s income statement information includes first two months 2008 2 provision income taxes based tax laws rates countries investees operate taxation regimes vary nominal rates also allowability deductions credits benefits 12 debt lease obligations debt including capital lease obligations consisted scheduled maturities credit facilities described well capital lease obligations borrowings next five years beyond credit facilities credit facilities amended comprised 6000 million term loan maturing august 10 2012 4000 million revolving line credit utilized provide 3000 million letters credit expiring august 10 2012 hereinafter refer credit facilities collectively “credit facilities” december 31 2008 2007 amounts outstanding revolving line flowserve corporation notes consolidated financial statements continued credit outstanding letters credit 1042 million 1151 million december 31 2008 2007 respectively reduced borrowing capacity 2958 million 2849 million respectively borrowings credit facilities bear interest rate equal option either 1 base rate based greater prime rate recently announced administrative agent credit facilities federal funds rate plus 050 2 london interbank offered rate “libor” plus applicable margin determined reference ratio total debt consolidated earnings interest taxes depreciation amortization “ebitda” december 31 2008 0875 15 borrowings revolving line credit term loan respectively connection credit facilities entered 3850 million notional amount interest rate swaps december 31 2008 hedge exposure floating interest rates addition pay lenders credit facilities commitment fee equal percentage determined reference ratio total debt consolidated ebitda unutilized portion revolving line credit letter credit fees respect financial standby letter credit outstanding credit facilities equal percentage based applicable margin effect libor borrowings new revolving line credit fees financial performance standby letters credit 0875 04375 respectively obligations credit facilities unconditionally guaranteed jointly severally substantially existing subsequently acquired organized domestic subsidiaries 65 capital stock certain foreign subsidiaries addition prior obtaining maintaining investment grade credit ratings guarantors’ obligations credit facilities collateralized substantially guarantors’ assets credit facilities contain among things covenants restricting subsidiaries’ ability dispose assets merge pay dividends repurchase redeem capital stock indebtedness incur indebtedness guarantees create liens enter agreements negative pledge clauses make certain investments acquisitions enter sale leaseback transactions enter transactions affiliates make capital expenditures engage business activity existing business credit facilities also contain covenants requiring us deliver lenders audited annual unaudited quarterly financial statements leverage interest coverage financial covenant certificates compliance maximum permitted leverage ratio 325 times debt total consolidated ebitda minimum interest coverage 325 times consolidated ebitda total interest expense compliance financial covenants credit facilities tested quarterly credit facilities include events default usual types credit facilities including nonpayment principal interest violation covenants incorrectness representations warranties cross defaults cross acceleration bankruptcy material judgments employee retirement income security act 1974 amended “erisa” events actual asserted invalidity guarantees security documents certain changes control company occurrence event default could result acceleration guarantors’ obligations credit facilities complied covenants december 31 2008 repayment obligations made scheduled repayments credit facilities 57 million 28 million 0 2008 2007 2006 respectively made mandatory repayments 2008 2007 mandatory repayments 2006 consisted 144 million using net cash proceeds sale gsg 09 million using excess cash flows defined credit facilities made optional prepayments 2008 2007 2006 made optional prepayments 50 million credit facilities terminated european investment bank credit facility repaid outstanding principle balance 850 million may prepay loans credit facilities whole part without premium penalty time flowserve corporation notes consolidated financial statements continued european letter credit facility september 14 2007 entered unsecured european letter credit facility “european loc facility” renewable annually issue letters credit aggregate face amount exceed 1500 million time initial commitment 800 million increased 1100 million effective september 12 2008 aggregate commitment european loc facility may increased 1500 million may agreed among parties may decreased us option without premium fee penalty european loc facility used contingent obligations solely respect surety performance bonds bank guarantees similar obligations outstanding letters credit drawn european loc facility 1040 million 1452 million 350 million 511 million december 31 2008 2007 respectively pay certain fees letters credit written european loc facility based upon ratio total debt consolidated ebitda december 31 2008 annual fees equaled 0875 plus fronting fee 01 operating leases noncancelable operating leases certain offices service quick response centers certain manufacturing operating facilities machinery equipment automobiles rental expense relating operating leases 436 million 393 million 293 million 2008 2007 2006 respectively future minimum lease payments due noncancelable operating leases amounts thousands 13 pension postretirement benefits sponsor several noncontributory defined benefit pension plans covering substantially us employees certain nonus employees provide benefits based years service age job grade levels type compensation retirement benefits covered employees provided contributory pension plans cash balance pension plans governmentsponsored retirement programs funded defined benefit pension plans receive funding based independent actuarial valuations provide current service amount sufficient amortize unfunded prior service periods exceed 30 years funding falling within legal limits proscribed prevailing regulation also maintain unfunded defined benefit plans permitted local regulations receive funding benefits become due periods presented used measurement date december 31 worldwide pension postretirement medical plans us defined benefit plans maintain qualified nonqualified defined benefit pension plans us qualified plan provides coverage substantially fulltime us employees receive benefits earnings threshold specified us department labor us plans designed operate “cash balance” arrangements total accumulated benefit obligation equivalent total projected benefit obligation “benefit obligation” nonqualified plans primarily cover small number employees including current former members senior management providing benefit levels equivalent participants otherwise limited us department labor rules flowserve corporation notes consolidated financial statements continued net defined benefit pension expense us defined benefit pension plans including qualified nonqualified plans estimated prior service benefit defined benefit pension plans amortized accumulated comprehensive loss us pension expense 2009 13 million estimated net loss defined benefit pension plans amortized accumulated comprehensive loss us pension expense 2009 65 million amortize estimated prior service benefits estimated net losses remaining expected service period following summarizes net pension liability us plans following summarizes amounts recognized balance sheet us plans flowserve corporation notes consolidated financial statements continued following table shows change accumulated comprehensive loss attributable components net cost change benefit obligations us plans net tax following assumptions related us defined benefit pension plans december 31 2008 compared december 31 2007 increased discount rate 625 675 based analysis publiclytraded investment grade us corporate bonds higher yield due current market conditions increased average assumed rate compensation increase 45 48 increased expected rate return assets 775 800 primarily based target allocations expected longterm asset returns expected rate return plan assets longterm nature shortterm market changes significantly impact rates flowserve corporation notes consolidated financial statements continued following summary changes us defined benefit plans’ pension obligations following reconciliation us defined benefit pension plans’ assets 1 significant decline return plan assets 2008 primarily result recent declines global debt equity markets amortized income remaining expected service period contributed 508 million 161 million us defined benefit pension plans 2008 2007 respectively payments exceeded minimum funding requirements mandated us department labor rules estimated contribution 2009 expected 55 million 75 million following table summarizes expected cash activity us defined benefit pension plans future amounts millions flowserve corporation notes consolidated financial statements continued asset allocation us defined benefit pension plans end 2008 2007 asset category follows none common stock directly held plans investment strategy invest various securities order pay retirement benefits plan participants minimizing cash contributions life plan accomplished preserving capital diversified investments high quality instruments earning longterm rate return consistent acceptable degree risk taking account liquidity needs plan investment policy invest approximately 65 plan assets equity securities 35 fixed income securities within investment category assets allocated various investment styles professional money management firms manage assets engage consultant assist evaluating activities periodically review investment policy generally conjunction asset liability study also regularly rebalance actual allocation target investment allocation nonus defined benefit plans maintain defined benefit pension plans cover employees following countries austria france germany india indonesia italy japan mexico netherlands sweden united kingdom net defined benefit pension expense nonus pension plans estimated net loss defined benefit pension plans amortized accumulated comprehensive loss nonus expense 2009 24 million following summarizes net pension liability nonus plans flowserve corporation notes consolidated financial statements continued 1 net deferred tax liability 2007 includes effect reversal valuation allowance 2007 see note 17 discussion valuation allowances following summarizes amounts recognized balance sheet nonus plans following table shows change accumulated comprehensive loss attributable components net cost change benefit obligations nonus plans net tax following assumptions related nonus defined benefit pension plans december 31 2008 compared december 31 2007 decreased average discount rate nonus plans 561 547 based primarily lower yields investment grade corporate bonds flowserve corporation notes consolidated financial statements continued united kingdom decreased average rate return assets 591 december 31 2007 435 december 31 2008 expected rate return plan assets longterm nature shortterm market changes significantly impact rates many nonus defined benefit plans unfunded permitted local regulation expected longterm rate return assets funded plans determined assessing rates return asset class following reconciliation nonus plans’ defined benefit pension obligations 1 actuarial loss 2008 primarily reflects impact experience losses plan united kingdom 2 decrease currency translation impact 2008 compared 2007 reflects strengthening us dollar exchange rate significant currencies primarily british pound euro following reconciliation nonus plans’ defined benefit pension assets 1 significant decline return plan assets 2008 primarily result recent declines global debt equity markets losses amortized income remaining service period 2 decrease currency translation impact 2008 compared 2007 reflects strengthening us dollar exchange rate significant currencies primarily british pound euro flowserve corporation notes consolidated financial statements continued following table summarizes expected cash activity nonus defined benefit plans future amounts millions asset allocations nonus defined benefit pension plans end 2008 2007 follows none common stock held directly plans cases investment strategy plans invest various securities order pay retirement benefits plan participants minimizing required cash contributions life plan accomplished preserving capital diversification high quality investments earning longterm rate return consistent acceptable degree risk legal requirements particular country taking account liquidity needs plan asset allocation differs plan based upon plan’s benefit obligation participants well results asset liability studies conducted plan professional money management firms manage plan assets engage consultants country assist evaluation activities defined benefit pension plans accumulated benefit obligations excess plan assets following summarizes key pension plan information regarding plans whose accumulated benefit obligations exceed fair value respective plan assets postretirement medical plans sponsor several defined benefit postretirement health care plans covering current retirees limited number future retirees us plans provide medical dental benefits administered insurance companies health maintenance organizations plans include participant contributions deductibles coinsurance provisions limitations integrated medicare group plans fund plans benefits paid incur health maintenance organization premiums plans hold assets period presented accordingly investment strategy targeted allocations plan assets benefits postretirement medical plans available new employees existing employees flowserve corporation notes consolidated financial statements continued net postretirement benefit expense postretirement medical plans estimated prior service benefit postretirement medical plans amortized accumulated comprehensive loss us pension expense 2009 20 million estimated net gain postretirement medical plans amortized accumulated comprehensive loss us expense 2009 24 million following summarizes accrued postretirement benefits liability postretirement medical plans following summarizes amounts recognized balance sheet postretirement benefits following table shows change accumulated comprehensive loss attributable components net cost change benefit obligations postretirement benefits net tax flowserve corporation notes consolidated financial statements continued following reconciliation postretirement benefits obligation 1 increase actuarial gain 2008 primarily reflects impact changes assumptions related employee retention rates plans based recent trends following presents expected benefit payments future periods amounts millions following assumptions related postretirement benefits assumed ranges annual rates increase medical costs used determine net expense 78 2008 88 2007 90 2006 gradual decrease 50 2012 future years flowserve corporation notes consolidated financial statements continued assumed heath care cost trend rates effect amounts reported postretirement medical plans onepercentage point change assumed health care cost trend rates would following effect 2008 reported amounts thousands made contributions postretirement medical plans pay benefits 39 million 2008 66 million 2007 64 million 2006 postretirement medical plans unfunded make contributions covered individuals’ claims approved payment accordingly contributions period directly correlated benefits paid defined contribution plans sponsor several defined contribution plans covering substantially us canadian employees certain nonus employees may contribute plans contributions matched varying amounts us including opportunities discretionary matching contributions us defined contribution plan expense 130 million 2008 80 million 2007 68 million 2006 2008 discontinued discretionary contributions defined contribution plan us increased matching contributions 25 participants us defined contribution plan option invest common stock discretionary contributions us typically funded common stock therefore plans assets include holdings common stock 14 legal matters contingencies asbestosrelated claims defendant large number pending lawsuits include many cases multiple claimants seek recover damages personal injury allegedly caused exposure asbestoscontaining products manufactured andor distributed us past aggregate number asbestosrelated claims declined recent years assurance trend continue average cost per claim increased asbestoscontaining materials incorporated products primarily encapsulated used components process equipment believe significant emission asbestoscontaining fibers occurred use equipment believe high percentage claims covered applicable insurance indemnities companies shareholder litigation appeal dismissed class action case derivative case dismissals 2003 related lawsuits filed federal court northern district texas alleging violated federal securities laws cases consolidated lead plaintiff amended complaint several times lead plaintiff’s last pleading fifth consolidated amended complaint “complaint” complaint alleged federal securities violations occurred february 6 2001 september 27 2002 named defendants company c scott greer former chairman president chief executive officer renee j hornbaker former vice president chief financial officer pricewaterhousecoopers llp independent registered public accounting firm banc america securities llc credit suisse first boston llc served underwriters two public stock offerings relevant period complaint asserted claims sections 10b 20a securities exchange act 1934 “exchange act” rule 10b5 thereunder sections 11 15 securities act 1933 “securities act” lead plaintiff sought unspecified compensatory damages forfeiture mr greer ms hornbaker unspecified incentivebased equitybased compensation profits stock sales recovery costs orders dated november 13 2007 january 4 2008 court denied plaintiffs’ motion class certification granted summary judgment favor defendants claims plaintiffs appealed rulings federal fifth flowserve corporation notes consolidated financial statements continued circuit court appeals appellate briefing complete oral argument held february 2 2009 date developments defend vigorously appeal effort plaintiffs overturn court’s denial class certification entry judgment favor us defendants 2005 shareholder derivative lawsuit filed purportedly behalf 193rd judicial district dallas county texas lawsuit originally named defendants mr greer ms hornbaker former current board members hugh k coble george haymaker jr william c rusnack michael f johnston charles rampacek kevin e sheehan diane c harris james rollans christopher bartlett named nominal defendant based primarily purported misstatements alleged abovedescribed federal securities case original lawsuit action asserted claims defendants breach fiduciary duty abuse control gross mismanagement waste corporate assets unjust enrichment plaintiff alleged purported violations state law occurred april 2000 date suit plaintiff sought behalf unspecified amount damages injunctive relief andor imposition constructive trust defendants’ assets disgorgement compensation profits benefits received defendants us recovery attorneys’ fees costs filed motion seeking dismissal case court thereafter ordered plaintiffs replead october 11 2007 plaintiffs filed amended petition adding new claims following additional defendants kathy giddings former vicepresident corporate controller bernard g rethore former chairman chief executive officer banc america securities llc credit suisse first boston llc served underwriters public stock offerings november 2001 april 2002 pricewaterhousecoopers llp independent registered public accounting firm april 2 2008 lawsuit dismissed court without prejudice plaintiffs’ request march 14 2006 shareholder derivative lawsuit filed purportedly behalf federal court northern district texas lawsuit named defendants mr greer ms hornbaker former current board members mr coble mr haymaker mr lewis kling mr rusnack mr johnston mr rampacek mr sheehan ms harris mr rollans mr bartlett named nominal defendant based primarily certain purported misstatements alleged abovedescribed federal securities case plaintiff asserted claims defendants breaches fiduciary duty purportedly occurred 2000 2004 plaintiff sought behalf unspecified amount damages disgorgement mr greer ms hornbaker salaries bonuses restricted stock options recovery attorneys’ fees costs pursuant motion filed us federal court dismissed case march 14 2007 primarily basis case properly filed federal court march 27 2007 plaintiff refiled essentially lawsuit naming defendants supreme court state new york believed new lawsuit improperly filed supreme court state new york filed motion seeking dismissal case january 2 2008 court entered order granting motion dismiss claims allowed plaintiffs opportunity replead notice entry dismissal order served plaintiff january 15 2008 date plaintiff neither filed amended complaint appealed dismissal order united nations oilforfood program entered disclosed previously sec filings material details settlements sec department justice “doj” dutch authorities relating products two foreign subsidiaries delivered iraq 1996 2003 united nations oilforfood program believe confidential french investigation may still ongoing accordingly cannot predict outcome french investigation time currently expect incur additional case resolution costs material amount matter however french authorities take enforcement action us regarding investigation may subject additional monetary nonmonetary penalties addition settlements governmental investigation referenced june 27 2008 republic iraq filed civil suit federal court new york 93 participants united nations oilforfood program including flowserve two foreign subsidiaries participated program intend flowserve corporation notes consolidated financial statements continued vigorously contest suit believe valid defenses claims asserted however cannot predict outcome suit present time whether resolution suit material adverse financial impact company export compliance march 2006 initiated voluntary process determine compliance posture respect us export control economic sanctions laws regulations upon initial investigation appeared product transactions technology transfers handled full compliance us export control laws regulations result conjunction outside counsel conducted voluntary systematic process review validate voluntarily disclose export violations discovered part review process completed comprehensive disclosures appropriate us government regulatory authorities end 2008 although disclosures may refined supplemented based review data collected selfdisclosure period october 1 2002 october 1 2007 number process pumps valves mechanical seals parts related thereto exported limited circumstances without required export reexport licenses without full compliance applicable rules regulations number different countries throughout world including certain us sanctioned countries foregoing information subject revision review submittal applicable us regulatory authorities taken number actions increase effectiveness global export compliance program included increasing personnel resources dedicated export compliance providing additional export compliance tools employees improving export transaction screening processes enhancing content frequency export compliance training programs selfreported violations us export control laws regulations may result civil criminal penalties including fines andor penalties currently unable definitively determine full extent nature total amount penalties might subject result selfreported violations us export control laws regulations currently involved potentially responsible party two former public waste disposal sites may subject remediation pending government procedures sites various stages evaluation federal state environmental authorities projected cost remediation sites well alleged “fair share” allocation remain uncertain studies completed parties either negotiated amicable resolution matter judicially resolved site many parties similarly identified identification location additional parties continuing applicable federal state law many parties identified financially strong solvent companies appear able pay share remediation costs based information waste disposal practices sites environmental regulatory process general believe likely ultimate remediation liability costs site apportioned among liable parties including site owners waste transporters according volumes andor toxicity wastes shown disposed sites believe exposure existing disposal sites material also defendant number lawsuits including product liability claims insured subject applicable deductibles arising ordinary course business also involved ordinary routine litigation incidental business none either individually aggregate believe material business operations overall financial condition however litigation inherently unpredictable resolutions dispositions claims lawsuits settlement otherwise could adverse impact financial position operating results cash flows reporting period resolution disposition occurs flowserve corporation notes consolidated financial statements continued although none aforementioned potential liabilities quantified absolute certainty except otherwise indicated established reserves covering exposures relating contingencies extent believed reasonably estimable probable based past experience available facts consequence legal matters including settlements publicly disclosed litigation otherwise well revisions prior estimates recognized net expenses approximately 3 million 9 million 8 million 2008 2007 2006 additional exposures beyond reserves could exist currently cannot estimated continue evaluate potential contingent loss exposures develop recognize expense soon losses become probable reasonably estimated 15 warranty reserve recorded reserves product warranty claims included current noncurrent liabilities following summary activity warranty reserve 16 shareholders’ equity february 26 2008 board directors authorized increase quarterly cash dividend 025 per share 015 per share effective first quarter 2008 generally dividend dateofrecord last month quarter dividend paid following month february 26 2008 board directors authorized program repurchase 3000 million outstanding common stock unspecified time period program commenced second quarter 2008 repurchased 17 million shares 1650 million 2008 17 income taxes provision income taxes consists following flowserve corporation notes consolidated financial statements continued expected cash payments current federal income tax expense 2008 2007 2006 reduced approximately 122 million 124 million 188 million respectively result tax deductions related exercise nonqualified employee stock options vesting restricted stock income tax benefit resulting stockbased compensation plans increased capital excess par value provision income taxes differs statutory corporate rate due following 2008 effective tax rate differed federal statutory rate 35 primarily due net impact foreign operations includes impacts lower foreign tax rates changes reserves established uncertain tax positions pursuant fin 48 benefits arising permanent reinvestment foreign subsidiaries changes valuation allowance estimates favorable tax ruling luxembourg net impact discrete items included discussion approximately 22 million 2007 effective tax rate differed federal statutory rate 35 primarily due net impact foreign operations includes impacts lower foreign tax rates net favorable results various tax audits changes valuation allowance estimates improvements partially offset additional reserves established uncertain tax positions pursuant adoption fin 48 discussed 2006 effective tax rate differed federal statutory rate 35 primarily due net impact foreign operations certain us nondeductible expenses sfas 109 “accounting income taxes” requires us provide deferred taxes temporary differences associated investment foreign subsidiaries financial reporting basis exceeds tax basis unless assert permanent reinvestment foreign jurisdictions pursuant accounting principles board opinion “apb” 23 “accounting income taxes special areas” financial reporting basis tax basis differences investments foreign subsidiaries consist unremitted earnings losses well foreign currency translation adjustments assert permanent reinvestment apb 23 unremitted foreign earnings however assert permanent reinvestment apb 23 certain portions initial invested capital various foreign subsidiaries three years reported period ended december 31 2008 recognized net deferred tax assets attributable excess foreign tax credits unremitted earnings foreign currency translation adjustments foreign subsidiaries excess financial reporting basis cash deemed dividend distributions foreign subsidiaries resulted recognition approximately 271 million 75 million income tax expense years ended december 31 2008 2007 respectively recorded benefit excess foreign tax credits associated deemed repatriation unremitted earnings credits available offset liability associated dividends flowserve corporation notes consolidated financial statements continued october 22 2004 american jobs creation act 2004 “2004 act” signed law providing phase existing eti exclusion foreign export sales viewed inconsistent international trade protocols set european union phase provides benefit otherwise qualifying export sales 2006 limited approximately 60 replacement loss eti export incentive 2004 act provides deduction income qualified domestic production activities phased 2005 2010 manufacturing deduction impact 2006 tax rate minor impact 2007 2008 tax rates effect future tax rates yet quantified guidance fasb staff position fas 1091 “application fasb statement 109 tax deduction qualified production activities provided american jobs creation act 2004” tax deduction qualified production activities treated special deduction described sfas 109 special deduction reported period deduction claimed tax return record valuation allowances reflect estimated amount deferred tax assets may realized based upon analysis existing deferred tax assets net operating losses tax credits jurisdiction expectations ability utilize tax attributes review past current estimated future taxable income establishment tax strategies net decrease valuation allowances rate reconciliation includes net reduction foreign valuation allowances 82 million deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes significant components consolidated deferred tax assets liabilities flowserve corporation notes consolidated financial statements continued approximately 1755 million us foreign net operating loss carryforwards december 31 2008 total 558 million state net operating losses net operating losses generated us unused begin expire 2009 majority expiring 2021 majority nonus net operating losses carry forward without expiration additionally approximately 21 million foreign tax credit carryforwards december 31 2008 expiring 2010 2016 21 million valuation allowance reserves recorded earnings income taxes comprised january 1 2007 adopted fin 48 addresses determination whether tax benefits claimed expected claimed tax return recorded financial statements fin 48 may recognize tax benefit uncertain tax position likely tax position sustained examination taxing authorities determination based technical merits position presumes uncertain tax position examined relevant taxing authority full knowledge relevant information tax benefits recognized financial statements position measured based largest benefit greater fifty percent likelihood realized upon ultimate settlement fin 48 also provides guidance derecognition classification interest penalties income taxes accounting interim periods requires increased disclosures cumulative effect adopting fin 48 increase tax reserves decrease 298 million opening retained earnings january 1 2007 upon adoption amount gross unrecognized tax benefits january 1 2007 approximately 129 million amount 849 million recognized would favorably impact effective tax rate interest penalties related income tax liabilities included income tax expense balance accrued interest penalties recorded balance sheet part fin 48 liability january 1 2007 approximately 14 million flowserve corporation notes consolidated financial statements continued tabular reconciliation total gross amount unrecognized tax benefits excluding interest penalties follows millions amount gross unrecognized tax benefits december 31 2008 1511 million includes 203 million accrued interest penalties amount 933 million recognized would favorably impact effective tax rate interest penalties related income tax liabilities included income tax expense total amount interest penalties recognized statement income years ended december 31 2008 2007 19 million 44 million respectively limited exception longer subject us federal state local income tax audits years 2004 nonus income tax audits years 2002 currently examination various years us germany italy venezuela argentina reasonably possible within next 12 months effective tax rate impacted resolution matters audited various taxing authorities also reasonably possible statute limitations close various taxing jurisdictions within next 12 months estimate could record reduction tax expense 9 million within next 12 months 18 business segment information principally engaged worldwide design manufacture distribution service industrial flow management equipment provide pumps valves mechanical seals primarily oil gas industry chemical power water industries requiring flow management products following three divisions constitutes business segment • flowserve pump division • flow control division • flow solutions division manufactures different products defined type products services provided division president reports directly chief executive officer division vice president finance reports directly chief accounting officer decisionmaking purposes chief executive officer members senior executive management use financial information generated reported division level corporate headquarters constitute separate division business segment evaluate segment performance allocate resources based segment’s operating income amounts classified “all other” include corporate headquarters costs minor entities constitute flowserve corporation notes consolidated financial statements continued separate segments intersegment sales transfers recorded cost plus profit margin sales eliminated consolidation following summary financial information reportable segments reconciled amounts reported consolidated financial statements 1 increase identifiable assets “all other” 2008 2007 primarily result increased cash balances flowserve corporation notes consolidated financial statements continued geographic information attribute sales different geographic areas based facilities’ locations longlived assets classified based geographic area assets located exclude deferred tax assets categorized noncurrent sales longlived assets geographic area follows 1 2008 2007 2006 germany accounted approximately 10 consolidated sales individual country within group represents 10 consolidated longlived assets period presented 2 “other” includes canada latin america asia pacific individual geographic segment within group represents 10 consolidated totals period presented net sales international customers including export sales united states represented 69 66 67 total sales 2008 2007 2006 respectively major customer information large number customers across large number manufacturing service facilities believe sales individual customer represent 10 consolidated sales years presented flowserve corporation notes consolidated financial statements continued 19 accumulated comprehensive loss following presents components accumulated comprehensive loss net related tax effects 1 decrease foreign currency translation adjustments 2008 primarily represents strengthening us dollar exchange rate versus euro british pound december 31 2008 compared december 31 2007 increase foreign currency translation adjustments 2007 2006 due primarily weakening us dollar exchange rate versus euro 2 decrease pension postretirement effects 2008 compared 2007 primarily reflects actuarial net losses resulting returns plan assets lower anticipated following tables present summary comprehensive expense income years ended december 31 2008 2007 2006 flowserve corporation notes consolidated financial statements continued 20 quarterly financial data unaudited following presents summary unaudited quarterly data 2008 2007 amounts millions except per share data significant fourth quarter adjustments 2008 significant fourth quarter adjustments 2007 net earnings record net gains approximately 9 million pretax certain legal matters ii reversal deferred tax valuation allowances approximately 8 million 21 subsequent events updates legal matters existence december 31 2008 new legal matters arisen since december 31 2008 discussed note 14 february 23 2009 board directors authorized increase payment quarterly dividends common stock 025 per share 027 per share payable quarterly beginning april 8 2009 item 9item 8 financial statements supplementary data report independent registered public accounting firm board directors shareholders flowserve corporation opinion consolidated financial statements listed index appearing item 15a1 present fairly material respects financial position flowserve corporation subsidiaries december 31 2009 2008 results operations cash flows three years period ended december 31 2009 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed accompanying index appearing item 15a2 presents fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintained material respects effective internal control financial reporting december 31 2009 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso company’s management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report internal control financial reporting appearing item 9a responsibility express opinions financial statements financial statement schedule company’s internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions discussed note 1 consolidated financial statements company changed manner calculates earnings per share manner accounts noncontrolling interests 2009 changed manner accounts uncertain tax positions 2007 company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp pricewaterhousecoopers llp dallas texas february 24 2010 flowserve corporation consolidated balance sheets see accompanying notes consolidated financial statements flowserve corporation consolidated statements income see accompanying notes consolidated financial statements flowserve corporation consolidated statements comprehensive income see accompanying notes consolidated financial statements flowserve corporation consolidated statements shareholders’ equity see accompanying notes consolidated financial statements flowserve corporation consolidated statements cash flows see accompanying notes consolidated financial statements flowserve corporation notes consolidated financial statements december 31 2009 2008 three years ended december 31 2009 1 significant accounting policies accounting developments produce engineered industrial pump systems engineered industrial valves control valves actuators controls mechanical seals auxiliary systems provide range related flow management services worldwide primarily process industries equipment manufactured serviced us predominantly used industries deal difficulttohandle corrosive fluids well environments extreme temperatures pressure horsepower speed business affected economic conditions united states “us” countries products sold serviced cyclical nature oil gas chemical power generation water management industries served relationship us dollar currencies demand pricing customers’ end products certain reclassifications retrospective adjustments made prior period information conform current period presentation reclassifications retrospective adjustments primarily result adoption guidance related 1 noncontrolling interests accounting standards codification “asc” 810 “consolidation” 2 twoclass method calculating earnings per share “eps” asc 260 “earnings per share” principles consolidation consolidated financial statements include accounts company wholly majorityowned subsidiaries addition consolidate variable interest entities deemed primary beneficiary minority interests nonaffiliated parties recognized majorityowned consolidated subsidiaries intercompany profits transactions balances among consolidated entities eliminated consolidated financial statements investments unconsolidated affiliated companies represent noncontrolling ownership interests 20 50 accounted using equity method approximates equity interest underlying equivalent net book value accounting principles generally accepted united states america “gaap” investments interests less 20 investee accounted cost method whereby income recognized event dividend receipt investments accounted cost method tested annually impairment use estimates process preparing financial statements conformity gaap requires management make estimates assumptions affect reported amounts certain assets liabilities revenues expenses management believes estimates assumptions reasonable however actual results may differ materially estimates significant estimates assumptions made management used determining • revenue recognition net liquidated damages delivery penalties • income taxes deferred taxes tax valuation allowances tax reserves • reserves contingent loss • retirement postretirement benefits • valuation goodwill indefinitelived intangible assets longlived assets revenue recognition revenues product sales recognized risks rewards ownership transferred customers based contractual delivery terms agreed customer fulfillment inconsequential perfunctory actions addition policy requires persuasive evidence arrangement fixed determinable sales price reasonable assurance collectibility contracts containing multiple elements determinable fair value recognize revenue amount equal element’s pro rata share contract’s fair value accordance contractual delivery terms element defer recognition revenue advance payments received customers performance obligations completed andor services performed freight charges billed flowserve corporation notes consolidated financial statements continued customers included sales related shipping costs included cost sales consolidated statements income revenues longterm contracts include contracts exceed certain internal thresholds regarding size duration project provide receipt progress billings customer recorded percentage completion method progress measured costtocost basis percentage completion revenue represents less 12 consolidated sales year presented revenue service repair contracts recognized services agreed customer rendered revenues generated fixed fee service repair contracts recognized ratable basis term contract contracts range duration generally extend five years fixed fee service contracts represent less 1 consolidated sales year presented certain instances provide guaranteed completion dates terms contracts failure meet contractual delivery dates result late delivery penalties nonrecoverable costs instances payment costs deemed probable perform project profitability analysis accounting costs reduction realizable revenues could potentially cause estimated total project costs exceed projected total revenues realized project instances would record reserves cover excesses period determined would adversely affect results operations financial position circumstances total projected reduced revenues still exceed total projected costs incurrence unrealized incentive fees nonrecoverable costs generally reduces profitability project time subsequent revenue recognition reported results would change different estimates used contract costs different estimates used contractual contingencies cash equivalents place temporary cash investments financial institutions policy invest institutions instruments minimal credit risk market risk investments original maturity three months less purchased classified cash equivalents highly liquid principal values subject significant risk change due interest rate fluctuations allowance doubtful accounts credit risk allowance doubtful accounts established based estimates amount uncollectible accounts receivable determined principally based upon aging accounts receivable also customer credit history industry market segment information economic trends conditions credit reports customer financial condition customer credit issues customer bankruptcies general economic conditions may also impact estimates credit risks mitigated diversity customer base across many different geographic regions industries performing creditworthiness analyses customers additionally mitigate credit risk letters credit advance payments received customers december 31 2009 2008 believe significant concentrations credit risk inventories related reserves inventories stated lowerofcost market cost determined firstin firstout method reserves excess obsolete inventories based upon assessment market conditions products determined historical usage estimated future demand due long life cycles products carry spare parts inventories historically low usage rates provide reserves inventory based demonstrated usage aging criteria income taxes deferred taxes tax valuation allowances tax reserves account income taxes asset liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases operating loss tax credit carryforwards deferred tax assets liabilities calculated using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized period includes enactment date record valuation allowances flowserve corporation notes consolidated financial statements continued reflect estimated amount deferred tax assets may realized based upon analysis existing deferred tax assets net operating losses tax credits jurisdiction expectations ability utilize tax attributes review past current estimated future taxable income establishment tax strategies estimates could impacted changes amount geographical source future income results implementation alteration tax planning strategies provide deferred taxes temporary differences associated investment foreign subsidiaries financial reporting basis exceeds tax basis unless assert permanent reinvestment foreign jurisdictions financial reporting basis tax basis differences investments foreign subsidiaries consist unremitted earnings losses well foreign currency translation adjustments amount income taxes pay subject ongoing audits federal state foreign tax authorities often result proposed assessments significant judgment required determining income tax provisions evaluating tax positions establish reserves open tax years uncertain tax positions may subject challenge various tax authorities consolidated tax provision related accruals include impact reasonably estimable losses related interest penalties deemed appropriate january 1 2007 adopted asc 740 “income taxes” addresses determination whether tax benefits claimed expected claimed tax return recorded financial statements asc 740 may recognize tax benefit uncertain tax position likely tax position sustained examination taxing authorities determination based technical merits position presumes uncertain tax position examined relevant taxing authority full knowledge relevant information tax benefits recognized financial statements position measured based largest benefit greater fifty percent likelihood realized upon ultimate settlement believe adequately provided reasonably foreseeable outcome related matters future results may include favorable unfavorable adjustments estimated tax liabilities extent expected tax outcome matters changes estimate impact income tax provision period determination made legal environmental accruals legal environmental reserves recorded based upon casebycase analysis relevant facts circumstances assessment potential legal obligations costs amounts relating legal environmental liabilities recorded probable loss incurred loss estimable assessments legal environmental costs based information obtained independent inhouse experts loss experience similar situations estimates may change future due new developments regarding facts circumstances matter estimates liabilities unsettled asbestosrelated claims based known claims experience preceding two years claims filed settled dismissed included accrued liabilities retirement obligations liabilities applicable consolidated balance sheets substantial majority asbestosrelated claims covered insurance indemnities estimated recoveries insurance carriers unsettled claims receivables settlements legal fees paid us asbestosrelated claims estimated using historical experience insurance recovery rates estimates future recoveries include estimates coverage financial viability insurance carriers estimated recoveries included assets net consolidated balance sheets changes claims filed settled dismissed adjustments events deemed unusual unlikely recur differences actual estimated settlement costs insurance indemnity recoveries could impact future expense warranty accruals warranty obligations based upon product failure rates materials usage service delivery costs analysis identified expected claims estimate cost resolve claims estimates expected claims generally factor historical claims known product issues warranty obligations based factors adjusted based historical sales trends preceding 24 months changes flowserve corporation notes consolidated financial statements continued claim rates differences actual expected warranty costs sales trends could impact warranty obligation estimates might adverse effects consolidated results operations financial position insurance accruals insurance accruals recorded wholly partially selfinsured risks medical benefits workers’ compensation based upon analysis claim loss history insurance deductibles policy limits relevant factors included accrued liabilities consolidated balance sheets estimates based upon information received actuaries insurance company adjusters independent claims administrators independent sources changes claims differences actual expected claim losses could impact future accruals receivables insurance carriers estimated using historical experience insurance recovery rates estimates future recoveries include estimates coverage financial viability insurance carriers estimated receivables included accounts receivable net assets net applicable consolidated balance sheets pension postretirement obligations determination retirement postretirement benefits obligations based estimates made management consultation independent actuaries investment advisors inherent valuations assumptions including discount rates expected rates return plan assets retirement rates mortality rates compensation increase factors current market conditions including changes rates return interest rates medical inflation rates considered selecting assumptions actuarial gains losses prior service costs recognized accumulated comprehensive loss arise amortize costs net pension expense remaining expected service period valuation goodwill indefinitelived intangible assets longlived assets value goodwill indefinitelived intangible assets tested annually impairment december 31 whenever events circumstances indicate assets may impaired impairment goodwill indefinitelived intangibles assessed reporting unit level correlates operating segments consider operating segments constitute business discrete financial information management regularly reviews net realizable value longlived assets including property plant equipment reviewed periodically indicators potential impairment conditions present based upon assessment estimated future cash flows related assets property plant equipment depreciation property plant equipment stated historical cost less accumulated depreciation asset retirement obligations exist capitalized part carrying amount asset depreciated remaining useful life asset useful lives leasehold improvements lesser remaining lease term useful life improvement assets retired otherwise disposed costs related accumulated depreciation removed accounts resulting gains losses included income operations period depreciation computed straightline method based estimated useful lives depreciable assets generally estimated useful lives assets costs related routine repairs maintenance expensed incurred internally developed software capitalize certain costs associated development internaluse software generally costs related significant software development projects amortized estimated useful life typically three five years upon implementation software flowserve corporation notes consolidated financial statements continued intangible assets intangible assets excluding trademarks considered indefinite life consist primarily engineering drawings distribution networks software patents items amortized estimated useful lives generally ranging 3 40 years assets reviewed impairment whenever events circumstances indicate impairment may occurred deferred loan costs deferred loan costs consisting fees expenses associated debt financing amortized term associated debt using effective interest method additional amortization recorded periods optional prepayments debt made fair values financial instruments carrying amounts financial instruments approximated fair value december 31 2009 carrying amounts financial instruments approximated fair value december 31 2008 except term loan interbank market term loan implied fair value approximately 495 million december 31 2008 compared carrying value 5497 million believe reflective general global economic conditions december 31 2008 assets liabilities recorded fair value consolidated balance sheets categorized based upon level judgment associated inputs used measure fair values hierarchical levels defined asc 820 “fair value measurements disclosures” directly related amount subjectivity associated inputs fair valuation assets liabilities asset liability’s categorization within fair value hierarchy based lowest level significant input valuation hierarchical levels follows level inputs unadjusted quoted prices active markets identical assets liabilities measurement date level ii inputs quoted prices included level either directly indirectly observable asset liability correlation market data measurement date duration instrument’s anticipated life level iii inputs reflect management’s best estimate market participants would use pricing asset liability measurement date consideration given risk inherent valuation technique risk inherent inputs model derivatives hedging activities part risk management strategy enter derivative contracts mitigate certain financial risks related foreign currencies interest rates riskmanagement derivatives policy outlining conditions enter financial derivative transactions employ foreign currency economic hedging strategy minimize potential losses earnings cash flows unfavorable foreign currency exchange rate movements strategy also minimizes potential gains favorable exchange rate movements foreign currency exposures arise transactions including firm commitments anticipated transactions denominated currency entity’s functional currency translation foreigndenominated assets liabilities us dollars primary currencies operate addition us dollar argentina peso australian dollar brazilian real british pound canadian dollar chinese yuan colombian peso euro indian rupee japanese yen mexican peso singapore dollar swedish krona venezuelan bolivar enter interest rate swap agreements purpose hedging exposure floating interest rates certain portions debt policy achieve hedge accounting treatment requires us document relationships hedging instruments hedged items risk management objective strategy entering hedges whether intend designate formal hedge accounting relationship process includes linking derivatives designated formal hedge accounting relationship fair value cash flow foreign currency hedges 1 specific assets liabilities balance sheet 2 specific firm commitments forecasted transactions cases designate hedge assess inception hedge ongoing basis whether derivatives highly effective offsetting changes fair value cash flows hedged items flowserve corporation notes consolidated financial statements continued whether derivatives may expected remain highly effective future periods failure demonstrate effectiveness offsetting exposures retroactively prospectively would cause us deem hedge ineffective derivatives recognized balance sheet fair values derivatives qualify hedge accounting elected apply hedge accounting includes substantially forward exchange contracts changes fair values derivatives recognized expense income net consolidated statements income inception new derivative contract formal hedge accounting elected policy requires us designate derivative 1 hedge forecasted transaction b variability cash flows received paid connection recognized asset liability “cash flow” hedge 2 foreign currency fair value “foreign currency” hedge changes fair value derivative highly effective documented designated qualified cash flow hedge extent hedge effective recorded comprehensive income loss earnings affected variability cash flows hedged transaction changes fair value foreign currency hedges recorded comprehensive income loss since satisfy accounting criteria cash flow hedge ineffectiveness represents amount changes fair value derivative mirror change cash flow forecasted transaction recorded current period earnings effective hedges changes value hedged item also recorded component comprehensive income loss underlying recognized balance sheet upon settlement realized gains losses recognized income consolidated statements income discontinue hedge accounting • deem hedge ineffective determine designation derivative hedging instrument longer appropriate • derivative longer effectively offsets changes cash flows hedged item firm commitments contracts • derivative expires terminates sold • occurrence contracted committed transaction longer probable occur originally expected period hedge accounting discontinued derivative remains outstanding carry derivative estimated fair value balance sheet recognizing changes fair value current period earnings cash flow hedge becomes ineffective deferred gains losses cash flow hedge remain accumulated comprehensive loss exposure relating item underlying hedge recognized becomes probable hedged forecasted transaction occur deferred gains losses hedging instrument recognized earnings immediately foreign currency translation assets liabilities foreign subsidiaries translated us dollars exchange rates prevailing balance sheet date income expenses translated average rates month translation gains losses generally reported component accumulated comprehensive loss transaction translation gains losses arising intercompany balances reported component accumulated comprehensive loss underlying transaction stems longterm equity investment debt designated due foreseeable future otherwise recognize transaction gains losses arising intercompany transactions component income intercompany balances longterm investment related designated due beyond foreseeable future may mitigate risk associated foreign currency fluctuations entering forward exchange contracts see note 8 discussion forward exchange contracts flowserve corporation notes consolidated financial statements continued transactional currency gains losses arising transactions currencies sites’ functional currencies changes fair value forward exchange contracts qualify hedge accounting included consolidated results operations years ended december 31 2009 2008 2007 recognized net losses gains 78 million 166 million 63 million amounts expense income net accompanying consolidated statements income stockbased compensation stockbased compensation measured grant date fair value policy set exercise price stock option awards value restricted share restricted share unit performancebased unit awards collectively referred “restricted shares” closing price common stock new york stock exchange date grant date grants authorized board directors restricted share units performancebased units refer restricted awards voting rights accrue dividends forfeited vesting occur options expensed using graded vesting model whereby recognize compensation cost requisite service period separately vesting tranche award adjust sharebased compensation least annually changes estimate expected equity award forfeitures based actual forfeiture experience intrinsic value restricted shares typically product share price date grant number restricted shares granted amortized straightline basis compensation expense periods restrictions lapse based expected number shares vest forfeiture rate based unvested restricted shares forfeited compared original total restricted shares granted 4year period excluding significant forfeiture events expected recur earnings per share effective january 1 2009 adopted twoclass method calculating eps retrospectively adjusted earnings per common share prior periods presented “twoclass” method earnings allocation formula determines earnings per share class common stock participating security earnings period distributed unvested restricted share awards earn nonforfeitable dividend rights qualify participating securities accordingly included basic computation unvested restricted shares participate equal basis common shares therefore difference undistributed earnings allocated participating security accordingly presentation prepared combined basis presented earnings per common share previously unvested restricted shares included outstanding within basic earnings per common share included diluted earnings per common share pursuant treasury stock method following reconciliation net earnings flowserve corporation weighted average shares calculating basic net earnings per common share flowserve corporation notes consolidated financial statements continued earnings per weighted average common share outstanding calculated follows diluted earnings per share based upon weighted average number shares determined basic earnings per share plus shares potentially issuable conjunction stock options restricted share units performance share units three years ended december 31 2009 2008 2007 options purchase common stock excluded computations potentially dilutive securities retrospectively adjusted prior period reflect results would reported applied provisions twoclass method computing earnings per common share periods presented effects change relates net earnings per share flowserve corporation common shareholders follows research development expense research development costs charged expense incurred aggregate research development costs included selling general administrative expenses 294 million 340 million 291 million 2009 2008 2007 respectively costs incurred flowserve corporation notes consolidated financial statements continued research development primarily include salaries benefits consumable supplies well rent professional fees utilities depreciation property equipment used research development activities business combinations business combinations referred financial statements used purchase method accounting allocate purchase price identifiable tangible intangible assets liabilities recognizing goodwill purchase price exceeds fair value identifiable assets net liabilities assumed subsequent events evaluate subsequent events date filing interim annual reports accounting developments pronouncements implemented september 2006 financial accounting standards board “fasb” issued guidance asc 820 established single definition fair value framework measuring fair value gaap expands disclosures fair value measurements guidance applies accounting pronouncements require permit fair value measurements however require new fair value measurements february 2008 fasb issued additional guidance delayed adoption nonfinancial assets nonfinancial liabilities except items recognized disclosed fair value annual frequently recurring basis january 1 2009 adoption guidance effective january 1 2009 material impact consolidated financial condition results operations december 2007 fasb issued guidance related business combinations asc 805 “business combinations” established principles requirements acquirer business combination recognizes measures identifiable assets acquired liabilities assumed noncontrolling interests acquiree goodwill acquired expands disclosures business combinations guidance requires acquirer recognize changes valuation allowances acquired deferred tax assets operations changes deferred tax benefits previously recognized corresponding reduction goodwill exception provisions regarding acquired deferred taxes tax contingencies applicable business combinations guidance applies prospectively business combinations acquisition date beginning first annual reporting period beginning december 15 2008 adoption guidance effective january 1 2009 material impact consolidated financial condition results operations december 2007 fasb issued guidance related consolidation asc 810 “consolidations” establishes accounting reporting standards require • ownership interests subsidiaries held parties parent clearly identified labeled presented consolidated balance sheet within equity separate parent’s equity • amount consolidated net income attributable parent noncontrolling interests clearly identified presented face consolidated statement income • changes parent’s ownership interest parent retains controlling financial interest subsidiary accounted consistently • subsidiary deconsolidated retained noncontrolling equity investment former subsidiary initially measured fair value • entities provide sufficient disclosures clearly identify distinguish interests parent interests noncontrolling owners flowserve corporation notes consolidated financial statements continued adoption guidance effective january 1 2009 applied retrospectively periods presented material impact consolidated financial condition results operations december 2008 fasb issued guidance related retirement benefits compensation asc 715 “compensation retirement benefits” amends guidance employer’s disclosures plan assets defined benefit pension postretirement plan adoption guidance effective january 1 2009 impact consolidated financial condition results operations march 2008 fasb issued guidance related derivatives hedging asc 815 “derivatives hedging” enhances disclosure framework requiring entities provide detailed disclosures entity uses derivative instruments derivative instruments related hedged items accounted derivative instruments related hedged items affect entity’s financial condition results operations cash flows adoption guidance effective january 1 2009 impact consolidated financial condition results operations april 2008 fasb issued guidance related intangibles business combinations asc 350 “intangibles goodwill other” asc 805 respectively amends factors considered developing renewal extension assumptions used determine useful life recognized intangible asset guidance intended improve consistency useful life recognized intangible asset period expected cash flows used measure fair value asset adoption guidance effective january 1 2009 impact consolidated financial condition results operations june 2008 fasb issued guidance related eps asc 260 concluded outstanding unvested sharebased payment awards contain rights nonforfeitable dividends participate undistributed earnings common shareholders therefore considered participating securities purposes computing earnings per share entities participating securities required use “twoclass” method computing earnings per share twoclass method earnings allocation formula determines earnings per share class common stock participating security according dividends declared accumulated participation rights undistributed earnings adoption guidance effective january 1 2009 applied retrospectively periods presented material impact consolidated financial condition results operations see “earnings per share” april 2009 fasb issued guidance related business combinations asc 805 amended clarified guidance address application initial recognition measurement subsequent measurement accounting disclosure assets liabilities arising contingencies business combination additional guidance applies prospectively business combinations acquisition date beginning first annual reporting period beginning december 15 2008 adoption guidance effective january 1 2009 material impact consolidated financial condition results operations april 2009 fasb issued guidance related interim disclosures fair value financial instruments asc 825 “financial instruments” requires disclosures fair value financial instruments interim reporting periods publiclytraded companies well annual financial statements adoption guidance effective april 1 2009 impact consolidated financial condition results operations april 2009 fasb issued guidance related investments debt equity securities asc 320 “investments debt equity securities” amended otherthantemporary impairment guidance gaap debt securities make guidance operational improve presentation disclosure otherthantemporary impairments debt equity securities financial statements guidance amend existing recognition measurement guidance related otherthantemporary impairments equity securities adoption guidance effective april 1 2009 material impact consolidated financial condition results operations flowserve corporation notes consolidated financial statements continued may 2009 fasb issued guidance related subsequent events asc 855 “subsequent events” clarified codified guidance previously issued american institute certified public accountants guidance established period balance sheet date management reporting entity evaluate events transactions may occur potential recognition disclosure financial statements circumstances entity recognize events transactions occurring balance sheet date financial statements disclosures entity make events transactions occurred balance sheet date adoption guidance effective april 1 2009 material impact consolidated financial condition results operations august 2009 fasb issued accounting standards update “asu” 200905 “fair value measurements disclosures asc 820 measuring liabilities fair value” provides amendments asc subtopic 82010 “fair value measurements disclosures overall” fair value measurement liabilities asu 200905 clarifies circumstances quoted market price identical liability available reporting entity required measure fair value using one following techniques valuation technique uses quoted market price identical liability traded asset quoted prices similar liabilities similar liabilities traded assets another valuation technique consistent principles asc 820 asu 200905 effective interim annual periods beginning august 2009 adoption asu 200905 effective october 1 2009 material impact consolidated financial condition results operations january 2010 fasb issued asu 201002 “accounting reporting decreases ownership subsidiary scope clarification” provides amendments asc 810 related noncontrolling interests expands disclosures deconsolidation subsidiary derecognition group assets within scope subtopic 81010 “consolidation overall” adoption guidance effective january 1 2009 material impact consolidated financial condition results operations pronouncements yet implemented june 2009 fasb issued guidance related transfers financial assets asc 860 “transfers servicing” guidance removes concept qualifying specialpurpose entity “qspe” clarifies determination whether transferor entities included transferor’s financial statements presented surrendered control transferred financial assets also defines term “participating interest” establish specific conditions reporting transfer portion financial asset sale removes special provisions guaranteed mortgage securitizations guidance requires transferor recognize initially measure fair value assets obtained including transferor’s beneficial interest liabilities incurred result transfer financial assets accounted sale enhanced disclosures required provide financial statement users greater transparency transfers financial assets transferor’s continuing involvement transferred financial assets new requirements effective fiscal years beginning november 15 2009 expect adoption material impact consolidated financial condition results operations june 2009 fasb issued guidance related variable interest entities “vie”” asc 810 guidance eliminates exclusion qspes consideration consolidation revises determination primary beneficiary vie require qualitative assessment whether company controlling financial interest 1 power direct activities significantly impact vie’s economic performance 2 right receive benefits obligation absorb losses vie could potentially significant vie determination primary beneficiary must reconsidered ongoing basis new requirements effective fiscal years beginning january 1 2010 expect adoption material impact consolidated financial condition results operations september 2009 fasb issued asu 200913 “revenue recognition asc 605 multipledeliverable revenue arrangements consensus fasb emerging issues task force” addressed flowserve corporation notes consolidated financial statements continued accounting multipledeliverable arrangements enable vendors account products services separately rather combined unit amendment addresses separate deliverables measure allocate arrangement consideration one units accounting asu 200913 effective prospectively revenue arrangements entered materially modified fiscal years beginning june 15 2010 still evaluating impact asu 200913 consolidated financial condition results operations january 2010 fasb issued asu 201006 “fair value measurements disclosures asc 820 improving disclosures fair value measurements” requires additional disclosures transfers level ii activity level iii fair value measurements new disclosures clarifications existing disclosures effective interim annual reporting periods beginning december 15 2009 except disclosures level iii activity effective fiscal years beginning december 15 2010 interim periods within fiscal years expect adoption asu 201006 material impact consolidated financial condition results operations 2 dispositions 2007 sold certain noncore assets aggregate sales proceeds 134 million largest sale occurred december 2007 sold noncore assets related rail operations wholly owned australian subsidiary thompsons kelly lewis pty ltd “tkl” 129 million recorded pretax gain 59 million allocation 21 million flowserve pump division goodwill gain included reduction selling general administrative expense consolidated statement income rail assets meet definition discontinued operation tkl rail operations part larger australian pump business rail assets material consolidated financial condition results operations pump assets tkl retained remain core part business 3 acquisitions effective april 21 2009 flowserve pump division acquired calder ag private swiss company supplier energy recovery technology use global desalination market 441 million net cash acquired total purchase price 284 million paid closing 24 million paid working capital valuation completed early july 2009 remaining 133 million total purchase price contingent upon calder ag achieving certain performance metrics twelve months following acquisition extent achieved expected paid cash within 12 months acquisition date initially recognized liability 44 million estimate acquisition date fair value contingent consideration based weighted probability achievement performance metrics date acquisition flowserve corporation notes consolidated financial statements continued purchase price allocated assets acquired liabilities assumed based estimates fair values date acquisition allocation purchase price summarized excess acquisition date fair value total purchase price estimated fair value net tangible intangible assets recorded goodwill pro forma information provided due immateriality 2009 estimated fair value contingent consideration reduced 0 based 2009 results updated weighted probability achievement performance metrics twelve months following acquisition resulting gain included selling general administrative expense “sga” consolidated statements income flowserve pump division acquired remaining 50 interest niigata worthington company ltd “niigata” japanese manufacturer pumps rotating equipment effective march 1 2008 24 million cash incremental interest acquired accounted step acquisition niigata’s results operations consolidated since date acquisition prior transaction 50 interest niigata recorded using equity method accounting upon consolidation effective date acquisition remaining 50 interest niigata balance sheet reflected increase cash debt 57 million 58 million respectively purchase price allocated assets acquired liabilities assumed based estimates fair values date acquisition estimate fair value net assets acquired exceeded cash paid accordingly goodwill recognized acquisition accounted bargain purchase resulting gain 34 million recorded first quarter 2008 reduced 06 million 28 million fourth quarter 2008 purchase accounting finalized gain included income net consolidated statement income due immateriality pro forma information provided due immateriality 2008 2007 completed small acquisitions 06 million 23 million respectively assets acquired primarily include inventory fixed assets intangible assets acquisitions immaterial individually aggregate thus pro forma financial information presented flowserve corporation notes consolidated financial statements continued 4 goodwill intangible assets changes carrying amount goodwill years ended december 31 2009 2008 follows 1 immaterial amount goodwill impaired 2005 related sale general services group amount disclosed separately due immateriality segment overall company 2 currency impact flow control division 2008 primarily related goodwill recorded united kingdom following table provides information changes intangible assets 2009 flowserve corporation notes consolidated financial statements continued following table provides information changes intangible assets 2008 1 2009 wrote expired fully amortized patent certain intangibles acquired 2009 2008 total 04 million 2 engineering drawings represent estimated fair value associated specific acquired product component schematics 3 accumulated amortization indefinitelived intangible assets relates amounts recorded prior implementation date guidance issued asc 350 following schedule outlines actual amortization expense recognized 2009 estimate future amortization based upon finitelived intangible assets owned december 31 2009 flowserve corporation notes consolidated financial statements continued 5 inventories net consisted following 2009 2008 2007 recognized expenses 137 million 118 million 89 million respectively excess obsolete inventory expenses included cost sales “cos” consolidated statements income 6 stockbased compensation plans flowserve corporation 2004 stock compensation plan “2004 plan” established april 21 2004 authorized issuance 3500000 shares common stock grants stock options restricted shares equitybased awards 3500000 shares common stock authorized 2004 plan 670581 remain available issuance addition 2004 plan established flowserve corporation equity incentive compensation plan “2010 plan” effective january 1 2010 shareholderapproved plan authorizes issuance 2900000 shares common stock form incentive stock options nonstatutory stock options restricted shares stock appreciation rights bonus stock plan begin using 2010 plan 2010 recorded stockbased compensation follows stock options granted officers employees directors allow purchase common shares market value stock date options granted although options granted market value generally options whether granted 2004 plan previously approved plans become exercisable staggered period ranging one five years typically one three years options generally expire ten years date grant within short period time following termination employment cessation services option holder options granted 2009 2008 flowserve corporation notes consolidated financial statements continued 2007 information related stock options issued officers employees directors prior 2007 plans presented following table additional information relating ranges options outstanding december 31 2009 follows december 31 2009 unrecognized compensation cost related outstanding unvested stock option awards weighted average remaining contractual life options outstanding december 31 2009 2008 55 years 63 years respectively total intrinsic value stock options exercised years ended december 31 2009 2008 2007 49 million 274 million 321 million respectively total fair value stock options vested years ended december 31 2009 2008 2007 27 million 41 million 55 million respectively restricted shares generally restrictions restricted shares expire minimum one year maximum five years shares subject forfeiture restriction period typically restricted share grants staggered vesting periods one three years grant date intrinsic value restricted shares typically product share price date grant number restricted shares granted amortized straightline basis compensation expense periods restrictions lapse unearned compensation amortized compensation expense vesting period restricted shares december 31 2009 2008 315 million 341 million respectively unearned compensation cost related unvested restricted shares expected recognized weighted flowserve corporation notes consolidated financial statements continued average period approximately 1 year amounts recognized net earnings prospective periods awards vest total market value restricted shares vested years ended december 31 2009 2008 2007 170 million 153 million 112 million respectively following tables summarize information regarding restricted shares unvested restricted shares outstanding december 31 2009 includes 530000 units performancebased vesting provisions performancebased units vest upon achievement performance targets issuable common shares performance targets based average annual return net assets rolling threeyear period compared measure defined peer group period compensation expense recognized 36month cliff vesting period based fair market value common stock date grant adjusted anticipated forfeitures performance period earned unearned compensation expense adjusted based changes expected achievement performance targets vesting provisions range 0 1010000 shares based predefined performance targets december 31 2009 estimate vesting 1010000 shares based expected achievement performance targets 7 derivatives hedging activities risk management derivatives policy specifies conditions may enter derivative contracts see note 1 additional information purpose entering derivatives designated hedging instruments overall risk management strategies enter forward exchange contracts hedge risks associated transactions denominated currencies local currency operation engaging transaction risk management derivatives policy specifies conditions may enter derivative contracts december 31 2009 2008 3096 million 5557 million respectively notional amount outstanding forward contracts third parties december 31 2009 length forward exchange contracts currently place ranged 15 days 14 months also part risk management program enter interest rate swap agreements hedge exposure floating interest rates certain portions debt december 31 2009 2008 3850 million notional amount outstanding interest rate swaps third parties interest rate swaps 100 effective december 31 2009 maximum remaining length interest rate contract place approximately 21 months exposed risk creditrelated losses resulting nonperformance counterparties financial instruments perform credit evaluations counterparties forward contracts interest rate swap agreements expect counterparties meet obligations experienced credit losses counterparties flowserve corporation notes consolidated financial statements continued fair value forward exchange contracts designated hedging instruments summarized fair value interest rate swaps cash flow hedging relationships summarized current noncurrent derivative assets reported consolidated balance sheets prepaid expenses assets net respectively current noncurrent derivative liabilities reported consolidated balance sheets accrued liabilities retirement obligations liabilities respectively impact net changes fair values forward exchange contracts designated hedging instruments summarized impact net changes fair values interest rate swaps cash flow hedging relationships summarized gains losses recognized consolidated statements income forward exchange contracts interest rate swaps classified income expense net interest expense respectively expect recognize losses gains 35 million 03 million net deferred taxes earnings 2010 2011 respectively related interest rate swap agreements based fair values december 31 2009 flowserve corporation notes consolidated financial statements continued 8 realignment programs initial realignment program february 2009 announced plan incur 40 million costs reduce optimize certain nonstrategic manufacturing facilities overall cost structure improving operating efficiency reducing redundancies maximizing global consistency driving improved financial performance “initial realignment program” initial realignment program consists restructuring nonrestructuring costs restructuring charges represent costs associated relocation certain business activities outsourcing business activities facility closures nonrestructuring charges represent majority initial realignment program costs incurred improve operating efficiency reduce redundancies primarily represent employee severance substantially expenses initial realignment program recognized 2009 expenses reported cos sga applicable consolidated statement income total initial realignment program charges following summary total charges incurred related initial realignment program 1 charges 14 million related initial realignment program expected incurred 2010 initial realignment program restructuring charges restructuring charges include costs related employee severance closed facilities contract termination costs asset writedowns exit costs severance costs primarily include costs associated involuntary termination benefits contract termination costs include costs related termination operating leases contract termination costs asset writedowns include accelerated depreciation fixed assets accelerated amortization intangible assets inventory writedowns includes costs related employee relocation asset relocation vacant facility costs ie taxes insurance charges flowserve corporation notes consolidated financial statements continued restructuring charges initial realignment program follows 1 charges 2009 equal charges incurred inception initial realignment program began 2009 2 charges 14 million related initial realignment program expected incurred 2010 following represents activity related restructuring reserve initial realignment program subsequent realignment program october 2009 announced plan commence additional realignment initiatives “subsequent realignment program” incur additional costs expand efforts optimize assets reduce overall cost structure respond reduced orders enhance customerfacing organization subsequent realignment program began fourth quarter 2009 continue 2010 january 2010 announced expectation incur 20 million total charges 2010 related initial subsequent realignment programs 14 million relating initial realignment program noted remaining 186 million relating subsequent realignment program 186 million charges expected incurred 2010 combined 305 million charges incurred 2009 disclosed brings total expected subsequent realignment program charges 491 million subsequent realignment program consists restructuring nonrestructuring costs restructuring charges represent majority subsequent realignment program represent costs associated relocation certain business activities outsourcing business activities facility closures nonrestructuring charges costs incurred improve operating efficiency reduce redundancies primarily represent employee severance expenses reported cos sga applicable consolidated statement income flowserve corporation notes consolidated financial statements continued total subsequent realignment program charges following summary total charges incurred related subsequent realignment program total charges 2009 1 total expected realignment charges represent management’s best estimate based initiatives identified date execution subsequent realignment program early stages amounts include approximately 12 million anticipated incurred initiatives currently consideration nature additional charges cannot currently determined flowserve corporation notes consolidated financial statements continued subsequent realignment program restructuring charges restructuring charges incurred subsequent realignment program 2009 follows 1 charges 2009 equal charges incurred inception subsequent realignment program began 2009 1 total expected restructuring charges represent management’s best estimate initiatives identified date execution subsequent realignment program early stages certain realignment initiatives remain consideration amount nature actual restructuring charges incurred could vary total expected charges following represents activity related restructuring reserve subsequent realignment program 9 fair value financial instruments financial instruments presented fair value consolidated balance sheets fair value defined price would received sell asset paid transfer liability orderly transaction market participants measurement date available fair value based observable market prices parameters derived prices parameters observable prices inputs available valuation models may applied assets liabilities recorded fair value consolidated balance sheets categorized based upon level judgment associated inputs used measure fair values hierarchical levels directly related amount subjectivity associated inputs fair valuation assets liabilities recurring fair value measurements limited investments derivative instruments equity securities fair value measurements derivative instruments determined using models maximize use observable market inputs including interest rate curves forward spot prices currencies classified level ii fair value hierarchy fair values derivatives flowserve corporation notes consolidated financial statements continued included note 7 fair value measurements investments equity securities determined using quoted market prices fair values investments equity securities changes thereto immaterial consolidated financial position results operations discussed note 2 liability 44 million initially recognized estimate acquisition date fair value contingent consideration liability classified level iii fair value hierarchy based weighted probability date acquisition achievement performance metrics observable market december 31 2009 liability reduced 0 based 2009 results updated weighted probability achievement performance metrics twelve months following acquisition 10 details certain consolidated balance sheet captions following tables present financial information certain consolidated balance sheet captions accounts receivable net accounts receivable net property plant equipment net property plant equipment net depreciation expense amount 572 million 526 million 495 million years ended december 31 2009 2008 2007 respectively included cost sales consolidated statements income remaining depreciation expense included selling general administrative expense assets net assets net flowserve corporation notes consolidated financial statements continued “other” assets include longterm tax receivables deferred loan costs items none individually exceed 5 total assets accrued liabilities accrued liabilities 1 2009 legal environmental matters includes reserve related shareholder litigation discussed note 14 “other” accrued liabilities include professional fees lease obligations insurance interest freight restructuring charges items none individually exceed 5 current liabilities see note 8 additional information restructuring charges retirement obligations liabilities retirement obligations liabilities 11 equity method investments december 31 2009 investments seven joint ventures one located china japan south korea saudi arabia united arab emirates two located india accounted using flowserve corporation notes consolidated financial statements continued equity method summarized combined income statement information based recent financial information unaudited investments reconciliation net income per combined income statement information equity income investees per consolidated statements income follows 1 discussed note 3 effective march 1 2008 purchased remaining 50 interest niigata resulting full consolidation niigata date prior transaction 50 interest recorded using equity method accounting result niigata’s income statement information includes first two months 2008 2 provision income taxes based tax laws rates countries investees operate taxation regimes vary nominal rates also allowability deductions credits benefits flowserve corporation notes consolidated financial statements continued 12 debt lease obligations debt including capital lease obligations consisted scheduled maturities credit facilities described well capital lease obligations borrowings credit facilities credit facilities amended comprised 6000 million secured term loan maturing august 10 2012 4000 million revolving line credit utilized provide 3000 million letters credit expiring august 10 2012 hereinafter refer credit facilities collectively “credit facilities” december 31 2009 2008 amounts outstanding revolving line credit outstanding letters credit 1231 million 1042 million december 31 2009 2008 respectively reduced borrowing capacity 2769 million 2958 million respectively borrowings credit facilities bear interest rate equal option either 1 base rate based greater prime rate recently announced administrative agent credit facilities federal funds rate plus 050 2 london interbank offered rate “libor” plus applicable margin determined reference ratio total debt consolidated earnings interest taxes depreciation amortization “ebitda” december 31 2009 0875 15 borrowings revolving line credit term loan respectively connection credit facilities entered 3850 million notional amount interest rate swaps december 31 2009 hedge exposure floating interest rates addition pay lenders credit facilities commitment fee equal percentage determined reference ratio total debt consolidated ebitda unutilized portion revolving line credit letter credit fees respect standby letter credit outstanding credit facilities equal percentage based applicable margin effect libor borrowings new revolving line credit fees financial performance standby letters credit 0875 04375 respectively obligations credit facilities unconditionally guaranteed jointly severally substantially existing subsequently acquired organized domestic subsidiaries 65 capital stock certain foreign subsidiaries addition prior obtaining maintaining investment grade credit ratings flowserve corporation notes consolidated financial statements continued guarantors’ obligations credit facilities collateralized substantially guarantors’ assets credit facilities contain among things covenants restricting subsidiaries’ ability dispose assets merge pay dividends repurchase redeem capital stock indebtedness incur indebtedness guarantees create liens enter agreements negative pledge clauses make certain investments acquisitions enter sale leaseback transactions enter transactions affiliates make capital expenditures engage business activity existing business credit facilities also contain covenants requiring us deliver lenders audited annual unaudited quarterly financial statements leverage interest coverage financial covenant certificates compliance maximum permitted leverage ratio 325 times debt total consolidated ebitda minimum interest coverage 325 times consolidated ebitda total interest expense compliance financial covenants credit facilities tested quarterly credit facilities include events default usual types credit facilities including nonpayment principal interest violation covenants incorrectness representations warranties cross defaults cross acceleration bankruptcy material judgments employee retirement income security act 1974 amended “erisa” events actual asserted invalidity guarantees security documents certain changes control company occurrence event default could result acceleration guarantors’ obligations credit facilities complied covenants december 31 2009 repayment obligations made scheduled repayments credit facilities 57 million 57 million 28 2009 2008 2007 respectively made mandatory repayments optional prepayments 2009 2008 2007 may prepay loans credit facilities whole part without premium penalty time european letter credit facilities ability issue additional letters credit previous european letter credit facility “old european loc facility” commitment 1100 million expired november 9 2009 paid annual fronting fees 0875 010 respectively letters credit written old european loc facility outstanding letters credit written old european loc facility 779 million 1115 million 1040 million 1452 million december 31 2009 2008 respectively october 30 2009 entered new 364day unsecured european letter credit facility “new european loc facility” initial commitment 1250 million new european loc facility renewable annually consistent old european loc facility used contingent obligations respect surety performance bonds bank guarantees similar obligations maturities five years pay fees 135 040 utilized unutilized capacity respectively new european loc facility outstanding letters credit drawn new european loc facility 28 million 40 million december 31 2009 certain banks parties facilities managing exposures aggregated basis commitment new european loc facility reduced face amount existing letters credit written old european loc facility prior expiration existing letters credit remain outstanding accordingly offset 1250 million capacity new european loc facility maturity december 31 2009 approximately two years majority outstanding existing letters credit consideration outstanding commitments facilities available capacity new european loc facility 691 million december 31 2009 flowserve corporation notes consolidated financial statements continued operating leases noncancelable operating leases certain offices service quick response centers certain manufacturing operating facilities machinery equipment automobiles rental expense relating operating leases 490 million 436 million 393 million 2009 2008 2007 respectively future minimum lease payments due noncancelable operating leases amounts thousands 13 pension postretirement benefits sponsor several noncontributory defined benefit pension plans covering substantially us employees certain nonus employees provide benefits based years service age job grade levels type compensation retirement benefits covered employees provided contributory pension plans cash balance pension plans governmentsponsored retirement programs funded defined benefit pension plans receive funding based independent actuarial valuations provide current service amount sufficient amortize unfunded prior service periods exceed 30 years funding falling within legal limits prescribed prevailing regulation also maintain unfunded defined benefit plans permitted local regulations receive funding benefits become due defined benefit plan strategy ensure current future benefit obligations adequately funded costeffective manner additionally investing objective achieve highest level investment performance compatible risk tolerance prudent investment practices longterm nature defined benefit plan liabilities funding strategy based longterm perspective formulating implementing investment policies evaluating investment performance asset allocation defined benefit plans reflect decision proportion investment equity fixed income securities appropriate various subasset classes least annually complete comprehensive review asset allocation policy underlying assumptions includes defined benefit plan liabilities longterm capital markets rate return assumptions risk tolerances expected rates return defined benefit plan assets derived reviews asset allocation strategy expected longterm performance asset classes risks factors adjusted specific investment strategy rates impacted changes general market conditions longterm nature shortterm market changes significantly impact rates significant concentration us equity exposure defined benefit plan assets however continue monitor allocations manage assets within acceptable levels risk periods presented used measurement date december 31 worldwide pension postretirement medical plans us defined benefit plans maintain qualified nonqualified defined benefit pension plans us qualified plan provides coverage substantially fulltime us employees receive benefits earnings threshold specified us department labor nonqualified plans primarily cover small number employees including current former members senior management providing benefit flowserve corporation notes consolidated financial statements continued levels equivalent participants otherwise limited us department labor rules us plans designed operate “cash balance” arrangements employee option take lump sum payment end service total accumulated benefit obligation equivalent total projected benefit obligation “benefit obligation” following assumptions related us defined benefit pension plans december 31 2009 compared december 31 2008 decreased discount rate 675 550 based analysis publiclytraded investment grade us corporate bonds lower yield due current market conditions maintained average assumed rate compensation 48 december 31 2009 2008 determining 2009 expense decreased expected rate return assets 800 775 primarily based target allocations expected longterm asset returns longterm rate return assumption calculated using quantitative approach utilizes unadjusted historical returns asset allocation inputs calculation expected rate return plan assets longterm nature shortterm market changes significantly impact rate net pension expense us defined benefit pension plans including qualified nonqualified plans estimated prior service benefit defined benefit pension plans amortized accumulated comprehensive loss us pension expense 2010 13 million estimated net loss defined benefit pension plans amortized accumulated comprehensive loss us pension expense 2010 99 million amortize estimated prior service benefits estimated net losses remaining expected service period flowserve corporation notes consolidated financial statements continued following summarizes net pension liability us plans following summarizes amounts recognized balance sheet us plans following summary changes us defined benefit plans’ pension obligations following table summarizes expected cash activity us defined benefit pension plans future amounts millions flowserve corporation notes consolidated financial statements continued following table shows change accumulated comprehensive loss attributable components net cost change benefit obligations us plans net tax following reconciliation us defined benefit pension plans’ assets 1 significant decline return plan assets 2008 primarily result 2008 declines global debt equity markets amortized income remaining expected service period contributed 831 million 508 million us defined benefit pension plans 2009 2008 respectively payments exceeded minimum funding requirements mandated us department labor rules estimated contribution 2010 expected 30 million 40 million excluding direct benefits paid flowserve corporation notes consolidated financial statements continued us defined benefit plan assets held qualified plan asset allocation qualified plan end 2009 2008 asset category follows none common stock directly held qualified plan investment strategy earn longterm rate return consistent acceptable degree risk minimize cash contributions life plan taking account liquidity needs plan preserve capital diversified investments high quality securities current allocation target invest approximately 55 plan assets equity securities 45 fixed income securities within investment category assets allocated various investment strategies professional money management firm manages assets engage consultant assist evaluating activities periodically review allocation target generally conjunction asset liability study consideration future cash flow needs regularly rebalance actual allocation target investment allocation plan assets invested commingled funds individual funds actively managed intent outperform specified benchmarks “pension investment committee” responsible setting investment strategy target asset allocation well selecting individual funds qualified plan approaching fully funded status working toward implementation liabilitydriven investing “ldi” strategy closely align duration assets duration liabilities ldi strategy result asset portfolio closely matches behavior liability thereby protecting funded status plan flowserve corporation notes consolidated financial statements continued plan’s financial instruments shown presented fair value see note 1 discussions hierarchical levels fair values plan’s investments determined fair values us defined benefit plan assets december 31 2009 us large cap funds seek outperform russell 1000 r index investments 1000 large medium capitalization us companies represented russell 1000 r index composed largest 1000 us equities russell 3000 r index determined market capitalization russell 3000 r index composed largest us equities smallest 2000 us equities determined market capitalization b us small cap funds seek outperform russell 2000 r index investments medium small capitalization us companies represented russell 2000 r index composed smallest 2000 us equities russell 3000 r index determined market capitalization c international large cap funds seek outperform msci europe australia far east index investments developed nations world maintain high degree diversification among countries currencies longterm governmentcredit funds seek outperform barclays capital us longterm governmentcredit index generating excess return variety diversified strategies securities longer durations sector rotation security selection tactical use highyield bonds e intermediate bonds seek outperform barclays capital us aggregate bond index generating excess return variety diversified strategies securities short intermediate durations sector rotation security selection tactical use highyield bonds f multistrategy hedge fund represents fund hedge funds invest variety private equity funds real estate level iii rollforward details provided due immateriality g details including level iii rollforward details provided due immateriality nonus defined benefit plans maintain defined benefit pension plans cover employees following countries austria france germany india indonesia italy japan mexico netherlands sweden united kingdom “uk” assets uk two plans netherlands one plan represent 97 total nonus plan assets “nonus assets” details countries’ assets provided due immateriality flowserve corporation notes consolidated financial statements continued following assumptions related nonus defined benefit pension plans december 31 2009 compared december 31 2008 decreased average discount rate nonus plans 547 541 based primarily lower applicable iboxx corporate aa bond indices uk euro zone determining 2009 expense increased average rate return assets 435 december 31 2008 438 december 31 2009 expected rate return plan assets longterm nature shortterm market changes significantly impact rates many nonus defined benefit plans unfunded permitted local regulation expected longterm rate return assets funded plans determined assessing rates return asset class calculated using quantitative approach utilizes unadjusted historical returns asset allocation inputs calculation work actuaries determine reasonableness longterm rate return assumptions looking several factors including historical returns expected future returns asset allocation risks asset class items net pension expense nonus defined benefit pension plans estimated net loss defined benefit pension plans amortized accumulated comprehensive loss nonus expense 2010 25 million amortize estimated prior service benefits estimated net losses remaining expected service period remaining expected lifetime inactive participants plans inactive participants following summarizes net pension liability nonus plans flowserve corporation notes consolidated financial statements continued following summarizes amounts recognized balance sheet nonus plans following reconciliation nonus plans’ defined benefit pension obligations 1 actuarial losses primarily reflect impact assumption changes plans uk experience losses 2 currency translation impact 2009 compared 2008 reflects weakening us dollar exchange rate significant currencies primarily british pound euro following table summarizes expected cash activity nonus defined benefit plans future amounts millions flowserve corporation notes consolidated financial statements continued following table shows change accumulated comprehensive loss attributable components net cost change benefit obligations nonus plans net tax following reconciliation nonus plans’ defined benefit pension assets 1 significant decline return plan assets 2008 primarily result 2008 declines global debt equity markets 2 currency translation impact 2009 compared 2008 reflects weakening us dollar exchange rate significant currencies primarily british pound euro contributions nonus defined benefit pension plans 2010 expected approximately 10 million excluding direct benefits paid flowserve corporation notes consolidated financial statements continued asset allocations nonus defined benefit pension plans end 2009 2008 follows none common stock held directly plans cases investment strategy plans earn longterm rate return consistent acceptable degree risk minimize cash contributions life plan taking account liquidity needs plan legal requirements particular country preserve capital diversified investments high quality securities asset allocation differs plan based upon plan’s benefit obligation participants well results asset liability studies conducted plan consideration future cash flow needs professional money management firms manage plan assets engage consultants uk netherlands assist evaluation activities assets uk plans overseen group trustees review investment strategy asset allocation fund selection assets passively managed invested index funds attempt match performance specified benchmark index assets netherlands plan independently managed outside service provider flowserve corporation notes consolidated financial statements continued fair values nonusassets december 31 2009 north american companies represents us canadian large cap equity index funds passively managed track respective benchmarks ftse allworld usa index ftse allworld canada index b uk companies represents uk equity index fund passively managed tracks ftse allshare index c european companies represents european equity index fund passively managed tracks ftse allworld developed europe exuk index asian pacific companies represents japanese pacific rim equity index funds passively managed track respective benchmarks ftse allworld japan index ftse allworld developed asia pacific exjapan index e global equity represents actively managed global equity funds taking topdown strategic view different regions analyzing companies based fundamentals marketdriven thematic quantitative factors generate alpha f emerging markets represents diversified portfolio shares issued companies developing emerging country latin america asia eastern europe middle east africa using bottomup stock selection process g uk government gilt index represents uk government issued fixed income investments passively managed track respective benchmarks ftse uk gilts indexlinked 5 years index ftse uk gilts 15 years index h uk corporate bond index represents uk corporate bond investments passively managed track iboxx 15 years £ nongilts index global fixed income bond represents actively managed diversified fixed income investment funds primarily invested traditional government bonds highquality corporate bonds asset backed securities addition emerging market debt high yield corporates flowserve corporation notes consolidated financial statements continued j includes assets held plans outside uk netherlands details including level iii rollforward details provided due immateriality defined benefit pension plans accumulated benefit obligations excess plan assets following summarizes key pension plan information regarding us nonus plans whose accumulated benefit obligations exceed fair value respective plan assets postretirement medical plans sponsor several defined benefit postretirement medical plans covering current retirees limited number future retirees us plans provide medical dental benefits administered insurance companies health maintenance organizations plans include participant contributions deductibles coinsurance provisions limitations integrated medicare group plans fund plans benefits health maintenance organization premiums paid plans hold assets period presented accordingly investment strategy targeted allocations plan assets benefits postretirement medical plans available new employees existing employees following assumptions related postretirement benefits assumed ranges annual rates increase medical costs used determine net expense 90 2009 78 2008 88 2007 gradual decrease 50 2031 future years net postretirement benefit expense postretirement medical plans estimated prior service benefit postretirement medical plans amortized accumulated comprehensive loss us pension expense 2010 19 million estimated net gain postretirement medical plans amortized accumulated comprehensive loss us expense 2010 23 million flowserve corporation notes consolidated financial statements continued following summarizes accrued postretirement benefits liability postretirement medical plans following summarizes amounts recognized balance sheet postretirement benefits following reconciliation postretirement benefits obligation 1 actuarial gain 2008 primarily reflects impact changes assumptions related employee retention rates plans based recent trends following presents expected benefit payments future periods amounts millions flowserve corporation notes consolidated financial statements continued following table shows change accumulated comprehensive loss attributable components net cost change benefit obligations postretirement benefits net tax made contributions postretirement medical plans pay benefits 38 million 2009 39 million 2008 66 million 2007 postretirement medical plans unfunded make contributions covered individuals’ claims approved payment accordingly contributions period directly correlated benefits paid assumed health care cost trend rates effect amounts reported postretirement medical plans onepercentage point change assumed health care cost trend rates would following effect 2009 reported amounts thousands defined contribution plans sponsor several defined contribution plans covering substantially us canadian employees certain nonus employees may contribute plans contributions matched varying amounts us including opportunities discretionary matching contributions us defined contribution plan expense 136 million 2009 130 million 2008 80 million 2007 2008 discontinued discretionary contributions defined contribution plan us increased matching contributions 25 participants us defined contribution plan option invest common stock discretionary contributions us previously funded common stock therefore plan assets include holdings common stock 14 legal matters contingencies asbestosrelated claims defendant number pending lawsuits include many cases multiple claimants seek recover damages personal injury allegedly caused exposure asbestoscontaining products manufactured andor distributed us past overall number asbestosrelated claims generally declined recent years assurance trend continue average cost per flowserve corporation notes consolidated financial statements continued claim increase asbestoscontaining materials incorporated products primarily encapsulated used components process equipment believe significant emission asbestoscontaining fibers occurred use equipment believe high percentage claims covered applicable insurance indemnities companies shareholder litigation pending settlement 2003 related lawsuits filed federal court northern district texas alleging violated federal securities laws cases consolidated lead plaintiff amended complaint several times lead plaintiff’s last pleading fifth consolidated amended complaint “complaint” complaint alleged federal securities violations occurred february 6 2001 september 27 2002 named defendants company c scott greer former chairman president chief executive officer renee j hornbaker former vice president chief financial officer pricewaterhousecoopers llp independent registered public accounting firm banc america securities llc credit suisse first boston llc served underwriters two public stock offerings relevant period complaint asserted claims sections 10b 20a securities exchange act 1934 “exchange act” rule 10b5 thereunder sections 11 15 securities act 1933 “securities act” lead plaintiff sought unspecified compensatory damages forfeiture mr greer ms hornbaker unspecified incentivebased equitybased compensation profits stock sales recovery costs orders dated november 13 2007 january 4 2008 district court denied plaintiffs’ motion class certification granted summary judgment favor defendants claims plaintiffs appealed rulings federal fifth circuit court appeals “court appeals” june 19 2009 court appeals issued opinion vacating district court’s denial class certification reversing part vacating part district court’s entry summary judgment result court appeals’ opinion case remanded district court proceedings consistent opinion consideration certain issues including whether plaintiffs demonstrate case certified class action parties engaged discussions following issuance court appeals’ opinion furtherance amicable resolution case resulted stipulation settlement executed filed district court settlement subject various customary conditions including preliminary approval district court notice class members class member optout thresholds final hearing final approval district court recognized charge 75 million related increased fees accrued resolution costs third quarter 2009 bringing total charges matter 135 million represents net obligation payments made directly insurance carriers pending settlement 55 million total settlement amount total obligation pending settlement reflected accrued liabilities consolidated balance sheet corresponding amount prepaid expenses amount paid behalf insurance carriers settlement conditions resolved litigation proceeds continue believe valid defenses claims asserted continue vigorously defend case united nations oilforfood program believe confidential french investigation may still ongoing relating products two foreign subsidiaries delivered iraq 1996 2003 united nations oilforfood program accordingly cannot predict outcome french investigation time currently expect incur additional case resolution costs material amount matter however french authorities take enforcement action us regarding investigation may subject additional monetary nonmonetary penalties addition governmental investigation referenced june 27 2008 republic iraq filed civil suit federal court new york 93 participants united nations oilforfood program including flowserve corporation notes consolidated financial statements continued flowserve two foreign subsidiaries participated program intend vigorously contest suit believe valid defenses claims asserted however cannot predict outcome suit present time whether resolution suit material adverse financial impact company export compliance march 2006 initiated voluntary process determine compliance posture respect united states “us” export control economic sanctions laws regulations upon initial investigation appeared product transactions technology transfers handled full compliance us export control laws regulations result conjunction outside counsel conducted voluntary systematic process review validate voluntarily disclose export violations discovered part review process completed comprehensive disclosures appropriate us government regulatory authorities end 2008 continue work authorities supplement clarify specific aspects disclosures based review data collected selfdisclosure period october 1 2002 october 1 2007 number process pumps valves mechanical seals parts related thereto exported limited circumstances without required export reexport licenses without full compliance applicable rules regulations number different countries throughout world including certain us sanctioned countries foregoing information subject revision review submittal applicable us regulatory authorities taken number actions increase effectiveness global export compliance program included increasing personnel resources dedicated export compliance providing additional export compliance tools employees improving export transaction screening processes enhancing content frequency export compliance training programs selfreported violations us export control laws regulations may result civil criminal penalties including fines andor penalties currently engaged discussions us regulators penalties part effort resolve matter however currently believe penalties material adverse impact company currently unable definitively determine full extent nature total amount penalties might subject result selfreported violations us export control laws regulations currently involved potentially responsible party three former public waste disposal sites may subject remediation pending government procedures sites various stages evaluation federal state environmental authorities projected cost remediation sites well alleged “fair share” allocation remain uncertain studies completed parties either negotiated amicable resolution matter judicially resolved site many parties similarly identified many parties identified financially strong solvent companies appear able pay share remediation costs based information waste disposal practices sites environmental regulatory process general believe likely ultimate remediation liability costs site apportioned among liable parties including site owners waste transporters according volumes andor toxicity wastes shown disposed sites believe exposure existing disposal sites material also defendant number lawsuits including product liability claims insured subject applicable deductibles arising ordinary course business also involved ordinary routine litigation incidental business none either individually aggregate believe material business operations overall financial condition however litigation inherently unpredictable resolutions dispositions claims lawsuits settlement otherwise could adverse impact flowserve corporation notes consolidated financial statements continued financial position results operations cash flows reporting period resolution disposition occurs although none aforementioned potential liabilities quantified absolute certainty except otherwise indicated established reserves covering exposures relating contingencies extent believed reasonably estimable probable based past experience available facts additional exposures beyond reserves could exist currently cannot estimated continue evaluate potential contingent loss exposures develop recognize expense soon losses become probable reasonably estimated 15 warranty reserve recorded reserves product warranty claims included current noncurrent liabilities following summary activity warranty reserve 16 shareholders’ equity february 23 2009 board directors authorized increase quarterly cash dividend 027 per share 025 per share effective first quarter 2009 february 22 2010 board directors authorized increase payment quarterly dividends common stock 027 per share 029 per share payable quarterly beginning april 7 2010 generally dividend dateofrecord last month quarter dividend paid following month february 26 2008 board directors authorized program repurchase 3000 million outstanding common stock unspecified time period program commenced second quarter 2008 repurchased 544500 1741100 shares 409 million 1650 million 2009 2008 respectively date repurchased total 2285600 shares 2059 million program flowserve corporation notes consolidated financial statements continued 17 income taxes provision income taxes consists following expected cash payments current federal income tax expense 2009 2008 2007 reduced approximately 04 million 122 million 124 million respectively result tax deductions related exercise nonqualified employee stock options vesting restricted stock income tax benefit resulting stockbased compensation plans increased capital excess par value provision income taxes differs statutory corporate rate due following net increase decrease valuation allowances rate reconciliation includes net increase reduction foreign valuation allowances 09 million 82 million 111 million 2009 2008 2007 respectively 2009 effective tax rate differed federal statutory rate 35 primarily due net impact foreign operations includes impacts lower foreign tax rates changes reserves established uncertain tax positions 2008 effective tax rate differed federal statutory rate 35 primarily due net impact foreign operations includes impacts lower foreign tax rates changes reserves established uncertain tax positions pursuant asc 740 benefits arising permanent reinvestment foreign flowserve corporation notes consolidated financial statements continued subsidiaries changes valuation allowance estimates favorable tax ruling luxembourg net impact discrete items included discussion approximately 22 million 2007 effective tax rate differed federal statutory rate 35 primarily due net impact foreign operations includes impacts lower foreign tax rates net favorable results various tax audits changes valuation allowance estimates improvements partially offset additional reserves established uncertain tax positions assert permanent reinvestment majority unremitted foreign earnings however assert permanent reinvestment certain portions initial invested capital various foreign subsidiaries three years reported period ended december 31 2009 recognized net deferred tax assets attributable excess foreign tax credits unremitted earnings foreign currency translation adjustments foreign subsidiaries excess financial reporting basis cash deemed dividend distributions foreign subsidiaries resulted recognition approximately 24 million 271 million 75 million income tax benefit expense years ended december 31 2009 2008 2007 respectively recorded benefit excess foreign tax credits associated deemed repatriation unremitted earnings credits available offset liability associated dividends american jobs creation act 2004 provides deduction income qualified domestic production activities phased 2005 2010 manufacturing deduction minor impact tax rates effect future tax rates yet quantified tax deduction qualified production activities treated special deduction pursuant asc 740 special deduction reported period deduction claimed tax return flowserve corporation notes consolidated financial statements continued deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes significant components consolidated deferred tax assets liabilities approximately 1584 million us foreign net operating loss carryforwards december 31 2009 total 377 million state net operating losses net operating losses generated us unused expire 2010 2026 majority nonus net operating losses carry forward without expiration additionally 98 million foreign tax credit carryforwards december 31 2009 expiring 2018 2019 04 million valuation allowance reserves recorded earnings income taxes comprised january 1 2007 adopted guidance asc 740 addresses determination whether tax benefits claimed expected claimed tax return recorded financial statements cumulative effect adopting asc 740 increase tax reserves decrease 298 million opening retained earnings january 1 2007 upon adoption amount gross unrecognized tax benefits january 1 2007 approximately 129 million amount 849 million recognized would favorably impact flowserve corporation notes consolidated financial statements continued effective tax rate accrued interest penalties recorded balance sheet january 1 2007 approximately 14 million tabular reconciliation total gross amount unrecognized tax benefits excluding interest penalties follows millions amount gross unrecognized tax benefits december 31 2009 1560 million includes 258 million accrued interest penalties amount 975 million recognized would favorably impact effective tax rate total amount interest penalties recognized statements income years ended december 31 2009 2008 2007 44 million 19 million 44 million respectively limited exception longer subject us federal state local income tax audits years 2004 nonus income tax audits years 2003 currently examination various years austria germany india japan mexico singapore us venezuela reasonably possible within next 12 months effective tax rate impacted resolution matters audited various taxing authorities also reasonably possible statute limitations close various taxing jurisdictions within next 12 months estimate could record reduction tax expense 96 million 224 million within next 12 months 18 business segment information principally engaged worldwide design manufacture distribution service industrial flow management equipment provide pumps valves mechanical seals primarily oil gas industry chemical power generation water management industries requiring flow management products december 31 2009 following three divisions constitutes business segment • flowserve pump division • flow control division • flow solutions division manufactures different products defined type products services provided division president reports directly chief executive officer division vice president finance reports directly chief accounting officer decisionmaking purposes chief executive officer members senior executive management use financial information generated flowserve corporation notes consolidated financial statements continued reported division level corporate headquarters constitute separate division business segment evaluate segment performance allocate resources based segment’s operating income amounts classified “all other” include corporate headquarters costs minor entities constitute separate segments intersegment sales transfers recorded cost plus profit margin sales eliminated consolidation following summary financial information reportable segments years ended december 31 2009 2008 2007 reconciled amounts reported consolidated financial statements 1 increase identifiable assets “all other” 2009 2008 2007 primarily result increased cash balances flowserve corporation notes consolidated financial statements continued geographic information attribute sales different geographic areas based facilities’ locations longlived assets classified based geographic area assets located exclude deferred tax assets categorized noncurrent sales longlived assets geographic area follows 1 2009 2008 2007 germany accounted approximately 10 consolidated sales individual country within group represents 10 consolidated longlived assets period presented 2 “other” includes canada latin america asia pacific individual geographic segment within group represents 10 consolidated totals period presented net sales international customers including export sales united states represented 73 69 66 total sales 2009 2008 2007 respectively major customer information large number customers across large number manufacturing service facilities believe sales individual customer represent 10 consolidated sales years presented flowserve corporation notes consolidated financial statements continued 19 accumulated comprehensive loss following presents components accumulated comprehensive loss net related tax effects 1 includes foreign currency translation adjustments attributable noncontrolling interests 2 foreign currency translation adjustments 2009 primarily represents weakening us dollar exchange rate versus euro british pound december 31 2009 compared december 31 2008 decrease foreign currency translation adjustments 2008 primarily represents strengthening us dollar exchange rate versus euro british pound december 31 2008 compared december 31 2007 3 decrease pension postretirement effects 2008 compared 2007 primarily reflects actuarial net losses resulting returns plan assets lower anticipated following tables present summary comprehensive expense income years ended december 31 2009 2008 2007 flowserve corporation notes consolidated financial statements continued 20 quarterly financial data unaudited following presents summary unaudited quarterly data 2009 2008 amounts millions except per share data significant fourth quarter adjustments 2009 pretax record 349 million charges related realignment programs see note 8 additional information realignment programs significant fourth quarter adjustments 2008 21 subsequent events venezuela january 8 2010 venezuelan government announced intention devalue currency bolivar move twotier exchange structure effective january 11 2010 official exchange rate expected move 215 430 bolivars us dollar nonessential items 260 bolivars us dollar essential items additionally effective january 1 2010 venezuela designated hyperinflationary result began use us dollar functional currency venezuela effective january 1 2010 accordance hyperinflationary accounting future currency fluctuations bolivar us dollar recorded statements income operations venezuela generally consist service center imports equipment parts certain locations flowserve corporation notes consolidated financial statements continued sale third parties within venezuela performs service repair activities venezuelan subsidiary’s sales 2009 total assets december 31 2009 represented approximately 1 less consolidated sales total assets periods although approvals venezuela’s commission administration foreign exchange slowed historically able remit dividends payments official rate currently anticipate future accordingly december 31 2009 used official rate 215 bolivars us dollar remeasurement translation venezuelan financial statements preliminary assessment impact devaluation incur aftertax charge approximately 14 million first quarter 2010 result remeasuring using official rate 430 bolivars us dollar currently assessing ongoing impact currency devaluation venezuelan operations imports market including venezuelan subsidiary’s ability remit cash dividends payments official rate potential ability imported products classified essential items ability recover exchange losses well actions venezuelan government economic conditions venezuela inflation capital spending hyperinflationary designation currency devaluation impact financial position results operations year ended december 31 2009 included annual report segment reorganization first quarter 2010 reorganizing divisional operations combining fpd fsd new flow solutions group “fsg” believe combination fpd fsd enables us continue building strong customer focus rotating equipment related products services drive enhanced customerfacing organization leverage best practices capabilities expect combined strength fsg provide greater efficiency integrated component manufacturing leverage global spending manufacturing resources improve productivity use common tools processes select design manufacture distribute service product portfolio fsg divided two reportable segments based type product engineered industrial engineered include longer leadtime highly engineered pump product operations former fpd substantially operations former fsd industrial consist standardized general purpose pump product operations former fpd fcd remains unchanged division reorganization effect reportable segments 2009 reflected accompanying financial information included annual report beginning 2010 segment reporting reflect structure described prior periods retrospectively adjusted conform 2010 reportable segment structure presentation item 9item 8 financial statements supplementary data report independent registered public accounting firm board directors shareholders flowserve corporation opinion consolidated financial statements listed index appearing item 15a1 present fairly material respects financial position flowserve corporation subsidiaries december 31 2010 2009 results operations cash flows three years period ended december 31 2010 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed accompanying index appearing item 15a2 presents fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintained material respects effective internal control financial reporting december 31 2010 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso company’s management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report internal control financial reporting appearing item 9a responsibility express opinions financial statements financial statement schedule company’s internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions discussed note 1 consolidated financial statements company changed manner calculates earnings per share manner accounts noncontrolling interests 2009 company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp pricewaterhousecoopers llp dallas texas february 23 2011 flowserve corporation consolidated balance sheets see accompanying notes consolidated financial statements flowserve corporation consolidated statements income see accompanying notes consolidated financial statements flowserve corporation consolidated statements comprehensive income see accompanying notes consolidated financial statements flowserve corporation consolidated statements shareholders’ equity see accompanying notes consolidated financial statements flowserve corporation consolidated statements cash flows see accompanying notes consolidated financial statements flowserve corporation notes consolidated financial statements december 31 2010 2009 three years ended december 31 2010 1 significant accounting policies accounting developments principally engaged worldwide design manufacture distribution service industrial flow management equipment provide long leadtime highly engineered pumps standardized general purpose pumps mechanical seals industrial valves related automation products solutions primarily oil gas chemical power generation water management general industries requiring flow management products services equipment manufactured serviced us predominantly used industries deal difficulttohandle corrosive fluids well environments extreme temperatures pressure horsepower speed business affected economic conditions united states “us” countries products sold serviced cyclical nature oil gas chemical power generation water management industries served relationship us dollar currencies demand pricing customers’ end products certain reclassifications retrospective adjustments made prior period information conform current period presentation reclassifications retrospective adjustments primarily result adoption guidance related 1 noncontrolling interests accounting standards codification “asc” 810 “consolidation” 2 twoclass method calculating earnings per share “eps” asc 260 “earnings per share” 2009 segment reorganization previously disclosed 2009 annual report form 10k reorganized divisional operations combining former flowserve pump division “fpd” former flow solutions division “fsd” flow solutions group “fsg” effective january 1 2010 fsg divided two reportable segments based type product manage business fsg engineered product division “epd” fsg industrial product division “ipd” epd includes longer leadtime highly engineered pump product operations former fpd substantially operations former fsd ipd consists standardized general purpose pump product operations former fpd flow control division “fcd” affected retrospectively adjusted prior period financial information reflect new reporting structure venezuela previously disclosed 2009 annual report form 10k effective january 11 2010 venezuelan government devalued currency bolivar moved twotier exchange structure “2010 currency devaluation” official exchange rate moved 215 430 bolivars us dollar nonessential items 260 bolivars us dollar essential items additionally effective january 1 2010 venezuela designated hyperinflationary result began use us dollar functional currency venezuela december 30 2010 venezuelan government announced intention eliminate favorable essential items rate effective january 1 2011 operations venezuela generally consist service center imports equipment parts certain locations resale third parties within venezuela performs service repair activities venezuelan subsidiary’s sales year ended december 31 2010 total assets december 31 2010 represented less 1 consolidated sales total assets period although approvals venezuela’s commission administration foreign exchange become uncertain historically able remit dividends payments official rate currently anticipate future accordingly used official rate 430 bolivars us dollar remeasurement venezuelan financial statements us dollars result 2010 currency devaluation recognized onetime loss 124 million first quarter 2010 loss reported expense income net consolidated statement income resulted tax benefit addition result settling certain us dollar denominated liabilities relating essential import items favorable 260 bolivars us dollar exchange rate realized 48 million foreign currency exchange gains expense income net year ended december 31 2010 consolidated statement income flowserve corporation notes consolidated financial statements continued resulted tax expense elimination favorable essential items rate impact consolidated financial position results operations year ended december 31 2010 included annual report expect elimination favorable essential items rate material impact consolidated financial condition results operations 2011 however due elimination favorable essential items rate future settlement certain us dollar denominated liabilities result foreign exchange gains expense income net consolidated statements income evaluated carrying value related assets concluded current impairment continuing assess monitor ongoing impact currency devaluations venezuelan operations imports market including venezuelan subsidiary’s ability remit cash dividends payments official rate well actions venezuelan government economic conditions venezuela may adversely impact future consolidated financial condition results operations principles consolidation consolidated financial statements include accounts company wholly majorityowned subsidiaries addition consolidate variable interest entities deemed primary beneficiary noncontrolling interests nonaffiliated parties recognized majorityowned consolidated subsidiaries intercompany profits transactions balances among consolidated entities eliminated consolidated financial statements investments unconsolidated affiliated companies represent noncontrolling ownership interests 20 50 accounted using equity method approximates equity interest underlying equivalent net book value accounting principles generally accepted us “gaap” investments interests less 20 investee accounted cost method whereby income recognized event dividend receipt investments accounted cost method tested annually impairment recorded 31 million gain 2010 sale investment joint venture accounted cost method use estimates process preparing financial statements conformity gaap requires management make estimates assumptions affect reported amounts certain assets liabilities revenues expenses management believes estimates assumptions reasonable however actual results may differ materially estimates significant estimates assumptions made management used determining • revenue recognition net liquidated damages delivery penalties • income taxes deferred taxes tax valuation allowances tax reserves • reserves contingent loss • retirement postretirement benefits • valuation goodwill indefinitelived intangible assets longlived assets revenue recognition revenues product sales recognized risks rewards ownership transferred customers based contractual delivery terms agreed customer fulfillment inconsequential perfunctory actions addition policy requires persuasive evidence arrangement fixed determinable sales price reasonable assurance collectibility contracts containing multiple elements determinable fair value recognize revenue amount equal element’s pro rata share contract’s fair value accordance contractual delivery terms element defer recognition revenue advance payments received customers performance obligations completed andor services performed freight charges billed customers included sales related shipping costs included cost sales consolidated statements income flowserve corporation notes consolidated financial statements continued revenues longterm contracts exceed certain internal thresholds regarding size duration project provide receipt progress billings customer recorded percentage completion method progress measured costtocost basis percentage completion revenue represents less 9 consolidated sales year presented revenue service repair contracts recognized services agreed customer rendered revenues generated fixed fee service repair contracts recognized ratable basis term contract contracts range duration generally extend five years fixed fee service contracts represent less 2 consolidated sales year presented certain instances provide guaranteed completion dates terms contracts failure meet contractual delivery dates result late delivery penalties nonrecoverable costs instances payment costs deemed probable perform project profitability analysis accounting costs reduction realizable revenues could potentially cause estimated total project costs exceed projected total revenues realized project instances would record reserves cover excesses period determined would adversely affect results operations financial position circumstances total projected reduced revenues still exceed total projected costs incurrence unrealized incentive fees nonrecoverable costs generally reduces profitability project time subsequent revenue recognition reported results would change different estimates used contract costs different estimates used contractual contingencies cash equivalents place temporary cash investments financial institutions policy invest institutions instruments minimal credit risk market risk investments original maturity three months less purchased classified cash equivalents highly liquid principal values subject significant risk change due interest rate fluctuations allowance doubtful accounts credit risk allowance doubtful accounts established based estimates amount uncollectible accounts receivable determined principally based upon aging accounts receivable also customer credit history industry market segment information economic trends conditions credit reports customer credit issues customer bankruptcies general economic conditions may also impact estimates credit risks mitigated diversity customer base across many different geographic regions industries performing creditworthiness analyses customers additionally mitigate credit risk letters credit advance payments received customers december 31 2010 2009 believe significant concentrations credit risk inventories related reserves inventories stated lowerofcost market cost determined firstin firstout method reserves excess obsolete inventories based upon assessment market conditions products determined historical usage estimated future demand due long life cycles products carry spare parts inventories historically low usage rates provide reserves inventory based demonstrated usage aging criteria income taxes deferred taxes tax valuation allowances tax reserves account income taxes asset liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases operating loss tax credit carryforwards deferred tax assets liabilities calculated using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized period includes enactment date record valuation allowances reflect estimated amount deferred tax assets may realized based upon analysis existing deferred tax assets net operating losses tax credits jurisdiction expectations ability utilize tax attributes review past current estimated future taxable income establishment tax flowserve corporation notes consolidated financial statements continued strategies estimates could impacted changes amount geographical source future income results implementation alteration tax planning strategies provide deferred taxes temporary differences associated investment foreign subsidiaries financial reporting basis exceeds tax basis unless assert permanent reinvestment foreign jurisdictions financial reporting basis tax basis differences investments foreign subsidiaries consist unremitted earnings losses well foreign currency translation adjustments amount income taxes pay subject ongoing audits federal state foreign tax authorities often result proposed assessments significant judgment required determining income tax provisions evaluating tax positions establish reserves open tax years uncertain tax positions may subject challenge various tax authorities consolidated tax provision related accruals include impact reasonably estimable losses related interest penalties deemed appropriate recognize tax benefit uncertain tax position likely tax position sustained examination taxing authorities determination based technical merits position presumes uncertain tax position examined relevant taxing authority full knowledge relevant information tax benefits recognized financial statements position measured based largest benefit greater fifty percent likelihood realized upon ultimate settlement believe adequately provided reasonably foreseeable outcome related matters future results may include favorable unfavorable adjustments estimated tax liabilities extent expected tax outcome matters changes estimate impact income tax provision period determination made legal environmental accruals legal environmental reserves recorded based upon casebycase analysis relevant facts circumstances assessment potential legal obligations costs amounts relating legal environmental liabilities recorded probable loss incurred loss estimable assessments legal environmental costs based information obtained independent inhouse experts loss experience similar situations estimates may change future due new developments regarding facts circumstances matter estimates liabilities unsettled asbestosrelated claims based known claims experience preceding two years claims filed settled dismissed included accrued liabilities retirement obligations liabilities applicable consolidated balance sheets substantial majority asbestosrelated claims covered insurance indemnities estimated indemnities recoveries insurance carriers unsettled claims receivables settlements legal fees paid us asbestosrelated claims estimated using historical experience insurance recovery rates estimates future recoveries include estimates coverage financial viability insurance carriers estimated recoveries included assets net consolidated balance sheets changes claims filed settled dismissed adjustments events deemed unusual unlikely recur differences actual estimated settlement costs insurance indemnity recoveries could impact future expense warranty accruals warranty obligations based upon product failure rates materials usage service delivery costs analysis identified expected claims estimate cost resolve claims estimates expected claims generally factor historical claims known product issues warranty obligations based factors adjusted based historical sales trends preceding 24 months changes claim rates differences actual expected warranty costs sales trends could impact warranty obligation estimates might adverse effects consolidated results operations financial position flowserve corporation notes consolidated financial statements continued insurance accruals insurance accruals recorded wholly partially selfinsured risks medical benefits workers’ compensation based upon analysis claim loss history insurance deductibles policy limits relevant factors included accrued liabilities consolidated balance sheets estimates based upon information received actuaries insurance company adjusters independent claims administrators independent sources changes claims differences actual expected claim losses could impact future accruals receivables insurance carriers estimated using historical experience insurance recovery rates estimates future recoveries include estimates coverage financial viability insurance carriers estimated receivables included accounts receivable net assets net applicable consolidated balance sheets pension postretirement obligations determination pension postretirement benefits obligations based estimates made management consultation independent actuaries investment advisors inherent valuations assumptions including discount rates expected rates return plan assets retirement rates mortality rates compensation increase factors current market conditions including changes rates return interest rates medical inflation rates considered selecting assumptions actuarial gains losses prior service costs recognized accumulated comprehensive loss arise amortize costs net pension expense remaining expected service period valuation goodwill indefinitelived intangible assets longlived assets value goodwill indefinitelived intangible assets tested impairment december 31 year whenever events circumstances indicate assets may impaired connection segment reorganization reallocated goodwill redefined reporting units evaluated goodwill impairment identification reporting units began operating segment level epd ipd fcd considered whether components one level operating segment levels identified reporting units purposes allocating goodwill testing goodwill impairment based certain conditions included among factors extent component represents business ii aggregation economically similar components within operating segments resulted nine reporting units factors considered determining whether aggregation components appropriate included similarity nature products services nature production processes methods distribution types industries served impairment losses goodwill recognized whenever implied fair value goodwill less carrying value estimate fair value reporting units based income approach whereby calculate fair value reporting unit based present value estimated future cash flows discounted cash flow analysis requires us make various judgmental assumptions future sales operating margins growth rates discount rates based budgets business plans economic projections anticipated future cash flows market participants assumptions also made varying perpetual growth rates periods beyond longterm business plan period record impairment goodwill 2010 2009 2008 also consider market capitalization evaluation fair value goodwill market capitalization increased 2010 indicate potential impairment goodwill december 31 2010 impairment losses indefinitelived intangible assets recognized whenever estimated fair value less carrying value fair values calculated trademarks using “relief royalty” method estimates fair value trademarks determining present value royalty payments avoided result owning trademark method includes judgmental assumptions sales growth discount rates consistent assumptions used determine fair value reporting units discussed record impairment trademarks 2010 2009 2008 flowserve corporation notes consolidated financial statements continued net realizable value longlived assets including property plant equipment finitelived intangible assets reviewed periodically indicators potential impairments present based upon assessment estimated future cash flows related assets utilizing methodology similar goodwill additional considerations related longlived assets include expected maintenance improvements changes expected uses ongoing operating performance utilization property plant equipment depreciation property plant equipment stated historical cost less accumulated depreciation asset retirement obligations exist capitalized part carrying amount asset depreciated remaining useful life asset useful lives leasehold improvements lesser remaining lease term useful life improvement assets retired otherwise disposed costs related accumulated depreciation removed accounts resulting gains losses included income operations period depreciation computed straightline method based estimated useful lives depreciable assets generally estimated useful lives assets costs related routine repairs maintenance expensed incurred internally developed software capitalize certain costs associated development internaluse software generally costs related significant software development projects amortized estimated useful life typically three five years upon implementation software intangible assets intangible assets excluding trademarks considered indefinite life consist primarily engineering drawings distribution networks software patents items amortized estimated useful lives generally ranging 3 40 years assets reviewed impairment whenever events circumstances indicate impairment may occurred deferred loan costs deferred loan costs consisting fees expenses associated debt financing amortized term associated debt using effective interest method additional amortization recorded periods optional prepayments debt made fair values financial instruments carrying amounts financial instruments approximated fair value december 31 2010 2009 assets liabilities recorded fair value consolidated balance sheets categorized based upon level judgment associated inputs used measure fair values hierarchical levels defined asc 820 “fair value measurements disclosures” directly related amount subjectivity associated inputs fair valuation assets liabilities asset liability’s categorization within fair value hierarchy based lowest level significant input valuation hierarchical levels follows level inputs unadjusted quoted prices active markets identical assets liabilities measurement date level ii inputs quoted prices included level either directly indirectly observable asset liability correlation market data measurement date duration instrument’s anticipated life level iii inputs reflect management’s best estimate market participants would use pricing asset liability measurement date consideration given risk inherent valuation technique risk inherent inputs model flowserve corporation notes consolidated financial statements continued derivatives hedging activities part risk management strategy enter derivative contracts mitigate certain financial risks related foreign currencies interest rates riskmanagement derivatives policy outlining conditions enter financial derivative transactions employ foreign currency economic hedging strategy minimize potential losses earnings cash flows unfavorable foreign currency exchange rate movements strategy also minimizes potential gains favorable exchange rate movements foreign currency exposures arise transactions including firm commitments anticipated transactions denominated currency entity’s functional currency translation foreigndenominated assets liabilities us dollars primary currencies operate addition us dollar argentine peso australian dollar brazilian real british pound canadian dollar chinese yuan colombian peso euro indian rupee japanese yen mexican peso singapore dollar swedish krona venezuelan bolivar enter interest rate swap agreements purpose hedging exposure floating interest rates certain portions debt policy achieve hedge accounting treatment requires us document relationships hedging instruments hedged items risk management objective strategy entering hedges whether intend designate formal hedge accounting relationship process includes linking derivatives designated formal hedge accounting relationship fair value cash flow foreign currency hedges 1 specific assets liabilities balance sheet 2 specific firm commitments forecasted transactions cases designate hedge assess inception hedge ongoing basis whether derivatives highly effective offsetting changes fair value cash flows hedged items whether derivatives may expected remain highly effective future periods failure demonstrate effectiveness offsetting exposures retroactively prospectively would cause us deem hedge ineffective derivatives recognized balance sheet fair values derivatives qualify hedge accounting elected apply hedge accounting includes substantially forward exchange contracts changes fair values derivatives recognized expense income net consolidated statements income inception new derivative contract formal hedge accounting elected policy requires us designate derivative 1 hedge forecasted transaction b variability cash flows received paid connection recognized asset liability “cash flow” hedge 2 foreign currency fair value “foreign currency” hedge changes fair value derivative highly effective documented designated qualified cash flow hedge extent hedge effective recorded comprehensive expense income earnings affected variability cash flows hedged transaction changes fair value foreign currency hedges recorded comprehensive expense income since satisfy accounting criteria cash flow hedge ineffectiveness represents amount changes fair value derivative mirror change cash flow forecasted transaction recorded current period earnings effective hedges changes value hedged item also recorded component comprehensive expense income underlying recognized balance sheet upon settlement realized gains losses recognized income consolidated statements income discontinue hedge accounting • deem hedge ineffective determine designation derivative hedging instrument longer appropriate • derivative longer effectively offsets changes cash flows hedged item firm commitments contracts flowserve corporation notes consolidated financial statements continued • derivative expires terminates sold • occurrence contracted committed transaction longer probable occur originally expected period hedge accounting discontinued derivative remains outstanding carry derivative estimated fair value balance sheet recognizing changes fair value current period earnings cash flow hedge becomes ineffective deferred gains losses cash flow hedge remain accumulated comprehensive loss exposure relating item underlying hedge recognized becomes probable hedged forecasted transaction occur deferred gains losses hedging instrument recognized earnings immediately foreign currency translation assets liabilities foreign subsidiaries translated us dollars exchange rates prevailing balance sheet date income expenses translated average rates month translation gains losses reported component accumulated comprehensive loss transaction translation gains losses arising intercompany balances reported component accumulated comprehensive loss underlying transaction stems longterm equity investment debt designated due foreseeable future otherwise recognize transaction gains losses arising intercompany transactions component income intercompany balances longterm investment related designated due beyond foreseeable future may mitigate risk associated foreign currency fluctuations entering forward exchange contracts see note 6 discussion forward exchange contracts transactional currency gains losses arising transactions currencies sites’ functional currencies changes fair value forward exchange contracts qualify hedge accounting included consolidated results operations years ended december 31 2010 2009 2008 recognized net losses gains 265 million 78 million 166 million amounts expense income net accompanying consolidated statements income stockbased compensation stockbased compensation measured grantdate fair value exercise price stock option awards value restricted share restricted share unit performancebased unit awards collectively referred “restricted shares” set closing price common stock new york stock exchange date grant date grants authorized board directors restricted share units performancebased units refer restricted awards voting rights accrue dividends forfeited vesting occur options expensed using graded vesting model whereby recognize compensation cost requisite service period separately vesting tranche award adjust sharebased compensation least annually changes estimate expected equity award forfeitures based actual forfeiture experience intrinsic value restricted shares typically product share price date grant number restricted shares granted amortized straightline basis compensation expense periods restrictions lapse based expected number shares vest forfeiture rate based unvested restricted shares forfeited compared original total restricted shares granted 4year period excluding significant forfeiture events expected recur earnings per share use twoclass method calculating eps “twoclass” method earnings allocation formula determines earnings per share class common stock participating security earnings period distributed unvested restricted share awards earn nonforfeitable dividend rights qualify participating securities accordingly included basic computation unvested restricted shares participate equal basis common shares therefore difference undistributed earnings allocated participating security accordingly presentation prepared combined basis flowserve corporation notes consolidated financial statements continued presented earnings per common share following reconciliation net earnings flowserve corporation weighted average shares calculating basic net earnings per common share earnings per weighted average common share outstanding calculated follows diluted earnings per share based upon weighted average number shares determined basic earnings per share plus shares potentially issuable conjunction stock options restricted shares three years ended december 31 2010 2009 2008 options purchase common stock excluded computations potentially dilutive securities research development expense research development costs charged expense incurred aggregate research development costs included selling general administrative expenses 295 million 294 million 340 million 2010 2009 2008 respectively costs incurred research development primarily include salaries benefits consumable supplies well rent professional fees utilities depreciation property equipment used research development activities business combinations business combinations referred financial statements used purchase method accounting allocate purchase price identifiable tangible intangible assets liabilities recognizing goodwill purchase price exceeds fair value identifiable assets acquired net liabilities assumed accounting developments pronouncements implemented june 2009 financial accounting standards board “fasb” issued guidance related variable interest entities “vie” accounting standards codification “asc” 810 guidance eliminates exclusion qualifying specialpurpose entities “qspe” consideration consolidation revises determination primary beneficiary vie require qualitative assessment whether company controlling financial interest 1 power direct activities significantly impact vie’s economic flowserve corporation notes consolidated financial statements continued performance 2 right receive benefits obligation absorb losses vie could potentially significant vie determination primary beneficiary must reconsidered ongoing basis adoption guidance effective january 1 2010 material impact consolidated financial condition results operations january 2010 fasb issued accounting standards update “asu” 201006 “fair value measurements disclosures asc 820 improving disclosures fair value measurements” requires additional disclosures transfers level ii activity level iii fair value measurements new disclosures clarifications existing disclosures effective interim annual reporting periods beginning december 15 2009 except disclosures level iii activity effective fiscal years beginning december 15 2010 interim periods within fiscal years adoption level ii disclosure guidance effective january 1 2010 material impact consolidated financial condition results operations expect adoption level iii disclosure guidance material impact consolidated financial condition results operations may 2010 fasb issued asu 201019 “foreign currency asc 830 multiple foreign currency exchange rates” requires additional disclosures cases reported balances financial reporting purposes differ actual us dollar denominated balances investments venezuela adoption guidance effective january 1 2010 material impact consolidated financial condition results operations pronouncements yet implemented september 2009 fasb issued asu 200913 “revenue recognition asc 605 multipledeliverable revenue arrangements consensus fasb emerging issues task force” addresses accounting multipledeliverable arrangements enable vendors account products services separately rather combined unit amendment addresses separate deliverables measure allocate arrangement consideration one units accounting asu 200913 effective prospectively revenue arrangements entered materially modified fiscal years beginning june 15 2010 expect adoption asu 200913 material impact consolidated financial condition results operations december 2010 fasb issued asu 201028 “intangibles goodwill asc 350 perform step 2 goodwill impairment test reporting units zero negative carrying amounts consensus fasb emerging issues task force” modifies step 1 goodwill impairment test reporting units zero negative carrying amounts amendment requires entity perform step 2 goodwill impairment test likely goodwill impairment exists consider whether adverse qualitative factors indicating impairment may exist asu 201028 effective fiscal years interim periods within years beginning december 15 2010 expect adoption asu 201028 material impact consolidated financial condition results operations december 2010 fasb issued asu 201029 “business combinations asc 805 disclosure supplementary pro forma information business combinations consensus fasb emerging issues task force” specifies public entity presents comparative financial statements entity disclose revenue earnings combined entity though business combination occurred current year occurred beginning comparable prior annual reporting period amendment also expands supplemental pro forma disclosures asc 805 include description nature amount material nonrecurring pro forma adjustments directly attributable business combination included reported pro forma revenue earnings asu 201029 effective business combinations acquisition date beginning first annual reporting period beginning flowserve corporation notes consolidated financial statements continued december 15 2010 expect adoption asu 201029 material impact consolidated financial condition results operations 2 acquisitions valbart srl effective july 16 2010 acquired inclusion fcd 100 valbart srl “valbart” privatelyowned italian valve manufacturer share purchase cash 1994 million included 338 million existing valbart net debt defined valbart’s third party debt less cash hand repaid closing valbart manufactures trunnionmounted ball valves used primarily upstream midstream oil gas applications enables us offer complete valve product portfolio oil gas project customers acquisition included valbart’s portion joint venture us entered december 2009 operational 2010 terms purchase agreement deposited 58 million escrow held applied breach representations warranties indemnities 30 months expiration escrow residual amounts shall released sellers satisfaction purchase price third quarter 2010 purchase price allocated preliminary basis assets acquired liabilities assumed based initial estimates fair values date acquisition fourth quarter 2010 recorded measurement period adjustments primarily related revised estimates gross margin acquired backlog preliminary amounts recognized reflect new information obtained facts circumstances existed acquisition date known would affected measurements amounts recognized date purchase price allocated assets acquired liabilities assumed based estimates fair values date acquisition allocation purchase price including mentioned measurement period adjustments summarized excess acquisition date fair value total purchase price estimated fair value net tangible intangible assets recorded goodwill represents value expected obtained flowserve corporation notes consolidated financial statements continued ability competitive offering complete valve product portfolio leveraging current sales distribution service network goodwill related acquisition recorded fcd segment expected deductible tax purposes trademarks indefinitelived intangible assets existing customer relationships noncompete agreements engineering drawings expected weighted average useful lives five years four years 10 years respectively total amortizable intangible assets weighted average useful life approximately five years subsequent july 16 2010 revenues expenses valbart included consolidated statements income valbart acquisition decreased operating income year ended december 31 2010 124 million including 27 million acquisitionrelated costs acquisitionrelated costs included consolidated statements income selling general administrative expense “sga” valbart generated approximately 81 million 104 million thencurrent exchange rates sales unaudited fiscal year ended may 31 2010 pro forma information provided due immateriality measurement period adjustments discussed overall impact operating income year ended december 31 2010 measurement period adjustments would immaterially decreased operating income three nine months ended september 30 2010 previously reported retrospectively adjust prior periods calder ag effective april 21 2009 acquired inclusion epd calder ag “calder” private swiss company supplier energy recovery technology use global desalination market 441 million net cash acquired total purchase price 284 million paid closing 24 million paid working capital valuation completed early july 2009 remaining 133 million total purchase price contingent upon calder achieving certain performance metrics twelve months following acquisition extent achieved expected paid cash within 12 months acquisition date initially recognized liability 44 million estimate acquisition date fair value contingent consideration based weighted probability achievement performance metrics specified period time date acquisition purchase price allocated assets acquired liabilities assumed based estimates fair values date acquisition allocation purchase price summarized excess acquisition date fair value total purchase price estimated fair value net tangible intangible assets recorded goodwill pro forma information provided due immateriality flowserve corporation notes consolidated financial statements continued third quarter 2009 estimated fair value contingent consideration reduced 22 million based third quarter 2009 results updated weighted probability achievement performance metrics within specified time frame fourth quarter 2009 estimated fair value contingent consideration reduced 0 based 2009 results updated weighted probability achievement performance metrics twelve months following acquisition resulting gains included selling general administrative expense “sga” consolidated statement income final measurement date performance metrics march 31 2010 performance metrics met resulting payment contingent consideration niigata worthington company ltd acquired inclusion epd remaining 50 interest niigata worthington company ltd “niigata” japanese manufacturer pumps rotating equipment effective march 1 2008 24 million cash incremental interest acquired accounted step acquisition niigata’s results operations consolidated since date acquisition prior transaction 50 interest niigata recorded using equity method accounting upon consolidation effective date acquisition remaining 50 interest niigata balance sheet reflected increase cash debt 57 million 58 million respectively purchase price allocated assets acquired liabilities assumed based estimates fair values date acquisition estimate fair value net assets acquired exceeded cash paid accordingly goodwill recognized acquisition accounted bargain purchase resulting gain 34 million recorded first quarter 2008 reduced 06 million 28 million fourth quarter 2008 purchase accounting finalized gain included expense income net consolidated statement income due immateriality pro forma information provided due immateriality 3 goodwill intangible assets changes carrying amount goodwill years ended december 31 2010 2009 follows 1 goodwill measurement period adjustments related acquisition valbart see note 2 additional information flowserve corporation notes consolidated financial statements continued following table provides information changes intangible assets 2010 following table provides information changes intangible assets 2009 1 2010 2009 wrote expired fully amortized intangible assets patents total 113 million 04 million respectively 2 engineering drawings represent estimated fair value associated specific acquired product component schematics 3 accumulated amortization indefinitelived intangible assets relates amounts recorded prior implementation date guidance issued asc 350 flowserve corporation notes consolidated financial statements continued following schedule outlines actual amortization expense recognized 2010 estimate future amortization based upon finitelived intangible assets owned december 31 2010 4 inventories net consisted following 2010 2009 2008 recognized expenses 101 million 137 million 118 million respectively excess obsolete inventory expenses included cost sales “cos” consolidated statements income 5 stockbased compensation plans established flowserve corporation equity incentive compensation plan “2010 plan” effective january 1 2010 shareholderapproved plan authorizes issuance 2900000 shares common stock form restricted shares restricted share units performancebased units collectively referred “restricted shares” incentive stock options nonstatutory stock options stock appreciation rights bonus stock 2900000 shares common stock authorized 2010 plan 2629565 remain available issuance december 31 2010 addition 2010 plan also maintain flowserve corporation 2004 stock compensation plan “2004 plan” established april 21 2004 plan authorizes issuance 3500000 shares common stock grants restricted shares stock flowserve corporation notes consolidated financial statements continued options equitybased awards 3500000 shares common stock authorized 2004 plan 590707 remain available issuance december 31 2010 recorded stockbased compensation follows stock options granted officers employees directors allow purchase common shares market value stock date options granted although options granted market value generally options whether granted 2004 plan previously approved plans become exercisable staggered period ranging one five years typically one three years december 31 2010 outstanding options fully vested options generally expire ten years date grant within short period time following termination employment cessation services option holder options granted 2010 2009 2008 information related stock options issued officers employees directors prior 2008 plans presented following table additional information relating ranges options outstanding december 31 2010 follows flowserve corporation notes consolidated financial statements continued december 31 2010 unrecognized compensation cost related outstanding stock option awards weighted average remaining contractual life options outstanding december 31 2010 2009 42 years 55 years respectively total intrinsic value stock options exercised years ended december 31 2010 2009 2008 86 million 49 million 274 million respectively stock options vested year ended december 31 2010 compared total fair value stock options 27 million 41 million vested years ended december 31 2009 2008 respectively restricted shares generally restrictions restricted shares expire minimum one year maximum five years shares subject forfeiture restriction period typically restricted share grants staggered vesting periods one three years grant date intrinsic value restricted shares typically product share price date grant number restricted shares granted amortized straightline basis compensation expense periods restrictions lapse unearned compensation amortized compensation expense vesting period restricted shares december 31 2010 2009 316 million 315 million respectively unearned compensation cost related unvested restricted shares expected recognized weightedaverage period approximately 1 year amounts recognized net earnings prospective periods awards vest total market value restricted shares vested years ended december 31 2010 2009 2008 319 million 170 million 153 million respectively following tables summarize information regarding restricted shares unvested restricted shares outstanding december 31 2010 includes 460000 units performancebased vesting provisions performancebased units vest upon achievement performance targets issuable common shares performance targets based average annual return net assets rolling threeyear period compared measure predefined peer group period compensation expense recognized 36month cliff vesting period based fair market value common stock date grant adjusted anticipated forfeitures performance period earned unearned compensation expense adjusted based changes expected achievement performance targets vesting provisions range 0 870000 shares based predefined performance targets december 31 2010 estimate vesting 870000 shares based expected achievement performance targets 6 derivatives hedging activities risk management derivatives policy specifies conditions may enter derivative contracts see note 1 additional information purpose entering derivatives designated hedging instruments overall risk management strategies enter forward exchange contracts hedge risks associated transactions denominated currencies local currency operation flowserve corporation notes consolidated financial statements continued engaging transaction december 31 2010 2009 3585 million 3096 million respectively notional amount outstanding forward exchange contracts third parties december 31 2010 length forward exchange contracts currently place ranged 4 days 31 months also part risk management program enter interest rate swap agreements hedge exposure floating interest rates certain portions debt december 31 2010 2009 3500 million 3850 million respectively notional amount outstanding interest rate swaps third parties interest rate swaps 100 effective december 31 2010 maximum remaining length interest rate contract place approximately 33 months exposed risk creditrelated losses resulting nonperformance counterparties financial instruments perform credit evaluations counterparties forward exchange contracts interest rate swap agreements expect counterparties meet obligations experienced credit losses counterparties fair value forward exchange contracts designated hedging instruments summarized fair value interest rate swaps cash flow hedging relationships summarized current noncurrent derivative assets reported consolidated balance sheets prepaid expenses assets net respectively current noncurrent derivative liabilities reported consolidated balance sheets accrued liabilities retirement obligations liabilities respectively impact net changes fair values forward exchange contracts designated hedging instruments summarized flowserve corporation notes consolidated financial statements continued impact net changes fair values interest rate swaps cash flow hedging relationships summarized gains losses recognized consolidated statements income forward exchange contracts interest rate swaps classified expense income net interest expense respectively expect recognize losses gains 12 million 03 million 03 million net deferred taxes earnings 2011 2012 2013 respectively related interest rate swap agreements based fair values december 31 2010 7 realignment programs beginning 2009 initiated realignment programs reduce optimize certain nonstrategic manufacturing facilities overall cost structure improving operating efficiency reducing redundancies maximizing global consistency driving improved financial performance expand efforts optimize assets respond reduced orders drive enhanced customerfacing organization “realignment programs” currently expect total realignment program charges approximately 91 million approved plans 864 million incurred december 31 2010 realignment programs consist restructuring nonrestructuring charges restructuring charges represent costs associated relocation certain business activities outsourcing business activities facility closures nonrestructuring charges costs incurred improve operating efficiency reduce redundancies primarily represent employee severance expenses reported cos sga applicable consolidated statements income flowserve corporation notes consolidated financial statements continued total realignment program charges presented net adjustments relating changes estimates previously recorded amounts net adjustments recorded 2010 58 million flowserve corporation notes consolidated financial statements continued 1 total expected realignment charges represent management’s best estimate date approved plans execution certain initiatives still process amount nature actual realignment charges incurred could vary total expected charges realignment program restructuring charges restructuring charges include costs related employee severance closed facilities contract termination costs asset writedowns exit costs severance costs primarily include costs associated involuntary termination benefits contract termination costs include costs related termination operating leases contract termination costs asset writedowns include accelerated depreciation fixed assets accelerated amortization intangible assets inventory writedowns includes costs related employee relocation asset relocation vacant facility costs ie taxes insurance charges flowserve corporation notes consolidated financial statements continued restructuring charges net adjustments realignment program follows 1 total expected realignment charges represent management’s best estimate date approved plans execution certain initiatives still process amount nature actual realignment charges incurred could vary total expected charges following represents activity related restructuring reserve realignment program 8 fair value financial instruments financial instruments presented fair value consolidated balance sheets fair value defined price would received sell asset paid transfer liability orderly transaction market flowserve corporation notes consolidated financial statements continued participants measurement date available fair value based observable market prices parameters derived prices parameters observable prices inputs available valuation models may applied assets liabilities recorded fair value consolidated balance sheets categorized based upon level judgment associated inputs used measure fair values hierarchical levels directly related amount subjectivity associated inputs fair valuation assets liabilities recurring fair value measurements limited investments derivative instruments equity securities fair value measurements derivative instruments determined using models maximize use observable market inputs including interest rate curves forward spot prices currencies classified level ii fair value hierarchy fair values derivatives included note 6 fair value measurements investments equity securities determined using quoted market prices fair values investments equity securities changes thereto immaterial consolidated financial position results operations discussed note 2 liability 44 million initially recognized estimate acquisition date fair value contingent consideration liability classified level iii fair value hierarchy based weighted probability date acquisition achievement performance metrics observable market december 31 2009 liability reduced 0 based 2009 results updated weighted probability achievement performance metrics twelve months following acquisition 9 details certain consolidated balance sheet captions following tables present financial information certain consolidated balance sheet captions accounts receivable net accounts receivable net property plant equipment net property plant equipment net depreciation expense amount 603 million 572 million 526 million years ended december 31 2010 2009 2008 respectively included cos consolidated statements income remaining depreciation expense included sga flowserve corporation notes consolidated financial statements continued assets net assets net “other” assets include longterm tax receivables deferred loan costs items none individually exceed 5 total assets accrued liabilities accrued liabilities 1 2009 legal environmental matters included reserve related shareholder class action litigation resolved second quarter 2010 disclosed 2009 annual report form 10k “other” accrued liabilities include professional fees lease obligations insurance interest freight restructuring charges items none individually exceed 5 current liabilities see note 7 additional information restructuring charges flowserve corporation notes consolidated financial statements continued retirement obligations liabilities retirement obligations liabilities 10 equity method investments december 31 2010 investments seven joint ventures one located china japan south korea saudi arabia united arab emirates two located india accounted using equity method summarized combined income statement information based recent financial information unaudited investments flowserve corporation notes consolidated financial statements continued reconciliation net income per combined income statement information equity income investees per consolidated statements income follows 1 discussed note 2 effective march 1 2008 purchased remaining 50 interest niigata resulting full consolidation niigata date prior transaction 50 interest recorded using equity method accounting result combined income statement information includes niigata first two months 2008 2 provision income taxes based tax laws rates countries investees operate taxation regimes vary nominal rates also allowability deductions credits benefits 11 debt lease obligations debt including capital lease obligations consisted scheduled maturities new credit facilities described well capital lease obligations borrowings flowserve corporation notes consolidated financial statements continued new credit facilities december 14 2010 “closing date” entered new credit agreement “credit agreement” bank america na swingline lender letter credit issuer administrative agent lenders party thereto together “lenders” term debt “new term loan” revolving credit facility “new revolving credit facility” credit agreement provides aggregate commitment 10 billion including 5000 million new term loan facility maturity date december 14 2015 5000 million new revolving credit facility maturity date december 14 2015 collectively referred “new credit facilities” new revolving credit facility includes 3000 million sublimit issuance letters credit subject certain conditions right increase amount new revolving credit facility aggregate amount exceed 2000 million used proceeds advanced new term loan along approximately 40 million cash hand repay outstanding indebtedness existing credit agreement dated august 12 2005 amended included 6000 million term loan “old term loan” 4000 million revolving line credit collectively referred “old credit agreement” connection repayment outstanding letters credit old credit agreement transferred new revolving credit facility terminated old credit agreement closing date proceeds new revolving credit facility used fund capital expenditures working capital needs future draws new revolving credit facility subject various conditions including existence default credit agreement incurred 116 million fees related new credit facilities prior refinancing 27 million unamortized deferred loan costs related old credit agreement based upon syndicate financial institutions credit agreement expensed 15 million unamortized deferred loan costs 01 million fees related credit agreement expense income net 2010 remaining 115 million fees related credit agreement capitalized along remaining 12 million previously unamortized deferred loan costs total 127 million deferred loan costs included assets net costs amortized term credit agreement recorded interest expense december 31 2010 2009 amounts outstanding new revolving credit facility revolving line credit old credit agreement respectively outstanding letters credit 1339 million 1231 million december 31 2010 2009 respectively reduced borrowing capacity 3661 million 2769 million respectively borrowings new credit facilities respect swingline loans bear interest rate equal option either 1 london interbank offered rate “libor” plus 175 250 applicable depending consolidated leverage ratio 2 base rate based greater prime rate recently announced administrative agent new credit facilities federal funds rate plus 050 3 daily rate equal one month libor plus 10 plus applicable margin 075 150 determined reference ratio total debt consolidated earnings interest taxes depreciation amortization “ebitda” applicable interest rate december 31 2010 23 borrowings new credit facilities connection new credit facilities entered 3500 million notional amount interest rate swaps december 31 2010 hedge exposure floating interest rates pay lenders new credit facilities commitment fee equal percentage ranging 030 050 determined reference ratio total debt consolidated ebitda unutilized portion new revolving credit facility letter credit fees respect standby letter credit outstanding new credit facilities equal percentage based applicable margin effect libor borrowings new revolving credit facility fees financial performance standby letters credit 20 10 respectively flowserve corporation notes consolidated financial statements continued obligations new credit facilities unconditionally guaranteed jointly severally substantially existing subsequently acquired organized domestic subsidiaries 65 capital stock certain foreign subsidiaries subject certain controlled company materiality exceptions lenders agreed release collateral achieve investment grade rating moody’s investors service inc standard poor’s ratings services senior unsecured noncreditenhanced longterm debt case outlook stable better understanding identical collateral required pledged lenders anytime following release collateral investment grade rating maintained addition prior obtaining maintaining investment grade credit ratings guarantors’ obligations new credit facilities collateralized substantially guarantors’ assets achieved ratings december 31 2010 credit agreement contains among things covenants defining subsidiaries’ ability dispose assets merge pay dividends repurchase redeem capital stock indebtedness incur indebtedness guarantees create liens enter agreements negative pledge clauses make certain investments acquisitions enter transactions affiliates engage business activity existing business credit agreement also contains covenants requiring us deliver lenders leverage interest coverage financial covenant certificates compliance maximum permitted leverage ratio 325 times debt total consolidated ebitda minimum interest coverage 325 times consolidated ebitda total interest expense compliance financial covenants credit agreement tested quarterly complied covenants december 31 2010 credit agreement includes customary events default including nonpayment principal interest violation covenants incorrectness representations warranties cross defaults cross acceleration bankruptcy material judgments employee retirement income security act 1974 amended “erisa” events actual asserted invalidity guarantees security documents certain changes control company occurrence event default could result acceleration guarantors’ obligations new credit facilities repayment obligations made scheduled repayments old credit agreement 43 million 57 million 57 million 2010 2009 2008 respectively made mandatory repayments optional prepayments 2010 2009 2008 exception proceeds advanced new term loan facility along approximately 40 million cash hand repay outstanding indebtedness old credit agreement may prepay loans new credit facilities whole part without premium penalty time european letter credit facilities october 30 2009 entered new 364day unsecured european letter credit facility “new european loc facility” initial commitment 1250 million new european loc facility renewable annually consistent old european loc facility used contingent obligations respect surety performance bonds bank guarantees similar obligations maturities five years renewed new european loc facility october 2010 consistent terms additional 364day period pay fees 135 040 utilized unutilized capacity respectively new european loc facility outstanding letters credit drawn new european loc facility 557 million 745 million 28 million 40 million december 31 2010 2009 respectively ability issue additional letters credit previous european letter credit facility “old european loc facility” commitment 1100 million expired november 9 2009 paid annual fronting fees 0875 010 respectively letters credit written old european loc facility outstanding letters credit written old european loc facility 333 million 445 million 779 million 1115 million december 31 2010 2009 respectively flowserve corporation notes consolidated financial statements continued certain banks parties facilities managing exposures aggregated basis commitment new european loc facility reduced face amount existing letters credit written old european loc facility prior expiration existing letters credit remain outstanding accordingly offset 1250 million capacity new european loc facility maturity december 31 2010 approximately two years majority outstanding existing letters credit consideration outstanding commitments facilities available capacity new european loc facility 1023 million december 31 2010 557 million drawn operating leases noncancelable operating leases certain offices service quick response centers certain manufacturing operating facilities machinery equipment automobiles rental expense relating operating leases 469 million 490 million 436 million 2010 2009 2008 respectively future minimum lease payments due noncancelable operating leases amounts thousands 12 pension postretirement benefits sponsor several noncontributory defined benefit pension plans covering substantially us employees certain nonus employees provide benefits based years service age job grade levels type compensation retirement benefits covered employees provided contributory pension plans cash balance pension plans governmentsponsored retirement programs funded defined benefit pension plans receive funding based independent actuarial valuations provide current service amount sufficient amortize unfunded prior service periods exceed 30 years funding falling within legal limits prescribed prevailing regulation also maintain unfunded defined benefit plans permitted local regulations receive funding benefits become due defined benefit plan strategy ensure current future benefit obligations adequately funded costeffective manner additionally investing objective achieve highest level investment performance compatible risk tolerance prudent investment practices longterm nature defined benefit plan liabilities funding strategy based longterm perspective formulating implementing investment policies evaluating investment performance asset allocation defined benefit plans reflect decision proportion investment equity fixed income securities appropriate various subasset classes least annually complete comprehensive review asset allocation policy underlying assumptions includes defined benefit plan liabilities longterm capital markets rate return assumptions risk tolerances expected rates return defined benefit plan assets derived reviews asset allocation strategy expected longterm performance asset classes risks factors adjusted specific investment strategy rates impacted changes general market conditions longterm nature shortterm market changes significantly impact rates flowserve corporation notes consolidated financial statements continued significant concentration us equity exposure defined benefit plan assets however continue monitor allocations manage assets within acceptable levels risk periods presented used measurement date december 31 worldwide pension postretirement medical plans us defined benefit plans maintain qualified nonqualified defined benefit pension plans us qualified plan provides coverage substantially fulltime us employees receive benefits earnings threshold specified us department labor nonqualified plans primarily cover small number employees including current former members senior management providing benefit levels equivalent participants otherwise limited us department labor rules us plans designed operate “cash balance” arrangements employee option take lump sum payment end service total accumulated benefit obligation equivalent total projected benefit obligation “benefit obligation” following assumptions related us defined benefit pension plans december 31 2010 compared december 31 2009 decreased discount rate 550 500 based analysis publiclytraded investment grade us corporate bonds lower yield due current market conditions december 31 2010 compared december 31 2009 decreased average assumed rate compensation 480 425 determining 2010 expense decreased expected rate return assets 775 700 primarily based target allocations expected longterm asset returns longterm rate return assumption calculated using quantitative approach utilizes unadjusted historical returns asset allocation inputs calculation net pension expense us defined benefit pension plans including qualified nonqualified plans estimated prior service benefit defined benefit pension plans amortized accumulated comprehensive loss us pension expense 2011 12 million estimated net loss flowserve corporation notes consolidated financial statements continued defined benefit pension plans amortized accumulated comprehensive loss us pension expense 2011 107 million amortize estimated prior service benefits estimated net losses remaining expected service period following summarizes net pension liability us plans following summarizes amounts recognized balance sheet us plans following summary changes us defined benefit plans’ pension obligations following table summarizes expected cash activity us defined benefit pension plans future amounts millions flowserve corporation notes consolidated financial statements continued following table shows change accumulated comprehensive loss attributable components net cost change benefit obligations us plans net tax following reconciliation us defined benefit pension plans’ assets contributed 334 million 831 million us defined benefit pension plans 2010 2009 respectively payments exceeded minimum funding requirements mandated us department labor rules estimated contribution 2011 expected 7 million 10 million excluding direct benefits paid flowserve corporation notes consolidated financial statements continued us defined benefit plan assets held qualified plan asset allocation qualified plan end 2010 2009 asset category follows 1 less 1 holdings category none common stock directly held qualified plan investment strategy earn longterm rate return consistent acceptable degree risk minimize cash contributions life plan taking account liquidity needs plan preserve capital diversified investments high quality securities current allocation target invest approximately 50 plan assets equity securities 50 fixed income securities within investment category assets allocated various investment strategies professional money management firm manages assets engage consultant assist evaluating activities periodically review allocation target generally conjunction asset liability study consideration future cash flow needs regularly rebalance actual allocation target investment allocation plan assets invested commingled funds individual funds actively managed intent outperform specified benchmarks “pension investment committee” responsible setting investment strategy target asset allocation well selecting individual funds qualified plan approaching fully funded status working toward implementation liabilitydriven investing “ldi” strategy closely align duration assets duration liabilities ldi strategy result asset portfolio closely matches behavior liability thereby protecting funded status plan flowserve corporation notes consolidated financial statements continued plan’s financial instruments shown presented fair value see note 1 discussions hierarchical levels fair values plan’s investments determined fair values us defined benefit plan assets december 31 2010 us large cap funds seek outperform russell 1000 r index investments 1000 large medium capitalization us companies represented russell 1000 r index composed largest 1000 us equities russell 3000 r index determined market capitalization russell 3000 r index composed largest us equities determined market capitalization b us small cap funds seek outperform russell 2000 r index investments medium small capitalization us companies represented russell 2000 r index composed smallest 2000 us equities russell 3000 r index determined market capitalization c international large cap funds seek outperform msci europe australia far east index investments developed nations world maintain high degree diversification among countries currencies longterm governmentcredit funds seek outperform barclays capital us longterm governmentcredit index generating excess return variety diversified strategies securities longer durations sector rotation security selection tactical use highyield bonds e intermediate bonds seek outperform barclays capital us aggregate bond index generating excess return variety diversified strategies securities short intermediate durations sector rotation security selection tactical use highyield bonds f multistrategy hedge fund represents fund hedge funds invest variety private equity funds real estate level iii rollforward details provided due immateriality g details including level iii rollforward details provided due immateriality nonus defined benefit plans maintain defined benefit pension plans cover employees following countries austria france germany india indonesia italy japan mexico netherlands sweden united kingdom “uk” assets uk two plans netherlands one plan represent 97 total nonus plan assets “nonus assets” details countries’ assets provided due immateriality flowserve corporation notes consolidated financial statements continued following assumptions related nonus defined benefit pension plans december 31 2010 compared december 31 2009 decreased average discount rate nonus plans 541 513 based primarily lower applicable corporate aa bond yields uk euro zone determining 2010 expense increased average rate return assets 438 december 31 2009 621 december 31 2010 primarily result increase uk rate return assets expected rate return plan assets longterm nature shortterm market changes significantly impact rates many nonus defined benefit plans unfunded permitted local regulation expected longterm rate return assets funded plans determined assessing rates return asset class calculated using quantitative approach utilizes unadjusted historical returns asset allocation inputs calculation work actuaries determine reasonableness longterm rate return assumptions looking several factors including historical returns expected future returns asset allocation risks asset class items net pension expense nonus defined benefit pension plans estimated net loss defined benefit pension plans amortized accumulated comprehensive loss nonus pension expense 2011 20 million amortize estimated net losses remaining expected service period remaining expected lifetime inactive participants plans inactive participants flowserve corporation notes consolidated financial statements continued following summarizes net pension liability nonus plans following summarizes amounts recognized balance sheet nonus plans following reconciliation nonus plans’ defined benefit pension obligations 1 actuarial losses primarily reflect impact assumption changes plans uk netherlands 2 currency translation impact 2010 compared 2009 reflects strengthening us dollar exchange rate significant currencies primarily british pound euro flowserve corporation notes consolidated financial statements continued following table summarizes expected cash activity nonus defined benefit plans future amounts millions following table shows change accumulated comprehensive loss attributable components net cost change benefit obligations nonus plans net tax following reconciliation nonus plans’ defined benefit pension assets 1 currency translation impact 2010 compared 2009 reflects strengthening us dollar exchange rate significant currencies primarily british pound euro contributions nonus defined benefit pension plans 2011 expected approximately 10 million excluding direct benefits paid flowserve corporation notes consolidated financial statements continued asset allocations nonus defined benefit pension plans end 2010 2009 follows 1 less 1 holdings emerging markets none common stock held directly plans cases investment strategy plans earn longterm rate return consistent acceptable degree risk minimize cash contributions life plan taking account liquidity needs plan legal requirements particular country preserve capital diversified investments high quality securities asset allocation differs plan based upon plan’s benefit obligation participants well results asset liability studies conducted plan consideration future cash flow needs professional money management firms manage plan assets engage consultants uk netherlands assist evaluation activities assets uk plans overseen group trustees review investment strategy asset allocation fund selection assets passively managed invested index funds attempt match performance specified benchmark index assets netherlands plan independently managed outside service provider flowserve corporation notes consolidated financial statements continued fair values nonus assets december 31 2010 north american companies represents us canadian large cap equity index funds passively managed track respective benchmarks ftse allworld usa index ftse allworld canada index b uk companies represents uk equity index fund passively managed tracks ftse allshare index c european companies represents european equity index fund passively managed tracks ftse allworld developed europe exuk index asian pacific companies represents japanese pacific rim equity index funds passively managed track respective benchmarks ftse allworld japan index ftse allworld developed asia pacific exjapan index e global equity represents actively managed global equity funds taking topdown strategic view different regions analyzing companies based fundamentals marketdriven thematic quantitative factors generate alpha f emerging markets represents diversified portfolio shares issued companies developing emerging country latin america asia eastern europe middle east africa using bottomup stock selection process g uk government gilt index represents uk government issued fixed income investments passively managed track respective benchmarks ftse uk gilt indexlinked 5 years index ftse uk gilt 15 years index h uk corporate bond index represents uk corporate bond investments passively managed track iboxx 15 years £ nongilt index global fixed income bond represents actively managed diversified fixed income investment funds primarily invested traditional government bonds highquality corporate bonds asset backed securities addition emerging market debt high yield corporates flowserve corporation notes consolidated financial statements continued j includes assets held plans outside uk netherlands details including level iii rollforward details provided due immateriality defined benefit pension plans accumulated benefit obligations excess plan assets following summarizes key pension plan information regarding us nonus plans whose accumulated benefit obligations exceed fair value respective plan assets postretirement medical plans sponsor several defined benefit postretirement medical plans covering certain current retirees limited number future retirees us plans provide medical dental benefits administered insurance companies health maintenance organizations plans include participant contributions deductibles coinsurance provisions limitations integrated medicare group plans fund plans benefits health maintenance organization premiums paid plans hold assets period presented accordingly investment strategy targeted allocations plan assets benefits postretirement medical plans available new employees existing employees following assumptions related postretirement benefits assumed ranges annual rates increase medical costs used determine net expense 90 2010 90 2009 78 2008 gradual decrease 50 2032 future years net postretirement benefit income expense postretirement medical plans estimated prior service benefit postretirement medical plans amortized accumulated comprehensive loss us pension expense 2011 16 million estimated net gain postretirement medical plans amortized accumulated comprehensive loss us expense 2011 17 million flowserve corporation notes consolidated financial statements continued following summarizes accrued postretirement benefits liability postretirement medical plans following summarizes amounts recognized balance sheet postretirement benefit following reconciliation postretirement benefit obligation following presents expected benefit payments future periods amounts millions following table shows change accumulated comprehensive loss attributable components net cost change benefit obligations postretirement benefits net tax flowserve corporation notes consolidated financial statements continued made contributions postretirement medical plans pay benefits 38 million 2010 38 million 2009 39 million 2008 postretirement medical plans unfunded make contributions covered individuals’ claims approved payment accordingly contributions period directly correlated benefits paid assumed health care cost trend rates effect amounts reported postretirement medical plans onepercentage point change assumed health care cost trend rates would following effect 2010 reported amounts thousands defined contribution plans sponsor several defined contribution plans covering substantially us canadian employees certain nonus employees may contribute plans contributions matched varying amounts us including opportunities discretionary matching contributions us defined contribution plan expense 173 million 2010 167 million 2009 164 million 2008 discontinued discretionary contributions defined contribution plan us increased matching contributions 25 participants us defined contribution plan option invest common stock discretionary contributions us previously funded common stock therefore plan assets include holdings common stock 13 legal matters contingencies asbestosrelated claims defendant substantial number lawsuits seek recover damages personal injury allegedly caused exposure asbestoscontaining products manufactured andor distributed heritage companies past overall number asbestosrelated claims generally declined recent years assurance trend continue average cost per claim increase asbestoscontaining materials incorporated products primarily encapsulated used internal components process equipment believe significant emission asbestos fibers occurred use equipment believe high percentage claims covered applicable insurance indemnities companies united nations oilforfood program french investigation formally opened first quarter 2010 relating products one french subsidiaries delivered iraq 1996 2003 united nations oilforfood program currently expect incur additional case resolution costs material amount matter however french authorities take enforcement action french subsidiary regarding investigation may flowserve corporation notes consolidated financial statements continued subject monetary nonmonetary penalties currently believe material adverse effect company addition governmental investigation referenced june 27 2008 republic iraq filed civil suit federal court new york 93 participants united nations oilforfood program including us two foreign subsidiaries participated program material developments case since initially filed intend vigorously contest suit believe valid defenses claims asserted cannot predict outcome suit present time currently believe resolution suit material adverse financial impact company export compliance march 2006 initiated voluntary process determine compliance posture respect us export control economic sanctions laws regulations upon initial investigation appeared product transactions technology transfers handled full compliance us export control laws regulations result conjunction outside counsel conducted voluntary systematic process review validate voluntarily disclose export violations discovered part review process completed comprehensive disclosures appropriate us government regulatory authorities end 2008 continued work authorities supplement clarify specific aspects disclosures based review data collected selfdisclosure period october 1 2002 october 1 2007 number process pumps valves mechanical seals parts related thereto exported limited circumstances without required export reexport licenses without full compliance applicable rules regulations number different countries throughout world including certain us sanctioned countries taken number actions increase effectiveness global export compliance program included increasing personnel resources dedicated export compliance providing additional export compliance tools employees improving export transaction screening processes enhancing content frequency export compliance training programs selfreported violations us export control laws regulations expected result civil penalties including fines andor penalties currently engaged discussions us regulators final disposition case part effort resolve matter currently believe penalties material adverse impact company believe appropriate reserves accrued address matter currently involved potentially responsible party four former public waste disposal sites various stages evaluation remediation projected cost remediation sites well alleged “fair share” allocation remain uncertain studies completed parties either negotiated amicable resolution matter judicially resolved site many parties similarly identified many parties identified financially strong solvent companies appear able pay share remediation costs based information waste disposal practices sites environmental regulatory process general believe likely ultimate remediation liability costs site apportioned among liable parties including site owners waste transporters according volumes andor toxicity wastes shown disposed sites believe exposure existing disposal sites material also defendant number lawsuits including product liability claims insured subject applicable deductibles arising ordinary course business also involved uninsured routine litigation incidental business currently believe none litigation either flowserve corporation notes consolidated financial statements continued individually aggregate material business operations overall financial condition however litigation inherently unpredictable resolutions dispositions claims lawsuits settlement otherwise could adverse impact financial position results operations cash flows reporting period resolution disposition occurs although none aforementioned potential liabilities quantified absolute certainty except otherwise indicated established reserves covering exposures relating contingencies extent believed reasonably estimable probable based past experience available facts additional exposures beyond reserves could exist currently cannot estimated continue evaluate update reserves necessary appropriate 14 warranty reserve recorded reserves product warranty claims included current noncurrent liabilities following summary activity warranty reserve 15 shareholders’ equity february 23 2009 board directors authorized increase quarterly cash dividend 027 per share 025 per share effective first quarter 2009 february 22 2010 board directors authorized increase payment quarterly dividends common stock 027 per share 029 per share payable quarterly beginning april 7 2010 february 21 2011 board directors authorized increase payment quarterly dividends common stock 029 per share 032 per share payable quarterly beginning april 14 2011 generally dividend dateofrecord last month quarter dividend paid following month february 26 2008 board directors authorized program repurchase 3000 million outstanding common stock unspecified time period program commenced second quarter 2008 repurchased 450000 544500 1741100 shares 460 million 409 million 1650 million 2010 2009 2008 respectively date repurchased total 2735600 shares 2519 million program flowserve corporation notes consolidated financial statements continued 16 income taxes provision income taxes consists following expected cash payments current income tax expense 2010 2009 2008 reduced approximately 100 million 04 million 122 million respectively result tax deductions related exercise nonqualified employee stock options vesting restricted stock income tax benefit resulting stockbased compensation plans increased capital excess par value provision income taxes differs statutory corporate rate due following net decrease valuation allowances rate reconciliation includes net reduction increase foreign valuation allowances 23 million 09 million 82 million 2010 2009 2008 respectively 2010 2009 effective tax rates differed federal statutory rate 35 primarily due net impact foreign operations included impacts lower foreign tax rates changes reserves established uncertain tax positions 2008 effective tax rate differed federal statutory rate 35 primarily due net impact foreign operations includes impacts lower foreign tax rates changes reserves established uncertain tax positions benefits arising permanent reinvestment foreign subsidiaries changes flowserve corporation notes consolidated financial statements continued valuation allowance estimates favorable tax ruling luxembourg net impact discrete items included discussion approximately 22 million assert permanent reinvestment majority invested capital unremitted foreign earnings foreign subsidiaries however assert permanent reinvestment limited number foreign subsidiaries future distributions may occur cumulative amount undistributed earnings considered permanently reinvested 11 billion earnings repatriated future period provision income taxes may increase materially period three years reported period ended december 31 2010 recognized net deferred tax assets attributable excess foreign tax credits unremitted earnings foreign currency translation adjustments foreign subsidiaries excess financial reporting basis subsidiaries permanent reinvestment asserted cash deemed dividend distributions resulted recognition approximately 82 million 24 million 271 million income tax benefit expense years ended december 31 2010 2009 2008 respectively recorded benefit excess foreign tax credits associated deemed repatriation unremitted earnings credits available offset liability associated dividends american jobs creation act 2004 provides deduction income qualified domestic production activities phased 2005 2010 manufacturing deduction minor impact tax rates effect future tax rates yet quantified tax deduction qualified production activities treated special deduction reported period deduction claimed tax return flowserve corporation notes consolidated financial statements continued deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes significant components consolidated deferred tax assets liabilities approximately 1781 million us foreign net operating loss carryforwards december 31 2010 total 567 million state net operating losses net operating losses generated us unused expire 2011 2026 majority nonus net operating losses carry forward without expiration additionally 295 million foreign tax credit carryforwards december 31 2010 expiring 2018 2020 valuation allowance reserves recorded earnings income taxes comprised flowserve corporation notes consolidated financial statements continued tabular reconciliation total gross amount unrecognized tax benefits excluding interest penalties follows millions amount gross unrecognized tax benefits december 31 2010 1307 million includes 261 million accrued interest penalties amount 807 million recognized would favorably impact effective tax rate total amounts interest penalties recognized consolidated statements income years ended december 31 2010 2009 2008 23 million 44 million 19 million respectively limited exception longer subject us federal state local income tax audits years 2006 nonus income tax audits years 2003 currently examination various years austria germany india singapore us venezuela reasonably possible within next 12 months effective tax rate impacted resolution matters audited various taxing authorities also reasonably possible statute limitations close various taxing jurisdictions within next 12 months estimate could record reduction tax expense 60 million 206 million within next 12 months 17 business segment information principally engaged worldwide design manufacture distribution service industrial flow management equipment provide long leadtime highly engineered pumps standardized general purpose pumps mechanical seals industrial valves related automation products solutions primarily oil gas chemical power generation water management general industries requiring flow management products services previously disclosed 2009 annual report form 10k 2010 quarterly reports form 10q note 1 annual report reorganized divisional operations combining former fpd former fsd fsg effective january 1 2010 conduct operations three business segments based type product manage business • epd long leadtime engineered pumps pump systems mechanical seals auxiliary systems replacement parts related services • ipd preconfigured pumps pump systems related products services • fcd engineered industrial valves control valves actuators controls related services president fsg reports directly chief executive officer “ceo” structure fsg consists two reportable operating segments epd ipd vice president finance reports directly flowserve corporation notes consolidated financial statements continued chief accounting officer “cao” fcd president reports directly ceo vice president finance reports directly cao decisionmaking purposes ceo members senior executive management use financial information generated reported reportable segment level corporate headquarters constitute separate division business segment evaluate segment performance allocate resources based reportable segment’s operating income amounts classified “eliminations other” include corporate headquarters costs minor entities constitute separate segments intersegment sales transfers recorded cost plus profit margin sales related margin sales eliminated consolidation following summary financial information reportable segments years ended december 31 2010 2009 2008 reconciled amounts reported consolidated financial statements 1 changes identifiable assets “eliminations other” 2010 2009 2008 primarily result changes cash balances flowserve corporation notes consolidated financial statements continued geographic information attribute sales different geographic areas based facilities’ locations longlived assets classified based geographic area assets located exclude deferred tax assets categorized noncurrent sales longlived assets geographic area follows 1 “ema” includes europe middle east africa germany accounted approximately 11 2010 10 2009 2008 consolidated sales italy accounted approximately 10 consolidated longlived assets 2010 individual country within group represents 10 consolidated longlived assets period presented experienced disruption business resulting recent developing political economic conditions middle east continue closely monitor conditions 2 “asia” includes asia australia individual geographic segment within group represents 10 consolidated longlived assets period presented 3 “other” includes canada latin america individual geographic segment within group represents 10 consolidated totals period presented net sales international customers including export sales united states represented 73 69 total sales 2010 2009 2008 respectively flowserve corporation notes consolidated financial statements continued major customer information large number customers across large number manufacturing service facilities believe sales individual customer represent 10 consolidated sales years presented 18 accumulated comprehensive loss following presents components accumulated comprehensive loss net related tax effects 1 includes foreign currency translation adjustments attributable noncontrolling interests 2 foreign currency translation adjustments 2010 primarily represents strengthening us dollar exchange rate versus euro british pound december 31 2010 compared december 31 2009 foreign currency translation adjustments 2009 primarily represents weakening us dollar exchange rate versus euro british pound december 31 2009 compared december 31 2008 following tables present summary comprehensive expense income years ended december 31 2010 2009 2008 flowserve corporation notes consolidated financial statements continued 19 quarterly financial data unaudited following presents summary unaudited quarterly data 2010 2009 amounts millions except per share data significant fourth quarter adjustment 2010 pretax record 81 million charges related realignment programs see note 7 additional information realignment programs significant fourth quarter adjustments 2009 pretax record 349 million charges related realignment programs see note 7 additional information realignment programs item 9item 8 financial statements supplementary data report independent registered public accounting firm board directors shareholders flowserve corporation opinion consolidated financial statements listed index appearing item 15a1 present fairly material respects financial position flowserve corporation subsidiaries december 31 2012 2011 results operations cash flows three years period ended december 31 2012 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed accompanying index appearing item 15a2 presents fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintained material respects effective internal control financial reporting december 31 2012 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso companys management responsible financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included managements report internal control financial reporting appearing item 9a responsibility express opinions financial statements companys internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions companys internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles companys internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate flowserve corporation consolidated balance sheets see accompanying notes consolidated financial statements flowserve corporation consolidated statements income see accompanying notes consolidated financial statements flowserve corporation consolidated statements comprehensive income see accompanying notes consolidated financial statements flowserve corporation consolidated statements shareholders’ equity flowserve corporation consolidated statements cash flows flowserve corporation notes consolidated financial statements december 31 2012 2011 three years ended december 31 2012 1 significant accounting policies accounting developments principally engaged worldwide design manufacture distribution service industrial flow management equipment provide long lead time custom highlyengineered pumps standardized generalpurpose pumps mechanical seals industrial valves related automation products solutions primarily oil gas chemical power generation water management general industries requiring flow management products services equipment manufactured serviced us predominantly used industries deal difficulttohandle corrosive fluids well environments extreme temperatures pressure horsepower speed business affected economic conditions united states us countries products sold serviced cyclical nature competitive environment oil gas chemical power generation water management general industries served relationship us dollar currencies demand pricing customers’ end products principles consolidation consolidated financial statements include accounts company wholly majorityowned subsidiaries addition would consolidate variable interest entities deemed primary beneficiary noncontrolling interests nonaffiliated parties recognized majorityowned consolidated subsidiaries intercompany profitslosses transactions balances among consolidated entities eliminated consolidated financial statements investments unconsolidated affiliated companies represent noncontrolling ownership interests 20 50 accounted using equity method approximates equity interest underlying equivalent net book value accounting principles generally accepted us gaap investments interests less 20 investee accounted cost method whereby income recognized event dividend receipt investments accounted cost method tested impairment indicator present use estimates process preparing financial statements conformity us gaap requires us make estimates assumptions affect reported amounts certain assets liabilities revenues expenses believe estimates assumptions reasonable however actual results may differ materially estimates significant estimates assumptions used determining • revenue recognition net liquidated damages delivery penalties • income taxes deferred taxes tax valuation allowances tax reserves • reserves contingent loss • retirement postretirement benefits • valuation goodwill indefinitelived intangible assets longlived assets revenue recognition revenues product sales recognized risks rewards ownership transferred customers typically based contractual delivery terms agreed customer fulfillment inconsequential perfunctory actions addition policy requires persuasive evidence arrangement fixed determinable sales price reasonable assurance collectability defer recognition revenue advance payments received customers performance obligations completed andor services performed freight charges billed customers included sales related shipping costs included cost sales consolidated statements income contracts typically include cancellation provisions require customers reimburse us costs incurred date cancellation well contractual cancellation penalties enter certain contracts multiple deliverables may include combination designing developing manufacturing modifying installing commissioning flow management equipment providing services related performance products delivery products services typically occurs within one twoyear period although many arrangements book ship type orders shorter timeframe delivery aggregate separate deliverables units accounting based whether deliverables standalone value customer general right return exists contract value allocated ratably units accounting arrangement based relative selling prices determined deliverables sold separately revenues longterm contracts exceed certain internal thresholds regarding size duration project provide receipt progress billings customer recorded percentage completion method progress flowserve corporation notes consolidated financial statements continued measured costtocost basis percentage completion revenue represents less 9 consolidated sales year presented revenue service repair contracts recognized services agreed customer rendered revenues generated fixed fee service repair contracts recognized ratable basis term contract contracts range duration generally extend five years fixed fee service contracts represent aproximately 1 consolidated sales year presented certain instances provide guaranteed completion dates terms contracts failure meet contractual delivery dates result late delivery penalties nonrecoverable costs instances payment costs deemed probable perform project profitability analysis accounting costs reduction realizable revenues could potentially cause estimated total project costs exceed projected total revenues realized project instances would record reserves cover excesses period determined circumstances total projected revenues still exceed total projected costs incurrence penalties nonrecoverable costs generally reduces profitability project time subsequent revenue recognition cash equivalents place temporary cash investments financial institutions policy invest institutions instruments minimal credit risk market risk investments original maturity three months less purchased classified cash equivalents highly liquid principal values subject significant risk change due interest rate fluctuations allowance doubtful accounts credit risk allowance doubtful accounts established based estimates amount uncollectible accounts receivable determined principally based upon aging accounts receivable also customer credit history industry market segment information economic trends conditions credit reports customer credit issues customer bankruptcies general economic conditions may also impact estimates credit risks mitigated diversity customer base across many different geographic regions industries performing creditworthiness analyses customers additionally mitigate credit risk letters credit advance payments received customers december 31 2012 2011 believe significant concentrations credit risk inventories related reserves inventories stated lower cost market cost determined firstin firstout method reserves excess obsolete inventories based upon assessment market conditions products determined historical usage estimated future demand due long life cycles products carry spare parts inventories historically low usage rates provide reserves inventory based demonstrated usage aging criteria income taxes deferred taxes tax valuation allowances tax reserves account income taxes asset liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases operating loss tax credit carryforwards deferred tax assets liabilities calculated using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized period includes enactment date record valuation allowances reflect estimated amount deferred tax assets may realized based upon analysis existing deferred tax assets net operating losses tax credits jurisdiction expectations ability utilize tax attributes review past current estimated future taxable income establishment tax strategies provide deferred taxes temporary differences associated investment foreign subsidiaries financial reporting basis exceeds tax basis unless assert permanent reinvestment foreign jurisdictions financial reporting basis tax basis differences investments foreign subsidiaries consist unremitted earnings losses well foreign currency translation adjustments amount income taxes pay subject ongoing audits federal state foreign tax authorities often result proposed assessments establish reserves open tax years uncertain tax positions may subject challenge various tax authorities consolidated tax provision related accruals include impact reasonably estimable losses related interest penalties deemed appropriate recognize tax benefit uncertain tax position likely tax position sustained examination taxing authorities determination based technical merits position presumes uncertain tax position examined relevant taxing authority full knowledge relevant information flowserve corporation notes consolidated financial statements continued tax benefits recognized financial statements position measured based largest benefit greater fifty percent likelihood realized upon ultimate settlement legal environmental accruals legal environmental reserves recorded based upon casebycase analysis relevant facts circumstances assessment potential legal obligations costs amounts relating legal environmental liabilities recorded probable loss incurred loss estimable assessments legal environmental costs based information obtained independent inhouse experts loss experience similar situations estimates updated applicable new information regarding facts circumstances matter becomes available legal fees associated legal environmental liabilities expensed incurred estimates liabilities unsettled asbestosrelated claims based known claims experience preceding two years claims filed settled dismissed adjustments events deemed unusual unlikely recur included retirement obligations liabilities consolidated balance sheets substantial majority asbestosrelated claims covered insurance indemnities estimated indemnities receivables insurance carriers unsettled claims receivables settlements legal fees paid us asbestosrelated claims estimated using historical experience insurance recovery rates estimates future recoveries include estimates coverage financial viability insurance carriers estimated receivables included assets net consolidated balance sheets claims pending certain insurers resolved favorably estimated future recoveries would result discrete gains applicable quarter warranty accruals warranty obligations based upon product failure rates materials usage service delivery costs analysis identified expected claims estimate cost resolve claims estimates expected claims generally factor historical claims known product issues warranty obligations based factors adjusted based historical sales trends preceding 24 months insurance accruals insurance accruals recorded wholly partially selfinsured risks medical benefits workers’ compensation based upon analysis claim loss history insurance deductibles policy limits relevant factors updated annually included accrued liabilities consolidated balance sheets estimates based upon information received actuaries insurance company adjusters independent claims administrators independent sources receivables insurance carriers estimated using historical experience insurance recovery rates estimates future recoveries include estimates coverage financial viability insurance carriers estimated receivables included accounts receivable net assets net applicable consolidated balance sheets pension postretirement obligations determination pension postretirement benefits obligations based estimates made management consultation independent actuaries investment advisors inherent valuations assumptions including discount rates expected rates return plan assets retirement rates mortality rates compensation increase factors reviewed annually updated necessary current market conditions including changes rates return interest rates medical inflation rates considered selecting assumptions actuarial gains losses prior service costs recognized accumulated comprehensive loss arise amortize costs net pension expense remaining expected service period property plant equipment depreciation property plant equipment stated historical cost less accumulated depreciation asset retirement obligations exist capitalized part carrying amount asset depreciated remaining useful life asset useful lives leasehold improvements lesser remaining lease term useful life improvement assets retired otherwise disposed costs related accumulated depreciation removed accounts resulting gains losses included income operations period depreciation computed straightline method based estimated useful lives depreciable assets case assets capital leases related lease turn generally estimated useful lives assets costs related routine repairs maintenance expensed incurred flowserve corporation notes consolidated financial statements continued internally developed software capitalize certain costs associated development internaluse software generally costs related significant software development projects amortized estimated useful life typically three five years upon implementation software intangible assets intangible assets excluding trademarks considered indefinite life consist primarily engineering drawings patents existing customer relationships software distribution networks items amortized estimated useful lives generally ranging three 40 years assets reviewed impairment whenever events circumstances indicate impairment may occurred valuation goodwill indefinitelived intangible assets longlived assets value goodwill indefinitelived intangible assets tested impairment december 31 year whenever events circumstances indicate assets may impaired identification reporting units began operating segment level considered whether components one level operating segment levels identified reporting units purpose testing goodwill impairment based certain conditions included among factors extent component represents business ii aggregation economically similar components within operating segments resulted eight reporting units factors considered determining whether aggregation components appropriate included similarity nature products services nature production processes methods distribution types industries served impairment losses goodwill recognized whenever implied fair value goodwill less carrying value estimate fair value reporting units based income approach whereby calculate fair value reporting unit based present value estimated future cash flows discounted cash flow analysis requires us make various judgmental assumptions future sales operating margins growth rates discount rates based budgets business plans economic projections anticipated future cash flows market participants assumptions also made varying perpetual growth rates periods beyond longterm business plan period record impairment goodwill 2012 2011 2010 also consider market capitalization evaluation fair value goodwill market capitalization increased compared 2011 indicate potential impairment goodwill december 31 2012 impairment losses indefinitelived intangible assets recognized whenever estimated fair value less carrying value fair values calculated trademarks using relief royalty method estimates fair value trademarks determining present value estimated royalty payments avoided result owning trademark method includes judgmental assumptions sales growth discount rates significant impact fair value substantially consistent assumptions used determine fair value reporting units discussed record material impairment trademarks 2012 2011 2010 net realizable value longlived assets including property plant equipment finitelived intangible assets reviewed indicators potential impairments present net realizable value based upon assessment estimated future cash flows related assets utilizing methodology similar goodwill additional considerations related longlived assets include expected maintenance improvements changes expected uses ongoing operating performance utilization deferred loan costs deferred loan costs consisting fees expenses associated debt financing amortized term associated debt using effective interest method additional amortization recorded periods optional prepayments debt made fair values financial instruments except senior notes carrying amounts financial instruments approximated fair value december 31 2012 2011 assets liabilities recorded fair value consolidated balance sheets categorized based upon level judgment associated inputs used measure fair values hierarchical levels defined accounting standards codification asc 820 fair value measurements disclosures directly related amount subjectivity associated inputs fair valuation assets liabilities asset liability’s categorization within fair value hierarchy based lowest level significant input valuation hierarchical levels follows level inputs unadjusted quoted prices active markets identical assets liabilities measurement date flowserve corporation notes consolidated financial statements continued level ii inputs quoted prices included level either directly indirectly observable asset liability correlation market data measurement date duration instrument’s anticipated life level iii inputs reflect management’s best estimate market participants would use pricing asset liability measurement date consideration given risk inherent valuation technique risk inherent inputs model derivatives hedging activities riskmanagement derivatives policy outlining conditions enter financial derivative transactions use derivatives trading speculative purposes derivatives recognized balance sheet fair values accounting gains losses resulting changes fair value depends use derivative whether designated qualifies hedge accounting forward exchange contracts employ foreign currency economic hedging strategy mitigate certain financial risks resulting foreign currency exchange rate movements impact foreign currency denominated receivables payables firm committed transactions forecasted sales purchases elected apply hedge accounting derivatives changes fair values recognized currently expense income net consolidated statements income see note 6 discussion forward exchange contracts interest rate swaps enter interest rate swap agreements purpose hedging cash flow exposure floating interest rates certain portions debt document hedging relationship hedging instruments hedged items risk management objective strategy entering hedges designation formal hedging relationship assess inception hedge ongoing basis whether derivatives highly effective offsetting changes fair value cash flows hedged items whether derivatives may expected remain highly effective future periods changes fair value derivative highly effective documented designated qualified cash flow hedge extent hedge effective recorded comprehensive loss earnings affected variability cash flows hedged transaction ineffective portion gain loss immediately recognized earnings gain loss due ineffectiveness recorded years ended december 31 2012 2011 2010 upon settlement realized gains losses recognized interest expense consolidated statements income discontinue hedge accounting 1 deem hedge ineffective determine designation derivative hedging instrument longer appropriate 2 derivative longer effectively offsets changes cash flows hedged item firm commitments contracts 3 derivative expires terminates sold 4 occurrence contracted committed transaction longer probable occur originally expected period hedge accounting discontinued derivative remains outstanding carry derivative estimated fair value balance sheet recognizing changes fair value current period earnings cash flow hedge becomes ineffective deferred gains losses cash flow hedge remain accumulated comprehensive loss exposure relating item underlying hedge recognized becomes probable hedged forecasted transaction occur deferred gains losses hedging instrument recognized earnings immediately foreign currency translation assets liabilities foreign subsidiaries translated us dollars exchange rates prevailing balance sheet date income expenses translated average rates month translation gains losses reported component accumulated comprehensive loss transactional currency gains losses arising transactions currencies sites’ functional currencies included consolidated results operations transaction translation gains losses arising intercompany balances reported component accumulated comprehensive loss underlying transaction stems longterm equity investment debt designated due foreseeable future otherwise recognize transaction gains losses arising intercompany transactions component income intercompany balances longterm investment related designated due beyond foreseeable future may mitigate risk associated foreign currency fluctuations entering forward exchange contracts stockbased compensation stockbased compensation measured grantdate fair value exercise price stock option awards value restricted share restricted share unit performancebased unit awards collectively referred restricted shares set closing price common stock new york stock exchange date grant flowserve corporation notes consolidated financial statements continued date grants authorized board directors restricted share units performancebased units refer restricted awards voting rights accrue dividends forfeited vesting occur intrinsic value restricted shares typically product share price date grant number restricted shares granted amortized straightline basis compensation expense periods restrictions lapse based expected number shares vest forfeiture rate based unvested restricted shares forfeited compared original total restricted shares granted 4year period excluding significant forfeiture events expected recur earnings per share use twoclass method calculating earnings per share eps determines earnings per share class common stock participating security earnings period distributed unvested restricted share awards earn nonforfeitable dividend rights qualify participating securities accordingly included basic computation unvested restricted shares participate equal basis common shares therefore difference undistributed earnings allocated participating security accordingly presentation prepared combined basis presented earnings per common share following reconciliation net earnings flowserve corporation weighted average shares calculating basic net earnings per common share earnings per weighted average common share outstanding calculated follows diluted earnings per share based upon weighted average number shares determined basic earnings per share plus shares potentially issuable conjunction stock options restricted share units performance share units three years ended december 31 2012 2011 2010 options purchase common stock excluded computations potentially dilutive securities none considered antidilutive research development expense research development costs charged expense incurred aggregate research development costs included selling general administrative expenses sga 389 million 350 million 295 million 2012 2011 2010 respectively costs incurred research development primarily include salaries benefits consumable supplies well rent professional fees utilities depreciation property equipment used research development activities flowserve corporation notes consolidated financial statements continued accounting developments pronouncements implemented may 2011 financial accounting standards board fasb issued accounting standards update asu 201104 fair value measurement topic 820 amendments achieve common fair value measurement disclosure requirements us gaap ifrss clarifies requirements us gaap measuring fair value disclosing information fair value measurements order improve comparability fair value measurements presented disclosed financial statements prepared accordance us gaap international financial reporting standards ifrss amendments result major change application requirements topic 820 clarify application existing fair value measurement requirements change particular principles requirements measuring fair value disclosing information fair value measurements adoption asu 201104 effective january 1 2012 impact consolidated financial condition results operations june 2011 fasb issued asu 201105 comprehensive income topic 220 presentation comprehensive income specifies entity option present total comprehensive income components net income components comprehensive income either single continuous statement comprehensive income two separate consecutive statements amendment also requires entity present face financial statements reclassification adjustments items reclassified comprehensive income net income december 2011 fasb issued asu 201112 deferral effective date amendments presentation reclassifications items accumulated comprehensive income accounting standards update 201105 defer requirement present face financial statements reclassification adjustments items reclassified comprehensive income net income adoption asu nos 201105 201112 effective january 1 2012 impact consolidated financial condition results operations september 2011 fasb issued asu 201108 intangibles goodwill topic 350 testing goodwill impairment specifies entity option first assess qualitative factors determine whether likely fair value reporting unit less carrying amount basis determining whether necessary perform twostep goodwill impairment test entity required calculate fair value reporting unit unless entity determines likely fair value less carrying amount adoption asu 201108 effective january 1 2012 impact consolidated financial condition results operations pronouncements yet implemented december 2011 fasb issued asu 201111 balance sheet topic 210 disclosures offsetting assets liabilities requires enhanced disclosures financial instruments derivative instruments either 1 offset accordance either accounting standards codification asc 2102045 balance sheet offsetting asc 8151045 derivatives hedging overall 2 subject enforceable master netting arrangement similar agreement irrespective whether offset accordance either asc 2102045 asc 8151045 asu 201111 effective fiscal years interim periods within years beginning december 31 2012 disclosure requirements shall applied retrospectively periods presented adoption asu 201111 impact consolidated financial condition results operations july 2012 fasb issued asu 201202 intangiblesgoodwill topic 350 testing indefinitelived intangible assets impairment specifies entity option first assess qualitative factors determine whether likely asset impaired unless entity determines likely fair value asset less carrying amount would need calculate fair value asset year asu 201202 effective annual interim impairment tests performed fiscal years beginning september 15 2012 adoption asu 201202 impact consolidated financial condition results operations january 2013 fasb issued asu 201301 balance sheet topic 210 clarifying scope disclosures offsetting assets liabilities limits scope asu 201111 derivatives repurchase agreements securities lending transactions extent 1 offset financial statements 2 subject enforceable master netting arrangement similar agreement asu 201301 effective fiscal years interim period within years beginning january 1 2013 disclosure requirements shall applied retrospectively periods presented adoption asu 201301 impact consolidated financial condition results operations february 2013 fasb issued asu 201302 comprehensive income topic 220 reporting amounts reclassified accumulated comprehensive income requires entity provide information amounts flowserve corporation notes consolidated financial statements continued reclassified accumulated comprehensive income addition entity required present either face statement net income presented notes significant amounts reclassified accumulated comprehensive income respective line items net income amount reclassified required us gaap reclassified net income entirety reporting period amounts required us gaap reclassified entirety net income entity required crossreference disclosures required us gaap provide additional detail amounts asu 201302 effective prospectively fiscal years interim period within years beginning december 15 2012 adoption asu 201302 impact consolidated financial condition results operations 2 acquisitions lawrence pumps inc effective october 28 2011 acquired inclusion engineered product division epd 100 lawrence pumps inc lpi privatelyowned usbased pump manufacturer final purchase price 882 million reflects immaterial adjustments goodwill current liabilities 2012 lpi specializes design development manufacture engineered centrifugal slurry pumps critical services within petroleum refining petrochemical pulp paper energy markets terms purchase agreement deposited 15 million escrow held applied breach representations warranties indemnities 24 months additionally right make indemnification claims 15 purchase price 18 months expiration escrow period residual amounts shall released sellers satisfaction purchase price purchase price allocated assets acquired liabilities assumed based estimates fair values date acquisition summarized excess acquisition date fair value total purchase price estimated fair value net tangible intangible assets recorded goodwill represents value expected obtained ability competitive offering complete pump product portfolio leveraging current sales distribution service network lpi products proprietary niche applications strategically complement product portfolio goodwill related acquisition recorded epd segment expected deductible tax purposes upon acquisition existing customer relationships represent approximately 16 million intangible assets acquired expected weighted average useful life ten years total amortizable intangible assets expected weighted average useful life ten years subsequent october 28 2011 revenues expenses lpi included consolidated statements income pro forma information provided due immateriality lpi generated approximately 44 million sales fiscal year ended december 31 2010 valbart srl effective july 16 2010 acquired inclusion flow control division fcd 100 valbart srl valbart privatelyowned italian valve manufacturer share purchase cash 1994 million included 338 million existing valbart net debt defined valbart’s third party debt less cash hand repaid closing valbart manufactures trunnionmounted ball valves used primarily upstream midstream oil gas applications enables us offer complete valve product portfolio oil gas project customers acquisition included valbart’s portion joint venture us entered december 2009 operational 2010 terms purchase agreement deposited 58 million escrow held applied breach representations warranties indemnities 30 months expiration escrow residual amounts shall released sellers satisfaction purchase price flowserve corporation notes consolidated financial statements continued excess acquisition date fair value total purchase price estimated fair value net tangible intangible assets recorded goodwill represents value expected obtained ability competitive offering complete valve product portfolio leveraging sales distribution service network goodwill related acquisition recorded fcd segment expected deductible tax purposes trademarks indefinitelived intangible assets upon acquisition existing customer relationships noncompete agreements engineering drawings expected weighted average useful lives five years four years ten years respectively total amortizable intangible assets weighted average useful life approximately five years subsequent july 16 2010 revenues expenses valbart included consolidated statements income pro forma information provided due immateriality 3 goodwill intangible assets changes carrying amount goodwill years ended december 31 2012 2011 follows 1 goodwill primarily related acquisition lpi see note 2 additional information following table provides information intangible assets years ended december 31 2012 2011 1 engineering drawings represent estimated fair value associated specific acquired product component schematics 2 existing customer relationships acquired prior 2011 useful life five years 3 accumulated amortization indefinitelived intangible assets relates amounts recorded prior implementation date guidance issued asc 350 flowserve corporation notes consolidated financial statements continued following schedule outlines actual amortization expense recognized 2012 estimate future amortization based upon finitelived intangible assets owned december 31 2012 amortization expense finitelived intangible assets 142 million 2011 108 million 2010 4 inventories net consisted following 2012 2011 2010 recognized expenses 182 million 165 million 101 million respectively excess obsolete inventory expenses included cost sales cos consolidated statements income 5 stockbased compensation plans established flowserve corporation equity incentive compensation plan 2010 plan effective january 1 2010 shareholderapproved plan authorizes issuance 2900000 shares common stock form incentive stock options nonstatutory stock options restricted shares stock appreciation rights bonus stock 2900000 shares common stock authorized 2010 plan 2171883 available issuance december 31 2012 addition 2010 plan also maintain flowserve corporation 2004 stock compensation plan “2004 plan” established april 21 2004 plan authorizes issuance 3500000 shares common stock grants restricted shares stock options equitybased awards 3500000 shares common stock authorized 2004 plan 275945 available issuance december 31 2012 stock options granted officers employees directors allow purchase common shares market value stock date options granted generally options whether granted 2004 plan previously approved plans become exercisable staggered period ranging one five years typically one three years december 31 2012 outstanding options fully vested options generally expire 10 years date grant within short period time following termination employment cessation services option holder options granted 2012 2011 2010 information related stock options issued officers employees directors prior 2010 plans presented following table flowserve corporation notes consolidated financial statements continued additional information relating ranges options outstanding december 31 2012 follows december 31 2012 unrecognized compensation cost related outstanding stock option awards weighted average remaining contractual life options outstanding december 31 2012 2011 33 years 37 years respectively total intrinsic value stock options exercised years ended december 31 2012 2011 2010 07 million 15 million 86 million respectively stock options vested years ended december 31 2012 2011 2010 restricted shares generally restrictions restricted shares expire minimum one year maximum three years shares subject forfeiture restriction period typically restricted share grants staggered vesting periods one three years grant date intrinsic value restricted shares typically product share price date grant number restricted shares granted amortized straightline basis compensation expense periods restrictions lapse unearned compensation amortized compensation expense vesting period restricted shares december 31 2012 2011 304 million 270 million respectively unearned compensation cost related unvested restricted shares expected recognized weightedaverage period approximately one year amounts recognized net earnings prospective periods awards vest total fair value restricted shares vested years ended december 31 2012 2011 2010 364 million 351 million 319 million respectively recorded stockbased compensation restricted shares follows flowserve corporation notes consolidated financial statements continued following table summarizes information regarding restricted shares unvested restricted shares outstanding december 31 2012 includes approximately 317000 units performancebased vesting provisions performancebased units issuable common stock vest upon achievement predefined performance targets primarily based average annual return net assets threeyear period compared measure defined peer group period units granted three annual grants since january 1 2010 vesting percentage 0 200 depending achievement specific performance targets compensation expense recognized ratably cliffvesting period 36 months based fair market value common stock date grant adjusted anticipated forfeitures performance period earned unearned compensation expense adjusted based changes expected achievement performance targets vesting provisions range 0 approximately 627000 shares based performance targets december 31 2012 estimate vesting approximately 506000 shares based expected achievement performance targets 6 derivatives hedging activities risk management derivatives policy specifies conditions may enter derivative contracts see note 1 additional information purpose entering derivatives designated hedging instruments overall risk management strategies enter forward exchange contracts hedge risks associated transactions denominated currencies local currency operation engaging transaction december 31 2012 2011 6089 million 4812 million respectively notional amount outstanding forward exchange contracts third parties december 31 2012 length forward exchange contracts currently place ranged 2 days 29 months also part risk management program enter interest rate swap agreements hedge exposure floating interest rates certain portions debt december 31 2012 2011 2750 million 3300 million respectively notional amount outstanding interest rate swaps third parties interest rate swaps 100 effective december 31 2012 maximum remaining length interest rate contract place approximately 30 months exposed risk creditrelated losses resulting nonperformance counterparties financial instruments perform credit evaluations counterparties forward exchange contracts interest rate swap agreements expect counterparties meet obligations experienced credit losses counterparties fair value forward exchange contracts designated hedging instruments summarized flowserve corporation notes consolidated financial statements continued fair value interest rate swaps cash flow hedging relationships summarized current noncurrent derivative assets reported consolidated balance sheets prepaid expenses assets net respectively current noncurrent derivative liabilities reported consolidated balance sheets accrued liabilities retirement obligations liabilities respectively impact net changes fair values forward exchange contracts designated hedging instruments summarized impact net changes fair values interest rate swaps cash flow hedging relationships summarized expect recognize losses 10 million 05 million 02 million net deferred taxes earnings 2013 2014 2015 respectively related interest rate swap agreements based fair values december 31 2012 7 fair value financial instruments financial instruments presented fair value consolidated balance sheets fair value defined price would received sell asset paid transfer liability orderly transaction market participants measurement date available fair value based observable market prices parameters derived prices parameters observable prices inputs available valuation models may applied assets liabilities recorded fair value consolidated balance sheets categorized based upon level judgment associated inputs used measure fair values recurring fair value measurements limited investments derivative instruments equity securities fair value measurements derivative instruments determined using models maximize use observable market inputs including interest rate curves forward spot prices currencies classified level ii fair value hierarchy fair values derivatives included note 6 fair value measurements investments equity securities determined using quoted market prices classified level fair values investments equity securities changes thereto immaterial consolidated financial position results operations fair value debt excluding senior notes defined note 10 estimated using interest rates similar debt recently issued companies credit metrics similar classified level ii fair value hierarchy carrying value debt included note 10 except senior notes approximates fair value estimated fair value senior notes december 31 2012 5027 million compared carrying value 4981 million estimated fair value senior notes based level quoted market rates carrying amounts financial instruments eg accounts receivable net accounts payable approximated fair value december 31 2012 december 31 2011 8 details certain consolidated balance sheet captions following tables present financial information certain consolidated balance sheet captions accounts receivable net accounts receivable net property plant equipment net certain reclassifications made prior period information conform current year presentation property plant equipment net accrued liabilities accrued liabilities accrued liabilities include professional fees lease obligations insurance interest freight restructuring charges accrued cash dividends payable legal environmental matters derivative liabilities items none individually exceed 5 current liabilities flowserve corporation notes consolidated financial statements continued retirement obligations liabilities retirement obligations liabilities 9 equity method investments december 31 2012 investments eight joint ventures one located japan south korea saudi arabia united arab emirates two located china india accounted using equity method summarized combined financial statement information based recent financial information unaudited investments 1 provision income taxes based tax laws rates countries investees operate taxation regimes vary nominal rates also allowability deductions credits benefits flowserve corporation notes consolidated financial statements continued reconciliation net income per combined income statement information equity income investees per consolidated statements income follows investments unconsolidated affiliates 840 million 703 million december 31 2012 2011 respectively recorded assets net balance sheet 10 debt lease obligations debt including capital lease obligations consisted scheduled maturities senior credit facility described well senior notes debt senior notes september 11 2012 completed public offering 5000 million aggregate principal amount senior notes due september 15 2022 senior notes senior notes bear interest rate 350 per year payable march 15 september 15 year commencing march 15 2013 senior notes priced 99615 par value reflecting discount aggregate principal amount time prior june 15 2022 right redeem senior notes whole part option redemption price equal greater 1 100 principal amount senior notes redeemed 2 sum present values remaining scheduled payments principal interest respect senior notes redeemed discounted redemption date semiannual basis applicable treasury rate plus 30 basis points addition time june 15 2022 may redeem senior notes redemption price equal 100 principal amount flowserve corporation notes consolidated financial statements continued senior notes redeemed case also pay accrued unpaid interest principal amount redeemed redemption date senior notes unsecured jointly severally fully unconditionally guaranteed certain domestic subsidiaries guarantors senior credit facility described guarantees automatically unconditionally released discharged guarantor subsidiary sold sells assets requirement legal covenant defeasance discharge obligations satisfied upon delivery officers certificate trustee guarantor subsidiary guarantee obligations senior credit facility senior notes rank equally right payment senior unsecured indebtedness used portion net proceeds senior notes offering repay 2500 million outstanding principal balance bridge loan described used remaining portion net proceeds general corporate purposes including repayment outstanding balance revolving credit facility described repurchase shares common stock discussed note 15 senior credit facility august 20 2012 entered credit agreement bank america na swingline lender letter credit issuer administrative agent lenders party thereto together “lenders” providing term debt revolving credit facility credit agreement provides aggregate commitment 125 billion including 4000 million term loan facility maturity date august 20 2017 “term loan facility” 8500 million revolving credit facility maturity date august 20 2017 “revolving credit facility” together term loan facility “senior credit facility” revolving credit facility includes 3000 million sublimit issuance letters credit 300 million sublimit swingline loans subject certain conditions right increase amount term loan facility revolving credit facility aggregate amount exceed 2500 million obligations senior credit facility guaranteed certain domestic subsidiaries lenders agreed release guarantees achieve certain credit ratings achieved ratings december 31 2012 used 4000 million proceeds advanced term loan facility along approximately 217 million advanced revolving credit facility repay outstanding indebtedness thenexisting term loan revolving credit facility “prior revolving credit facility” pursuant thenexisting credit agreement dated december 14 2010 amended “prior credit agreement” connection repayment outstanding letters credit prior credit agreement transferred revolving credit facility terminated prior credit agreement august 20 2012 future borrowings revolving credit facility subject various conditions including absence default senior credit facility december 31 2012 december 31 2011 amounts outstanding revolving credit facility prior revolving credit facility respectively outstanding letters credit 1522 million 1474 million december 31 2012 december 31 2011 respectively reduced borrowing capacity revolving credit facility prior revolving credit facility 6978 million 3526 million respectively senior credit facility contains among things covenants defining subsidiaries ability dispose assets merge pay dividends repurchase redeem capital stock indebtedness incur indebtedness guarantees create liens enter agreements negative pledge clauses make certain investments acquisitions enter transactions affiliates engage business activity existing business senior credit facility requires us maximum permitted leverage ratio 325 times debt total consolidated ebitda defined senior credit facility minimum interest coverage 325 times consolidated ebitda total interest expense compliance financial covenants senior credit facility tested quarterly compliance covenants december 31 2012 repayment obligations may prepay loans senior credit facility whole part without premium penalty time commitment fee payable quarterly daily unused portions senior credit facility 0225 period ended december 31 2012 made scheduled principal repayments 50 million senior credit facility 125 million prior credit agreement 2012 made scheduled principal repayments prior credit agreement previous credit agreement 250 million 43 million 2011 2010 respectively scheduled principal repayments 50 million due next three quarters 100 million fourth quarter 2013 senior credit facility senior credit facility bears floating rate interest entered 2750 million notional amount interest rate swaps december 31 2012 hedge exposure floating interest rates flowserve corporation notes consolidated financial statements continued bridge loan june 15 2012 entered loan agreement jpmorgan chase bank na administrative agent lenders party thereto providing term loan aggregate commitment 2500 million term 364 days “bridge loan” proceeds bridge loan used fund share repurchase program described note 15 consolidated financial statements included annual report bridge loan repaid entirety third quarter 2012 using portion net proceeds senior notes offering european letter credit facilities october 30 2009 entered new 364day unsecured european letter credit facility european loc facility initial commitment €1250 million european loc facility renewable annually used contingent obligations respect surety performance bonds bank guarantees similar obligations maturities five years renewed european loc facility october 2012 additional 364day period amended certain provisions conform senior credit facility senior notes pay fees 100 135 utilized capacity 035 unutilized capacity european loc facility outstanding letters credit drawn european loc facility €631 million 833 million €810 million 1050 million december 31 2012 2011 respectively ability issue additional letters credit previous european letter credit facility old european loc facility commitment €1100 million expired november 9 2009 paid annual fronting fees 0875 010 respectively letters credit written old european loc facility outstanding letters credit written old european loc facility december 31 2012 €122 million 158 million december 31 2011 available capacity european loc facility €619 million 817 million december 31 2012 european letter credit facilities contain covenants restricting ability certain foreign subsidiaries issue debt incur liens sell assets merge consolidate make certain investments pay dividends enter agreements negative pledge clauses engage business activity existing business european loc facility also incorporates reference covenants contained senior credit facility compliance covenants european loc facility december 31 2012 operating leases noncancelable operating leases certain offices service quick response centers certain manufacturing operating facilities machinery equipment automobiles rental expense relating operating leases 636 million 528 million 469 million 2012 2011 2010 respectively future minimum lease payments due noncancelable operating leases amounts thousands 11 supplemental guarantor financial information september 11 2012 completed public offering senior notes fully unconditionally jointly severally guaranteed certain 100 owned domestic subsidiaries accordance rule 3−10 regulation s−x promulgated securities act 1933 following condensed consolidating financial statements present financial position results operations cash flows flowserve corporation referred “parent” purpose note parent−only issuer basis combined guarantor subsidiaries guarantor−only basis combined nonguarantor subsidiaries nonguarantoronly basis elimination adjustments necessary arrive information parent guarantor subsidiaries nonguarantor subsidiaries consolidated basis investments subsidiaries accounted using equity method presentation flowserve corporation notes consolidated financial statements continued condensed consolidating balance sheets flowserve corporation notes consolidated financial statements continued flowserve corporation notes consolidated financial statements continued condensed consolidating statements income flowserve corporation notes consolidated financial statements continued flowserve corporation notes consolidated financial statements continued condensed consolidating statements cash flows flowserve corporation notes consolidated financial statements continued flowserve corporation notes consolidated financial statements continued flowserve corporation notes consolidated financial statements continued 12 pension postretirement benefits sponsor several noncontributory defined benefit pension plans covering substantially us employees certain nonus employees provide benefits based years service age job grade levels type compensation retirement benefits covered employees provided contributory pension plans cash balance pension plans governmentsponsored retirement programs funded defined benefit pension plans receive funding based independent actuarial valuations provide current service amount sufficient amortize unfunded prior service periods exceed 30 years funding falling within legal limits prescribed prevailing regulation also maintain unfunded defined benefit plans permitted local regulations receive funding benefits become due defined benefit plan strategy ensure current future benefit obligations adequately funded costeffective manner additionally investing objective achieve highest level investment performance compatible risk tolerance prudent investment practices longterm nature defined benefit plan liabilities funding strategy based longterm perspective formulating implementing investment policies evaluating investment performance asset allocation defined benefit plans reflect decision proportion investment equity fixed income securities appropriate various subasset classes least annually complete comprehensive review asset allocation policy underlying assumptions includes longterm capital markets rate return assumptions risk tolerances relative defined benefit plan liabilities expected rates return defined benefit plan assets derived review asset allocation strategy expected longterm performance asset classes risks factors adjusted specific investment strategy rates impacted changes general market conditions longterm nature shortterm market changes significantly impact rates us defined benefit plan assets consist balanced portfolio primarily us equity fixed income securities nonus defined benefit plan assets include significant concentration united kingdom uk equity fixed income securities monitor investment allocations manage plan assets maintain acceptable levels risk addition certain defined benefit plans hold investments european equity fixed income securities periods presented used measurement date december 31 us nonus pension postretirement medical plans us defined benefit plans maintain qualified nonqualified defined benefit pension plans us qualified plan provides coverage substantially fulltime us employees receive benefits earnings threshold specified us department labor nonqualified plans primarily cover small number employees including current former members senior management providing benefit levels equivalent participants otherwise limited us department labor rules us plans designed operate cash balance arrangements employee option take lump sum payment end service total accumulated benefit obligation equivalent total projected benefit obligation benefit obligation following assumptions related us defined benefit pension plans december 31 2012 compared december 31 2011 decreased discount rate 450 375 based analysis publiclytraded investment grade us corporate bonds lower yield due current market conditions december 31 2012 compared december 31 2011 average assumed rate compensation increase remained constant 425 determining 2012 expense expected rate return us plan assets remained consistent 2011 625 flowserve corporation notes consolidated financial statements continued primarily based target allocations expected longterm asset returns longterm rate return assumption calculated using quantitative approach utilizes unadjusted historical returns asset allocation inputs calculation net pension expense us defined benefit pension plans including qualified nonqualified plans estimated prior service benefit estimated net loss us defined benefit pension plans amortized accumulated comprehensive loss pension expense 2013 less 01 million 138 million respectively amortize estimated prior service benefits estimated net losses remaining expected service period following summarizes net pension liability us plans following summarizes amounts recognized balance sheet us plans following summary changes us defined benefit plans’ pension obligations flowserve corporation notes consolidated financial statements continued following table summarizes expected cash benefit payments us defined benefit pension plans future amounts millions following table shows change accumulated comprehensive loss attributable components net cost change benefit obligations us plans net tax amounts recorded accumulated comprehensive loss consist following reconciliation us defined benefit pension plans’ assets contributed 79 million 89 million us defined benefit pension plans 2012 2011 respectively payments exceeded minimum funding requirements mandated us department labor rules estimated contribution 2013 expected approximately 20 million excluding direct benefits paid flowserve corporation notes consolidated financial statements continued us defined benefit plan assets held qualified plan asset allocations qualified plan end 2012 2011 asset category follows 1 less 1 holdings category 2011 none common stock directly held qualified plan investment strategy earn longterm rate return consistent acceptable degree risk minimize cash contributions life plan taking account liquidity needs plan preserve capital diversified investments high quality securities current allocation target invest approximately 50 plan assets equity securities 50 fixed income securities within investment category assets allocated various investment strategies professional money management firm manages assets engage consultant assist evaluating activities periodically review allocation target generally conjunction asset liability study consideration future cash flow needs regularly rebalance actual allocation target investment allocation plan assets invested commingled funds individual funds actively managed intent outperform specified benchmarks pension investment committee responsible setting investment strategy target asset allocation well selecting individual funds qualified plan approached fully funded status implemented liabilitydriven investing ldi strategy closely aligns duration assets duration liabilities ldi strategy result asset portfolio closely matches behavior liability thereby protecting funded status plan flowserve corporation notes consolidated financial statements continued plan’s financial instruments shown presented fair value see note 1 discussion hierarchical levels fair values plan’s investments determined fair values us defined benefit plan assets us large cap funds seek outperform russell 1000 r index investments 1000 large medium capitalization us companies represented russell 1000 r index composed largest 1000 us equities russell 3000 r index determined market capitalization russell 3000 r index composed largest us equities determined market capitalization b us small cap funds seek outperform russell 2000 r index investments medium small capitalization us companies represented russell 2000 r index composed smallest 2000 us equities russell 3000 r index determined market capitalization c international large cap funds seek outperform msci europe australia far east index investments developed nations world maintain high degree diversification among countries currencies emerging markets funds represent diversified portfolio seeks high longterm returns comparable investments emerging markets investing stocks newly developed emerging market economies e longterm governmentcredit funds seek outperform barclays capital us longterm governmentcredit index generating excess return variety diversified strategies securities longer durations sector rotation security selection tactical use highyield bonds f intermediate bonds seek outperform barclays capital us aggregate bond index generating excess return variety diversified strategies securities short intermediate durations sector rotation security selection tactical use highyield bonds g details provided due immateriality nonus defined benefit plans maintain defined benefit pension plans cover employees following countries austria france germany india indonesia italy japan mexico netherlands sweden uk assets uk two plans netherlands one plan represent 98 total nonus plan assets nonus assets details countries’ plan assets provided due immateriality flowserve corporation notes consolidated financial statements continued following assumptions related nonus defined benefit pension plans december 31 2012 compared december 31 2011 decreased average discount rate nonus plans 509 416 based primarily lower applicable corporate aa bond yields euro zone uk determining 2012 expense decreased average expected rate return plan assets 613 december 31 2011 578 december 31 2012 primarily result decrease expected return longterm bond yields expected rate return plan assets longterm nature shortterm market changes significantly impact rates many nonus defined benefit plans unfunded permitted local regulation expected longterm rate return assets funded plans determined assessing rates return asset class calculated using quantitative approach utilizes unadjusted historical returns asset allocation inputs calculation work actuaries determine reasonableness longterm rate return assumptions looking several factors including historical returns expected future returns asset allocation risks asset class items net pension expense nonus defined benefit pension plans estimated net loss defined benefit pension plans amortized accumulated comprehensive loss nonus pension expense 2013 66 million amortize estimated net losses remaining expected service period remaining expected lifetime inactive participants plans inactive participants following summarizes net pension liability nonus plans flowserve corporation notes consolidated financial statements continued following summarizes amounts recognized balance sheet nonus plans following reconciliation nonus plans’ defined benefit pension obligations 1 actuarial losses primarily reflect impact assumption changes euro zone uk plans 2012 uk plans 2011 2 currency translation impact 2012 reflects weakening us dollar exchange rate significant currencies primarily british pound euro following table summarizes expected cash benefit payments nonus defined benefit plans future amounts millions flowserve corporation notes consolidated financial statements continued following table shows change accumulated comprehensive loss attributable components net cost change benefit obligations nonus plans net tax amounts recorded accumulated comprehensive loss consist following reconciliation nonus plans’ defined benefit pension assets contributions nonus defined benefit pension plans 2013 expected approximately 10 million excluding direct benefits paid flowserve corporation notes consolidated financial statements continued asset allocations nonus defined benefit pension plans end 2012 2011 follows none common stock held directly plans cases investment strategy plans earn longterm rate return consistent acceptable degree risk minimize cash contributions life plan taking account liquidity needs plan legal requirements particular country preserve capital diversified investments high quality securities asset allocation differs plan based upon plan’s benefit obligation participants well results asset liability studies conducted plan consideration future cash flow needs professional money management firms manage plan assets engage consultants uk netherlands assist evaluation activities assets uk plans overseen group trustees review investment strategy asset allocation fund selection assets passively managed invested index funds attempt match performance specified benchmark index assets netherlands plan independently managed outside service provider flowserve corporation notes consolidated financial statements continued fair values nonus assets north american companies represents us canadian large cap equity index funds passively managed track respective benchmarks ftse allworld usa index ftse allworld canada index b uk companies represents uk equity index fund passively managed tracks ftse allshare index c european companies represents european equity index fund passively managed tracks ftse allworld developed europe exuk index asian pacific companies represents japanese pacific rim equity index funds passively managed track respective benchmarks ftse allworld japan index ftse allworld developed asia pacific exjapan index e global equity represents actively managed global equity funds taking topdown strategic view different regions analyzing companies based fundamentals marketdriven thematic quantitative factors generate alpha f uk government gilt index represents uk government issued fixed income investments passively managed track respective benchmarks ftse uk gilt indexlinked 5 years index ftse uk gilt 15 years index g uk corporate bond index represents uk corporate bond investments passively managed track iboxx 15 years £ nongilt index h global fixed income bond represents mostly european fixed income investment funds actively managed diversified primarily invested traditional government bonds highquality corporate bonds assetbacked securities emerging market debt high yield corporates includes assets held plans outside uk netherlands details including level iii rollforward details provided due immateriality flowserve corporation notes consolidated financial statements continued defined benefit pension plans accumulated benefit obligations excess plan assets following summarizes key pension plan information regarding us nonus plans whose accumulated benefit obligations exceed fair value respective plan assets postretirement medical plans sponsor several defined benefit postretirement medical plans covering certain current retirees limited number future retirees us plans provide medical dental benefits administered insurance companies health maintenance organizations plans include participant contributions deductibles coinsurance provisions limitations integrated medicare group plans fund plans benefits health maintenance organization premiums paid plans hold assets period presented accordingly investment strategy targeted allocations plan assets benefits postretirement medical plans available new employees existing employees following assumptions related postretirement benefits assumed ranges annual rates increase medical costs used determine net expense 80 2012 85 2011 90 2010 gradual decrease 50 2032 future years net postretirement benefit income postretirement medical plans estimated prior service benefit cost expected amortized accumulated comprehensive loss us pension expense 2013 estimated net gain postretirement medical plans amortized accumulated comprehensive loss us expense 2013 12 million following summarizes accrued postretirement benefits liability postretirement medical plans flowserve corporation notes consolidated financial statements continued following summarizes amounts recognized balance sheet postretirement benefit obligation following reconciliation postretirement benefit obligation following presents expected benefit payments future periods amounts millions following table shows change accumulated comprehensive loss attributable components net cost change benefit obligations postretirement benefits net tax flowserve corporation notes consolidated financial statements continued amounts recorded accumulated comprehensive loss consist made contributions postretirement medical plans pay benefits 38 million 2012 39 million 2011 38 million 2010 postretirement medical plans unfunded make contributions covered individuals’ claims approved payment accordingly contributions period directly correlated benefits paid assumed health care cost trend rates effect amounts reported postretirement medical plans onepercentage point change assumed health care cost trend rates would following effect 2012 reported amounts thousands defined contribution plans sponsor several defined contribution plans covering substantially us canadian employees certain nonus employees may contribute plans contributions matched varying amounts us including opportunities discretionary matching contributions us defined contribution plan expense 193 million 2012 178 million 2011 173 million 2010 participants us defined contribution plan option invest common stock prior 2009 discretionary contributions us funded common stock therefore plan assets include holdings common stock effective january 1 2013 common stock longer investment option participants existing holdings stock effective date able maintain holdings time reallocated within plan participant taken distribution participant 13 legal matters contingencies asbestosrelated claims defendant substantial number lawsuits seek recover damages personal injury allegedly caused exposure asbestoscontaining products manufactured andor distributed heritage companies past overall number asbestosrelated claims generally declined recent years assurance trend continue average cost per claim increase asbestoscontaining materials incorporated products primarily encapsulated used internal components process equipment believe significant emission asbestos fibers occurred use equipment practice vigorously contest resolve claims successful resolving majority claims little payment historically high percentage resolved claims covered applicable insurance indemnities companies believe substantial majority existing claims continue covered insurance indemnities accordingly recorded liability estimate likely settlement asserted claims related receivable insurers companies estimated recovery extent believe amounts recovery probable otherwise dispute unfavorable rulings judgments settlement terms regarding claims could material adverse impact business financial condition results operations cash flows currently believe likelihood remote additionally claims pending certain insurers resolved favorably reflected recorded receivables would result discrete gains applicable quarter currently unable estimate impact unasserted asbestosrelated claims although future claims would also subject existing indemnities insurance coverage flowserve corporation notes consolidated financial statements continued united nations oilforfood program mid2006 french authorities began investigation 170 french companies one french subsidiaries included concerning suspected inappropriate activities conducted connection united nations oil food program previously disclosed french investigation french subsidiary formally opened first quarter 2010 french subsidiary filed formal response french court july 2012 french court ruled procedural motions challenge constitutionality charges quash indictment french court ruling currently proceeding formal review process currently expect incur additional case resolution costs material amount matter however french authorities take enforcement action french subsidiary regarding investigation may subject monetary nonmonetary penalties currently believe material adverse financial impact company addition governmental investigation referenced june 27 2008 republic iraq filed civil suit federal court new york 93 participants united nations oilforfood program including us two foreign subsidiaries participated program february 6 2013 us district court southern district new york issued ruling dismissed suit prejudice february 15 2013 plaintiff appealed district courts ruling continue vigorously contest suit believe valid defenses claims asserted currently believe resolution suit material adverse financial impact company currently involved potentially responsible party five former public waste disposal sites various stages evaluation remediation projected cost remediation sites well alleged fair share allocation remain uncertain studies completed parties either negotiated amicable resolution matter judicially resolved site many parties similarly identified many parties identified financially strong solvent companies appear able pay share remediation costs based information waste disposal practices sites environmental regulatory process general believe likely ultimate remediation liability costs site apportioned among liable parties including site owners waste transporters according volumes andor toxicity wastes shown disposed sites believe financial exposure existing disposal sites materially excess accrued reserves also defendant number lawsuits including product liability claims insured subject applicable deductibles arising ordinary course business also involved uninsured routine litigation incidental business currently believe none litigation either individually aggregate material business operations overall financial condition however litigation inherently unpredictable resolutions dispositions claims lawsuits settlement otherwise could adverse impact financial position results operations cash flows reporting period resolution disposition occurs although none aforementioned potential liabilities quantified absolute certainty except otherwise indicated established reserves covering exposures relating contingencies extent believed reasonably estimable probable based past experience available facts additional exposures beyond reserves could exist currently cannot estimated continue evaluate update reserves necessary appropriate 14 warranty reserve recorded reserves product warranty claims included current noncurrent liabilities following summary activity warranty reserve 15 shareholders’ equity dividends february 19 2013 board directors authorized increase payment quarterly dividends common stock 036 per share 042 per share payable beginning april 12 2013 february 20 2012 board directors authorized increase payment dividends common stock 032 per share 036 per share payable quarterly beginning april 13 2012 february 21 2011 board directors authorized increase payment quarterly dividends common stock 029 per share 032 per share payable quarterly beginning april 14 2011 generally dividend dateofrecord last month quarter dividend paid following month subsequent dividends reviewed board directors declared discretion dependent assessment financial situation business outlook applicable time share repurchase program may 31 2012 announced board directors endorsed updated capital structure strategy part capital structure strategy includes returning additional capital quickly shareholders expanded share repurchase program 10 billion 10 billion share repurchase program authorization included approximately 233 million remaining capacity prior share repurchase program originally approved board directors september 12 2011 replenished december 15 2011 february 19 2013 board directors approved 750 million share repurchase authorization included approximately 193 million remaining capacity 10 billion share repurchase authorization share repurchase program expiration date reserve right limit terminate repurchase program anytime without notice part 10 billion share repurchase program june 14 2012 entered accelerated share repurchase program “asr program” jp morgan securities llc agent jpmorgan chase bank na london branch agreed repurchase aggregate 3000 million common stock asr program paid 3000 million received initial delivery 2260738 shares representing 80 asr programs value thencurrent share price remaining 20 asr programs value delivered december 12 2012 program settlement resulted us receiving additional 153659 shares total 2414397 shares repurchased asr program based volumeweighted average price 12693 average common stock price repurchase period less agreed upon discount inclusive total shares 2414397 delivered asr program repurchased 6212780 1482833 450000 shares 7719 million 1500 million 460 million 2012 2011 2010 respectively december 31 2012 2857 million remaining capacity current share repurchase program 16 income taxes provision income taxes consists following expected cash payments current income tax expense 2012 2011 2010 reduced 110 million 57 million 100 million respectively result tax deductions related exercise nonqualified employee stock flowserve corporation notes consolidated financial statements continued options vesting restricted stock income tax benefit resulting stockbased compensation plans increased capital excess par value provision income taxes differs statutory corporate rate due following 2012 2011 2010 effective tax rates differed federal statutory rate 35 primarily due net impact foreign operations included impacts lower foreign tax rates changes reserves established uncertain tax positions assert permanent reinvestment majority invested capital unremitted foreign earnings foreign subsidiaries however assert permanent reinvestment limited number foreign subsidiaries future distributions may occur cumulative amount undistributed earnings considered permanently reinvested 16 billion permanently reinvested earnings repatriated future period form dividends otherwise provision income taxes may increase materially period three years reported period ended december 31 2012 recognized net deferred tax assets attributable excess foreign tax credits unremitted earnings foreign currency translation adjustments foreign subsidiaries excess financial reporting basis subsidiaries permanent reinvestment asserted cash deemed dividend distributions resulted recognition 23 million income tax expense year ended december 31 2012 95 million 82 million income tax benefit years ended december 31 2011 2010 respectively recorded benefit excess foreign tax credits associated deemed repatriation unremitted earnings credits available offset liability associated dividends deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes significant components consolidated deferred tax assets liabilities flowserve corporation notes consolidated financial statements continued 1634 million us foreign net operating loss carryforwards december 31 2012 total 445 million state net operating losses net operating losses generated us unused expire 2013 2027 majority nonus net operating losses carry forward without expiration additionally 314 million foreign tax credit carryforwards december 31 2012 expiring 2020 2021 valuation allowance reserves recorded earnings income taxes comprised flowserve corporation notes consolidated financial statements continued tabular reconciliation total gross amount unrecognized tax benefits excluding interest penalties follows millions amount gross unrecognized tax benefits december 31 2012 776 million includes 185 million accrued interest penalties amount 550 million recognized would favorably impact effective tax rate years ended december 31 2012 2011 2010 recognized net interest penalty income 29 million 19 million 23 million respectively consolidated statement income limited exception longer subject us federal income tax audits years 2010 state local income tax audits years 2008 nonus income tax audits years 2005 currently examination various years india italy singapore us venezuela vietnam reasonably possible within next 12 months effective tax rate impacted resolution matters audited various taxing authorities also reasonably possible statute limitations close various taxing jurisdictions within next 12 months estimate could record reduction tax expense approximately 14 million within next 12 months 17 business segment information business segments defined share focus industrial flow control technology high number common customers segments also complementary product offerings technologies often combined applications provide us net competitive advantage segments also benefit global footprint economies scale reducing administrative overhead costs serve customers cost effectively conduct operations three business segments based type product manage business • epd long lead time custom highlyengineered pumps pump systems mechanical seals auxiliary systems replacement parts related services • industrial product division ipd engineered preconfigured industrial pumps pump systems related products services • fcd engineered industrial valves control valves actuators controls related services decisionmaking purposes chief executive officer ceo members senior executive management use financial information generated reported reportable segment level corporate headquarters constitute separate division business segment january 11 2012 new unified operational leadership structure announced resulting creation chief operating officer position creation position impact defined three business segments assessment ceo chief operating decision maker evaluate segment performance allocate resources based reportable segment’s operating income amounts classified eliminations include corporate headquarters costs minor entities constitute separate segments intersegment sales transfers recorded cost plus profit margin sales related margin sales eliminated consolidation flowserve corporation notes consolidated financial statements continued following summary financial information reportable segments years ended december 31 2012 2011 2010 reconciled amounts reported consolidated financial statements 1 changes identifiable assets eliminations 2012 2011 2010 primarily result changes cash balances geographic information attribute sales different geographic areas based facilities’ locations longlived assets classified based geographic area assets located exclude deferred tax assets categorized noncurrent sales longlived assets geographic area follows flowserve corporation notes consolidated financial statements continued 1 ema includes europe middle east africa germany accounted approximately 8 2012 9 2011 9 2010 consolidated sales italy accounted approximately 10 consolidated longlived assets 2012 2011 individual country within group represents 10 consolidated totals period presented 2 asia includes asia australia individual country within group represents 10 consolidated totals period presented 3 includes canada latin america individual country within group represents 10 consolidated totals period presented net sales international customers including export sales us represented 71 total sales 2012 73 2011 2010 major customer information large number customers across large number manufacturing service facilities believe sales individual customer represent 10 consolidated sales years presented flowserve corporation notes consolidated financial statements continued 18 accumulated comprehensive loss following presents components accumulated comprehensive loss net related tax effects 1 includes foreign currency translation adjustments attributable noncontrolling interests 12 million 13 million 14 million december 31 2012 2011 2010 respectively 2 foreign currency translation adjustments 2012 primarily represents strengthening euro mexican peso indian rupee exchange rate versus us dollar december 31 2012 compared december 31 2011 foreign currency translation adjustments 2011 primarily represents strengthening us dollar exchange rate versus euro british pound december 31 2011 compared december 31 2010 19 quarterly financial data unaudited following presents summary unaudited quarterly data 2012 2011 amounts millions except per share data 1 earnings per share computed independently quarters presented sum quarters may equal total year amount due impact changes weighted average quarterly shares outstanding 20 subsequent event february 8 2013 venezuelan government announced intention devalue currency bolivar 43 63 bolivars us dollar operations venezuela generally consist service center performs service repair activities addition certain operations countries sell equipment parts typically denominated us dollars directly venezuelan customers venezuelan subsidiarys sales 2012 total assets december 31 2012 represented less 1 consolidated sales total assets period currently assessing ongoing impact currency devaluation venezuelan operations imports market including actions venezuelan government economic conditions venezuela inflation capital spending item 9item 8 financial statements supplementary data report independent registered public accounting firm board directors shareholders flowserve corporation opinion consolidated financial statements listed index appearing item 15a1 present fairly material respects financial position flowserve corporation subsidiaries december 31 2014 2013 results operations cash flows three years period ended december 31 2014 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed accompanying index appearing item 15a2 presents fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintained material respects effective internal control financial reporting december 31 2014 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission coso companys management responsible financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report internal control financial reporting responsibility express opinions financial statements financial statement schedule companys internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate flowserve corporation consolidated balance sheets see accompanying notes consolidated financial statements flowserve corporation consolidated statements income see accompanying notes consolidated financial statements flowserve corporation consolidated statements comprehensive income see accompanying notes consolidated financial statements flowserve corporation consolidated statements shareholders’ equity flowserve corporation consolidated statements cash flows flowserve corporation notes consolidated financial statements december 31 2014 2013 three years ended december 31 2014 1 significant accounting policies accounting developments principally engaged worldwide design manufacture distribution service industrial flow management equipment provide long lead time custom highlyengineered pumps standardized generalpurpose pumps mechanical seals industrial valves related automation products solutions primarily oil gas chemical power generation water management general industries requiring flow management products services equipment manufactured serviced us predominantly used industries deal difficulttohandle corrosive fluids well environments extreme temperatures pressure horsepower speed business affected economic conditions united states us countries products sold serviced cyclical nature competitive environment industries served relationship us dollar currencies demand pricing customers’ end products stock split june 7 2013 recorded threeforone stock split shareholders equity share data including treasury shares stockbased compensation award shares per share data presented herein retrospectively adjusted reflect impact increase authorized shares stock split appropriate details stock split included note 15 venezuela operations subsidiary venezuela generally consist service center performs service repair activities venezuelan subsidiarys sales year ending december 31 2014 total assets december 31 2014 represented less 1 consolidated sales total assets periods addition certain operations countries sell equipment parts typically denominated united states us dollars directly venezuelan customers experienced delays collecting payment accounts receivable national oil company venezuela primary venezuelan customer accounts receivable primarily us dollardenominated disputed historically writeoffs relating customer total outstanding accounts receivable customer approximately 9 gross accounts receivable december 31 2014 given experienced delays collecting payments estimate approximately 48 outstanding accounts receivable likely collected within one year therefore classified longterm within assets net december 31 2014 consolidated balance sheet effective february 13 2013 venezuelan government devalued currency bolivar 43 63 bolivars us dollar result devaluation recognized loss 40 million first quarter 2013 loss reported expense net consolidated statements income resulted tax benefit first quarter 2014 venezuelan government expanded use periodic auctions us dollars conducted complementary system foreign currency administration sicad december 31 2014 sicad exchange rate 120 bolivars us dollar compared official exchange rate 63 bolivars us dollar official addition second quarter 2014 venezuelan government created third currency exchange mechanism sicad ii currently interpreted available entities transactions exchange rate significantly less favorable official exchange rate sicad exchange rate december 31 2014 believe official exchange rate continues appropriate rate remeasure us dollar value assets liabilities results operations venezuelan subsidiary reference remeasure bolivardenominated net monetary assets december 31 2014 utilizing sicad ii exchange rate estimated resulting loss would approximately 8 million 14 million respectively february 2015 venezuelan government created new currency exchange mechanism simadi replaced sicad ii mechanism continuing assess monitor ongoing impact changes venezuelan foreign exchange market venezuelan operations imports market including venezuelan subsidiarys ability remit cash dividends payments official exchange rate well additional government actions political labor unrest economic conditions may adversely impact future consolidated financial condition results operations principles consolidation consolidated financial statements include accounts company wholly majorityowned subsidiaries addition would consolidate variable interest entities deemed primary beneficiary noncontrolling interests nonaffiliated parties recognized majorityowned consolidated subsidiaries intercompany profitslosses transactions balances among consolidated entities eliminated consolidated financial statements investments unconsolidated affiliated companies represent noncontrolling ownership interests 20 50 accounted using equity method approximates equity interest underlying equivalent net book value accounting principles generally accepted us gaap investments interests less 20 investee accounted cost method whereby income recognized event dividend receipt investments accounted cost method tested impairment indicator present use estimates process preparing financial statements conformity us gaap requires us make estimates assumptions affect reported amounts certain assets liabilities revenues expenses believe estimates assumptions reasonable however actual results may differ materially estimates significant estimates assumptions used determining • revenue recognition net liquidated damages delivery penalties • income taxes deferred taxes tax valuation allowances tax reserves • reserves contingent loss • retirement postretirement benefits • valuation goodwill indefinitelived intangible assets longlived assets revenue recognition revenues product sales recognized risks rewards ownership transferred customers typically based contractual delivery terms agreed customer fulfillment inconsequential perfunctory actions addition policy requires persuasive evidence arrangement fixed determinable sales price reasonable assurance collectability defer recognition revenue advance payments received customers performance obligations completed andor services performed freight charges billed customers included sales related shipping costs included cost sales consolidated statements income contracts typically include cancellation provisions require customers reimburse us costs incurred date cancellation well contractual cancellation penalties enter certain agreements multiple deliverables may include combination designing developing manufacturing modifying installing commissioning flow management equipment providing services related performance products delivery products services typically occurs within one twoyear period although many arrangements shortcycle type orders shorter timeframe delivery separate deliverables units accounting based whether deliverables standalone value customer impact general rights return immaterial contract value allocated ratably units accounting arrangement based relative selling prices determined deliverables sold separately revenues longterm contracts exceed certain internal thresholds regarding size duration project provide receipt progress billings customer recorded percentage completion method progress measured costtocost basis percentage completion revenue represents less 7 consolidated sales year presented revenue service repair contracts recognized services agreed customer rendered revenues generated fixed fee service repair contracts recognized ratable basis term contract contracts range duration generally extend five years fixed fee service contracts represent approximately 1 consolidated sales year presented certain instances provide guaranteed completion dates terms contracts failure meet contractual delivery dates result late delivery penalties nonrecoverable costs instances payment costs deemed probable perform project profitability analysis accounting costs reduction realizable revenues could potentially cause estimated total project costs exceed projected total revenues realized project instances would record reserves cover excesses period determined circumstances total projected revenues still exceed total projected costs incurrence penalties nonrecoverable costs generally reduces profitability project time subsequent revenue recognition cash equivalents place temporary cash investments financial institutions policy invest institutions instruments minimal credit risk market risk investments original maturity three months less purchased classified cash equivalents highly liquid principal values subject significant risk change due interest rate fluctuations allowance doubtful accounts credit risk allowance doubtful accounts established based estimates amount uncollectible accounts receivable determined principally based upon aging accounts receivable also customer credit history industry market segment information economic trends conditions credit reports customer credit issues customer bankruptcies general economic conditions may also impact estimates credit risks mitigated diversity customer base across many different geographic regions industries performing creditworthiness analyses customers additionally mitigate credit risk letters credit advance payments received customers december 31 2014 although experienced increased aging slower collection receivables primary venezuelan customer believe significant concentrations credit risk inventories related reserves inventories stated lower cost market cost determined firstin firstout method reserves excess obsolete inventories based upon assessment market conditions products determined historical usage estimated future demand due long life cycles products carry spare parts inventories historically low usage rates provide reserves inventory based demonstrated usage aging criteria income taxes deferred taxes tax valuation allowances tax reserves account income taxes asset liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases operating loss tax credit carryforwards deferred tax assets liabilities calculated using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized period includes enactment date record valuation allowances reflect estimated amount deferred tax assets may realized based upon analysis existing deferred tax assets net operating losses tax credits jurisdiction expectations ability utilize tax attributes review past current estimated future taxable income establishment tax strategies provide deferred taxes temporary differences associated investment foreign subsidiaries financial reporting basis exceeds tax basis unless assert permanent reinvestment foreign jurisdictions financial reporting basis tax basis differences investments foreign subsidiaries consist unremitted earnings losses well foreign currency translation adjustments amount income taxes pay subject ongoing audits federal state foreign tax authorities often result proposed assessments establish reserves open tax years uncertain tax positions may subject challenge various tax authorities consolidated tax provision related accruals include impact reasonably estimable losses related interest penalties deemed appropriate recognize tax benefit uncertain tax position likely tax position sustained examination taxing authorities determination based technical merits position presumes uncertain tax position examined relevant taxing authority full knowledge relevant information tax benefits recognized financial statements position measured based largest benefit greater fifty percent likelihood realized upon ultimate settlement legal environmental contingencies legal environmental reserves recorded based upon casebycase analysis relevant facts circumstances assessment potential legal obligations costs amounts relating legal environmental liabilities recorded probable loss incurred loss estimable assessments legal environmental costs based information obtained independent inhouse experts loss experience similar situations estimates updated applicable new information regarding facts circumstances matter becomes available legal fees associated legal environmental liabilities expensed incurred estimates liabilities unsettled asbestosrelated claims based known claims experience preceding two years claims filed settled dismissed adjustments events deemed unusual unlikely recur included retirement obligations liabilities consolidated balance sheets substantial majority asbestosrelated claims covered insurance indemnities estimated indemnities receivables insurance carriers unsettled claims receivables settlements legal fees paid us asbestosrelated claims estimated using historical experience insurance recovery rates estimates future recoveries include estimates coverage financial viability insurance carriers estimated receivables included assets net consolidated balance sheets claims pending certain insurers resolved favorably estimated future recoveries would result discrete gains applicable quarter currently unable estimate impact unasserted asbestosrelated claims although future claims would also subject existing indemnities insurance coverage warranty accruals warranty obligations based upon product failure rates materials usage service delivery costs analysis identified expected claims estimate cost resolve claims estimates expected claims generally factor historical claims known product issues warranty obligations based factors adjusted based historical sales trends preceding 24 months insurance accruals insurance accruals recorded wholly partially selfinsured risks medical benefits workers’ compensation based upon analysis claim loss history insurance deductibles policy limits relevant factors updated annually included accrued liabilities consolidated balance sheets estimates based upon information received actuaries insurance company adjusters independent claims administrators independent sources receivables insurance carriers estimated using historical experience insurance recovery rates estimates future recoveries include estimates coverage financial viability insurance carriers estimated receivables included accounts receivable net assets net applicable consolidated balance sheets pension postretirement obligations determination pension postretirement benefits obligations based estimates made management consultation independent actuaries investment advisors inherent valuations assumptions including discount rates expected rates return plan assets retirement rates mortality rates compensation increase factors reviewed annually updated necessary current market conditions including changes rates return interest rates medical inflation rates considered selecting assumptions actuarial gains losses prior service costs recognized accumulated comprehensive loss arise amortize costs net pension expense remaining expected service period property plant equipment depreciation property plant equipment stated historical cost less accumulated depreciation asset retirement obligations exist capitalized part carrying amount asset depreciated remaining useful life asset useful lives leasehold improvements lesser remaining lease term useful life improvement assets retired otherwise disposed costs related accumulated depreciation removed accounts resulting gains losses included income operations period depreciation computed straightline method based estimated useful lives depreciable assets case assets capital leases related lease turn generally estimated useful lives assets costs related routine repairs maintenance expensed incurred internally developed software capitalize certain costs associated development internaluse software generally costs related significant software development projects amortized estimated useful life typically three five years upon implementation software intangible assets intangible assets excluding trademarks considered indefinite life consist primarily engineering drawings patents existing customer relationships software distribution networks items amortized estimated useful lives generally ranging four 40 years assets reviewed impairment whenever events circumstances indicate impairment may occurred valuation goodwill indefinitelived intangible assets longlived assets value goodwill indefinitelived intangible assets tested impairment december 31 year whenever events circumstances indicate assets may impaired identification reporting units began operating segment level considered whether components one level operating segment levels identified reporting units purpose testing goodwill impairment based certain conditions included among factors extent component represents business ii aggregation economically similar components within operating segments resulted seven reporting units factors considered determining whether aggregation components appropriate included similarity nature products services nature production processes methods distribution types industries served impairment loss goodwill recognized implied fair value goodwill less carrying value estimate fair value reporting units based income approach whereby calculate fair value reporting unit based present value estimated future cash flows discounted cash flow analysis requires us make various judgmental assumptions future sales operating margins growth rates discount rates based budgets business plans economic projections anticipated future cash flows market participants assumptions also made varying perpetual growth rates periods beyond longterm business plan period record impairment goodwill 2014 2013 2012 also consider market capitalization evaluation fair value goodwill market capitalization decreased compared 2013 however indicate potential impairment goodwill december 31 2014 impairment losses indefinitelived intangible assets recognized whenever estimated fair value less carrying value fair values calculated trademarks using relief royalty method estimates fair value trademark determining present value estimated royalty payments avoided result owning trademark method includes judgmental assumptions sales growth discount rates significant impact fair value substantially consistent assumptions used determine fair value reporting units discussed record material impairment trademarks 2014 2013 2012 recoverable value longlived assets including property plant equipment finitelived intangible assets reviewed indicators potential impairments present recoverable value based upon assessment estimated future cash flows related assets utilizing assumptions similar goodwill additional considerations related longlived assets include expected maintenance improvements changes expected uses ongoing operating performance utilization deferred loan costs deferred loan costs consisting fees expenses associated debt financing amortized term associated debt using effective interest method additional amortization recorded periods optional prepayments debt made fair values financial instruments financial instruments presented fair value consolidated balance sheets exception longterm debt fair value defined price would received sell asset paid transfer liability orderly transaction market participants measurement date available fair value based observable market prices parameters derived prices parameters observable prices inputs available valuation models may applied assets liabilities recorded fair value consolidated balance sheets categorized based upon level judgment associated inputs used measure fair values hierarchical levels defined accounting standards codification asc 820 fair value measurements disclosures directly related amount subjectivity associated inputs fair valuation assets liabilities asset liability’s categorization within fair value hierarchy based lowest level significant input valuation hierarchical levels follows level inputs unadjusted quoted prices active markets identical assets liabilities measurement date level ii inputs quoted prices included level either directly indirectly observable asset liability correlation market data measurement date duration instrument’s anticipated life level iii inputs reflect management’s best estimate market participants would use pricing asset liability measurement date consideration given risk inherent valuation technique risk inherent inputs model recurring fair value measurements limited investments derivative instruments certain equity securities fair value measurements derivative instruments determined using models maximize use observable market inputs including interest rate curves forward spot prices currencies classified level ii fair value hierarchy fair values derivative instruments included note 6 fair value measurements investments equity securities determined using quoted market prices classified level fair values investments equity securities changes thereto immaterial consolidated financial position results operations derivatives hedging activities foreign currency derivatives hedging policy outlining conditions enter financial derivative transactions use derivative instruments trading speculative purposes derivative instruments recognized balance sheet fair values accounting gains losses resulting changes fair value depends whether derivative designated qualifies hedge accounting foreign exchange contracts employ foreign currency economic hedging strategy mitigate certain financial risks resulting foreign currency exchange rate movements impact foreign currency denominated receivables payables firm committed transactions forecasted sales purchases 2013 began designate certain forward exchange contracts hedging instruments apply hedge accounting instruments designated forward exchange contracts changes fair value recorded comprehensive loss underlying hedged item affects earnings time change fair value recognized sales consolidated statements income nondesignated forward exchange contracts changes fair values recognized immediately income expense net consolidated statements income see note 6 discussion forward exchange contracts interest rate swaps enter interest rate swap agreements purpose hedging cash flow exposure floating interest rates certain portions debt changes fair value designated interest rate swap recorded comprehensive loss earnings affected underlying hedged item ineffective portion gain loss immediately recognized earnings upon settlement realized gains losses recognized interest expense consolidated statements income see note 6 discussion interest rate swaps discontinue hedge accounting 1 deem hedge ineffective determine designation derivative hedging instrument longer appropriate 2 derivative matures terminates sold 3 occurrence contracted committed transaction longer probable occur originally expected period hedge accounting discontinued derivative remains outstanding carry derivative estimated fair value balance sheet recognizing changes fair value current period earnings cash flow hedge becomes ineffective deferred gains losses remain accumulated comprehensive loss underlying hedged item recognized becomes probable hedged forecasted transaction occur deferred gains losses hedging instrument recognized earnings immediately exposed risk creditrelated losses resulting nonperformance counterparties financial instruments perform credit evaluations counterparties forward exchange contracts interest rate swap agreements expect counterparties meet obligations necessary would adjust values derivative contracts counterparties’ credit risks foreign currency translation assets liabilities foreign subsidiaries translated us dollars exchange rates prevailing balance sheet date income expenses translated average rates month translation gains losses reported component accumulated comprehensive loss transactional currency gains losses arising transactions currencies sites’ functional currencies included consolidated results operations transaction translation gains losses arising intercompany balances reported component accumulated comprehensive loss underlying transaction stems longterm equity investment debt designated due foreseeable future otherwise recognize transaction gains losses arising intercompany transactions component income intercompany balances longterm investment related designated due beyond foreseeable future may mitigate risk associated foreign currency fluctuations entering forward exchange contracts stockbased compensation stockbased compensation measured grantdate fair value exercise price stock option awards value restricted share restricted share unit performancebased unit awards collectively referred restricted shares set closing price common stock new york stock exchange date grant date grants authorized board directors restricted share units performancebased units refer restricted awards voting rights accrue dividends forfeited vesting occur intrinsic value restricted shares typically product share price date grant number restricted shares granted amortized straightline basis compensation expense periods restrictions lapse based expected number shares vest forfeiture rate based unvested restricted shares forfeited compared original total restricted shares granted 4year period excluding significant forfeiture events expected recur earnings per share use twoclass method calculating earnings per share eps determines earnings per share class common stock participating security earnings period distributed unvested restricted share awards earn nonforfeitable dividend rights qualify participating securities accordingly included basic computation unvested restricted shares participate equal basis common shares therefore difference undistributed earnings allocated participating security accordingly presentation prepared combined basis presented earnings per common share following reconciliation net earnings flowserve corporation weighted average shares calculating basic net earnings per common share earnings per weighted average common share outstanding calculated follows diluted earnings per share based upon weighted average number shares determined basic earnings per share plus shares potentially issuable conjunction stock options restricted share units performance share units research development expense research development costs charged expense incurred aggregate research development costs included selling general administrative expenses sga 409 million 378 million 389 million 2014 2013 2012 respectively costs incurred research development primarily include salaries benefits consumable supplies well rent professional fees utilities depreciation property equipment used research development activities accounting developments pronouncements implemented february 2013 financial accounting standards board fasb issued accounting standards update asu 201304 liabilities topic 405 obligations resulting joint several liability arrangements total amount obligation fixed reporting date requires reporting entity jointly severally liable measure obligation sum amount entity agreed coobligors pay additional amount expects pay behalf one coobligors scope asu excludes obligations addressed existing guidance asu shall applied retrospectively arrangements existing beginning year adoption asu 201304 effective january 1 2014 impact consolidated financial condition results operations april 2013 fasb issued asu 201307 presentation financial statements topic 205 liquidation basis accounting requires entity prepare financial statements using liquidation basis accounting liquidation imminent liquidation imminent likelihood remote entity return liquidation either plan liquidation approved person persons authority make plan effective likelihood remote execution plan blocked parties b plan liquidation imposed forces example involuntary bankruptcy asu shall applied prospectively day liquidation becomes imminent adoption asu 201307 effective january 1 2014 impact consolidated financial condition results operations july 2013 fasb issued asu 201311 income taxes topic 740 presentation unrecognized tax benefit net operating loss carryforward similar tax loss tax credit carryforward exists provides guidance presentation unrecognized tax benefit net operating loss carryforward similar tax loss tax credit carryforward exists asu shall applied prospectively unrecognized tax benefits exist effective date adoption asu 201311 effective january 1 2014 impact consolidated financial condition results operations april 2014 fasb issued asu 201408 presentation financial statements topic 205 property plant equipment topic 360 reporting discontinued operations disclosures disposals components entity provides guidance requirements reporting discontinued operations discontinued operation may include component entity group components entity business nonprofit activity disposal component entity group components entity required reported discontinued operations disposal represents strategic shift major effect entity’s operations financial results component entity group components entity meets criteria classified held sale disposed sale disposed sale eg abandonment distribution owners spinoff asu also introduces new disclosure requirements discontinued operations asu shall applied prospectively disposals classifications held sale components entity b businesses nonprofit activities acquisition classified held sale occur effective date early adopted asu effective january 1 2014 impact consolidated financial condition results operations november 2014 fasb issued asu 201417 “business combinations topic 805 pushdown accounting” provides guidance pushdown accounting requirements whether threshold acquired entity option apply pushdown accounting standalone financial statements upon changeincontrol event based facts circumstances asu supersedes sec staff accounting bulletin topic 5j “new basis accounting required certain circumstances emerging issues task force topic nod97 pushdown accounting” adopted asu effective immediately impact consolidated financial condition results operations pronouncements yet implemented may 2014 fasb issued asu 201409 revenue contracts customers topic 606 supersedes revenue recognition requirements revenue recognition topic 605 standard principlebased provides fivestep model determine revenue recognized core principle company recognize revenue transfers promised goods services customers amount reflects consideration company expects entitled exchange goods services also expanded disclosure requirements asu public entities asu 201409 effective annual reporting periods beginning december 15 2016 including interim periods within reporting period allows either full retrospective adoption modified retrospective adoption currently evaluating impact asu 201409 consolidated financial condition results operations june 2014 fasb issued asu 201411 transfers servicing topic 860 repurchasetomaturity transactions repurchase financings disclosures asu changes accounting repurchasetomaturity transactions linked repurchase financings transactions accounted secured borrowings accounting change effective first interim annual period beginning december 15 2014 early adoption permitted also new disclosure requirements asu adoption asu 201411 material impact consolidated financial condition results operations june 2014 fasb issued asu 201412 compensationstock compensation topic 718 accounting sharebased payments terms award provide performance target could achieved requisite service period asu issued address sharebased payment awards performance target affecting vesting could achieved employee’s requisite service period asu effective annual periods interim periods within annual periods beginning december 15 2015 asu may applied either prospectively awards granted modified effective date b retrospectively awards performance targets outstanding beginning earliest annual period presented financial statements new modified awards thereafter adoption asu 201412 material impact consolidated financial condition results operations august 2014 fasb issued asu 201415 presentation financial statements going concern subtopic 20540 disclosure uncertainties entity’s ability continue going concern asu requires management evaluate whether conditions events raise substantial doubt ability company continue going concern one year date financial statements issued within one year date financial statements available issued applicable asu provides management guidance regarding responsibility disclose ability company continue going concern notes financial statements asu effective annual periods ending december 15 2016 interim periods thereafter early adoption permitted adoption asu 201415 impact consolidated financial condition results operations november 2014 fasb issued asu 201416 derivatives hedging topic 815 determining whether host contract hybrid financial instrument issued form share akin debt equity asu issued clarify reinforce practice evaluating relevant terms features reviewing nature host contract asu stipulates one term feature would define host contract’s economic characteristics risks result economic characteristics risks hybrid financial instrument whole would determine nature host contract asu effective fiscal years interim periods within fiscal years beginning december 15 2015 adoption asu 201416 impact consolidated financial condition results operations november 2014 fasb issued asu 201501 “income statementextraordinary unusual items subtopic 22520 simplifying income statement presentation eliminating concept extraordinary items” connection fasbs efforts simplify accounting standards fasb released new guidance simplifying income statement presentation eliminating concept extraordinary items us gaap issuance asu fasb determined elimination concept extraordinary items us gaap would reduce cost complexity application accounting standards maintaining improving usefulness information included financial statements adoption asu 201501 impact consolidated financial condition results operations 2 acquisitions disposition exit joint venture sihi group bv acquisition sihi group bv sihi january 7 2015 discussed note 21 naval oy effective march 31 2014 sold flow control divisions fcd naval oy naval business finnish valve manufacturer sale included navals manufacturing facility located laitila finland service support center located st petersburg russia cash proceeds sale totaled 468 million net cash divested resulted 134 million pretax gain recorded selling general administrative expense consolidated statements income net sales related naval business totaled 82 million first quarter 2014 innovative magdrive llc december 10 2013 acquired inclusion industrial product division ipd 100 innovative magdrive llc innomag privatelyowned usbased company specializing advanced sealless magnetic drive centrifugal pumps chemical general industries asset purchase 787 million cash total purchase price 675 million paid remaining 112 million total purchase price contingent upon innomag achieving certain performance metrics two fiveyear periods following acquisition extent achieved expected paid cash within four months performance measurement dates recorded liability 75 million estimate acquisition date fair value contingent consideration based weighted probability achievement performance metrics innomag generated approximately 17 million sales unaudited fiscal year ended december 31 2012 purchase price allocated assets acquired liabilities assumed based estimates fair values date acquisition summarized excess acquisition date fair value total purchase price estimated fair value net tangible intangible assets recorded goodwill represents value expected obtained ability competitive offering complete pump product portfolio leveraging current sales distribution service network goodwill related acquisition recorded ipd segment upon acquisition knowhow existing customer relationships represented approximately 7 million intangible assets acquired expected weighted average useful life ten years total amortizable intangible assets expected weighted average useful life ten years subsequent december 10 2013 revenues expenses innomag included consolidated statements income pro forma information provided due immateriality audco india limited effective march 28 2013 joint venture partner agreed exit joint venture audco india limited “ail” manufactures integrated industrial valves india effect exit two separate transactions flow control division fcd acquired 100 ownership ails plug valve manufacturing business asset purchase cash 101 million sold 50 equity interest ail joint venture partner 462 million cash remeasured fair value previously held equity interest purchased net assets plug valve manufacturing business resulting net assets acquired approximately 25 million pretax gain 153 million sale equity interest ail resulted pretax gain 130 million gains recorded net earnings affiliates consolidated statements income pro forma information provided due immateriality prior transactions 50 interest ail recorded using equity method accounting 3 goodwill intangible assets changes carrying amount goodwill years ended december 31 2014 2013 follows 1 goodwill primarily related acquisition innomag 2013 see note 2 additional information 2 goodwill disposition related sale naval 2014 see note 2 additional information following table provides information intangible assets years ended december 31 2014 2013 1 engineering drawings represent estimated fair value associated specific acquired product component schematics 2 existing customer relationships acquired prior 2011 useful life five years 3 accumulated amortization indefinitelived intangible assets relates amounts recorded prior implementation date guidance issued asc 350 following schedule outlines actual amortization expense recognized 2014 estimate future amortization based upon finitelived intangible assets owned december 31 2014 amortization expense finitelived intangible assets 128 million 2013 160 million 2012 4 inventories net consisted following 2014 2013 2012 recognized expenses 192 million 244 million 182 million respectively excess obsolete inventory expenses included cost sales cos consolidated statements income 5 stockbased compensation plans maintain flowserve corporation equity incentive compensation plan 2010 plan shareholderapproved plan authorizing issuance 8700000 shares common stock form incentive stock options nonstatutory stock options restricted shares restricted share units performancebased units collectively referred restricted shares stock appreciation rights bonus stock 8700000 shares common stock authorized 2010 plan 5085954 available issuance december 31 2014 flowserve corporation 2004 stock compensation plan expired june 22 2014 827835 shares unissued stock options granted since 2006 stock options granted officers employees directors allow purchase common shares market value stock date options granted options generally become exercisable staggered period ranging one five years typically one three years december 31 2014 outstanding options fully vested options generally expire 10 years date grant within short period time following termination employment cessation services option holder options granted 2014 2013 2012 information related stock options issued officers employees directors prior 2010 plans presented following table additional information relating ranges options outstanding december 31 2014 follows december 31 2014 unrecognized compensation cost related outstanding stock option awards weighted average remaining contractual life options outstanding december 31 2014 2013 18 years 28 years respectively total intrinsic value stock options exercised years ended december 31 2014 2013 2012 zero 08 million 07 million respectively stock options vested years ended december 31 2014 2013 2012 restricted shares generally restrictions restricted shares expire minimum one year maximum three years shares subject forfeiture restriction period typically restricted share grants staggered vesting periods one three years grant date intrinsic value restricted shares typically product share price date grant number restricted shares granted amortized straightline basis compensation expense periods restrictions lapse unearned compensation amortized compensation expense vesting period restricted shares december 31 2014 2013 306 million 315 million respectively unearned compensation cost related unvested restricted shares expected recognized weightedaverage period approximately one year amounts recognized net earnings prospective periods awards vest total fair value restricted shares vested years ended december 31 2014 2013 2012 348 million 349 million 364 million respectively recorded stockbased compensation restricted shares follows following table summarizes information regarding restricted shares unvested restricted shares outstanding december 31 2014 includes approximately 811000 units performancebased vesting provisions performancebased units issuable common stock vest upon achievement predefined performance targets primarily based average annual return net assets threeyear period compared measure defined peer group period units granted three annual grants since january 1 2012 vesting percentage 0 200 depending achievement specific performance targets compensation expense recognized ratably cliffvesting period 36 months based fair market value common stock date grant adjusted anticipated forfeitures performance period earned unearned compensation expense adjusted based changes expected achievement performance targets vesting provisions range 0 approximately 1580000 shares based performance targets december 31 2014 estimate vesting approximately 1244000 shares based expected achievement performance targets 6 derivatives hedging activities risk management foreign currency derivatives hedging policy specifies conditions may enter derivative contracts see note 1 additional information purpose entering derivatives overall risk management strategies enter foreign exchange forward swap contracts hedge cash flow risks associated transactions denominated currencies local currency operation engaging transaction designated foreign exchange hedging instruments highly effective 2013 elected designate apply hedge accounting certain forward exchange contracts foreign exchange contracts designated hedging instruments notional values 1259 million 62 million december 31 2014 2013 respectively foreign exchange contracts designated hedging instruments notional values 4211 million 6107 million december 31 2014 2013 respectively december 31 2014 length foreign exchange contracts currently place ranged 5 days 37 months also part risk management program enter interest rate swap agreements hedge exposure floating interest rates certain portions debt december 31 2014 2013 400 million 1400 million respectively notional amount outstanding designated interest rate swaps third parties interest rate swaps highly effective december 31 2014 maximum remaining length interest rate swap contract place approximately 6 months exposed risk creditrelated losses resulting nonperformance counterparties financial instruments perform credit evaluations counterparties forward exchange contracts interest rate swap agreements expect counterparties meet obligations experienced credit losses counterparties fair value foreign exchange derivative contracts designated hedging instruments summarized fair value interest rate swaps foreign exchange derivative contracts designated hedging instruments summarized current noncurrent derivative assets reported consolidated balance sheets prepaid expenses assets net respectively current noncurrent derivative liabilities reported consolidated balance sheets accrued liabilities retirement obligations liabilities respectively impact net changes fair values foreign exchange contracts summarized gains losses recognized consolidated statements income foreign exchange contracts classified income expense net impact net changes fair values interest rate swaps cash flow hedging relationships immaterial disclosure purposes 7 fair value financial instruments fair value debt excluding senior notes estimated using interest rates similar debt recently issued companies credit metrics similar classified level ii fair value hierarchy carrying value debt included note 10 except senior notes approximates fair value estimated fair value senior notes based level quoted market rates estimated fair value senior notes december 31 2014 8101 million compared carrying value 7972 million carrying amounts financial instruments ie cash equivalents accounts receivable net accounts payable approximated fair value due shortterm nature december 31 2014 december 31 2013 8 details certain consolidated balance sheet captions following tables present financial information certain consolidated balance sheet captions accounts receivable net accounts receivable net disclosed note 1 reclassified portion accounts receivable longterm within assets net december 31 2014 consolidated balance sheet property plant equipment net property plant equipment net accrued liabilities accrued liabilities accrued liabilities include professional fees lease obligations insurance interest freight restructuring charges accrued cash dividends payable legal environmental matters derivative liabilities items none individually exceed 5 current liabilities retirement obligations liabilities retirement obligations liabilities 9 equity method investments occasionally enter joint venture arrangements local country partners preferred means entry countries barriers entry may exist similar consolidated subsidiaries unconsolidated joint ventures generally operate within primary businesses designing manufacturing assembling distributing fluid motion control products services agreements certain joint ventures restrict us otherwise entering respective market certain joint ventures produce andor sell products part broader product offering net earnings investments unconsolidated joint ventures reported net earnings affiliates consolidated statements income given integrated role unconsolidated joint ventures business net earnings affiliates presented component operating income discussed note 2 effective march 28 2013 joint venture partner agreed exit ail joint venture prior exit 50 interest recorded using equity method accounting december 31 2014 investments seven joint ventures one located india japan saudi arabia south korea united arab emirates two located china accounted using equity method immaterial disclosure purposes 10 debt lease obligations debt including capital lease obligations consisted scheduled maturities senior credit facility described well senior notes debt senior notes november 1 2013 completed public offering 3000 million aggregate principal amount senior notes due november 15 2023 senior notes 2023 senior notes bear interest rate 400 per year payable may 15 november 15 year 2023 senior notes priced 99532 par value reflecting discount aggregate principal amount used portion net proceeds 2023 senior notes offering repay amounts outstanding revolving credit facility described used remaining portion net proceeds general corporate purposes including acquisition innomag described note 2 september 11 2012 completed public offering 5000 million aggregate principal amount senior notes due september 15 2022 senior notes 2022 senior notes bear interest rate 350 per year payable march 15 september 15 year 2022 senior notes priced 99615 par value reflecting discount aggregate principal amount right redeem 2022 senior notes 2023 senior notes time prior june 15 2022 august 15 2023 respectively whole part option redemption price equal greater 1 100 principal amount senior notes redeemed 2 sum present values remaining scheduled payments principal interest respect senior notes redeemed discounted redemption date semiannual basis applicable treasury rate plus 30 basis points 2022 senior notes plus 25 basis points 2023 senior notes addition time june 15 2022 senior notes august 15 2023 senior notes may redeem senior notes redemption price equal 100 principal amount senior notes redeemed case also pay accrued unpaid interest principal amount redeemed redemption date 2022 senior notes 2023 senior notes unsecured jointly severally fully unconditionally guaranteed certain 100 owned domestic subsidiaries guarantors senior credit facility described rank equally right payment senior unsecured indebtedness guarantees automatically unconditionally released discharged guarantor subsidiary sold sells assets requirement legal covenant defeasance discharge obligations satisfied upon delivery officers certificate trustee guarantor subsidiary guarantee obligations senior credit facility 2022 2023 senior notes rank equally right payment senior unsecured indebtedness senior credit facility october 4 2013 amended existing credit agreement provided initial 4000 million term loan “term loan facility” revolving credit facility “revolving credit facility” together term loan facility “senior credit facility” significant amendments extended maturity senior credit facility one year october 4 2018 increased revolving credit facility 8500 million 10 billion removed 3000 million sublimit issuance performance letters credit revolving credit facility retains 300 million sublimit swing line loans significant existing terms credit agreement remained unchanged december 31 2014 december 31 2013 amounts outstanding revolving credit facility outstanding letters credit 768 million 1061 million december 31 2014 december 31 2013 respectively reduced borrowing capacity 9232 million 8939 million respectively senior credit facility subject certain conditions right increase amount term loan facility revolving credit facility aggregate amount exceed 4000 million obligations senior credit facility guaranteed certain 100 owned domestic subsidiaries guarantees released achieve certain credit ratings achieved ratings december 31 2014 future borrowings revolving credit facility subject various conditions including absence default senior credit facility senior credit facility contains among things covenants defining subsidiaries ability dispose assets merge pay dividends repurchase redeem capital stock indebtedness incur indebtedness guarantees create liens enter agreements negative pledge clauses make certain investments acquisitions enter transactions affiliates engage business activity existing business senior credit facility limits us maximum permitted leverage ratio 325 times debt total consolidated ebitda defined senior credit facility requires minimum interest coverage 325 times consolidated ebitda total interest expense compliance financial covenants senior credit facility tested quarterly compliance covenants december 31 2014 repayment obligations may prepay loans senior credit facility whole part without premium penalty time commitment fee payable quarterly daily unused portions senior credit facility 0175 per annum december 31 2014 made scheduled principal repayments term loan facility 400 million 250 million 50 million 2014 2013 2012 respectively made scheduled principal payments 125 million prior credit agreement 2012 scheduled principal repayments 100 million due next three quarters 15 million fourth quarter 2015 term loan facility senior credit facility bears floating rate interest entered 400 million notional amount interest rate swaps december 31 2014 hedge exposure floating interest rates european letter credit facility due increased capacity removal performance letters credit sublimit amended revolving credit facility elected renew 364day unsecured committed €1250 million european letter credit facility european loc facility expired october 2013 however portion existing letters credit remain outstanding still bound facilitys covenants european loc facilitys covenants restrict ability certain foreign subsidiaries issue debt incur liens sell assets merge consolidate make certain investments pay dividends enter agreements negative pledge clauses engage business activity existing business european loc facility also incorporates reference covenants contained senior credit facility compliance covenants european loc facility december 31 2014 remaining outstanding letters credit mature next three years outstanding letters credit drawn european loc facility €63 million 76 million €696 million 954 million december 31 2014 2013 respectively operating leases noncancelable operating leases certain offices service quick response centers certain manufacturing operating facilities machinery equipment automobiles rental expense relating operating leases 562 million 623 million 636 million 2014 2013 2012 respectively future minimum lease payments due noncancelable operating leases amounts thousands 11 supplemental guarantor financial information senior notes fully unconditionally jointly severally guaranteed certain 100 owned domestic subsidiaries following condensed consolidating financial statements present financial position results operations cash flows flowserve corporation referred “parent” purpose note parent−only issuer basis combined guarantor subsidiaries guarantor−only basis combined nonguarantor subsidiaries nonguarantoronly basis elimination adjustments necessary arrive information parent guarantor subsidiaries nonguarantor subsidiaries condensed consolidated basis investments subsidiaries accounted using equity method presentation condensed consolidating balance sheets condensed consolidating statements income comprehensive income condensed consolidating statements cash flows 12 pension postretirement benefits sponsor several noncontributory defined benefit pension plans covering substantially us employees certain nonus employees provide benefits based years service age job grade levels type compensation retirement benefits covered employees provided contributory pension plans cash balance pension plans governmentsponsored retirement programs funded defined benefit pension plans receive funding based independent actuarial valuations provide current service amount sufficient amortize unfunded prior service periods exceed 30 years funding falling within legal limits prescribed prevailing regulation also maintain unfunded defined benefit plans permitted local regulations receive funding benefits become due defined benefit plan strategy ensure current future benefit obligations adequately funded costeffective manner additionally investing objective achieve highest level investment performance compatible risk tolerance prudent investment practices longterm nature defined benefit plan liabilities funding strategy based longterm perspective formulating implementing investment policies evaluating investment performance asset allocation defined benefit plans reflect decision proportion investment equity fixed income securities appropriate various subasset classes least annually complete comprehensive review asset allocation policy underlying assumptions includes longterm capital markets rate return assumptions risk tolerances relative defined benefit plan liabilities expected rates return defined benefit plan assets derived review asset allocation strategy expected longterm performance asset classes risks factors adjusted specific investment strategy rates impacted changes general market conditions longterm nature shortterm market changes significantly impact rates us defined benefit plan assets consist balanced portfolio primarily us equity fixed income securities nonus defined benefit plan assets include significant concentration united kingdom uk fixed income securities monitor investment allocations manage plan assets maintain acceptable levels risk addition certain defined benefit plans hold investments european equity fixed income securities periods presented used measurement date december 31 us nonus pension plans postretirement medical plans us defined benefit plans maintain qualified nonqualified defined benefit pension plans us qualified plan provides coverage substantially fulltime us employees receive benefits earnings threshold specified us department labor nonqualified plans primarily cover small number employees including current former members senior management providing benefit levels equivalent participants otherwise limited us department labor rules us plans designed operate cash balance arrangements employee option take lump sum payment end service total accumulated benefit obligation equivalent total projected benefit obligation benefit obligation following assumptions related us defined benefit pension plans december 31 2014 compared december 31 2013 decreased discount rate 450 400 based analysis publiclytraded investment grade us corporate bonds lower yield due current market conditions december 31 2014 compared december 31 2013 average assumed rate compensation increase remained constant 425 determining 2014 expense expected rate return us plan assets remained constant 600 primarily based target allocations expected longterm asset returns longterm rate return assumption calculated using quantitative approach utilizes unadjusted historical returns asset allocation inputs calculation us plans adopted rp2014 mortality tables mp2014 improvement scale published october 2014 applied rp2014 tables based constituency plan population union nonunion participants adjusted improvement scale utilize 75 ultimate improvement rate consistent assumptions adopted social security administration trustees based longterm historical experience currently believe approach provides best estimate future obligation plan participants elect receive plan benefits lump sum end service rather annuity updated mortality tables immaterial effect pension obligation net pension expense us defined benefit pension plans including qualified nonqualified plans estimated prior service cost estimated net loss us defined benefit pension plans amortized accumulated comprehensive loss pension expense 2015 05 million 90 million respectively amortize estimated prior service benefits estimated net losses remaining expected service period following summarizes net pension liability asset us plans following summarizes amounts recognized balance sheet us plans following summary changes us defined benefit plans’ pension obligations 1 2014 actuarial loss primarily reflects impact decrease discount rate following table summarizes expected cash benefit payments us defined benefit pension plans future amounts millions following table shows change accumulated comprehensive loss attributable components net cost change benefit obligations us plans net tax amounts recorded accumulated comprehensive loss consist following reconciliation us defined benefit pension plans’ assets contributed 207 million 242 million us defined benefit pension plans 2014 2013 respectively payments exceeded minimum funding requirements mandated us department labor rules estimated contribution 2015 expected approximately 20 million excluding direct benefits paid us defined benefit plan assets held qualified plan asset allocations qualified plan end 2014 2013 asset category follows 1 less 1 holdings category 2014 2013 none common stock directly held qualified plan investment strategy earn longterm rate return consistent acceptable degree risk minimize cash contributions life plan taking account liquidity needs plan preserve capital diversified investments high quality securities current allocation target invest approximately 50 plan assets equity securities 50 fixed income securities within investment category assets allocated various investment strategies professional money management firm manages assets engage consultant assist evaluating activities periodically review allocation target generally conjunction asset liability study consideration future cash flow needs regularly rebalance actual allocation target investment allocation plan assets invested commingled funds individual funds actively managed intent outperform specified benchmarks pension investment committee responsible setting investment strategy target asset allocation well selecting individual funds qualified plan approached fully funded status implemented liabilitydriven investing ldi strategy closely aligns duration assets duration liabilities ldi strategy results asset portfolio closely matches behavior liability thereby protecting funded status plan’s financial instruments shown presented fair value see note 1 discussion hierarchical levels fair values plan’s investments determined prior period information updated conform current year presentation fair values us defined benefit plan assets us large cap funds seek outperform russell 1000 r index investments large medium capitalization us companies represented russell 1000 r index composed largest 1000 us equities determined market capitalization b us small cap funds seek outperform russell 2000 r index investments medium small capitalization us companies represented russell 2000 r index composed smallest 2000 us equities determined market capitalization c international large cap funds seek outperform msci europe australia far east index investments developed nations world maintain high degree diversification among countries currencies emerging markets funds represent diversified portfolio seeks high longterm returns comparable investments emerging markets investing stocks newly developed emerging market economies e world equity funds seek outperform russell developed large cap index net full market cycle funds goal provide favorable total return relative benchmark primarily longterm capital appreciation f ldi funds seek outperform barclaysrussell ldi index investing high quality mostly corporate bonds fixed income securities closely match found discount curves used value plans liabilities g longterm governmentcredit funds seek outperform barclays capital us longterm governmentcredit index generating excess return variety diversified strategies securities longer durations sector rotation security selection tactical use highyield bonds nonus defined benefit plans maintain defined benefit pension plans cover employees following countries austria france germany india indonesia italy japan mexico netherlands sweden uk assets uk two plans netherlands one plan represent 97 total nonus plan assets nonus assets details countries’ plan assets provided due immateriality following assumptions related nonus defined benefit pension plans december 31 2014 compared december 31 2013 decreased average discount rate nonus plans 422 340 based analysis bonds publiclytraded instruments country lower yields due market conditions determine 2014 pension expense increased average expected rate return plan assets slightly 549 december 31 2013 551 december 31 2014 primarily due asset returns greater expected year expected rate return plan assets longterm nature shortterm market changes significantly impact rate many nonus defined benefit plans unfunded permitted local regulation expected longterm rate return assets funded plans determined assessing rates return asset class calculated using quantitative approach utilizes unadjusted historical returns asset allocation inputs calculation work actuaries determine reasonableness longterm rate return assumptions looking several factors including historical returns expected future returns asset allocation risks asset class items net pension expense nonus defined benefit pension plans estimated prior service cost estimated net loss nonus defined benefit pension plans amortized accumulated comprehensive loss pension expense 2015 01 million 53 million respectively amortize estimated net losses remaining expected service period remaining expected lifetime inactive participants plans inactive participants following summarizes net pension liability nonus plans following summarizes amounts recognized balance sheet nonus plans following reconciliation nonus plans’ defined benefit pension obligations 1 2014 actuarial losses primarily reflect impact decrease discount rates countries except venezuela 2 currency translation impact reflects strengthening us dollar significant currencies primarily euro british pound following table summarizes expected cash benefit payments nonus defined benefit plans future amounts millions following table shows change accumulated comprehensive loss attributable components net cost change benefit obligations nonus plans net tax amounts recorded accumulated comprehensive loss consist following reconciliation nonus plans’ defined benefit pension assets contributions nonus defined benefit pension plans 2015 expected approximately 12 million excluding direct benefits paid asset allocations nonus defined benefit pension plans end 2014 2013 follows none common stock held directly plans cases investment strategy plans earn longterm rate return consistent acceptable degree risk minimize cash contributions life plan taking account liquidity needs plan legal requirements particular country preserve capital diversified investments high quality securities asset allocation differs plan based upon plan’s benefit obligation participants well results asset liability studies conducted plan consideration future cash flow needs professional money management firms manage plan assets engage consultants uk netherlands assist evaluation activities assets uk plans overseen group trustees review investment strategy asset allocation fund selection assets passively managed invested index funds attempt match performance specified benchmark index assets netherlands plan independently managed outside service provider fair values nonus assets north american companies represents us canadian large cap equity index funds passively managed track respective benchmarks ftse allworld usa index ftse allworld canada index b uk companies represents uk equity index fund passively managed tracks ftse allshare index c european companies represents european equity index fund passively managed tracks ftse allworld developed europe exuk index asian pacific companies represents japanese pacific rim equity index funds passively managed track respective benchmarks ftse allworld japan index ftse allworld developed asia pacific exjapan index e global equity represents actively managed global equity funds taking topdown strategic view different regions analyzing companies based fundamentals marketdriven thematic quantitative factors generate alpha f uk government gilt index represents uk government issued fixed income investments passively managed track respective benchmarks ftse uk gilt indexlinked 5 years index ftse uk gilt 15 years index ftse uk gilt indexlinked 25 years index g uk corporate bond index represents uk corporate bond investments passively managed track iboxx 15 years £ nongilt index h global fixed income bond represents mostly european fixed income investment funds actively managed diversified primarily invested traditional government bonds highquality corporate bonds asset backed securities emerging market debt high yield corporate bonds includes assets held plans outside uk netherlands details including level iii rollforward details provided due immateriality defined benefit pension plans accumulated benefit obligations excess plan assets following summarizes key pension plan information regarding us nonus plans whose accumulated benefit obligations exceed fair value respective plan assets increase 2014 primarily due inclusion us qualified plan net liability position december 31 2014 postretirement medical plans sponsor several defined benefit postretirement medical plans covering certain current retirees limited number future retirees us plans provide medical dental benefits administered insurance companies health maintenance organizations plans include participant contributions deductibles coinsurance provisions limitations integrated medicare group plans fund plans benefits health maintenance organization premiums paid plans hold assets period presented accordingly investment strategy targeted allocations plan assets benefits postretirement medical plans available new employees existing employees following assumptions related postretirement benefits assumed ranges annual rates increase medical costs used determine net expense 75 2014 2013 80 2012 gradual decrease 50 2025 future years net postretirement benefit income postretirement medical plans estimated prior service cost expected amortized accumulated comprehensive loss us pension expense 2015 02 million estimated net gain postretirement medical plans amortized accumulated comprehensive loss us expense 2015 06 million following summarizes accrued postretirement benefits liability postretirement medical plans following summarizes amounts recognized balance sheet postretirement benefit obligation following reconciliation postretirement benefit obligation following presents expected benefit payments future periods amounts millions following table shows change accumulated comprehensive loss attributable components net cost change benefit obligations postretirement benefits net tax amounts recorded accumulated comprehensive loss consist made contributions postretirement medical plans pay benefits 38 million 2014 37 million 2013 38 million 2012 postretirement medical plans unfunded make contributions covered individuals’ claims approved payment accordingly contributions period directly correlated benefits paid assumed health care cost trend rates effect amounts reported postretirement medical plans onepercentage point change assumed health care cost trend rates would following effect 2014 reported amounts thousands defined contribution plans sponsor several defined contribution plans covering substantially us canadian employees certain nonus employees may contribute plans contributions matched varying amounts us including opportunities discretionary matching contributions us defined contribution plan expense 204 million 2014 200 million 2013 193 million 2012 effective january 1 2013 common stock longer investment option prior 2013 participants us defined contribution plan option invest common stock therefore plan assets prior 2013 included holdings common stock participants existing holdings stock effective date able maintain holdings time reallocated within plan participant taken distribution participant 13 legal matters contingencies asbestosrelated claims defendant substantial number lawsuits seek recover damages personal injury allegedly caused exposure asbestoscontaining products manufactured andor distributed heritage companies past overall number asbestosrelated claims generally declined recent years assurance trend continue average cost per claim increase asbestoscontaining materials incorporated products encapsulated used internal components process equipment believe significant emission asbestos fibers occurred use equipment practice vigorously contest resolve claims successful resolving majority claims little payment historically high percentage resolved claims covered applicable insurance indemnities companies believe substantial majority existing claims continue covered insurance indemnities accordingly recorded liability estimate likely settlement asserted claims related receivable insurers companies estimated recovery extent believe amounts recovery probable otherwise dispute unfavorable rulings judgments settlement terms regarding claims could material adverse impact business financial condition results operations cash flows currently believe likelihood remote additionally claims pending certain insurers resolved favorably reflected recorded receivables would result discrete gains applicable quarter currently unable estimate impact unasserted asbestosrelated claims although future claims would also subject existing indemnities insurance coverage united nations oilforfood program mid2006 french authorities began investigation 170 french companies one french subsidiaries included concerning suspected inappropriate activities conducted connection united nations oil food program previously disclosed french investigation french subsidiary formally opened first quarter 2010 french subsidiary filed formal response french court july 2012 french court ruled procedural motions challenge constitutionality charges quash indictment french court currently proceeding formal review process hearings expected occur marchapril 2015 currently expect incur additional case resolution costs material amount matter however french authorities ultimately take enforcement action french subsidiary regarding investigation may subject monetary nonmonetary penalties currently believe material adverse financial impact company addition governmental investigation referenced june 27 2008 republic iraq filed civil suit federal court new york 93 participants united nations oilforfood program including us two foreign subsidiaries participated program material developments case since initially filed intend vigorously contest suit believe valid defenses claims asserted cannot predict outcome suit present time currently believe resolution suit material adverse financial impact company currently involved potentially responsible party five former public waste disposal sites various stages evaluation remediation projected cost remediation sites well alleged fair share allocation remain uncertain studies completed parties either negotiated amicable resolution matter judicially resolved site many parties similarly identified many parties identified financially strong solvent companies appear able pay share remediation costs based information waste disposal practices sites environmental regulatory process general believe likely ultimate remediation liability costs site apportioned among liable parties including site owners waste transporters according volumes andor toxicity wastes shown disposed sites believe financial exposure existing disposal sites materially excess accrued reserves also defendant number lawsuits including product liability claims insured subject applicable deductibles arising ordinary course business also involved uninsured routine litigation incidental business currently believe none litigation either individually aggregate material business operations overall financial condition however litigation inherently unpredictable resolutions dispositions claims lawsuits settlement otherwise could adverse impact financial position results operations cash flows reporting period resolution disposition occurs although none aforementioned potential liabilities quantified absolute certainty except otherwise indicated established reserves covering exposures relating contingencies extent believed reasonably estimable probable based past experience available facts additional exposures beyond reserves could exist currently cannot estimated continue evaluate update reserves necessary appropriate 14 warranty reserve recorded reserves product warranty claims included current liabilities following summary activity warranty reserve 15 shareholders’ equity stock split may 23 2013 certificate incorporation amended increase number authorized shares common stock 1200 million 3050 million enable threeforone stock split approved board directors february 7 2013 form 200 common stock dividend record date stock split june 7 2013 additional shares distributed june 21 2013 result threeforone stock split 117861772 shares common stock issued par value common stock remained unchanged 125 per share required 1473 million retrospectively reclassified capital excess par value common shares within shareholders equity section consolidated balance sheets shareholders equity share data including treasury shares stockbased compensation award shares per share data presented herein retrospectively adjusted reflect impact increase authorized shares stock split appropriate dividends february 16 2015 board directors authorized increase payment quarterly dividends common stock 016 per share 018 per share payable beginning april 10 2015 february 17 2014 board directors authorized increase payment quarterly dividends common stock 014 per share 016 per share payable beginning april 11 2014 february 19 2013 board directors authorized increase payment quarterly dividends common stock 012 per share 014 per share payable beginning april 12 2013 generally dividend dateofrecord last month quarter dividend paid following month subsequent dividends reviewed board directors declared discretion dependent assessment financial situation business outlook applicable time share repurchase program may 31 2012 announced board directors endorsed capital structure strategy expanded share repurchase program 10 billion february 19 2013 board directors approved 7500 million share repurchase authorization november 13 2014 board directors approved 5000 million share repurchase authorization included approximately 175 million remaining capacity prior 7500 million share repurchase authorization share repurchase program expiration date reserve right limit terminate repurchase program anytime without notice part 10 billion share repurchase program june 14 2012 entered accelerated share repurchase program “asr program” jp morgan securities llc agent jpmorgan chase bank na london branch agreed repurchase aggregate 3000 million common stock total 7243191 shares repurchased asr program based volumeweighted average price 4231 average common stock price repurchase period less agreed upon discount repurchased 3420656 8142723 18638340 shares 2465 million 4583 million 7719 million 2014 2013 2012 respectively december 31 2014 4644 million remaining capacity current share repurchase program 16 income taxes provision income taxes consists following expected cash payments current income tax expense 2014 2013 2012 reduced 86 million 101 million 110 million respectively result tax deductions related vesting restricted stock exercise nonqualified employee stock options income tax benefit resulting stockbased compensation plans increased capital excess par value provision income taxes differs statutory corporate rate due following 2014 2013 2012 effective tax rates differed federal statutory rate 35 primarily due net impact foreign operations included impacts lower foreign tax rates changes reserves established uncertain tax positions assert permanent reinvestment majority invested capital unremitted foreign earnings foreign subsidiaries however assert permanent reinvestment limited number foreign subsidiaries future distributions may occur cumulative amount undistributed earnings considered permanently reinvested 17 billion permanently reinvested earnings repatriated future period form dividends otherwise provision income taxes may increase materially period quantification deferred tax liability associated indefinitely reinvested differences practicable due complexities hypothetical calculation three years reported period ended december 31 2014 recognized net deferred tax assets attributable excess foreign tax credits unremitted earnings foreign currency translation adjustments foreign subsidiaries excess financial reporting basis subsidiaries permanent reinvestment asserted cash deemed dividend distributions resulted recognition 69 million income tax benefit 2014 50 million 23 million income tax expense 2013 2012 respectively recorded benefit excess foreign tax credits associated deemed repatriation unremitted earnings credits available offset liability associated dividends deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes significant components consolidated deferred tax assets liabilities 1380 million us foreign net operating loss carryforwards december 31 2014 total 352 million state net operating losses net operating losses generated us unused expire 2015 2027 majority nonus net operating losses carry forward without expiration additionally 297 million foreign tax credit carryforwards december 31 2014 expiring 2020 2023 valuation allowance 06 million recorded earnings income taxes comprised tabular reconciliation total gross amount unrecognized tax benefits excluding interest penalties follows millions amount gross unrecognized tax benefits december 31 2014 662 million includes 147 million accrued interest penalties amount 533 million recognized would favorably impact effective tax rate years ended december 31 2014 2013 2012 recognized net interest penalty income 15 million 24 million 29 million respectively consolidated statements income limited exception longer subject us federal income tax audits years 2012 state local income tax audits years 2009 nonus income tax audits years 2007 currently examination various years austria germany india italy singapore us venezuela reasonably possible within next 12 months effective tax rate impacted resolution matters audited various taxing authorities also reasonably possible statute limitations close various taxing jurisdictions within next 12 months estimate could record reduction tax expense approximately 12 million within next 12 months 17 business segment information business segments share focus industrial flow control technology high number common customers segments also complementary product offerings technologies often combined applications provide us net competitive advantage segments also benefit global footprint economies scale reducing administrative overhead costs serve customers cost effectively conduct operations three business segments based type product manage business • epd long lead time custom highlyengineered pumps pump systems mechanical seals auxiliary systems replacement parts related services • ipd engineered preconfigured industrial pumps pump systems related products services • fcd engineered industrial valves control valves actuators controls related services decisionmaking purposes chief executive officer ceo members senior executive management use financial information generated reported reportable segment level corporate headquarters constitute separate division business segment january 11 2012 new unified operational leadership structure announced resulting creation chief operating officer position creation position impact defined three business segments assessment ceo chief operating decision maker evaluate segment performance allocate resources based reportable segment’s operating income amounts classified eliminations include corporate headquarters costs minor entities constitute separate segments intersegment sales transfers recorded cost plus profit margin sales related margin sales eliminated consolidation following summary financial information reportable segments years ended december 31 2014 2013 2012 reconciled amounts reported consolidated financial statements geographic information attribute sales different geographic areas based facilities’ locations longlived assets classified based geographic area assets located exclude deferred taxes goodwill intangible assets prior period information updated conform current year presentation sales longlived assets geographic area follows 1 ema includes europe middle east africa individual country within group represents 10 consolidated totals period presented 2 asia includes asia australia individual country within group represents 10 consolidated totals period presented 3 includes canada latin america individual country within group represents 10 consolidated totals period presented net sales international customers including export sales us represented approximately 68 total sales 2014 71 2013 2012 major customer information large number customers across large number manufacturing service facilities believe sales individual customer represent 10 consolidated sales years presented 18 accumulated comprehensive loss following presents components accumulated comprehensive loss aocl net related tax effects 1 includes foreign currency translation adjustments attributable noncontrolling interests 13 million december 31 2014 12 million december 31 2013 2012 foreign currency translation impact primarily represents weakening euro exchange rate versus us dollar period following table presents reclassifications aocl 1 amounts parentheses indicate decreases income none reclassification amounts noncontrolling interest component 2 accumulated comprehensive loss components included computation net periodic pension cost see note 12 additional details december 31 2014 expect recognize losses 38 million net deferred taxes earnings next twelve months related designated cash flow hedges based fair values december 31 2014 19 quarterly financial data unaudited following presents summary unaudited quarterly data 2014 2013 amounts millions except per share data 1 earnings per share computed independently quarters presented sum quarters may equal total year amount due impact changes weighted average quarterly shares outstanding significant pretax fourth quarter adjustment 2013 record 107 million charges related realignment program see note 20 additional information realignment program 20 2013 realignment program fourth quarter 2013 initiated realignment program reduce optimize certain nonstrategic qrc manufacturing facilities overall cost structure 2013 realignment program expect total 2013 realignment program charges 158 million approved plans 124 million incurred december 31 2014 realignment charges net adjustments 16 million 107 million years ended december 31 2014 2013 respectively majority charges restructuring nature realignment program consists restructuring nonrestructuring charges restructuring charges represent costs associated relocation reorganization certain business activities facility closures primarily represent employee severance nonrestructuring charges costs incurred improve operating efficiency reduce redundancies primarily represent employee severance expenses reported cos sga applicable consolidated statements income generally aforementioned charges paid cash except asset writedowns noncash charges restructuring reserve related 2013 realignment program 11 million 63 million december 31 2014 2013 respectively 21 subsequent event january 7 2015 acquired inclusion ipd 100 sihi global provider engineered vacuum fluid pumps related services cash 3650 million acquisition funded using approximately 110 million available cash approximately 255 million borrowings revolving credit facility anticipate incurring longerterm indebtness first quarter 2015 repay borrowings revolving credit facility due size scope timing acquisition preliminary purchase price allocation available time filing annual report form 10k sihi based netherlands operations primarily europe lesser extent americas asia sihis 2014 sales unaudited approximately €270 million sihi expected strengthen flowserve’s extensive portfolio products services addition engineered vacuum fluid pumps well associated aftermarket services parts sihi’s offerings primarily serve chemical market well pharmaceutical food beverage process industries sihi’s existing installed base leading position supplier vacuum fluid pumps complement chemical industry strategy acquisition provides flowserve additional engineering manufacturing experience opportunity leverage global platform deliver combined financial synergies item 9item 8 financial statements supplementary data report independent registered public accounting firm board directors shareholders flowserve corporation opinion consolidated financial statements listed index appearing item 15a1 present fairly material respects financial position flowserve corporation subsidiaries december 31 2015 2014 results operations cash flows three years period ended december 31 2015 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed index appearing item 15a2 presents fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintained material respects effective internal control financial reporting december 31 2015 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission coso companys management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report internal control financial reporting responsibility express opinions financial statements financial statement schedule companys internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate described management’s report internal control financial reporting management excluded sihi group bv “sihi” assessment internal control financial reporting december 31 2015 acquired company january 7 2015 also excluded sihi audit internal control financial reporting sihi wholly owned subsidiary whose total assets sales represent approximately 10 6 respectively related consolidated financial statement amounts year ended december 31 2015 flowserve corporation consolidated balance sheets see accompanying notes consolidated financial statements flowserve corporation consolidated statements income see accompanying notes consolidated financial statements flowserve corporation consolidated statements comprehensive income see accompanying notes consolidated financial statements flowserve corporation consolidated statements shareholders’ equity flowserve corporation consolidated statements cash flows flowserve corporation notes consolidated financial statements december 31 2015 2014 three years ended december 31 2015 1 significant accounting policies accounting developments principally engaged worldwide design manufacture distribution service industrial flow management equipment provide long lead time custom highlyengineered pumps standardized generalpurpose pumps mechanical seals industrial valves related automation products solutions primarily oil gas chemical power generation water management general industries requiring flow management products services equipment manufactured serviced us predominantly used industries deal difficulttohandle corrosive fluids well environments extreme temperatures pressure horsepower speed business affected economic conditions united states us countries products sold serviced cyclical nature competitive environment industries served relationship us dollar currencies demand pricing customers’ end products stock split june 7 2013 recorded threeforone stock split shareholders equity share data including treasury shares stockbased compensation award shares per share data presented herein retrospectively adjusted reflect impact increase authorized shares stock split appropriate details stock split included note 14 venezuela operations venezuela primarily consist service center performs service repair activities venezuelan subsidiarys sales year ending december 31 2015 total assets december 31 2015 represented less 05 consolidated sales total assets periods assets primarily consisted united states us dollardenominated monetary assets bolivardenominated nonmonetary assets december 31 2015 addition certain operations countries sell equipment parts typically denominated us dollars directly venezuelan customers experienced delays collecting payment accounts receivable national oil company venezuela primary venezuelan customer accounts receivable primarily us dollardenominated disputed historically written accounts receivable customer total outstanding accounts receivable customer approximately 7 9 gross accounts receivable december 31 2015 2014 respectively given experienced delays collecting payments estimate approximately 64 outstanding accounts receivable likely collected within one year therefore classified longterm within assets net december 31 2015 consolidated balance sheet december 31 2014 approximately 48 classified longterm effective february 13 2013 venezuelan government devalued official exchange rate 43 63 bolivars us dollar result devaluation recognized loss 40 million first quarter 2013 loss reported expense net consolidated statements income resulted tax benefit march 2015 determined based specific facts circumstances simadi exchange rate appropriate remeasurement venezuelan subsidiarys bolivardenominated net monetary assets us dollars result remeasurement first quarter 2015 recognized loss 206 million 185 million reported expense income net 21 million cost goods sold consolidated statement income resulted tax benefit december 31 2015 believe simadi exchange rate continues appropriate rate remeasure us dollar value assets liabilities results operations venezuelan subsidiary december 31 2015 simadi exchange rate 1987 bolivars us dollar compared official exchange rate 63 bolivars us dollar continuing assess monitor ongoing impact changes venezuelan foreign exchange market venezuelan operations imports market including venezuelan subsidiarys ability remit cash dividends payments simadi exchange rate well additional government actions political labor unrest economic conditions including venezuelan governments fiscal obligations may adversely impact future consolidated financial condition results operations principles consolidation consolidated financial statements include accounts company wholly majorityowned subsidiaries addition would consolidate variable interest entities deemed primary beneficiary noncontrolling interests nonaffiliated parties recognized majorityowned consolidated subsidiaries intercompany profitslosses transactions balances among consolidated entities eliminated consolidated financial statements investments unconsolidated affiliated companies represent noncontrolling ownership interests 20 50 accounted using equity method approximates equity interest underlying equivalent net book value accounting principles generally accepted us gaap investments interests less 20 investee accounted cost method whereby income recognized event dividend receipt investments accounted cost method tested impairment indicator present use estimates process preparing financial statements conformity us gaap requires us make estimates assumptions affect reported amounts certain assets liabilities revenues expenses believe estimates assumptions reasonable however actual results may differ materially estimates significant estimates assumptions used determining • timing amount revenue recognition • deferred taxes tax valuation allowances tax reserves • reserves contingent loss • pension postretirement benefits • valuation goodwill indefinitelived intangible assets longlived assets revenue recognition revenues product sales recognized risks rewards ownership transferred customers typically based contractual delivery terms agreed customer fulfillment inconsequential perfunctory actions addition policy requires persuasive evidence arrangement fixed determinable sales price reasonable assurance collectibility defer recognition revenue advance payments received customers performance obligations completed andor services performed freight charges billed customers included sales related shipping costs included cost sales consolidated statements income contracts typically include cancellation provisions require customers reimburse us costs incurred date cancellation well contractual cancellation penalties enter certain agreements multiple deliverables may include combination designing developing manufacturing modifying installing commissioning flow management equipment providing services related performance products delivery products services typically occurs within one twoyear period although many arrangements shortcycle type orders shorter timeframe delivery separate deliverables units accounting based whether deliverables standalone value customer impact general rights return immaterial contract value allocated ratably units accounting arrangement based relative selling prices determined deliverables sold separately revenues longterm contracts exceed certain internal thresholds regarding size duration project provide receipt progress billings customer recorded percentage completion method progress measured costtocost basis percentage completion revenue represents less 7 consolidated sales year presented revenue service repair contracts recognized services agreed customer rendered revenues generated fixed fee service repair contracts recognized ratable basis term contract contracts range duration generally extend five years fixed fee service contracts represent approximately 1 consolidated sales year presented certain instances provide guaranteed completion dates terms contracts failure meet contractual delivery dates result late delivery penalties nonrecoverable costs instances payment costs deemed probable perform project profitability analysis accounting costs reduction realizable revenues could potentially cause estimated total project costs exceed projected total revenues realized project instances would record reserves cover excesses period determined circumstances total projected revenues still exceed total projected costs incurrence penalties nonrecoverable costs generally reduces profitability project time subsequent revenue recognition cash equivalents place temporary cash investments financial institutions policy invest institutions instruments minimal credit risk market risk investments original maturity three months less purchased classified cash equivalents highly liquid principal values subject significant risk change due interest rate fluctuations allowance doubtful accounts credit risk allowance doubtful accounts established based estimates amount uncollectible accounts receivable determined principally based upon aging accounts receivable also customer credit history industry market segment information economic trends conditions credit reports customer credit issues customer bankruptcies general economic conditions may also impact estimates credit risks mitigated diversity customer base across many different geographic regions industries performing creditworthiness analyses customers additionally mitigate credit risk letters credit advance payments received customers december 31 2015 although experienced increased aging slower collection receivables primary venezuelan customer believe significant concentrations credit risk inventories related reserves inventories stated lower cost market cost determined firstin firstout method reserves excess obsolete inventories based upon assessment market conditions products determined historical usage estimated future demand due long life cycles products carry spare parts inventories historically low usage rates provide reserves inventory based demonstrated usage aging criteria income taxes deferred taxes tax valuation allowances tax reserves account income taxes asset liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases operating loss tax credit carryforwards deferred tax assets liabilities calculated using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized period includes enactment date record valuation allowances reflect estimated amount deferred tax assets may realized based upon analysis existing deferred tax assets net operating losses tax credits jurisdiction expectations ability utilize tax attributes review past current estimated future taxable income establishment tax strategies provide deferred taxes temporary differences associated investment foreign subsidiaries financial reporting basis exceeds tax basis unless assert permanent reinvestment foreign jurisdictions financial reporting basis tax basis differences investments foreign subsidiaries consist unremitted earnings losses well foreign currency translation adjustments amount income taxes pay subject ongoing audits federal state foreign tax authorities often result proposed assessments establish reserves open tax years uncertain tax positions may subject challenge various tax authorities consolidated tax provision related accruals include impact reasonably estimable losses related interest penalties deemed appropriate recognize tax benefit uncertain tax position likely tax position sustained examination taxing authorities determination based technical merits position presumes uncertain tax position examined relevant taxing authority full knowledge relevant information tax benefits recognized financial statements position measured based largest benefit greater fifty percent likelihood realized upon ultimate settlement legal environmental contingencies legal environmental reserves recorded based upon casebycase analysis relevant facts circumstances assessment potential legal obligations costs amounts relating legal environmental liabilities recorded probable loss incurred loss estimable assessments legal environmental costs based information obtained independent inhouse experts loss experience similar situations estimates updated applicable new information regarding facts circumstances matter becomes available legal fees associated legal environmental liabilities expensed incurred estimates liabilities unsettled asbestosrelated claims based known claims experience preceding two years claims filed settled dismissed adjustments events deemed unusual unlikely recur included retirement obligations liabilities consolidated balance sheets substantial majority asbestosrelated claims covered insurance indemnities estimated indemnities receivables insurance carriers unsettled claims receivables settlements legal fees paid us asbestosrelated claims estimated using historical experience insurance recovery rates estimates future recoveries include estimates coverage financial viability insurance carriers estimated receivables included assets net consolidated balance sheets claims pending certain insurers resolved favorably estimated future recoveries would result discrete gains applicable quarter currently unable estimate impact unasserted asbestosrelated claims although future claims would also subject existing indemnities insurance coverage warranty accruals warranty obligations based upon product failure rates materials usage service delivery costs analysis identified expected claims estimate cost resolve claims estimates expected claims generally factor historical claims known product issues warranty obligations based factors adjusted based historical sales trends preceding 24 months insurance accruals insurance accruals recorded wholly partially selfinsured risks medical benefits workers’ compensation based upon analysis claim loss history insurance deductibles policy limits relevant factors updated annually included accrued liabilities consolidated balance sheets estimates based upon information received actuaries insurance company adjusters independent claims administrators independent sources receivables insurance carriers estimated using historical experience insurance recovery rates estimates future recoveries include estimates coverage financial viability insurance carriers estimated receivables included accounts receivable net assets net applicable consolidated balance sheets pension postretirement obligations determination pension postretirement benefits obligations based estimates made management consultation independent actuaries investment advisors inherent valuations assumptions including discount rates expected rates return plan assets retirement rates mortality rates compensation increase factors reviewed annually updated necessary current market conditions including changes rates return interest rates medical inflation rates considered selecting assumptions actuarial gains losses prior service costs recognized accumulated comprehensive loss arise amortize costs net pension expense remaining expected service period property plant equipment depreciation property plant equipment stated historical cost less accumulated depreciation asset retirement obligations exist capitalized part carrying amount asset depreciated remaining useful life asset useful lives leasehold improvements lesser remaining lease term useful life improvement assets retired otherwise disposed costs related accumulated depreciation removed accounts resulting gains losses included income operations period depreciation computed straightline method based estimated useful lives depreciable assets case assets capital leases related lease turn generally estimated useful lives assets costs related routine repairs maintenance expensed incurred internally developed software capitalize certain costs associated development internaluse software generally costs related significant software development projects amortized estimated useful life typically three five years upon implementation software intangible assets intangible assets excluding trademarks considered indefinite life consist primarily engineering drawings patents existing customer relationships software distribution networks items amortized estimated useful lives generally ranging four 40 years assets reviewed impairment whenever events circumstances indicate impairment may occurred valuation goodwill indefinitelived intangible assets longlived assets value goodwill indefinitelived intangible assets tested impairment december 31 year whenever events circumstances indicate assets may impaired identification reporting units began operating segment level considered whether components one level operating segment levels identified reporting units purpose testing goodwill impairment based certain conditions included among factors extent component represents business ii aggregation economically similar components within operating segments resulted seven reporting units factors considered determining whether aggregation components appropriate included similarity nature products services nature production processes methods distribution types industries served impairment loss goodwill recognized implied fair value goodwill less carrying value estimate fair value reporting units based income approach whereby calculate fair value reporting unit based present value estimated future cash flows discounted cash flow analysis requires us make various judgmental assumptions future sales operating margins growth rates discount rates based budgets business plans economic projections anticipated future cash flows market participants assumptions also made varying perpetual growth rates periods beyond longterm business plan period record impairment goodwill 2015 2014 2013 however estimated fair value engineered product operations epo reporting unit reduced significantly 2015 due broadbased capital spending declines heightened pricing pressure experienced oil gas markets anticipated continue near midterm epo reporting unit component epd reporting segment primarily focused long lead time custom highlyengineered pumps pump systems december 31 2015 epo reporting unit approximately 157 million goodwill estimated fair value exceeded carrying value approximately 70 key assumptions used determining estimated fair value epo reporting unit included annual operating plan forecasted operating results successful execution current realignment programs identified strategic initiatives constant cost capital shortterm stabilization mid longterm improvement macroeconomic conditions oil gas market relatively stable world gross domestic product although concluded impairment goodwill associated epo reporting unit december 31 2015 continue closely monitor performance related market conditions future indicators potential impairment reassess accordingly also consider market capitalization evaluation fair value goodwill market capitalization decreased compared 2014 however indicate potential impairment goodwill december 31 2015 impairment losses indefinitelived intangible assets recognized whenever estimated fair value less carrying value fair values calculated trademarks using relief royalty method estimates fair value trademark determining present value estimated royalty payments avoided result owning trademark method includes judgmental assumptions sales growth discount rates significant impact fair value substantially consistent assumptions used determine fair value reporting units discussed record material impairment trademarks 2015 2014 2013 recoverable value longlived assets including property plant equipment finitelived intangible assets reviewed indicators potential impairments present recoverable value based upon assessment estimated future cash flows related assets utilizing assumptions similar goodwill additional considerations related longlived assets include expected maintenance improvements changes expected uses ongoing operating performance utilization deferred loan costs deferred loan costs consisting fees expenses associated debt financing amortized term associated debt using effective interest method additional amortization recorded periods optional prepayments debt made fair values financial instruments financial instruments presented fair value consolidated balance sheets exception longterm debt fair value defined price would received sell asset paid transfer liability orderly transaction market participants measurement date available fair value based observable market prices parameters derived prices parameters observable prices inputs available valuation models may applied assets liabilities recorded fair value consolidated balance sheets categorized based upon level judgment associated inputs used measure fair values hierarchical levels defined accounting standards codification asc 820 fair value measurements disclosures directly related amount subjectivity associated inputs fair valuation assets liabilities asset liability’s categorization within fair value hierarchy based lowest level significant input valuation hierarchical levels follows level inputs unadjusted quoted prices active markets identical assets liabilities measurement date level ii inputs quoted prices included level either directly indirectly observable asset liability correlation market data measurement date duration instrument’s anticipated life level iii inputs reflect management’s best estimate market participants would use pricing asset liability measurement date consideration given risk inherent valuation technique risk inherent inputs model recurring fair value measurements limited investments derivative instruments certain equity securities fair value measurements derivative instruments determined using models maximize use observable market inputs including interest rate curves forward spot prices currencies classified level ii fair value hierarchy fair values derivative instruments included note 6 fair value measurements investments equity securities determined using quoted market prices classified level fair values investments equity securities changes thereto immaterial consolidated financial position results operations derivatives hedging activities foreign currency derivatives hedging policy outlining conditions enter financial derivative transactions use derivative instruments trading speculative purposes derivative instruments recognized balance sheet fair values accounting gains losses resulting changes fair value depends whether derivative designated qualifies hedge accounting foreign exchange contracts employ foreign currency economic hedging strategy mitigate certain financial risks resulting foreign currency exchange rate movements impact foreign currency denominated receivables payables firm committed transactions forecasted sales purchases 2013 began designate certain forward exchange contracts hedging instruments apply hedge accounting instruments designated forward exchange contracts changes fair value recorded comprehensive loss underlying hedged item affects earnings time change fair value recognized sales consolidated statements income nondesignated forward exchange contracts changes fair values recognized immediately expense income net consolidated statements income see note 6 discussion forward exchange contracts interest rate swaps enter interest rate swap agreements purpose hedging cash flow exposure floating interest rates certain portions debt changes fair value designated interest rate swap recorded comprehensive loss earnings affected underlying hedged item ineffective portion gain loss immediately recognized earnings upon settlement realized gains losses recognized interest expense consolidated statements income see note 6 discussion interest rate swaps discontinue hedge accounting 1 deem hedge ineffective determine designation derivative hedging instrument longer appropriate 2 derivative matures terminates sold 3 occurrence contracted committed transaction longer probable occur originally expected period hedge accounting discontinued derivative remains outstanding carry derivative estimated fair value balance sheet recognizing changes fair value current period earnings cash flow hedge becomes ineffective deferred gains losses remain accumulated comprehensive loss underlying hedged item recognized becomes probable hedged forecasted transaction occur deferred gains losses hedging instrument recognized earnings immediately exposed risk creditrelated losses resulting nonperformance counterparties financial instruments perform credit evaluations counterparties forward exchange contracts interest rate swap agreements expect counterparties meet obligations necessary would adjust values derivative contracts counterparties’ credit risks foreign currency translation assets liabilities foreign subsidiaries translated us dollars exchange rates prevailing balance sheet date income expenses translated average rates month translation gains losses reported component accumulated comprehensive loss transactional currency gains losses arising transactions currencies sites’ functional currencies included consolidated results operations transaction translation gains losses arising intercompany balances reported component accumulated comprehensive loss underlying transaction stems longterm equity investment debt designated due foreseeable future otherwise recognize transaction gains losses arising intercompany transactions component income intercompany balances longterm investment related designated due beyond foreseeable future may mitigate risk associated foreign currency fluctuations entering forward exchange contracts stockbased compensation stockbased compensation measured grantdate fair value exercise price stock option awards value restricted share restricted share unit performancebased unit awards collectively referred restricted shares set closing price common stock new york stock exchange date grant date grants authorized board directors restricted share units performancebased units refer restricted awards voting rights accrue dividends forfeited vesting occur intrinsic value restricted shares typically product share price date grant number restricted shares granted amortized straightline basis compensation expense periods restrictions lapse based expected number shares vest forfeiture rate based unvested restricted shares forfeited compared original total restricted shares granted 4year period excluding significant forfeiture events expected recur earnings per share use twoclass method calculating earnings per share eps determines earnings per share class common stock participating security earnings period distributed unvested restricted share awards earn nonforfeitable dividend rights qualify participating securities accordingly included basic computation unvested restricted shares participate equal basis common shares therefore difference undistributed earnings allocated participating security accordingly presentation prepared combined basis presented earnings per common share following reconciliation net earnings flowserve corporation weighted average shares calculating basic net earnings per common share earnings per weighted average common share outstanding calculated follows diluted earnings per share based upon weighted average number shares determined basic earnings per share plus shares potentially issuable conjunction stock options restricted share units performance share units research development expense research development costs charged expense incurred aggregate research development costs included selling general administrative expenses sga 459 million 409 million 378 million 2015 2014 2013 respectively costs incurred research development primarily include salaries benefits consumable supplies well rent professional fees utilities depreciation property equipment used research development activities accounting developments pronouncements implemented june 2014 financial accounting standards board fasb issued accounting standards update asu 201411 transfers servicing topic 860 repurchasetomaturity transactions repurchase financings disclosures asu changes accounting repurchasetomaturity transactions linked repurchase financings transactions accounted secured borrowings accounting change effective first interim annual period beginning december 15 2014 early adoption permitted also new disclosure requirements asu adoption asu 201411 january 1 2015 impact consolidated financial condition results operations april 2015 fasb issued asu 201505 intangibles goodwill otherinternaluse software subtopic 35040 customer’s accounting fees paid cloud computing arrangement asu provides explicit guidance customers accounting fees paid connection cloud computing arrangements asu 201505 effective periods beginning december 15 2015 early adoption permitted adopted amendments asu immediately impact consolidated financial condition results operations may 2015 fasb issued asu 201508 business combinations topic 805 pushdown accounting amendments sec paragraphs pursuant staff accounting bulletin 115 asu amends various us securities exchange commission sec paragraphs pursuant issuance staff accounting bulletin 115 amendments conform board’s guidance pushdown accounting sec adopted amendments asu immediately impact consolidated financial condition results operations september 2015 fasb issued asu 201516 business combinations topic 805 simplifying accounting measurementperiod adjustments asu eliminates requirement account business combination measurement period adjustments retrospectively measurement period adjustments recognized prospectively reporting period adjustment amount determined nature amount measurement period adjustments recognized reporting period must disclosed including value adjustment current period income statement line item relating income effects would recognized previous periods adjustment provisional amounts recognized acquisition date asu 201516 effective periods beginning december 15 2015 early adoption permitted adopted amendments asu immediately impact consolidated financial condition results operations pronouncements yet implemented may 2014 fasb issued asu 201409 revenue contracts customers topic 606 supersedes revenue recognition requirements revenue recognition topic 605 standard principlebased provides fivestep model determine revenue recognized core principle company recognize revenue transfers promised goods services customers amount reflects consideration company expects entitled exchange goods services also expanded disclosure requirements asu august 2015 fasb issued asu 201514 revenue contracts customers topic 606 deferral effective date result public entities apply new standard annual reporting periods beginning december 15 2017 including interim periods within reporting periods early adoption original public entity effective date permitted currently evaluating impact asu 201409 consolidated financial condition results operations june 2014 fasb issued asu 201412 compensationstock compensation topic 718 accounting sharebased payments terms award provide performance target could achieved requisite service period asu issued address sharebased payment awards performance target affecting vesting could achieved employee’s requisite service period asu effective annual periods interim periods within annual periods beginning december 15 2015 asu may applied either prospectively awards granted modified effective date b retrospectively awards performance targets outstanding beginning earliest annual period presented financial statements new modified awards thereafter adoption asu 201412 material impact consolidated financial condition results operations august 2014 fasb issued asu 201415 presentation financial statements going concern subtopic 20540 disclosure uncertainties entity’s ability continue going concern asu requires management evaluate whether conditions events raise substantial doubt ability company continue going concern one year date financial statements issued within one year date financial statements available issued applicable asu provides management guidance regarding responsibility disclose ability company continue going concern notes financial statements asu effective annual periods ending december 15 2016 interim periods thereafter early adoption permitted adoption asu 201415 impact consolidated financial condition results operations november 2014 fasb issued asu 201416 derivatives hedging topic 815 determining whether host contract hybrid financial instrument issued form share akin debt equity asu issued clarify reinforce practice evaluating relevant terms features reviewing nature host contract asu stipulates one term feature would define host contract’s economic characteristics risks result economic characteristics risks hybrid financial instrument whole would determine nature host contract asu effective fiscal years interim periods within fiscal years beginning december 15 2015 adoption asu 201416 impact consolidated financial condition results operations january 2015 fasb issued asu 201501 “income statementextraordinary unusual items subtopic 22520 simplifying income statement presentation eliminating concept extraordinary items” connection fasbs efforts simplify accounting standards fasb released new guidance simplifying income statement presentation eliminating concept extraordinary items us gaap issuance asu fasb determined elimination concept extraordinary items us gaap would reduce cost complexity application accounting standards maintaining improving usefulness information included financial statements asu effective fiscal years interim periods within fiscal years beginning december 15 2015 adoption asu 201501 impact consolidated financial condition results operations february 2015 fasb issued asu 201502 consolidation topic 810 amendments consolidation analysis” provides guidance analysis process companies must perform order determine whether legal entity consolidated new asu simplifies us gaap eliminating entity specific consolidation guidance limited partnerships also revises aspects consolidation analysis include ownership assessment variable interest entities vies fee arrangements related parties assessed amendments rescind indefinite deferral fasb statement 167 amendments fasb interpretation 46r certain investment funds replace permanent scope exception money market funds asu effective periods beginning december 15 2015 early adoption permitted including adoption interim period adoption asu 201502 impact consolidated financial condition results operations april 2015 fasb issued asu 201503 interest imputation interest subtopic 83530 simplifying presentation debt issuance costs” asu issued connection fasbs efforts simplify accounting standards presentation debt issuance costs amendments asu require companies present debt issuance costs manner present debt discounts currently reported direct deduction carrying value debt liability applicability requirement impact recognition measurement guidance debt issuance costs asu 201503 effective periods beginning december 15 2015 early adoption allowed financial statements yet issued adoption asu 201503 material impact consolidated financial condition results operations may 2015 fasb issued asu 201507 fair value measurement topic 820 disclosures investments certain entities calculate net asset value per share equivalent consensus emerging issues task force asu removes requirement categorize investments fair value measured using net asset value per share practical expedient within fair value hierarchy asu effective periods beginning december 15 2015 early adoption permitted adoption asu 201507 material impact consolidated financial condition results operations july 2015 fasb issued asu 201511 inventory topic 330 simplifying measurement inventory previous issuance asu asc 330 required entity measure inventory lower cost market asu 201511 specifies “market” defined “net realizable value” estimated selling price ordinary course business less reasonably predictable costs completion disposal transportation asu effective fiscal years interim periods within fiscal years beginning december 15 2016 application applied prospectively earlier application permitted beginning interim annual reporting period adoption asu 201511 material impact consolidated financial condition results operations august 2015 fasb issued asu 201515 interest imputation interest subtopic 83530 presentation subsequent measurement debt issuance costs associated lineofcredit arrangementsamendments sec paragraphs pursuant staff announcement june 18 2015 eitf meeting sec update asu clarifies sec staff’s position presenting measuring debt issuance costs incurred connection lineof credit arrangements sec staff announced would object entity deferring presenting debt issuance costs asset subsequently amortizing deferred debt issuance costs ratably term lineofcredit arrangement adoption asu 201515 material impact consolidated financial condition results operations november 2015 fasb issued asu 201517 balance sheet classification deferred taxes simplify presentation deferred income taxes amendments update require deferred tax liabilities assets classified noncurrent classified statement financial position update effective periods beginning december 15 2016 early application permitted adoption asu 201517 material impact consolidated financial condition results operations january 2016 fasb issued asu 201601 financial instruments overall subtopic 82510 recognition measurement financial assets financial liabilities asu requires entities measure equity investments result consolidation accounted equity method fair value changes fair value recognized net income asu also requires entity present separately comprehensive income portion total change fair value liability resulting change instrumentspecific credit risk entity elected measure liability fair value accordance fair value option financial instruments requirement disclose methods significant assumptions used estimate fair value financial instruments measured amortized cost balance sheet eliminated asu effective fiscal years beginning december 15 2017 including interim periods within fiscal years currently evaluating impact asu 201601 consolidated financial condition results operations 2 acquisitions disposition exit joint venture sihi group bv effective january 7 2015 acquired inclusion industrial product division ipd 100 sihi group bv sihi global provider engineered vacuum fluid pumps related services primarily servicing chemical market well pharmaceutical food beverage process industries stock purchase €2867 million 3415 million based exchange rates effect time acquisition closed net cash acquired cash acquisition funded using approximately 110 million available cash approximately 255 million initial borrowings revolving credit facility defined discussed note 10 subsequently paid portion net proceeds march 2015 offering 2022 eur senior notes defined discussed note 10 sihi based netherlands operations primarily europe lesser extent americas asia first quarter 2015 fair value assets acquired liabilities assumed recorded preliminary basis second quarter 2015 recorded measurement period adjustments primarily related revision estimated fair value investment unconsolidated joint venture reclassifications net impact goodwill adjustments made preliminary amounts recognized reflect new information obtained facts circumstances existed acquisition date known would affected measurements amounts recognized date material impact opening balance sheet measurement period adjustments identified third fourth quarters 2015 allocation purchase price including mentioned measurement period adjustments summarized excess acquisition date fair value total purchase price estimated fair value net assets recorded goodwill 2011 million represents value expected obtained strengthening portfolio products services addition sihis engineered vacuum fluid pumps well associated aftermarket services parts goodwill related acquisition recorded ipd segment expected deductible tax purposes trademarks primarily indefinitelived intangibles date acquisition existing customer relationships engineering drawings backlog expected weighted average useful lives 10 years 10 years less one year respectively total amortizable intangible assets weighted average useful live approximately 9 years subsequent january 7 2015 revenues expenses sihi included consolidated statement income sihi operations generated sales approximately 2942 million impacted net earnings loss 395 million year ended december 31 2015 sihis sales unaudited approximately €270 million fiscal year ended november 30 2014 proforma financial information presented due immateriality naval oy effective march 31 2014 sold flow control divisions fcd naval oy naval business finnish valve manufacturer sale included navals manufacturing facility located laitila finland service support center located st petersburg russia cash proceeds sale totaled 468 million net cash divested resulted 134 million pretax gain recorded selling general administrative expense consolidated statements income net sales related naval business totaled 82 million first quarter 2014 innovative magdrive llc december 10 2013 acquired inclusion industrial product division ipd 100 innovative magdrive llc innomag privatelyowned usbased company specializing advanced sealless magnetic drive centrifugal pumps chemical general industries asset purchase 787 million cash total purchase price 675 million paid remaining 112 million total purchase price contingent upon innomag achieving certain performance metrics two fiveyear periods following acquisition extent achieved expected paid cash within four months performance measurement dates initially recorded liability 75 million estimate acquisition date fair value contingent consideration based weighted probability achievement performance metrics fourth quarter 2015 estimated fair value contingent consideration reduced 07 million based 2015 results updated weighted probability achievement performance metrics within specified time frame resulting gain included sga consolidated statement income subsequent december 10 2013 revenues expenses innomag included consolidated statements income pro forma information provided due immateriality audco india limited effective march 28 2013 joint venture partner agreed exit joint venture audco india limited “ail” manufactures integrated industrial valves india effect exit two separate transactions flow control division fcd acquired 100 ownership ails plug valve manufacturing business asset purchase cash 101 million sold 50 equity interest ail joint venture partner 462 million cash remeasured fair value previously held equity interest purchased net assets plug valve manufacturing business resulting net assets acquired approximately 25 million pretax gain 153 million sale equity interest ail resulted pretax gain 130 million gains recorded net earnings affiliates consolidated statements income pro forma information provided due immateriality prior transactions 50 interest ail recorded using equity method accounting 3 goodwill intangible assets changes carrying amount goodwill years ended december 31 2015 2014 follows 1 goodwill disposition related sale naval 2014 see note 2 additional information 2 goodwill addition primarily related acquisition sihi see note 2 additional information 3 movement goodwill ipd epd due segment composition change see note 16 additional information following table provides information intangible assets years ended december 31 2015 2014 1 engineering drawings represent estimated fair value associated specific acquired product component schematics 2 existing customer relationships acquired prior 2011 useful life five years 3 accumulated amortization indefinitelived intangible assets relates amounts recorded prior implementation date guidance issued asc 350 following schedule outlines actual amortization expense recognized 2015 estimate future amortization based upon finitelived intangible assets owned december 31 2015 amortization expense finitelived intangible assets 140 million 2014 128 million 2013 4 inventories net consisted following 2015 2014 2013 recognized expenses 242 million 192 million 244 million respectively excess obsolete inventory expenses included cost sales cos consolidated statements income 5 stockbased compensation plans maintain flowserve corporation equity incentive compensation plan 2010 plan shareholderapproved plan authorizing issuance 8700000 shares common stock form incentive stock options nonstatutory stock options restricted shares restricted share units performancebased units collectively referred restricted shares stock appreciation rights bonus stock 8700000 shares common stock authorized 2010 plan 4172064 available issuance december 31 2015 flowserve corporation 2004 stock compensation plan expired june 22 2014 827835 shares unissued stock options granted since 2006 stock options granted officers employees directors allow purchase common shares market value stock date options granted options generally become exercisable staggered period ranging one five years typically one three years december 31 2015 outstanding options fully vested options generally expire 10 years date grant within short period time following termination employment cessation services option holder options granted 2015 2014 2013 information related stock options issued officers employees directors prior 2010 plans presented following table additional information relating ranges options outstanding december 31 2015 follows december 31 2015 unrecognized compensation cost related outstanding stock option awards weighted average remaining contractual life options outstanding december 31 2015 2014 one year 18 years respectively total intrinsic value stock options exercised years ended december 31 2015 2014 2013 less 1 million year stock options vested years ended december 31 2015 2014 2013 restricted shares generally restrictions restricted shares expire minimum one year maximum three years shares subject forfeiture restriction period typically restricted share grants staggered vesting periods one three years grant date intrinsic value restricted shares typically product share price date grant number restricted shares granted amortized straightline basis compensation expense periods restrictions lapse unearned compensation amortized compensation expense vesting period restricted shares december 31 2015 2014 302 million 306 million respectively unearned compensation cost related unvested restricted shares expected recognized weightedaverage period approximately one year amounts recognized net earnings prospective periods awards vest total fair value restricted shares vested years ended december 31 2015 2014 2013 413 million 348 million 349 million respectively recorded stockbased compensation restricted shares follows following table summarizes information regarding restricted shares unvested restricted shares outstanding december 31 2015 includes approximately 817000 units performancebased vesting provisions performancebased units issuable common stock vest upon achievement predefined performance targets primarily based average annual return net assets threeyear period compared measure defined peer group period units granted three annual grants since january 1 2013 vesting percentage 0 200 depending achievement specific performance targets compensation expense recognized ratably cliffvesting period 36 months based fair market value common stock date grant adjusted anticipated forfeitures performance period earned unearned compensation expense adjusted based changes expected achievement performance targets vesting provisions range 0 approximately 1491000 shares based performance targets december 31 2015 estimate vesting approximately 998000 shares based expected achievement performance targets 6 derivatives hedging activities risk management foreign currency derivatives hedging policy specifies conditions may enter derivative contracts see note 1 additional information purpose entering derivatives overall risk management strategies enter foreign exchange forward swap contracts hedge cash flow risks associated transactions denominated currencies local currency operation engaging transaction designated foreign exchange hedging instruments highly effective 2013 elected designate apply hedge accounting certain forward exchange contracts foreign exchange contracts designated hedging instruments notional values 210 million 1259 million december 31 2015 2014 respectively foreign exchange contracts designated hedging instruments notional values 3763 million 4211 million december 31 2015 2014 respectively december 31 2015 length foreign exchange contracts currently place ranged 6 days 25 months also part risk management program enter interest rate swap agreements hedge exposure floating interest rates certain portions debt december 31 2015 notional amounts outstanding interest rate swaps third parties compared 400 million december 31 2014 exposed risk creditrelated losses resulting nonperformance counterparties financial instruments perform credit evaluations counterparties forward exchange contracts interest rate swap agreements expect counterparties meet obligations experienced credit losses counterparties fair value foreign exchange derivative contracts designated hedging instruments summarized fair value interest rate swaps foreign exchange derivative contracts designated hedging instruments summarized current noncurrent derivative assets reported consolidated balance sheets prepaid expenses assets net respectively current noncurrent derivative liabilities reported consolidated balance sheets accrued liabilities retirement obligations liabilities respectively impact net changes fair values foreign exchange contracts summarized gains losses recognized consolidated statements income foreign exchange contracts classified expense income net impact net changes fair values interest rate swaps cash flow hedging relationships immaterial disclosure purposes march 2015 designated €2557 million €5000 million 2022 eur senior notes discussed note 10 net investment hedge investments certain international subsidiaries use euro functional currency used spot method measure effectiveness net investment hedge method reporting period change carrying value 2022 eur senior notes due remeasurement effective portion reported accumulated comprehensive loss consolidated balance sheet remaining change carrying value ineffective portion recognized expense net consolidated statements income evaluate effectiveness net investment hedge prospective basis beginning quarter record ineffectiveness year ended december 31 2015 7 fair value financial instruments fair value debt excluding senior notes described note 10 estimated using interest rates similar debt recently issued companies credit metrics similar classified level ii fair value hierarchy carrying value debt included note 10 except senior notes approximates fair value estimated fair value senior notes based level quoted market rates estimated fair value senior notes december 31 2015 12959 million compared carrying value 13373 million carrying amounts financial instruments ie cash equivalents accounts receivable net accounts payable approximated fair value due shortterm nature december 31 2015 december 31 2014 8 details certain consolidated balance sheet captions following tables present financial information certain consolidated balance sheet captions accounts receivable net accounts receivable net disclosed note 1 reclassified portion accounts receivable longterm within assets net december 31 2015 2014 consolidated balance sheets property plant equipment net property plant equipment net accrued liabilities accrued liabilities accrued liabilities include professional fees lease obligations insurance interest freight accrued cash dividends payable legal environmental matters derivative liabilities restructuring reserves items none individually exceed 5 current liabilities retirement obligations liabilities retirement obligations liabilities 9 equity method investments occasionally enter joint venture arrangements local country partners preferred means entry countries barriers entry may exist similar consolidated subsidiaries unconsolidated joint ventures generally operate within primary businesses designing manufacturing assembling distributing fluid motion control products services agreements certain joint ventures restrict us otherwise entering respective market certain joint ventures produce andor sell products part broader product offering net earnings investments unconsolidated joint ventures reported net earnings affiliates consolidated statements income given integrated role unconsolidated joint ventures business net earnings affiliates presented component operating income discussed note 2 effective march 28 2013 joint venture partner agreed exit ail joint venture prior exit 50 interest recorded using equity method accounting december 31 2015 investments eight joint ventures one located chile india japan saudi arabia south korea united arab emirates two located china accounted using equity method immaterial disclosure purposes 10 debt lease obligations debt including capital lease obligations consisted scheduled maturities senior credit facility described well senior notes debt senior notes march 17 2015 completed public offering €5000 million euro senior notes aggregate principal amount due march 17 2022 eur senior notes 2022 eur senior notes bear interest rate 125 per year payable year march 17 commencing march 17 2016 2022 eur senior notes priced 99336 par value reflecting discount aggregate principal amount proceeds offering €4967 million 5263 million based exchange rates effect time offering closed used portion proceeds 2022 eur senior notes ultimately fund acquisition sihi described note 2 anticipate utilizing remaining portion general corporate purposes november 1 2013 completed public offering 3000 million aggregate principal amount senior notes due november 15 2023 senior notes 2023 senior notes bear interest rate 400 per year payable may 15 november 15 year 2023 senior notes priced 99532 par value reflecting discount aggregate principal amount used portion net proceeds 2023 senior notes offering repay amounts outstanding revolving credit facility described used remaining portion net proceeds general corporate purposes including acquisition innomag described note 2 september 11 2012 completed public offering 5000 million aggregate principal amount senior notes due september 15 2022 senior notes 2022 senior notes bear interest rate 350 per year payable march 15 september 15 year 2022 senior notes priced 99615 par value reflecting discount aggregate principal amount right redeem 2022 senior notes 2023 senior notes time prior june 15 2022 august 15 2023 respectively whole part option redemption price equal greater 1 100 principal amount senior notes redeemed 2 sum present values remaining scheduled payments principal interest respect senior notes redeemed discounted redemption date semiannual basis applicable treasury rate plus 30 basis points 2022 senior notes plus 25 basis points 2023 senior notes addition time june 15 2022 senior notes august 15 2023 senior notes may redeem senior notes redemption price equal 100 principal amount senior notes redeemed case also pay accrued unpaid interest principal amount redeemed redemption date similarly right redeem 2022 eur senior notes december 17 2021 whole part option redemption price equal greater 1 100 principal amount senior notes redeemed 2 sum present values remaining scheduled payments principal interest respect senior notes redeemed exclusive interest accrued excluding date redemption discounted redemption date annual basis comparable german government bond rate plus 25 basis points senior notes senior credit facility fully unconditionally jointly severally guaranteed certain 100 owned domestic subsidiaries pursuant terms senior credit facility indentures governing senior notes guarantees obligations subject release company satisfactorily achieved met following guaranty release conditions obtains ratings bbb stable outlook better sp baa2 stable outlook better moody’s b domestic subsidiaries guarantee material indebtedness february 27 2015 standard poors ratings services raised corporate credit senior unsecured debt rating company bbb stable outlook march 11 2015 moody’s investors services corporate credit senior unsecured debt rating company baa2 stable outlook result guarantees senior notes senior credit facility released march 26 2015 upon discharge terms note indentures senior credit facility agreement therefore company exempt disclosing supplemental guarantor financial information accordance rule 310 regulation sx promulgated securities act 1933 senior credit facility credit agreement provides 4000 million term loan “term loan facility” 10 billion revolving credit facility “revolving credit facility” together term loan facility “senior credit facility” october 14 2015 amended senior credit facility amendment extended maturity senior credit facility two years october 14 2020 lowered sublimits issuance letters credit reduced commitment fee 0175 015 daily unused portions senior credit facility amended senior credit facility also increased maximum permitted leverage ratio 325 35 times debt total consolidated ebitda defined senior credit facility pursuant terms senior credit facility indentures governing senior notes obligations longer carry conditional guarantee certain 100 owned domestic subsidiaries subject certain conditions right increase amount term loan facility revolving credit facility aggregate amount exceed 4000 million existing terms senior credit facility remained unchanged december 31 2015 december 31 2014 amounts outstanding revolving credit facility outstanding letters credit 1052 million 768 million december 31 2015 december 31 2014 respectively reduced borrowing capacity 8948 million 9232 million respectively senior credit facility contains among things covenants defining subsidiaries ability dispose assets merge pay dividends repurchase redeem capital stock indebtedness incur indebtedness guarantees create liens enter agreements negative pledge clauses make certain investments acquisitions enter transactions affiliates engage business activity existing business compliance financial covenants senior credit facility tested quarterly compliance covenants december 31 2015 repayment obligations may prepay loans senior credit facility whole part without premium penalty time commitment fee payable quarterly daily unused portions senior credit facility 015 per annum december 31 2015 made scheduled principal repayments term loan facility 450 million 400 million 250 million 2015 2014 2013 respectively scheduled principal repayments 150 million due next four quarters 2016 term loan facility result extending maturity term loan two years scheduled repayments 600 million 2018 2019 450 million 2020 operating leases noncancelable operating leases certain offices service quick response centers certain manufacturing operating facilities machinery equipment automobiles rental expense relating operating leases 531 million 562 million 623 million 2015 2014 2013 respectively future minimum lease payments due noncancelable operating leases amounts thousands 11 pension postretirement benefits sponsor several noncontributory defined benefit pension plans covering substantially us employees certain nonus employees provide benefits based years service age job grade levels type compensation retirement benefits covered employees provided contributory pension plans cash balance pension plans governmentsponsored retirement programs funded defined benefit pension plans receive funding based independent actuarial valuations provide current service amount sufficient amortize unfunded prior service periods exceed 30 years funding falling within legal limits prescribed prevailing regulation also maintain unfunded defined benefit plans permitted local regulations receive funding benefits become due defined benefit plan strategy ensure current future benefit obligations adequately funded costeffective manner additionally investing objective achieve highest level investment performance compatible risk tolerance prudent investment practices longterm nature defined benefit plan liabilities funding strategy based longterm perspective formulating implementing investment policies evaluating investment performance asset allocation defined benefit plans reflect decision proportion investment equity fixed income securities appropriate various subasset classes least annually complete comprehensive review asset allocation policy underlying assumptions includes longterm capital markets rate return assumptions risk tolerances relative defined benefit plan liabilities expected rates return defined benefit plan assets derived review asset allocation strategy expected longterm performance asset classes risks factors adjusted specific investment strategy rates impacted changes general market conditions longterm nature shortterm market changes significantly impact rates us defined benefit plan assets consist balanced portfolio primarily us equity fixed income securities nonus defined benefit plan assets include significant concentration united kingdom uk fixed income securities monitor investment allocations manage plan assets maintain acceptable levels risk addition certain defined benefit plans hold investments european equity fixed income securities periods presented used measurement date december 31 us nonus pension plans postretirement medical plans us defined benefit plans maintain qualified nonqualified defined benefit pension plans us qualified plan provides coverage substantially fulltime us employees receive benefits earnings threshold specified us department labor nonqualified plans primarily cover small number employees including current former members senior management providing benefit levels equivalent participants otherwise limited us department labor rules us plans designed operate cash balance arrangements employee option take lump sum payment end service total accumulated benefit obligation equivalent total projected benefit obligation benefit obligation following assumptions related us defined benefit pension plans december 31 2015 compared december 31 2014 increased discount rate 400 475 based analysis publiclytraded investment grade us corporate bonds higher yield due current market conditions december 31 2015 compared december 31 2014 average assumed rate compensation increase decreased 400 compared 425 determining 2015 expense expected rate return us plan assets increased 625 primarily based target allocations expected longterm asset returns longterm rate return assumption calculated using quantitative approach utilizes unadjusted historical returns asset allocation inputs calculation us plans adopted rp2006 mortality tables mp2015 improvement scale published october 2015 applied rp2006 tables based constituency plan population union nonunion participants adjusted improvement scale utilize 75 ultimate improvement rate consistent assumptions adopted social security administration trustees based longterm historical experience currently believe approach provides best estimate future obligation plan participants elect receive plan benefits lump sum end service rather annuity updated mortality tables immaterial effect pension obligation net pension expense us defined benefit pension plans including qualified nonqualified plans estimated prior service cost estimated net loss us defined benefit pension plans amortized accumulated comprehensive loss pension expense 2016 05 million 49 million respectively amortize estimated prior service benefits estimated net losses remaining expected service period following summarizes net pension liability us plans following summarizes amounts recognized balance sheet us plans following summary changes us defined benefit plans’ pension obligations 1 2015 actuarial gain primarily reflects impact increase discount rate following table summarizes expected cash benefit payments us defined benefit pension plans future amounts millions following table shows change accumulated comprehensive loss attributable components net cost change benefit obligations us plans net tax amounts recorded accumulated comprehensive loss consist following reconciliation us defined benefit pension plans’ assets contributed 210 million 207 million us defined benefit pension plans 2015 2014 respectively payments exceeded minimum funding requirements mandated us department labor rules estimated contribution 2016 expected approximately 20 million excluding direct benefits paid us defined benefit plan assets held qualified plan asset allocations qualified plan end 2015 2014 asset category follows none common stock directly held qualified plan investment strategy earn longterm rate return consistent acceptable degree risk minimize cash contributions life plan taking account liquidity needs plan preserve capital diversified investments high quality securities current allocation target invest approximately 50 plan assets equity securities 50 fixed income securities within investment category assets allocated various investment strategies professional money management firm manages assets engage consultant assist evaluating activities periodically review allocation target generally conjunction asset liability study consideration future cash flow needs regularly rebalance actual allocation target investment allocation plan assets invested commingled funds individual funds actively managed intent outperform specified benchmarks pension investment committee responsible setting investment strategy target asset allocation well selecting individual funds qualified plan approached fully funded status implemented liabilitydriven investing ldi strategy closely aligns duration assets duration liabilities ldi strategy results asset portfolio closely matches behavior liability thereby protecting funded status plan’s financial instruments shown presented fair value see note 1 discussion hierarchical levels fair values plan’s investments determined prior period information updated conform current year presentation fair values us defined benefit plan assets us large cap funds seek outperform russell 1000 r index investments large medium capitalization us companies represented russell 1000 r index composed largest 1000 us equities determined market capitalization b us small cap funds seek outperform russell 2000 r index investments medium small capitalization us companies represented russell 2000 r index composed smallest 2000 us equities determined market capitalization c international large cap funds seek outperform msci europe australia far east index investments developed nations world maintain high degree diversification among countries currencies emerging markets funds represent diversified portfolio seeks high longterm returns comparable investments emerging markets investing stocks newly developed emerging market economies e world equity funds seek outperform russell developed large cap index net full market cycle funds goal provide favorable total return relative benchmark primarily longterm capital appreciation f ldi funds seek outperform barclaysrussell ldi index investing high quality mostly corporate bonds fixed income securities closely match found discount curves used value plans liabilities g longterm governmentcredit funds seek outperform barclays capital us longterm governmentcredit index generating excess return variety diversified strategies securities longer durations sector rotation security selection tactical use highyield bonds nonus defined benefit plans maintain defined benefit pension plans cover employees following countries austria belgium canada france germany india italy mexico netherlands sweden switzerland uk assets uk two plans netherlands canada represent 94 total nonus plan assets nonus assets details countries’ plan assets provided due immateriality following assumptions related nonus defined benefit pension plans december 31 2015 compared december 31 2014 decreased average discount rate nonus plans 340 313 based analysis bonds publiclytraded instruments country lower yields due market conditions determine 2015 pension expense decreased average expected rate return plan assets 551 december 31 2014 503 december 31 2015 primarily due asset returns lower expected year expected rate return plan assets longterm nature shortterm market changes significantly impact rate many nonus defined benefit plans unfunded permitted local regulation expected longterm rate return assets funded plans determined assessing rates return asset class calculated using quantitative approach utilizes unadjusted historical returns asset allocation inputs calculation work actuaries determine reasonableness longterm rate return assumptions looking several factors including historical returns expected future returns asset allocation risks asset class items net pension expense nonus defined benefit pension plans 2016 significant estimated prior service cost amortized accumulated comprehensive loss pension expense nonus defined benefit pension plans estimated net loss nonus defined benefit pension plans amortized accumulated comprehensive loss pension expense 2016 49 million amortize estimated net losses remaining expected service period remaining expected lifetime inactive participants plans inactive participants following summarizes net pension liability nonus plans following summarizes amounts recognized balance sheet nonus plans following reconciliation nonus plans’ defined benefit pension obligations 1 2015 actuarial gain primarily reflects increase discount rate germany 2 currency translation impact reflects strengthening us dollar significant currencies primarily euro british pound following table summarizes expected cash benefit payments nonus defined benefit plans future amounts millions following table shows change accumulated comprehensive loss attributable components net cost change benefit obligations nonus plans net tax amounts recorded accumulated comprehensive loss consist following reconciliation nonus plans’ defined benefit pension assets contributions nonus defined benefit pension plans 2016 expected approximately 12 million excluding direct benefits paid asset allocations nonus defined benefit pension plans end 2015 2014 follows none common stock held directly plans cases investment strategy plans earn longterm rate return consistent acceptable degree risk minimize cash contributions life plan taking account liquidity needs plan legal requirements particular country preserve capital diversified investments high quality securities asset allocation differs plan based upon plan’s benefit obligation participants well results asset liability studies conducted plan consideration future cash flow needs professional money management firms manage plan assets engage consultants uk netherlands assist evaluation activities assets uk plans overseen group trustees review investment strategy asset allocation fund selection assets passively managed invested index funds attempt match performance specified benchmark index assets netherlands plan independently managed outside service provider fair values nonus assets north american companies represents us canadian large cap equity index funds passively managed track respective benchmarks ftse allworld usa index ftse allworld canada index b uk companies represents uk equity index fund passively managed tracks ftse allshare index c european companies represents european equity index fund passively managed tracks ftse allworld developed europe exuk index asian pacific companies represents japanese pacific rim equity index funds passively managed track respective benchmarks ftse allworld japan index ftse allworld developed asia pacific exjapan index e global equity represents actively managed global equity funds taking topdown strategic view different regions analyzing companies based fundamentals marketdriven thematic quantitative factors generate alpha f uk government gilt index represents uk government issued fixed income investments passively managed track respective benchmarks ftse uk gilt indexlinked 5 years index ftse uk gilt 15 years index ftse uk gilt indexlinked 25 years index g uk corporate bond index represents uk corporate bond investments passively managed track iboxx 15 years £ nongilt index h global fixed income bond represents investment funds actively managed diversified invested traditional government bonds highquality corporate bonds asset backed securities emerging market debt includes assets held plans outside uk netherlands details including level iii rollforward details provided due immateriality defined benefit pension plans accumulated benefit obligations excess plan assets following summarizes key pension plan information regarding us nonus plans whose accumulated benefit obligations exceed fair value respective plan assets increase 2015 primarily due sihi acquisition partially offset actuarial gains due changes assumptions december 31 2015 postretirement medical plans sponsor several defined benefit postretirement medical plans covering certain current retirees limited number future retirees us plans provide medical dental benefits administered insurance companies health maintenance organizations plans include participant contributions deductibles coinsurance provisions limitations integrated medicare group plans fund plans benefits health maintenance organization premiums paid plans hold assets period presented accordingly investment strategy targeted allocations plan assets benefits postretirement medical plans available new employees existing employees following assumptions related postretirement benefits assumed ranges annual rates increase medical costs used determine net expense 75 2015 2014 2013 gradual decrease 50 2025 future years net postretirement benefit income postretirement medical plans estimated prior service cost expected amortized accumulated comprehensive loss us pension expense 2016 01 million estimated net gain postretirement medical plans amortized accumulated comprehensive loss us expense 2016 06 million following summarizes accrued postretirement benefits liability postretirement medical plans following summarizes amounts recognized balance sheet postretirement benefit obligation following reconciliation postretirement benefit obligation following presents expected benefit payments future periods amounts millions following table shows change accumulated comprehensive loss attributable components net cost change benefit obligations postretirement benefits net tax amounts recorded accumulated comprehensive loss consist made contributions postretirement medical plans pay benefits 51 million 2015 38 million 2014 37 million 2013 postretirement medical plans unfunded make contributions covered individuals’ claims approved payment accordingly contributions period directly correlated benefits paid assumed health care cost trend rates effect amounts reported postretirement medical plans onepercentage point change assumed health care cost trend rates would following effect 2015 reported amounts thousands defined contribution plans sponsor several defined contribution plans covering substantially us canadian employees certain nonus employees may contribute plans contributions matched varying amounts us including opportunities discretionary matching contributions us defined contribution plan expense 196 million 2015 204 million 2014 200 million 2013 effective january 1 2013 common stock longer investment option prior 2013 participants us defined contribution plan option invest common stock therefore plan assets prior 2013 included holdings common stock participants existing holdings stock effective date able maintain holdings time reallocated within plan participant taken distribution participant 12 legal matters contingencies asbestosrelated claims defendant substantial number lawsuits seek recover damages personal injury allegedly caused exposure asbestoscontaining products manufactured andor distributed heritage companies past overall number asbestosrelated claims generally declined recent years assurance trend continue average cost per claim increase asbestoscontaining materials incorporated products encapsulated used internal components process equipment believe significant emission asbestos fibers occurred use equipment practice vigorously contest resolve claims successful resolving majority claims little payment historically high percentage resolved claims covered applicable insurance indemnities companies believe substantial majority existing claims continue covered insurance indemnities accordingly recorded liability estimate likely settlement asserted claims related receivable insurers companies estimated recovery extent believe amounts recovery probable otherwise dispute unfavorable rulings judgments settlement terms regarding claims could material adverse impact business financial condition results operations cash flows currently believe likelihood remote additionally claims pending certain insurers resolved favorably reflected recorded receivables would result discrete gains applicable quarter currently unable estimate impact unasserted asbestosrelated claims although future claims would also subject existing indemnities insurance coverage united nations oilforfood program mid2006 french authorities began investigation 170 french companies one french subsidiaries included concerning suspected inappropriate activities conducted connection united nations oil food program previously disclosed french investigation french subsidiary formally opened first quarter 2010 french subsidiary filed formal response french court july 2012 french court ruled procedural motions challenge constitutionality charges quash indictment hearings occurred april 12 2015 company presented defense closing arguments june 18 2015 french court issued ruling dismissing case company defendants however july 1 2015 french prosecutor lodged appeal currently expect incur additional case resolution costs material amount matter however french authorities ultimately take enforcement action french subsidiary regarding investigation may subject monetary nonmonetary penalties currently believe material adverse financial impact company currently involved potentially responsible party five former public waste disposal sites various stages evaluation remediation projected cost remediation sites well alleged fair share allocation remain uncertain studies completed parties either negotiated amicable resolution matter judicially resolved site many parties similarly identified many parties identified financially strong solvent companies appear able pay share remediation costs based information waste disposal practices sites environmental regulatory process general believe likely ultimate remediation liability costs site apportioned among liable parties including site owners waste transporters according volumes andor toxicity wastes shown disposed sites believe financial exposure existing disposal sites materially excess accrued reserves previously disclosed terminated employee overseas subsidiary uncovering actions violated code business conduct may violated foreign corrupt practices act completed internal investigation matter selfreported potential violation united states department justice “doj” sec continue cooperate doj sec previously received subpoena sec requesting additional information documentation related matter process responding currently believe matter material adverse financial impact company assurance company subjected monetary penalties additional costs also defendant number lawsuits including product liability claims insured subject applicable deductibles arising ordinary course business also involved uninsured routine litigation incidental business currently believe none litigation either individually aggregate material business operations overall financial condition however litigation inherently unpredictable resolutions dispositions claims lawsuits settlement otherwise could adverse impact financial position results operations cash flows reporting period resolution disposition occurs although none aforementioned potential liabilities quantified absolute certainty except otherwise indicated established reserves covering exposures relating contingencies extent believed reasonably estimable probable based past experience available facts additional exposures beyond reserves could exist currently cannot estimated continue evaluate update reserves necessary appropriate 13 warranty reserve recorded reserves product warranty claims included current liabilities following summary activity warranty reserve 14 shareholders’ equity stock split may 23 2013 certificate incorporation amended increase number authorized shares common stock 1200 million 3050 million enable threeforone stock split approved board directors february 7 2013 form 200 common stock dividend record date stock split june 7 2013 additional shares distributed june 21 2013 result threeforone stock split 117861772 shares common stock issued par value common stock remained unchanged 125 per share required 1473 million retrospectively reclassified capital excess par value common shares within shareholders equity section consolidated balance sheets periods prior 2013 shareholders equity share data including treasury shares stockbased compensation award shares per share data presented herein retrospectively adjusted reflect impact increase authorized shares stock split appropriate dividends february 15 2016 board directors authorized increase payment quarterly dividends common stock 018 per share 019 per share payable beginning april 8 2016 february 16 2015 board directors authorized increase payment quarterly dividends common stock 016 per share 018 per share payable beginning april 10 2015 february 17 2014 board directors authorized increase payment quarterly dividends common stock 014 per share 016 per share payable beginning april 11 2014 february 19 2013 board directors authorized increase payment quarterly dividends common stock 012 per share 014 per share payable beginning april 12 2013 generally dividend dateofrecord last month quarter dividend paid following month subsequent dividends reviewed board directors declared discretion dependent assessment financial situation business outlook applicable time share repurchase program november 13 2014 board directors approved 5000 million share repurchase authorization included approximately 175 million remaining capacity prior 7500 million share repurchase authorization share repurchase program expiration date reserve right limit terminate repurchase program anytime without notice repurchased 6047839 3420656 8142723 shares 3037 million 2465 million 4583 million 2015 2014 2013 respectively december 31 2015 1607 million remaining capacity current share repurchase program 15 income taxes provision income taxes consists following expected cash payments current income tax expense 2015 2014 2013 reduced 64 million 86 million 101 million respectively result tax deductions related vesting restricted stock exercise nonqualified employee stock options income tax benefit resulting stockbased compensation plans increased capital excess par value provision income taxes differs statutory corporate rate due following 2015 tax rate differed federal statutory rate 35 primarily due tax impacts realignment programs nondeductible venezuelan exchange rate remeasurement loss establishment valuation allowance deferred tax assets brazil amount 126 million due deteriorating economic conditions brazil substantially offset net impact foreign operations included impacts lower foreign tax rates changes reserves established uncertain tax positions 2014 2013 effective tax rates differed federal statutory rate 35 primarily due net impact foreign operations included impacts lower foreign tax rates changes reserves established uncertain tax positions assert permanent reinvestment majority invested capital unremitted foreign earnings foreign subsidiaries however assert permanent reinvestment limited number foreign subsidiaries future distributions may occur cumulative amount undistributed earnings considered permanently reinvested 15 billion permanently reinvested earnings repatriated future period form dividends otherwise provision income taxes may increase materially period quantification deferred tax liability associated indefinitely reinvested differences practicable due complexities hypothetical calculation three years reported period ended december 31 2015 recognized net deferred tax assets attributable excess foreign tax credits unremitted earnings foreign currency translation adjustments foreign subsidiaries excess financial reporting basis subsidiaries permanent reinvestment asserted cash deemed dividend distributions resulted recognition 24 million income tax benefit 2015 69 million 50 million income tax expense 2014 2013 respectively recorded benefit excess foreign tax credits associated deemed repatriation unremitted earnings credits available offset liability associated dividends deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes significant components consolidated deferred tax assets liabilities 1553 million us foreign net operating loss carryforwards december 31 2015 total 344 million state net operating losses net operating losses generated us unused expire 2016 2027 majority nonus net operating losses carry forward without expiration additionally 465 million foreign tax credit carryforwards december 31 2015 expiring 2020 2023 valuation allowance 06 million recorded earnings income taxes comprised tabular reconciliation total gross amount unrecognized tax benefits excluding interest penalties follows millions amount gross unrecognized tax benefits december 31 2015 704 million includes 144 million accrued interest penalties amount 608 million recognized would favorably impact effective tax rate recognized net interest penalty income year ended december 31 2015 recognized 15 million 24 million respectively years ended december 31 2014 2013 consolidated statements income limited exception longer subject us federal income tax audits years 2013 state local income tax audits years 2009 nonus income tax audits years 2008 currently examination various years austria germany india italy singapore spain us venezuela reasonably possible within next 12 months effective tax rate impacted resolution matters audited various taxing authorities also reasonably possible statute limitations close various taxing jurisdictions within next 12 months estimate could record reduction tax expense approximately 12 million within next 12 months 16 business segment information business segments share focus industrial flow control technology high number common customers segments also complementary product offerings technologies often combined applications provide us net competitive advantage segments also benefit global footprint economies scale reducing administrative overhead costs serve customers cost effectively conduct operations three business segments based type product manage business • epd long lead time custom highlyengineered pumps pump systems mechanical seals auxiliary systems replacement parts related services • ipd engineered preconfigured industrial pumps pump systems related products services • fcd engineered industrial valves control valves actuators controls related services decisionmaking purposes chief executive officer ceo members senior executive management use financial information generated reported reportable segment level corporate headquarters constitute separate division business segment evaluate segment performance allocate resources based reportable segment’s operating income amounts classified eliminations include corporate headquarters costs minor entities constitute separate segments intersegment sales transfers recorded cost plus profit margin sales related margin sales eliminated consolidation first quarter 2015 made composition changes epd ipd reportable segments take consideration acquisition sihi closed january 7 2015 effective january 1 2015 certain activities primarily related engineered pumps seals previously included ipd business segment reported epd business segment changes materially impact segment results segment assets change business segments management structure chief operating decision maker evaluate segment performance allocate resources prior periods retrospectively adjusted conform new reportable segment composition following summary financial information reportable segments years ended december 31 2015 2014 2013 reconciled amounts reported consolidated financial statements geographic information attribute sales different geographic areas based facilities’ locations longlived assets classified based geographic area assets located exclude deferred taxes goodwill intangible assets prior period information updated conform current year presentation sales longlived assets geographic area follows 1 ema includes europe middle east africa individual country within group represents 10 consolidated totals period presented 2 asia includes asia australia individual country within group represents 10 consolidated totals period presented 3 includes canada latin america individual country within group represents 10 consolidated totals period presented net sales international customers including export sales us represented approximately 66 total sales 2015 68 2014 71 2013 major customer information large number customers across large number manufacturing service facilities believe sales individual customer represent 10 consolidated sales years presented 17 accumulated comprehensive loss following presents components accumulated comprehensive loss aocl net related tax effects 1 includes foreign currency translation adjustments attributable noncontrolling interests 27 million 13 million 12 million december 31 2015 2014 2013 respectively foreign currency translation impact primarily represents weakening euro brazilian real argentine peso exchange rates versus us dollar period additionally includes net investment hedge losses 42 million net deferred taxes year ended december 31 2015 amounts parentheses indicate debits following table presents reclassifications aocl 1 amounts parentheses indicate decreases income none reclassification amounts noncontrolling interest component 2 accumulated comprehensive loss components included computation net periodic pension cost see note 11 additional details december 31 2015 expect recognize losses 23 million net deferred taxes earnings next twelve months related designated cash flow hedges based fair values december 31 2015 18 realignment programs first quarter 2015 initiated realignment program r1 realignment program reduce optimize certain nonstrategic qrcs manufacturing facilities sihi acquisition anticipate total investment program approximately 50 million related identified initiatives primarily restructuring including related severance costs primarily incurred ipd r1 realignment program charges 336 million recorded ipd 07 million epd 55 million reported income tax expense consolidated statement income year ended december 31 2015 anticipate majority remaining charges incurred 2016 second quarter 2015 initiated second realignment program r2 realignment program better align costs improve longterm efficiency including manufacturing optimization consolidation facilities reduction workforce transfer activities highcost regions lowercost facilities anticipate total investment program approximately 350 million subject final evaluation anticipate majority charges incurred 2016 realignment programs consist restructuring nonrestructuring charges restructuring charges represent costs associated relocation reorganization certain business activities facility closures include related severance costs nonrestructuring charges primarily employee severance associated workforce reductions reduce redundancies expenses primarily reported cos sga applicable consolidated statements income total realignment charges net adjustments 1170 million 16 million 107 million year ended december 31 2015 2014 2013 respectively generally aforementioned charges paid cash except asset writedowns noncash charges total restructuring reserve related realignment programs 583 million 11 million december 31 2015 2014 respectively r1 realignment program following summary total charges net adjustments related r1 realignment program year ended december 31 2015 addition charges 55 million reported income tax expense consolidated statement income year ended december 31 2015 following represents activity primarily severance related restructuring reserve r1 realignment program r2 realignment program following summary charges net adjustments related r2 realignment program year ended december 31 2015 addition charges 34 million reported income tax expense consolidated statement income year ended december 31 2015 restructuring charges represent costs associated relocation reorganization certain business activities facility closures include costs related employee severance closed facilities contract termination costs asset writedowns costs severance costs primarily include costs associated involuntary termination benefits contract termination costs include costs related termination operating leases contract termination costs asset writedowns include accelerated depreciation fixed assets accelerated amortization intangible assets inventory writedowns costs generally includes costs related employee relocation asset relocation vacant facility costs ie taxes insurance charges following summary restructuring charges net adjustments r2 realignment program year ended december 31 2015 following represents activity primarily severance related restructuring reserve r2 realignment program 19 quarterly financial data unaudited following presents summary unaudited quarterly data 2015 2014 amounts millions except per share data 1 earnings per share computed independently quarters presented sum quarters may equal total year amount due impact changes weighted average quarterly shares outstanding significant fourth quarter impact 2015 earnings income taxes record 524 million charges related realignment programs see note 18 additional information realignment programs addition 315 million less broadbased annual incentive compensation expense fourth quarter 2015 compared period 2014 item 9item 8 financial statements supplementary data report independent registered public accounting firm board directors shareholders flowserve corporation opinion consolidated financial statements listed index appearing item 15a1 present fairly material respects financial position flowserve corporation subsidiaries december 31 2016 2015 results operations cash flows three years period ended december 31 2016 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed accompanying index appearing item 15a2 presents fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintained material respects effective internal control financial reporting december 31 2016 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission coso companys management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included managements report internal control financial reporting responsibility express opinions financial statements financial statement schedule companys internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate flowserve corporation consolidated balance sheets see accompanying notes consolidated financial statements flowserve corporation consolidated statements income see accompanying notes consolidated financial statements flowserve corporation consolidated statements comprehensive income see accompanying notes consolidated financial statements flowserve corporation consolidated statements shareholders’ equity flowserve corporation consolidated statements cash flows flowserve corporation notes consolidated financial statements december 31 2016 2015 three years ended december 31 2016 1 significant accounting policies accounting developments principally engaged worldwide design manufacture distribution service industrial flow management equipment provide long lead time custom highlyengineered pumps standardized generalpurpose pumps mechanical seals industrial valves related automation products solutions primarily oil gas chemical power generation water management general industries requiring flow management products services equipment manufactured serviced us predominantly used industries deal difficulttohandle corrosive fluids well environments extreme temperatures pressure horsepower speed business affected economic conditions united states us countries products sold serviced cyclical nature competitive environment industries served relationship us dollar currencies demand pricing customers’ end products venezuela operations venezuela primarily consist service center performs service repair activities venezuelan subsidiarys sales year ended december 31 2016 represented less 05 consolidated sales assets december 31 2016 represented less 05 total consolidated assets primarily consisted united states us dollardenominated monetary assets bolivardenominated nonmonetary assets december 31 2016 addition certain operations countries sell equipment parts typically denominated us dollars directly venezuelan customers continue experience delays collecting payment accounts receivable national oil company venezuela primary venezuelan customer total outstanding gross accounts receivable customer approximately 6 7 gross accounts receivable december 31 2016 december 31 2015 respectively 100 64 classified longterm within assets net condensed consolidated balance sheet december 31 2016 2015 respectively accounts receivable primarily us dollardenominated disputed however historically writeoffs relating customer accounts receivable continue significantly arrears increased deterioration social political economic legal climate 2016 given rise significant uncertainties venezuelas economic political stability continue conduct business prepayment basis venezuelan customer volume activity diminished significantly throughout 2016 prior year levels september 2016 venezuelan customer offered current bondholders ability swap current bonds new bonds delayed maturity price premium higher coupon rate due current inability service debt obligations result bond swap offer sp global ratings downgraded customers bonds cc potentially indicates default imminent little prospect recovery although currently hold related bonds interpreted action indicative customers increasing inability make future payments accounts receivable accordingly due actions diminished activity business payments 2016 estimated ability fully collect accounts receivable primary venezuelan customer became less probable third quarter 2016 recorded charge 632 million selling general administrative expense sga fully reserve potentially uncollectible accounts receivable charge cost sales cos 19 million reserve related net inventory exposures continue pursue payments ongoing business venezuelan customer december 31 2016 dicom exchange rate formerly simadi 674 bolivars us dollar compared official exchange rate 100 bolivars us dollar march 31 2015 determined based specific facts circumstances simadi exchange rate appropriate remeasurement venezuelan subsidiarys bolivardenominated net monetary assets us dollars result remeasurement first quarter 2015 recognized loss 206 million 185 million reported income expense net 21 million cost goods sold condensed consolidated statement income resulted tax benefit december 31 2016 believe dicom exchange rate continues appropriate rate remeasure us dollar value assets liabilities results operations venezuelan subsidiary principles consolidation consolidated financial statements include accounts company wholly majorityowned subsidiaries addition would consolidate variable interest entities deemed primary beneficiary noncontrolling interests nonaffiliated parties recognized majorityowned consolidated subsidiaries intercompany profitslosses transactions balances among consolidated entities eliminated consolidated financial statements investments unconsolidated affiliated companies represent noncontrolling ownership interests 20 50 accounted using equity method approximates equity interest underlying equivalent net book value accounting principles generally accepted us gaap investments interests less 20 investee accounted cost method whereby income recognized event dividend receipt investments accounted cost method tested impairment indicator present use estimates process preparing financial statements conformity us gaap requires us make estimates assumptions affect reported amounts certain assets liabilities revenues expenses believe estimates assumptions reasonable however actual results may differ materially estimates significant estimates assumptions used determining • timing amount revenue recognition • deferred taxes tax valuation allowances tax reserves • reserves contingent loss • pension postretirement benefits • valuation goodwill indefinitelived intangible assets longlived assets revenue recognition revenues product sales recognized risks rewards ownership transferred customers typically based contractual delivery terms agreed customer fulfillment inconsequential perfunctory actions addition policy requires persuasive evidence arrangement fixed determinable sales price reasonable assurance collectibility defer recognition revenue advance payments received customers performance obligations completed andor services performed freight charges billed customers included sales related shipping costs included cost sales consolidated statements income contracts typically include cancellation provisions require customers reimburse us costs incurred date cancellation well contractual cancellation penalties enter certain agreements multiple deliverables may include combination designing developing manufacturing modifying installing commissioning flow management equipment providing services related performance products delivery products services typically occurs within one twoyear period although many arrangements shortcycle type orders shorter timeframe delivery separate deliverables units accounting based whether deliverables standalone value customer impact general rights return immaterial contract value allocated ratably units accounting arrangement based relative selling prices determined deliverables sold separately revenues longterm contracts exceed certain internal thresholds regarding size duration project provide receipt progress billings customer recorded percentage completion method progress measured costtocost basis percentage completion revenue represents less 7 consolidated sales year presented revenue service repair contracts recognized services agreed customer rendered revenues generated fixed fee service repair contracts recognized ratable basis term contract contracts range duration generally extend five years fixed fee service contracts represent approximately 1 consolidated sales year presented certain instances provide guaranteed completion dates terms contracts failure meet contractual delivery dates result late delivery penalties nonrecoverable costs instances payment costs deemed probable perform project profitability analysis accounting costs reduction realizable revenues could potentially cause estimated total project costs exceed projected total revenues realized project instances would record reserves cover excesses period determined circumstances total projected revenues still exceed total projected costs incurrence penalties nonrecoverable costs generally reduces profitability project time subsequent revenue recognition cash equivalents place temporary cash investments financial institutions policy invest institutions instruments minimal credit risk market risk investments original maturity three months less purchased classified cash equivalents highly liquid principal values subject significant risk change due interest rate fluctuations allowance doubtful accounts credit risk allowance doubtful accounts established based estimates amount uncollectible accounts receivable determined principally based upon aging accounts receivable also customer credit history industry market segment information economic trends conditions credit reports customer credit issues customer bankruptcies general economic conditions may also impact estimates credit risks mitigated diversity customer base across many different geographic regions industries performing creditworthiness analyses customers additionally mitigate credit risk letters credit advance payments received customers 2016 experienced increased aging slower collection receivables primary venezuelan customer due certain actions customer diminished activity business payments 2016 estimated ability fully collect accounts receivable primary venezuelan customer become less probable recorded charge selling general administrative expense sga fully reserve potential uncollectible accounts receivable charge cost sales cos reserve related net inventory exposures believe significant concentrations credit risk inventories related reserves inventories stated lower cost market cost determined firstin firstout method reserves excess obsolete inventories based upon assessment market conditions products determined historical usage estimated future demand due long life cycles products carry spare parts inventories historically low usage rates provide reserves inventory based demonstrated usage aging criteria income taxes deferred taxes tax valuation allowances tax reserves account income taxes asset liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases operating loss tax credit carryforwards deferred tax assets liabilities calculated using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized period includes enactment date record valuation allowances reflect estimated amount deferred tax assets may realized based upon analysis existing deferred tax assets net operating losses tax credits jurisdiction expectations ability utilize tax attributes review past current estimated future taxable income establishment tax strategies provide deferred taxes temporary differences associated investment foreign subsidiaries financial reporting basis exceeds tax basis unless assert permanent reinvestment foreign jurisdictions financial reporting basis tax basis differences investments foreign subsidiaries consist unremitted earnings losses well foreign currency translation adjustments amount income taxes pay subject ongoing audits federal state foreign tax authorities often result proposed assessments establish reserves open tax years uncertain tax positions may subject challenge various tax authorities consolidated tax provision related accruals include impact reasonably estimable losses related interest penalties deemed appropriate recognize tax benefit uncertain tax position likely tax position sustained examination taxing authorities determination based technical merits position presumes uncertain tax position examined relevant taxing authority full knowledge relevant information tax benefits recognized financial statements position measured based largest benefit greater fifty percent likelihood realized upon ultimate settlement legal environmental contingencies legal environmental reserves recorded based upon casebycase analysis relevant facts circumstances assessment potential legal obligations costs amounts relating legal environmental liabilities recorded probable loss incurred loss estimable assessments legal environmental costs based information obtained independent inhouse experts loss experience similar situations estimates updated applicable new information regarding facts circumstances matter becomes available legal fees associated legal environmental liabilities expensed incurred estimates liabilities unsettled asbestosrelated claims based known claims experience preceding two years claims filed settled dismissed adjustments events deemed unusual unlikely recur included retirement obligations liabilities consolidated balance sheets substantial majority asbestosrelated claims covered insurance indemnities estimated indemnities receivables insurance carriers unsettled claims receivables settlements legal fees paid us asbestosrelated claims estimated using historical experience insurance recovery rates estimates future recoveries include estimates coverage financial viability insurance carriers estimated receivables included assets net consolidated balance sheets claims pending certain insurers resolved favorably estimated future recoveries would result discrete gains applicable quarter currently unable estimate impact unasserted asbestosrelated claims although future claims would also subject existing indemnities insurance coverage warranty accruals warranty obligations based upon product failure rates materials usage service delivery costs analysis identified expected claims estimate cost resolve claims estimates expected claims generally factor historical claims known product issues warranty obligations based factors adjusted based historical sales trends preceding 24 months insurance accruals insurance accruals recorded wholly partially selfinsured risks medical benefits workers’ compensation based upon analysis claim loss history insurance deductibles policy limits relevant factors updated annually included accrued liabilities consolidated balance sheets estimates based upon information received actuaries insurance company adjusters independent claims administrators independent sources receivables insurance carriers estimated using historical experience insurance recovery rates estimates future recoveries include estimates coverage financial viability insurance carriers estimated receivables included accounts receivable net assets net applicable consolidated balance sheets pension postretirement obligations determination pension postretirement benefits obligations based estimates made management consultation independent actuaries investment advisors inherent valuations assumptions including discount rates expected rates return plan assets retirement rates mortality rates compensation increase factors reviewed annually updated necessary current market conditions including changes rates return interest rates medical inflation rates considered selecting assumptions actuarial gains losses prior service costs recognized accumulated comprehensive loss arise amortize costs net pension expense remaining expected service period property plant equipment depreciation property plant equipment stated historical cost less accumulated depreciation asset retirement obligations exist capitalized part carrying amount asset depreciated remaining useful life asset useful lives leasehold improvements lesser remaining lease term useful life improvement assets retired otherwise disposed costs related accumulated depreciation removed accounts resulting gains losses included income operations period depreciation computed straightline method based estimated useful lives depreciable assets case assets capital leases related lease turn generally estimated useful lives assets costs related routine repairs maintenance expensed incurred internally developed software capitalize certain costs associated development internaluse software generally costs related significant software development projects amortized estimated useful life typically three five years upon implementation software intangible assets intangible assets excluding trademarks considered indefinite life consist primarily engineering drawings patents existing customer relationships software distribution networks items amortized estimated useful lives generally ranging four 40 years assets reviewed impairment whenever events circumstances indicate impairment may occurred valuation goodwill indefinitelived intangible assets longlived assets value goodwill indefinitelived intangible assets tested impairment december 31 year whenever events circumstances indicate assets may impaired identification reporting units began operating segment level considered whether components one level operating segment levels identified reporting units purpose testing goodwill impairment based certain conditions included among factors extent component represents business ii aggregation economically similar components within operating segments resulted five reporting units factors considered determining whether aggregation components appropriate included similarity nature products services nature production processes methods distribution types industries served impairment loss goodwill recognized implied fair value goodwill less carrying value estimate fair value reporting units based income approach whereby calculate fair value reporting unit based present value estimated future cash flows discounted cash flow analysis requires us make various judgmental assumptions future sales operating margins growth rates discount rates based budgets business plans economic projections anticipated future cash flows market participants assumptions also made varying perpetual growth rates periods beyond longterm business plan period record impairment goodwill 2016 2015 2014 however estimated fair value engineered product operations epo ipd reporting units reduced significantly due broadbased capital spending declines heightened pricing pressure experienced oil gas markets anticipated continue near midterm epo reporting unit component epd reporting segment primarily focused long lead time custom highlyengineered pumps pump systems december 31 2016 epo reporting unit approximately 156 million goodwill estimated fair value exceeded carrying value approximately 45 addition ipd reporting unit primarily focused preconfigured industrial pumps pump systems approximately 298 million goodwill fair value exceeded carrying value approximately 70 key assumptions used determining estimated fair value epo ipd reporting units included annual operating plan forecasted operating results successful execution current realignment programs identified strategic initiatives constant cost capital shortterm stabilization mid longterm improvement macroeconomic conditions oil gas market relatively stable global gross domestic product although concluded impairment goodwill associated epo ipd reporting units december 31 2016 continue closely monitor performance related market conditions future indicators potential impairment reassess accordingly also consider market capitalization evaluation fair value goodwill market capitalization increased compared 2015 indicate potential impairment goodwill december 31 2016 impairment losses indefinitelived intangible assets recognized whenever estimated fair value less carrying value fair values calculated trademarks using relief royalty method estimates fair value trademark determining present value estimated royalty payments avoided result owning trademark method includes judgmental assumptions sales growth discount rates significant impact fair value substantially consistent assumptions used determine fair value reporting units discussed record material impairment trademarks 2016 2015 2014 recoverable value longlived assets including property plant equipment finitelived intangible assets reviewed indicators potential impairments present recoverable value based upon assessment estimated future cash flows related assets utilizing assumptions similar goodwill additional considerations related longlived assets include expected maintenance improvements changes expected uses ongoing operating performance utilization deferred loan costs deferred loan costs consisting fees expenses associated debt financing amortized term associated debt using effective interest method additional amortization recorded periods optional prepayments debt made fair values financial instruments financial instruments presented fair value consolidated balance sheets exception longterm debt fair value defined price would received sell asset paid transfer liability orderly transaction market participants measurement date available fair value based observable market prices parameters derived prices parameters observable prices inputs available valuation models may applied assets liabilities recorded fair value consolidated balance sheets categorized based upon level judgment associated inputs used measure fair values hierarchical levels defined accounting standards codification asc 820 fair value measurements disclosures directly related amount subjectivity associated inputs fair valuation assets liabilities asset liability’s categorization within fair value hierarchy based lowest level significant input valuation hierarchical levels follows level inputs unadjusted quoted prices active markets identical assets liabilities measurement date level ii inputs quoted prices included level either directly indirectly observable asset liability correlation market data measurement date duration instrument’s anticipated life level iii inputs reflect management’s best estimate market participants would use pricing asset liability measurement date consideration given risk inherent valuation technique risk inherent inputs model recurring fair value measurements limited investments derivative instruments certain equity securities fair value measurements derivative instruments determined using models maximize use observable market inputs including interest rate curves forward spot prices currencies classified level ii fair value hierarchy fair values derivative instruments included note 6 fair value measurements investments equity securities determined using quoted market prices classified level fair values investments equity securities changes thereto immaterial consolidated financial position results operations derivatives hedging activities foreign currency derivatives hedging policy outlining conditions enter financial derivative transactions use derivative instruments trading speculative purposes derivative instruments recognized balance sheet fair values accounting gains losses resulting changes fair value depends whether derivative designated qualifies hedge accounting foreign exchange contracts employ foreign currency economic hedging strategy mitigate certain financial risks resulting foreign currency exchange rate movements impact foreign currency denominated receivables payables firm committed transactions forecasted sales purchases 2013 began designate certain forward exchange contracts hedging instruments apply hedge accounting instruments designated forward exchange contracts changes fair value recorded comprehensive loss underlying hedged item affects earnings time change fair value recognized sales consolidated statements income nondesignated forward exchange contracts changes fair values recognized immediately income expense net consolidated statements income see note 6 discussion forward exchange contracts discontinue hedge accounting 1 deem hedge ineffective determine designation derivative hedging instrument longer appropriate 2 derivative matures terminates sold 3 occurrence contracted committed transaction longer probable occur originally expected period hedge accounting discontinued derivative remains outstanding carry derivative estimated fair value balance sheet recognizing changes fair value current period earnings cash flow hedge becomes ineffective deferred gains losses remain accumulated comprehensive loss underlying hedged item recognized becomes probable hedged forecasted transaction occur deferred gains losses hedging instrument recognized earnings immediately exposed risk creditrelated losses resulting nonperformance counterparties financial instruments perform credit evaluations counterparties forward exchange contracts expect counterparties meet obligations necessary would adjust values derivative contracts counterparties’ credit risks foreign currency translation assets liabilities foreign subsidiaries translated us dollars exchange rates prevailing balance sheet date income expenses translated average rates month translation gains losses reported component accumulated comprehensive loss transactional currency gains losses arising transactions currencies sites’ functional currencies included consolidated results operations transaction translation gains losses arising intercompany balances reported component accumulated comprehensive loss underlying transaction stems longterm equity investment debt designated due foreseeable future otherwise recognize transaction gains losses arising intercompany transactions component income intercompany balances longterm investment related designated due beyond foreseeable future may mitigate risk associated foreign currency fluctuations entering forward exchange contracts stockbased compensation stockbased compensation measured grantdate fair value exercise price stock option awards value restricted share restricted share unit performancebased unit awards collectively referred restricted shares set closing price common stock new york stock exchange date grant date grants authorized board directors restricted share units performancebased units refer restricted awards voting rights accrue dividends forfeited vesting occur intrinsic value restricted shares typically product share price date grant number restricted shares granted amortized straightline basis compensation expense periods restrictions lapse based expected number shares vest forfeiture rate based unvested restricted shares forfeited compared original total restricted shares granted 3year period excluding significant forfeiture events expected recur earnings per share use twoclass method calculating earnings per share eps determines earnings per share class common stock participating security earnings period distributed unvested restricted share awards earn nonforfeitable dividend rights qualify participating securities accordingly included basic computation unvested restricted shares participate equal basis common shares therefore difference undistributed earnings allocated participating security accordingly presentation prepared combined basis presented earnings per common share following reconciliation net earnings flowserve corporation weighted average shares calculating basic net earnings per common share earnings per weighted average common share outstanding calculated follows diluted earnings per share based upon weighted average number shares determined basic earnings per share plus shares potentially issuable conjunction stock options restricted share units performance share units research development expense research development costs charged expense incurred aggregate research development costs included selling general administrative expenses sga 428 million 459 million 409 million 2016 2015 2014 respectively costs incurred research development primarily include salaries benefits consumable supplies well rent professional fees utilities depreciation property equipment used research development activities accounting developments pronouncements implemented june 2014 fasb issued asu 201412 compensationstock compensation topic 718 accounting sharebased payments terms award provide performance target could achieved requisite service period asu issued address sharebased payment awards performance target affecting vesting could achieved employee’s requisite service period adoption asu 201412 effective january 1 2016 impact consolidated financial condition results operations august 2014 fasb issued asu 201415 presentation financial statements going concern subtopic 20540 disclosure uncertainties entity’s ability continue going concern asu requires management evaluate whether conditions events raise substantial doubt ability company continue going concern one year date financial statements issued within one year date financial statements available issued applicable asu provides management guidance regarding responsibility disclose ability company continue going concern notes financial statements asu effective annual periods ending december 15 2016 interim periods thereafter early adoption permitted adoption asu 201415 impact consolidated financial condition results operations november 2014 fasb issued asu 201416 derivatives hedging topic 815 determining whether host contract hybrid financial instrument issued form share akin debt equity asu issued clarify reinforce practice evaluating relevant terms features reviewing nature host contract adoption asu 201416 effective january 1 2016 impact consolidated financial condition results operations january 2015 fasb issued asu 201501 “income statementextraordinary unusual items subtopic 22520 simplifying income statement presentation eliminating concept extraordinary items connection fasbs efforts simplify accounting standards fasb released new guidance simplifying income statement presentation eliminating concept extraordinary items accounting principles generally accepted us “us gaap” adoption asu 201501 effective january 1 2016 impact consolidated financial condition results operations february 2015 fasb issued asu 201502 consolidation topic 810 amendments consolidation analysis” provides guidance analysis process companies must perform order determine whether legal entity consolidated adoption asu 201502 effective january 1 2016 impact consolidated financial condition results operations april 2015 fasb issued asu 201503 interest imputation interest subtopic 83530 simplifying presentation debt issuance costs” asu issued connection fasbs efforts simplify accounting standards presentation debt issuance costs asu requires companies present debt issuance costs manner debt discounts currently reported direct deduction carrying value debt liability applicability requirement impact recognition measurement guidance debt issuance costs august 2015 fasb issued asu 201515 interest imputation interest subtopic 83530 presentation subsequent measurement debt issuance costs associated lineofcredit arrangementsamendments sec paragraphs pursuant staff announcement june 18 2015 eitf meeting sec update asu sec staff announced would object entity deferring presenting debt issuance costs asset subsequently amortizing deferred debt issuance costs ratably term lineofcredit arrangement adopted provisions asu 201503 asu 201515 january 1 2016 prior period amounts reclassified conform current period presentation december 31 2015 103 million debt issuance costs reclassified consolidated balance sheet assets net longterm debt adoption asu 201503 asu 201515 effective january 1 2016 impact consolidated results operations may 2015 fasb issued asu 201507 fair value measurement topic 820 disclosures investments certain entities calculate net asset value per share equivalent consensus emerging issues task force asu removes requirement categorize investments fair value measured using net asset value per share practical expedient within fair value hierarchy adoption asu 201507 effective january 1 2016 impact consolidated financial condition results operations november 2015 fasb issued asu 201517 balance sheet classification deferred taxes simplify presentation deferred income taxes asu requires deferred tax liabilities assets classified noncurrent balance sheet adopted asu 201517 effective january 1 2016 result prior period amounts reclassified conform current period presentation december 31 2015 1560 million current deferred tax assets 114 million current deferred tax liabilities reclassified current increase 431 million noncurrent deferred tax assets decrease 1015 million noncurrent deferred tax liabilities balance sheet adoption asu 201517 effective january 1 2016 impact consolidated results operations pronouncements yet implemented may 2014 fasb issued asu 201409 revenue contracts customers topic 606 supersedes revenue recognition requirements revenue recognition topic 605 standard principlebased provides fivestep model determine revenue recognized core principle company recognize revenue transfers promised goods services customers amount reflects consideration company expects entitled exchange goods services companies permitted adopt new standard using one two transition methods full retrospective method requirements new standard applied contracts prior reporting period presented cumulative effect applying standard recognized earliest period presented modified retrospective method requirements new standard applied contracts open january 1 2018 required date adoption cumulative effect applying standard recognized adjustment beginning retained earnings year standard also includes significantly expanded disclosure requirements revenue since 2014 fasb issued several updates topic 606 currently evaluating impact asu 201409 related asus consolidated financial condition results operations plan adopt new revenue guidance effective january 1 2018 using modified retrospective method transition 2015 established crossfunctional implementation team consisting representatives across reportable segments begin process analyzing impact standard contracts preliminary results evaluation still process indicate one changes upon adoption may potentially increased “overtime” revenue recognition currently revenue recognized percentage completion method less 7 consolidated sales also anticipate changes consolidated balance sheet related accounts receivable contract assets contract liabilities additionally process evaluating designing necessary changes business processes systems controls support recognition disclosure new standard continuing evaluation determine impact consolidated financial condition results operations july 2015 fasb issued asu 201511 inventory topic 330 simplifying measurement inventory asu updates represent changes simplify subsequent measurement inventory previous issuance asu asc 330 required entity measure inventory lower cost market amendments asu 201511 update narrows “market” requirement “net realizable value” defined asu estimated selling prices ordinary course business less reasonably predictable costs completion disposal transportation asu effective fiscal years interim periods within fiscal years beginning december 15 2016 application asu made prospectively early application permitted beginning interim annual reporting period adoption asu 201511 expected material impact consolidated financial condition results operations january 2016 fasb issued asu 201601 financial instruments overall subtopic 82510 recognition measurement financial assets financial liabilities asu requires entities measure equity investments result consolidation accounted equity method fair value changes fair value recognized net income asu also requires entity present separately comprehensive income portion total change fair value liability resulting change instrumentspecific credit risk entity elected measure liability fair value accordance fair value option financial instruments requirement disclose methods significant assumptions used estimate fair value financial instruments measured amortized cost balance sheet eliminated asu effective fiscal years beginning december 15 2017 including interim periods within fiscal years currently evaluating impact asu 201601 consolidated financial condition results operations february 2016 fasb issued asu 201602 “leases topic 842” asu requires organizations lease assets recognize assets liabilities balance sheet rights obligations created leases asu affect presentation lease related expenses income statement cash flows increase required disclosures related leases asu effective annual periods beginning december 15 2018 including interim periods within fiscal years early adoption permitted currently evaluating impact asu 201602 consolidated financial condition results operations although continuing evaluate upon initial qualitative evaluation believe key change upon adoption balance sheet recognition leased assets liabilities based qualitative evaluation date believe changes income statement recognition material march 2016 fasb issued asu 201609 compensation stock compensation topic 718 improvements employee sharebased payment accounting asu affects accounting employee sharebased payment transactions relates accounting income taxes accounting forfeitures statutory tax withholding requirements asu effective annual periods beginning december 15 2016 including interim periods within fiscal years early adoption permitted evaluated impact asu 201609 believe material impact consolidated financial condition results operations june 2016 fasb issued asu 201613 financial instrumentscredit losses topic 326 measurement credit losses financial instruments amendments asu replace current incurred loss impairment methodology reflects expected credit losses requires consideration broader range reasonable supportable information inform credit loss estimates asu effective fiscal years beginning december 15 2019 including interim periods within fiscal years currently evaluating impact asu 201613 consolidated financial condition results operations august 2016 fasb issued asu 201615 “statement cash flows topic 230 classification certain cash receipts cash payments consensus fasb emerging issues task force” update issued objective reducing existing diversity practice certain cash receipts cash payments presented classified statement cash flows topic 230 topics asu effective fiscal years beginning december 15 2017 including interim periods within fiscal years currently evaluating impact asu 201615 consolidated financial condition results operations october 2016 fasb issued asu 201616 income taxes topic 740 intraentity transfers assets inventory asu guidance requires recognition income tax consequences intercompany asset transfer transfers inventory transfer occurs intercompany transfers inventory income tax effects continue deferred inventory sold third party asu effective reporting periods beginning december 15 2017 early adoption permitted currently evaluating impact asu 201616 consolidated financial condition results operations october 2016 fasb issued asu 201617 consolidation topic 810 interests held related parties common control amendments asu affect consolidation guidance regarding reporting entity single decision maker variable interest entity vie treat indirect interests entity held related parties common control reporting entity determining whether primary beneficiary vie asu effective reporting periods beginning december 15 2016 including interim periods fiscal years adoption asu 201617 expected material impact consolidated financial condition results operations november 2016 fasb issued asu 201618 statement cash flows topic 230 restricted cash amendments asu require statement cash flows explain change period total cash equivalents amounts generally described restricted cash restricted cash equivalents therefore amounts generally described restricted cash restricted cash equivalents included cash equivalents reconciling beginningofperiod endofperiod total amounts shown statement cash flows asu effective reporting periods beginning december 15 2017 including interim periods fiscal years adoption asu 201618 expected material impact consolidated financial condition results operations december 2016 fasb issued asu 201619 “technical corrections improvements” asu makes minor changes several topics fasb accounting standards codification us gaap amendments asu require transition guidance effective annual interim reporting periods beginning december 15 2016 early adoption permitted amendments require transition guidance amendments effective immediately currently evaluating impact asu 2016 19 consolidated financial condition results operations january 2017 fasb issued asu 201701 business combinations topic 805 clarifying definition business asu clarifies definition business provides guidance evaluating whether transactions accounted acquisitions disposals assets businesses definition clarification outlined asu affects many areas accounting including acquisitions disposals goodwill consolidation amendments asu effective annual periods beginning december 15 2017 including interim periods within annual periods currently evaluating impact asu 2017 01 consolidated financial condition results operations january 2017 fasb issued asu 201704 intangibles goodwill topic 350 simplifying test goodwill impairment amendments asu allow companies apply onestep quantitative test record amount goodwill impairment excess reporting unit’s carrying amount fair value exceed total amount goodwill allocated reporting unit amendments asu effective annual interim goodwill impairment tests fiscal years beginning december 15 2019 early adoption permitted interim annual goodwill impairment tests performed testing dates january 1 2017 currently evaluating impact asu 2017 04 consolidated financial condition results operations 2 acquisition disposition sihi group bv effective january 7 2015 acquired inclusion industrial product division ipd 100 sihi group bv sihi global provider engineered vacuum fluid pumps related services primarily servicing chemical market well pharmaceutical food beverage process industries stock purchase €2867 million 3415 million based exchange rates effect time acquisition closed net cash acquired cash acquisition funded using approximately 110 million available cash approximately 255 million initial borrowings revolving credit facility defined discussed note 10 subsequently paid portion net proceeds march 2015 offering 2022 eur senior notes defined discussed note 10 sihi based netherlands operations primarily europe lesser extent americas asia allocation purchase price summarized excess acquisition date fair value total purchase price estimated fair value net assets recorded goodwill 2011 million represents value expected obtained strengthening portfolio products services addition sihis engineered vacuum fluid pumps well associated aftermarket services parts goodwill related acquisition recorded ipd segment expected deductible tax purposes subsequent january 7 2015 revenues expenses sihi included consolidated statement income naval oy effective march 31 2014 sold flow control divisions fcd naval oy naval business finnish valve manufacturer sale included navals manufacturing facility located laitila finland service support center located st petersburg russia cash proceeds sale totaled 468 million net cash divested resulted 134 million pretax gain recorded selling general administrative expense consolidated statements income net sales related naval business totaled 82 million first quarter 2014 3 goodwill intangible assets changes carrying amount goodwill years ended december 31 2016 2015 follows 1 goodwill addition primarily related acquisition sihi see note 2 additional information 2 movement goodwill ipd epd due segment composition change see note 16 additional information following table provides information intangible assets years ended december 31 2016 2015 1 engineering drawings represent estimated fair value associated specific acquired product component schematics 2 existing customer relationships acquired prior 2011 useful life five years 3 accumulated amortization indefinitelived intangible assets relates amounts recorded prior implementation date guidance issued asc 350 following schedule outlines actual amortization expense recognized 2016 estimate future amortization based upon finitelived intangible assets owned december 31 2016 amortization expense finitelived intangible assets 220 million 2015 140 million 2014 4 inventories net consisted following 2016 recorded 155 million charge primarily related epd reporting segment write inventory brazil approximately 5 million related 2015 period amount material consolidated financial results reporting segment results current prior period 2016 2015 2014 recognized expenses 186 million 242 million 192 million respectively excess obsolete inventory expenses included cost sales cos consolidated statements income 5 stockbased compensation plans maintain flowserve corporation equity incentive compensation plan 2010 plan shareholderapproved plan authorizing issuance 8700000 shares common stock form incentive stock options nonstatutory stock options restricted shares restricted share units performancebased units collectively referred restricted shares stock appreciation rights bonus stock 8700000 shares common stock authorized 2010 plan 3240638 available issuance december 31 2016 longterm incentive program amended allow restricted shares granted january 1 2016 employees retire achieved least 55 years age ten years service continue vest original vesting period stock options granted since 2006 stock options granted officers employees directors allow purchase common shares market value stock date options granted options generally become exercisable staggered period ranging one five years typically one three years december 31 2016 outstanding options fully vested options generally expire ten years date grant within short period time following termination employment cessation services option holder options granted 2016 2015 2014 information related stock options issued officers employees directors plans presented following table weighted average remaining contractual life options outstanding december 31 2015 2014 one year 18 years respectively total intrinsic value stock options exercised year ended december 31 2016 24 million less 1 million period 2015 2014 stock options vested years ended december 31 2016 2015 2014 restricted shares generally restrictions restricted shares expire minimum one year maximum three years shares subject forfeiture restriction period typically restricted share grants staggered vesting periods one three years grant date intrinsic value restricted shares typically product share price date grant number restricted shares granted amortized straightline basis compensation expense periods restrictions lapse unearned compensation amortized compensation expense vesting period restricted shares december 31 2016 2015 152 million 302 million respectively unearned compensation cost related unvested restricted shares expected recognized weightedaverage period approximately one year amounts recognized net earnings prospective periods awards vest total fair value restricted shares vested years ended december 31 2016 2015 2014 388 million 413 million 348 million respectively recorded stockbased compensation restricted shares follows following table summarizes information regarding restricted shares unvested restricted shares outstanding december 31 2016 includes approximately 831000 units performancebased vesting provisions performancebased units issuable common stock vest upon achievement predefined performance targets primarily based average annual return net assets threeyear period compared measure defined peer group period units granted three annual grants since january 1 2014 vesting percentage 0 200 depending achievement specific performance targets compensation expense recognized ratably cliffvesting period 36 months based fair market value common stock date grant adjusted anticipated forfeitures performance period earned unearned compensation expense adjusted based changes expected achievement performance targets vesting provisions range 0 approximately 1593000 shares based performance targets december 31 2016 estimate vesting approximately 601000 shares based expected achievement performance targets 6 derivatives hedging activities risk management foreign currency derivatives hedging policy specifies conditions may enter derivative contracts see note 1 additional information purpose entering derivatives overall risk management strategies enter foreign exchange forward contracts hedge cash flow risks associated transactions denominated currencies local currency operation engaging transaction designated foreign exchange hedging instruments highly effective 2013 elected designate apply hedge accounting certain forward exchange contracts foreign exchange contracts designated hedging instruments notional values 06 million 210 million december 31 2016 2015 respectively foreign exchange contracts designated hedging instruments notional values 3932 million 3763 million december 31 2016 2015 respectively december 31 2016 length foreign exchange contracts currently place ranged 13 days 23 months exposed risk creditrelated losses resulting nonperformance counterparties financial instruments perform credit evaluations counterparties forward exchange contracts expect counterparties meet obligations experienced credit losses counterparties fair value foreign exchange contracts designated hedging instruments summarized current noncurrent derivative assets reported consolidated balance sheets prepaid expenses assets net respectively current noncurrent derivative liabilities reported consolidated balance sheets accrued liabilities retirement obligations liabilities respectively impact net changes fair values foreign exchange contracts summarized gains losses recognized consolidated statements income foreign exchange contracts classified income expense net march 2015 designated €2557 million €5000 million 2022 eur senior notes discussed note 10 net investment hedge investments certain international subsidiaries use euro functional currency used spot method measure effectiveness net investment hedge method reporting period change carrying value 2022 eur senior notes due remeasurement effective portion reported accumulated comprehensive loss consolidated balance sheet remaining change carrying value ineffective portion recognized income expense net consolidated statements income evaluate effectiveness net investment hedge prospective basis beginning quarter record ineffectiveness year ended december 31 2016 7 fair value financial instruments fair value debt excluding senior notes described note 10 estimated using interest rates similar debt recently issued companies credit metrics similar classified level ii fair value hierarchy carrying value debt included note 10 except senior notes approximates fair value estimated fair value senior notes based level quoted market rates estimated fair value senior notes december 31 2016 13272 million compared carrying value 13131 million carrying amounts financial instruments ie cash equivalents accounts receivable net accounts payable approximated fair value due shortterm nature december 31 2016 december 31 2015 8 details certain consolidated balance sheet captions following tables present financial information certain consolidated balance sheet captions accounts receivable net accounts receivable net disclosed note 1 reclassified portion accounts receivable longterm within assets net december 31 2016 2015 consolidated balance sheets 100 fully reserved december 31 2016 property plant equipment net property plant equipment net accrued liabilities accrued liabilities accrued liabilities include professional fees lease obligations insurance interest freight accrued cash dividends payable legal environmental matters derivative liabilities restructuring reserves items none individually exceed 5 current liabilities retirement obligations liabilities retirement obligations liabilities 1 prior period retrospectively adjusted reflect adoption asu 201517 balance sheet classification deferred taxes 9 equity method investments occasionally enter joint venture arrangements local country partners preferred means entry countries barriers entry may exist similar consolidated subsidiaries unconsolidated joint ventures generally operate within primary businesses designing manufacturing assembling distributing fluid motion control products services agreements certain joint ventures restrict us otherwise entering respective market certain joint ventures produce andor sell products part broader product offering net earnings investments unconsolidated joint ventures reported net earnings affiliates consolidated statements income given integrated role unconsolidated joint ventures business net earnings affiliates presented component operating income december 31 2016 investments eight joint ventures one located chile india japan saudi arabia south korea united arab emirates two located china accounted using equity method immaterial disclosure purposes 10 debt lease obligations debt including capital lease obligations consisted 1prior period information updated conform presentation requirements prescribed asu 201503 interest imputation interest subtopic 83530 scheduled maturities senior credit facility described well senior notes debt senior notes march 17 2015 completed public offering €5000 million euro senior notes aggregate principal amount due march 17 2022 eur senior notes 2022 eur senior notes bear interest rate 125 per year payable year march 17 commencing march 17 2016 2022 eur senior notes priced 99336 par value reflecting discount aggregate principal amount proceeds offering €4967 million 5263 million based exchange rates effect time offering closed used portion proceeds 2022 eur senior notes ultimately fund acquisition sihi described note 2 utilized remaining portion general corporate purposes november 1 2013 completed public offering 3000 million aggregate principal amount senior notes due november 15 2023 senior notes 2023 senior notes bear interest rate 400 per year payable may 15 november 15 year 2023 senior notes priced 99532 par value reflecting discount aggregate principal amount september 11 2012 completed public offering 5000 million aggregate principal amount senior notes due september 15 2022 senior notes 2022 senior notes bear interest rate 350 per year payable march 15 september 15 year 2022 senior notes priced 99615 par value reflecting discount aggregate principal amount right redeem 2022 senior notes 2023 senior notes time prior june 15 2022 august 15 2023 respectively whole part option redemption price equal greater 1 100 principal amount senior notes redeemed 2 sum present values remaining scheduled payments principal interest respect senior notes redeemed discounted redemption date semiannual basis applicable treasury rate plus 30 basis points 2022 senior notes plus 25 basis points 2023 senior notes addition time june 15 2022 senior notes august 15 2023 senior notes may redeem senior notes redemption price equal 100 principal amount senior notes redeemed case also pay accrued unpaid interest principal amount redeemed redemption date similarly right redeem 2022 eur senior notes december 17 2021 whole part option redemption price equal greater 1 100 principal amount senior notes redeemed 2 sum present values remaining scheduled payments principal interest respect senior notes redeemed exclusive interest accrued excluding date redemption discounted redemption date annual basis comparable german government bond rate plus 25 basis points senior credit facility credit agreement provides 4000 million term loan “term loan facility” 10 billion revolving credit facility “revolving credit facility” together term loan facility “senior credit facility” october 14 2015 amended senior credit facility amendment extended maturity senior credit facility two years october 14 2020 lowered sublimits issuance letters credit reduced commitment fee 0175 015 daily unused portions senior credit facility amended senior credit facility also increased maximum permitted leverage ratio 325 35 times debt total consolidated ebitda defined senior credit facility pursuant terms senior credit facility indentures governing senior notes obligations longer carry conditional guarantee certain 100 owned domestic subsidiaries subject certain conditions right increase amount term loan facility revolving credit facility aggregate amount exceed 4000 million existing terms senior credit facility remained unchanged december 31 2016 december 31 2015 revolving loans outstanding revolving credit facility outstanding letters credit 1026 million 1052 million december 31 2016 december 31 2015 respectively december 31 2016 due financial covenant senior credit facility amount available borrowings revolving credit facility effectively limited 5535 million amount available borrowings revolving credit facility 8948 million december 31 2015 senior credit facility contains among things covenants defining subsidiaries ability dispose assets merge pay dividends repurchase redeem capital stock indebtedness incur indebtedness guarantees create liens enter agreements negative pledge clauses make certain investments acquisitions enter transactions affiliates engage business activity existing business compliance financial covenants senior credit facility tested quarterly compliance covenants december 31 2016 repayment obligations may prepay loans senior credit facility whole part without premium penalty time commitment fee payable quarterly daily unused portions senior credit facility 015 per annum december 31 2016 made scheduled principal repayments term loan facility 600 million 450 million 400 million 2016 2015 2014 respectively scheduled principal repayments 150 million due next four quarters 2017 term loan facility operating leases noncancelable operating leases certain offices service quick response centers certain manufacturing operating facilities machinery equipment automobiles rental expense relating operating leases 547 million 531 million 562 million 2016 2015 2014 respectively future minimum lease payments due noncancelable operating leases amounts thousands 11 pension postretirement benefits sponsor several noncontributory defined benefit pension plans covering substantially us employees certain nonus employees provide benefits based years service age job grade levels type compensation retirement benefits covered employees provided contributory pension plans cash balance pension plans governmentsponsored retirement programs funded defined benefit pension plans receive funding based independent actuarial valuations provide current service amount sufficient amortize unfunded prior service periods exceed 30 years funding falling within legal limits prescribed prevailing regulation also maintain unfunded defined benefit plans permitted local regulations receive funding benefits become due defined benefit plan strategy ensure current future benefit obligations adequately funded costeffective manner additionally investing objective achieve highest level investment performance compatible risk tolerance prudent investment practices longterm nature defined benefit plan liabilities funding strategy based longterm perspective formulating implementing investment policies evaluating investment performance asset allocation defined benefit plans reflect decision proportion investment equity fixed income securities appropriate various subasset classes least annually complete comprehensive review asset allocation policy underlying assumptions includes longterm capital markets rate return assumptions risk tolerances relative defined benefit plan liabilities expected rates return defined benefit plan assets derived review asset allocation strategy expected longterm performance asset classes risks factors adjusted specific investment strategy rates impacted changes general market conditions longterm nature shortterm market changes significantly impact rates us defined benefit plan assets consist balanced portfolio primarily us equity fixed income securities nonus defined benefit plan assets include significant concentration united kingdom uk fixed income securities monitor investment allocations manage plan assets maintain acceptable levels risk periods presented used measurement date december 31 us nonus pension plans postretirement medical plans us defined benefit plans maintain qualified nonqualified defined benefit pension plans us qualified plan provides coverage substantially fulltime us employees receive benefits earnings threshold specified us department labor nonqualified plans primarily cover small number employees including current former members senior management providing benefit levels equivalent participants otherwise limited us department labor rules us plans designed operate cash balance arrangements employee option take lump sum payment end service total accumulated benefit obligation equivalent total projected benefit obligation benefit obligation following assumptions related us defined benefit pension plans december 31 2016 compared december 31 2015 decreased discount rate 475 400 based analysis publiclytraded investment grade us corporate bonds lower yield due current market conditions determining 2016 expense expected rate return us plan assets decreased 600 primarily based target allocations expected longterm asset returns longterm rate return assumption calculated using quantitative approach utilizes unadjusted historical returns asset allocation inputs calculation us plans adopted rp2006 mortality tables mp2016 improvement scale published october 2016 applied rp2006 tables based constituency plan population union nonunion participants adjusted improvement scale utilize 75 ultimate improvement rate consistent assumptions adopted social security administration trustees based longterm historical experience currently believe approach provides best estimate future obligation plan participants elect receive plan benefits lump sum end service rather annuity updated mortality tables immaterial effect pension obligation net pension expense us defined benefit pension plans including qualified nonqualified plans estimated prior service cost estimated net loss us defined benefit pension plans amortized accumulated comprehensive loss pension expense 2017 01 million 60 million respectively amortize estimated prior service benefits estimated net losses remaining expected service period following summarizes net pension liability us plans following summarizes amounts recognized balance sheet us plans following summary changes us defined benefit plans’ pension obligations 1 actuarial loss 2016 gain 2015 primarily reflect impact changes discount rate following table summarizes expected cash benefit payments us defined benefit pension plans future amounts millions following table shows change accumulated comprehensive loss attributable components net cost change benefit obligations us plans net tax amounts recorded accumulated comprehensive loss consist following reconciliation us defined benefit pension plans’ assets contributed 225 million 210 million us defined benefit pension plans 2016 2015 respectively payments exceeded minimum funding requirements mandated us department labor rules estimated contribution 2017 expected approximately 20 million excluding direct benefits paid us defined benefit plan assets held qualified plan asset allocations qualified plan end 2016 2015 asset category follows none common stock directly held qualified plan investment strategy earn longterm rate return consistent acceptable degree risk minimize cash contributions life plan taking account liquidity needs plan preserve capital diversified investments high quality securities current allocation target invest approximately 50 plan assets equity securities 50 fixed income securities within investment category assets allocated various investment strategies professional money management firm manages assets engage consultant assist evaluating activities periodically review allocation target generally conjunction asset liability study consideration future cash flow needs regularly rebalance actual allocation target investment allocation plan assets invested commingled funds individual funds actively managed intent outperform specified benchmarks pension investment committee responsible setting investment strategy target asset allocation well selecting individual funds qualified plan approached fully funded status implemented liabilitydriven investing ldi strategy closely aligns duration assets duration liabilities ldi strategy results asset portfolio closely matches behavior liability thereby protecting funded status plan’s financial instruments shown presented fair value see note 1 discussion hierarchical levels fair values plan’s investments determined fair values us defined benefit plan assets us large cap funds seek outperform russell 1000 r index investments large medium capitalization us companies represented russell 1000 r index composed largest 1000 us equities determined market capitalization b us small cap funds seek outperform russell 2000 r index investments medium small capitalization us companies represented russell 2000 r index composed smallest 2000 us equities determined market capitalization c international large cap funds seek outperform msci europe australia far east index investments developed nations world maintain high degree diversification among countries currencies emerging markets funds represent diversified portfolio seeks high longterm returns comparable investments emerging markets investing stocks newly developed emerging market economies e world equity funds seek outperform russell developed large cap index net full market cycle funds goal provide favorable total return relative benchmark primarily longterm capital appreciation f ldi funds seek outperform barclaysrussell ldi index investing high quality mostly corporate bonds fixed income securities closely match found discount curves used value plans liabilities g longterm governmentcredit funds seek outperform barclays capital us longterm governmentcredit index generating excess return variety diversified strategies securities longer durations sector rotation security selection tactical use highyield bonds nonus defined benefit plans maintain defined benefit pension plans cover employees following countries austria belgium canada france germany india italy mexico netherlands sweden switzerland uk assets uk two plans netherlands canada represent 94 total nonus plan assets nonus assets details countries’ plan assets provided due immateriality following assumptions related nonus defined benefit pension plans december 31 2016 compared december 31 2015 decreased average discount rate nonus plans 313 234 based analysis bonds publiclytraded instruments country lower yields due market conditions determine 2016 pension expense decreased average expected rate return plan assets 503 december 31 2015 468 december 31 2016 primarily based target allocations expected longterm asset returns expected rate return plan assets longterm nature shortterm market changes significantly impact rate many nonus defined benefit plans unfunded permitted local regulation expected longterm rate return assets funded plans determined assessing rates return asset class calculated using quantitative approach utilizes unadjusted historical returns asset allocation inputs calculation work actuaries determine reasonableness longterm rate return assumptions looking several factors including historical returns expected future returns asset allocation risks asset class items net pension expense nonus defined benefit pension plans 2017 significant estimated prior service cost amortized accumulated comprehensive loss pension expense nonus defined benefit pension plans estimated net loss nonus defined benefit pension plans amortized accumulated comprehensive loss pension expense 2017 35 million amortize estimated net losses remaining expected service period remaining expected lifetime inactive participants plans inactive participants following summarizes net pension liability nonus plans following summarizes amounts recognized balance sheet nonus plans following reconciliation nonus plans’ defined benefit pension obligations 1 2016 actuarial loss primarily reflects decrease discount rates uk eurozone 2 currency translation impact reflects strengthening us dollar significant currencies primarily euro british pound following table summarizes expected cash benefit payments nonus defined benefit plans future amounts millions following table shows change accumulated comprehensive loss attributable components net cost change benefit obligations nonus plans net tax amounts recorded accumulated comprehensive loss consist following reconciliation nonus plans’ defined benefit pension assets contributions nonus defined benefit pension plans 2017 expected approximately 6 million excluding direct benefits paid asset allocations nonus defined benefit pension plans end 2016 2015 follows none common stock held directly plans cases investment strategy plans earn longterm rate return consistent acceptable degree risk minimize cash contributions life plan taking account liquidity needs plan legal requirements particular country preserve capital diversified investments high quality securities asset allocation differs plan based upon plan’s benefit obligation participants well results asset liability studies conducted plan consideration future cash flow needs professional money management firms manage plan assets engage consultants uk assist evaluation activities assets uk plans overseen group trustees review investment strategy asset allocation fund selection assets passively managed invested index funds attempt match performance specified benchmark index fair values nonus assets north american companies represents us canadian large cap equity funds managed track respective benchmarks ftse allworld usa index ftse allworld canada index b uk companies represents uk equity index fund passively managed tracks ftse allshare index c european companies represents european equity index fund passively managed tracks ftse allworld developed europe exuk index asian pacific companies represents japanese pacific rim equity index funds passively managed track respective benchmarks ftse allworld japan index ftse allworld developed asia pacific exjapan index e global equity represents actively managed global equity funds taking topdown strategic view different regions analyzing companies based fundamentals marketdriven thematic quantitative factors generate alpha f uk government gilt index represents uk government issued fixed income investments passively managed track respective benchmarks ftse uk gilt indexlinked 5 years index ftse uk gilt 15 years index ftse uk gilt indexlinked 25 years index g uk corporate bond index represents uk corporate bond investments passively managed track iboxx 15 years £ nongilt index h global fixed income bond represents investment funds actively managed diversified invested traditional government bonds highquality corporate bonds asset backed securities emerging market debt liability driven investment seeks invest fixed income securities closely match found discount curves used value plans liabilities j multiasset seeks attractive riskadjusted return investing diversified portfolio strategies including equities fixed income k buyin contract represents asset held netherlands plan whereby cost providing benefits funded contract initial investment contract 197 million made january 1 2016 fair value currency adjustments resulted fair value 209 million december 31 2016 fair value asset based current present value accrued benefits fluctuate based changes obligations associated covered plan members well assumptions used present value calculation l includes assets held plans outside united kingdom netherlands details including level iii rollforward details material defined benefit pension plans accumulated benefit obligations excess plan assets following summarizes key pension plan information regarding us nonus plans whose accumulated benefit obligations exceed fair value respective plan assets postretirement medical plans sponsor several defined benefit postretirement medical plans covering certain current retirees limited number future retirees us plans provide medical dental benefits administered insurance companies health maintenance organizations plans include participant contributions deductibles coinsurance provisions limitations integrated medicare group plans fund plans benefits health maintenance organization premiums paid plans hold assets period presented accordingly investment strategy targeted allocations plan assets benefits postretirement medical plans available new employees existing employees following assumptions related postretirement benefits assumed ranges annual rates increase medical costs used determine net expense 75 2016 2015 2014 gradual decrease 50 2025 future years net postretirement benefit cost income postretirement medical plans estimated prior service cost expected amortized accumulated comprehensive loss us pension expense 2017 01 million estimated net loss postretirement medical plans amortized accumulated comprehensive loss us expense 2017 01 million following summarizes accrued postretirement benefits liability postretirement medical plans following summarizes amounts recognized balance sheet postretirement benefit obligation following reconciliation postretirement benefit obligation following presents expected benefit payments future periods amounts millions following table shows change accumulated comprehensive loss attributable components net cost change benefit obligations postretirement benefits net tax amounts recorded accumulated comprehensive loss consist made contributions postretirement medical plans pay benefits 44 million 2016 51 million 2015 38 million 2014 postretirement medical plans unfunded make contributions covered individuals’ claims approved payment accordingly contributions period directly correlated benefits paid assumed health care cost trend rates effect amounts reported postretirement medical plans onepercentage point change assumed health care cost trend rates would following effect 2016 reported amounts thousands defined contribution plans sponsor several defined contribution plans covering substantially us canadian employees certain nonus employees may contribute plans contributions matched varying amounts us including opportunities discretionary matching contributions us defined contribution plan expense 172 million 2016 196 million 2015 204 million 2014 12 legal matters contingencies asbestosrelated claims defendant substantial number lawsuits seek recover damages personal injury allegedly caused exposure asbestoscontaining products manufactured andor distributed heritage companies past overall number asbestosrelated claims generally declined recent years assurance trend continue average cost per claim increase asbestoscontaining materials incorporated products encapsulated used internal components process equipment believe significant emission asbestos fibers occurred use equipment practice vigorously contest resolve claims successful resolving majority claims little payment historically high percentage resolved claims covered applicable insurance indemnities companies believe substantial majority existing claims continue covered insurance indemnities accordingly recorded liability estimate likely settlement asserted claims related receivable insurers companies estimated recovery extent believe amounts recovery probable otherwise dispute unfavorable rulings judgments settlement terms regarding claims could material adverse impact business financial condition results operations cash flows currently believe likelihood remote additionally claims pending certain insurers resolved favorably reflected recorded receivables would result discrete gains applicable quarter currently unable estimate impact unasserted asbestosrelated claims although future claims would also subject existing indemnities insurance coverage united nations oilforfood program mid2006 french authorities began investigation 170 french companies one french subsidiaries included concerning suspected inappropriate activities conducted connection united nations oil food program previously disclosed french investigation french subsidiary formally opened first quarter 2010 french subsidiary filed formal response french court july 2012 french court ruled procedural motions challenge constitutionality charges quash indictment hearings occurred april 12 2015 company presented defense closing arguments june 18 2015 french court issued ruling dismissing case company defendants however july 1 2015 french prosecutor lodged appeal currently expect incur additional case resolution costs material amount matter however french authorities ultimately take enforcement action french subsidiary regarding investigation may subject monetary nonmonetary penalties currently believe material adverse financial impact company currently involved potentially responsible party five former public waste disposal sites various stages evaluation remediation projected cost remediation sites well alleged fair share allocation remain uncertain studies completed parties either negotiated amicable resolution matter judicially resolved site many parties similarly identified many parties identified financially strong solvent companies appear able pay share remediation costs based information waste disposal practices sites environmental regulatory process general believe likely ultimate remediation liability costs site apportioned among liable parties including site owners waste transporters according volumes andor toxicity wastes shown disposed sites believe financial exposure existing disposal sites materially excess accrued reserves previously disclosed terminated employee overseas subsidiary uncovering actions violated code business conduct may violated foreign corrupt practices act completed internal investigation matter selfreported potential violation united states department justice “doj” sec continue cooperate doj sec previously received subpoena sec requesting additional information documentation related matter completed response subpoena currently believe matter material adverse financial impact company assurance company subjected monetary penalties additional costs also defendant number lawsuits including product liability claims insured subject applicable deductibles arising ordinary course business also involved uninsured routine litigation incidental business currently believe none litigation either individually aggregate material business operations overall financial condition however litigation inherently unpredictable resolutions dispositions claims lawsuits settlement otherwise could adverse impact financial position results operations cash flows reporting period resolution disposition occurs although none aforementioned potential liabilities quantified absolute certainty except otherwise indicated established reserves covering exposures relating contingencies extent believed reasonably estimable probable based past experience available facts additional exposures beyond reserves could exist currently cannot estimated continue evaluate update reserves necessary appropriate 13 warranty reserve recorded reserves product warranty claims included current liabilities following summary activity warranty reserve 14 shareholders’ equity dividends february 15 2016 board directors authorized increase payment quarterly dividends common stock 018 per share 019 per share payable beginning april 8 2016 february 16 2015 board directors authorized increase payment quarterly dividends common stock 016 per share 018 per share payable beginning april 10 2015 february 17 2014 board directors authorized increase payment quarterly dividends common stock 014 per share 016 per share payable beginning april 11 2014 generally dividend dateofrecord last month quarter dividend paid following month subsequent dividends reviewed board directors declared discretion dependent assessment financial situation business outlook applicable time share repurchase program november 13 2014 board directors approved 5000 million share repurchase authorization share repurchase program expiration date reserve right limit terminate repurchase program anytime without notice repurchases shares outstanding common stock year ended december 31 2016 compared share repurchases 6047839 3037 million 3420656 2465 million 2015 2014 respectively december 31 2016 1607 million remaining capacity current share repurchase program 15 income taxes provision income taxes consists following expected cash payments current income tax expense 2016 2015 2014 reduced 02 million 64 million 86 million respectively result tax deductions related vesting restricted stock exercise nonqualified employee stock options income tax benefit resulting stockbased compensation plans increased capital excess par value provision income taxes differs statutory corporate rate due following 2016 tax rate differed federal statutory rate 35 primarily due net impact foreign operations tax impacts realignment programs losses certain foreign jurisdictions tax benefit provided effective tax rate 337 year ended december 31 2016 decreased 353 2015 due primarily tax impacts described 2015 tax rate differed federal statutory rate 35 primarily due tax impacts realignment programs nondeductible venezuelan exchange rate remeasurement loss establishment valuation allowance deferred tax assets brazil amount 126 million partially offset net impact foreign operations included impacts lower foreign tax rates changes reserves established uncertain tax positions 2014 tax rate differed federal statutory rate 35 primarily due net impact foreign operations included impacts lower foreign tax rates changes reserves established uncertain tax positions assert permanent reinvestment majority invested capital unremitted foreign earnings foreign subsidiaries however assert permanent reinvestment limited number foreign subsidiaries future distributions may occur cumulative amount undistributed earnings considered permanently reinvested 15 billion permanently reinvested earnings repatriated future period form dividends otherwise provision income taxes may increase materially period quantification deferred tax liability associated indefinitely reinvested differences practicable due complexities hypothetical calculation three years reported period ended december 31 2016 recognized net deferred tax assets attributable excess foreign tax credits unremitted earnings foreign currency translation adjustments foreign subsidiaries excess financial reporting basis subsidiaries permanent reinvestment asserted cash deemed dividend distributions resulted recognition 46 million 24 million 69 million income tax expense december 31 2016 2015 2014 respectively recorded benefit excess foreign tax credits associated deemed repatriation unremitted earnings credits available offset liability associated dividends deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes significant components consolidated deferred tax assets liabilities 2250 million us foreign net operating loss carryforwards december 31 2016 total 350 million state net operating losses net operating losses generated us unused expire 2017 2027 majority nonus net operating losses carry forward without expiration additionally 600 million foreign tax credit carryforwards december 31 2016 expiring 2020 2026 valuation allowance 06 million recorded earnings income taxes comprised tabular reconciliation total gross amount unrecognized tax benefits excluding interest penalties follows millions amount gross unrecognized tax benefits december 31 2016 751 million includes 158 million accrued interest penalties amount 665 million recognized would favorably impact effective tax rate years ended december 31 2016 recognized net interest penalty income 16 million period 2015 recognized net interest penalty income 2014 recognized 15 million limited exception longer subject us federal income tax audits years 2014 state local income tax audits years 2010 nonus income tax audits years 2009 currently examination various years austria canada germany india italy singapore us venezuela reasonably possible within next 12 months effective tax rate impacted resolution matters audited various taxing authorities also reasonably possible statute limitations close various taxing jurisdictions within next 12 months estimate could record reduction tax expense approximately 17 million within next 12 months 16 business segment information business segments share focus industrial flow control technology high number common customers segments also complementary product offerings technologies often combined applications provide us net competitive advantage segments also benefit global footprint economies scale reducing administrative overhead costs serve customers cost effectively conduct operations three business segments based type product manage business • epd long lead time custom highlyengineered pumps pump systems mechanical seals auxiliary systems replacement parts related services • ipd engineered preconfigured industrial pumps pump systems related products services • fcd engineered industrial valves control valves actuators controls related services decisionmaking purposes chief executive officer ceo members senior executive management use financial information generated reported reportable segment level corporate headquarters constitute separate division business segment evaluate segment performance allocate resources based reportable segment’s operating income amounts classified eliminations include corporate headquarters costs minor entities constitute separate segments intersegment sales transfers recorded cost plus profit margin sales related margin sales eliminated consolidation first quarter 2015 made composition changes epd ipd reportable segments take consideration acquisition sihi closed january 7 2015 effective january 1 2015 certain activities primarily related engineered pumps seals previously included ipd business segment reported epd business segment changes materially impact segment results segment assets change business segments management structure chief operating decision maker evaluate segment performance allocate resources prior periods retrospectively adjusted conform new reportable segment composition following summary financial information reportable segments years ended december 31 2016 2015 2014 reconciled amounts reported consolidated financial statements 1prior period information updated conform presentation requirements prescribed asu 201503 interest imputation interest subtopic 83530 asu 201517 balance sheet classification deferred taxes geographic information attribute sales different geographic areas based facilities’ locations longlived assets classified based geographic area assets located exclude deferred taxes goodwill intangible assets prior period information updated conform current year presentation sales longlived assets geographic area follows 1 ema includes europe middle east africa individual country within group represents 10 consolidated totals period presented 2 asia includes asia australia individual country within group represents 10 consolidated totals period presented 3 includes canada latin america individual country within group represents 10 consolidated totals period presented 4 prior period longlived assets information updated conform presentation requirements prescribed asu 201503 interest imputation interest subtopic 83530 net sales international customers including export sales us represented approximately 64 total sales 2016 66 2015 68 2014 major customer information large number customers across large number manufacturing service facilities believe sales individual customer represent 10 consolidated sales years presented 17 accumulated comprehensive loss following presents components accumulated comprehensive loss aocl net related tax effects 1 includes foreign currency translation adjustments attributable noncontrolling interests 34 million 27 million 13 million december 31 2016 2015 2014 respectively foreign currency translation impact primarily represents weakening british pound euro mexican peso exchange rates versus us dollar period includes net investment hedge gain 56 million loss 42 million net deferred taxes year ended december 31 2016 2015 respectively amounts parentheses indicate debits following table presents reclassifications aocl 1 amounts parentheses indicate decreases income none reclassification amounts noncontrolling interest component 2 accumulated comprehensive loss components included computation net periodic pension cost see note 11 additional details december 31 2016 expect recognize losses 01 million net deferred taxes earnings next twelve months related designated cash flow hedges based fair values december 31 2016 18 realignment programs first quarter 2015 initiated realignment program r1 realignment program reduce optimize certain nonstrategic qrcs manufacturing facilities sihi acquisition second quarter 2015 initiated second realignment program r2 realignment program better align costs improve longterm efficiency including manufacturing optimization consolidation facilities reduction workforce transfer activities highcost regions lowercost facilities divestiture certain nonstrategic assets r1 realignment program r2 realignment program collectively realignment programs consist restructuring nonrestructuring charges restructuring charges represent costs associated relocation reorganization certain business activities facility closures include related severance costs nonrestructuring charges primarily employee severance associated workforce reductions reduce redundancies expenses primarily reported cos sga applicable condensed consolidated statements income anticipate total investment programs approximately 400 million including projects still final evaluation anticipate majority remaining charges incurred throughout 2017 generally aforementioned charges paid cash except asset writedowns noncash charges following summary total charges net adjustments related realignment programs 1 income tax expense includes exit taxes well nondeductible costs following summary total inception date charges net adjustments related realignment programs 1 includes 468 million restructuring charges primarily cos related r1 realignment program 2 income tax expense includes exit taxes well nondeductible costs restructuring charges represent costs associated relocation reorganization certain business activities facility closures include costs related employee severance closed facilities contract termination costs asset writedowns costs severance costs primarily include costs associated involuntary termination benefits contract termination costs include costs related termination operating leases contract termination costs asset writedowns include accelerated depreciation fixed assets accelerated amortization intangible assets divestiture certain nonstrategic assets inventory writedowns costs generally include costs related employee relocation asset relocation vacant facility costs ie taxes insurance charges following summary restructuring charges net adjustments realignment programs 1 income tax expense includes exit taxes well nondeductible costs 1 income tax expense includes exit taxes well nondeductible costs following summary total inception date restructuring charges net adjustments related realignment programs 1 includes 468 million restructuring charges primarily cos related r1 realignment program 2 income tax expense includes exit taxes well nondeductible costs following represents activity primarily severance related restructuring reserve realignment programs 19 quarterly financial data unaudited following presents summary unaudited quarterly data 2016 2015 amounts millions except per share data 1 earnings per share computed independently quarters presented sum quarters may equal total year amount due impact changes weighted average quarterly shares outstanding significant fourth quarter impact 2016 earnings income taxes record 298 million charges related realignment programs see note 18 additional information realignment programs significant fourth quarter impact 2015 earnings income tax record 524 million charges related realignment programs addition 315 million less broadbased annual incentive compensation expense fourth quarter 2015 compared period 2014 item 9item 8 financial statements supplementary data report independent registered public accounting firm board directors shareholders flowserve corporation opinions financial statements internal control financial reporting audited accompanying consolidated balance sheets flowserve corporation subsidiaries december 31 2017 2016 related consolidated statements income comprehensive income shareholders’ equity cash flows three years period ended december 31 2017 including related notes schedule valuation qualifying accounts three years period ended december 31 2017 appearing item15a2 collectively referred “consolidated financial statements” also audited companys internal control financial reporting december 31 2017 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission coso opinion consolidated financial statements referred present fairly material respects financial position company december 31 2017 2016 results operations cash flows three years period ended december 31 2017 conformity accounting principles generally accepted united states america also opinion company maintained material respects effective internal control financial reporting december 31 2017 based criteria established internal control integrated framework 2013 issued coso basis opinions companys management responsible consolidated financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included managements report internal control financial reporting appearing item 9a responsibility express opinions company’s consolidated financial statements companys internal control financial reporting based audits public accounting firm registered public company accounting oversight board united states pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audits obtain reasonable assurance whether consolidated financial statements free material misstatement whether due error fraud whether effective internal control financial reporting maintained material respects audits consolidated financial statements included performing procedures assess risks material misstatement consolidated financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures consolidated financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation consolidated financial statements audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions definition limitations internal control financial reporting company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp pricewaterhousecoopers llp dallas texas february 28 2018 served company’s auditor since 2000 flowserve corporation consolidated balance sheets see accompanying notes consolidated financial statements flowserve corporation consolidated statements income see accompanying notes consolidated financial statements flowserve corporation consolidated statements comprehensive income see accompanying notes consolidated financial statements flowserve corporation consolidated statements shareholders’ equity flowserve corporation consolidated statements cash flows flowserve corporation notes consolidated financial statements december 31 2017 2016 three years ended december 31 2017 1 significant accounting policies accounting developments principally engaged worldwide design manufacture distribution service industrial flow management equipment provide long lead time custom highlyengineered pumps standardized generalpurpose pumps mechanical seals industrial valves related automation products solutions primarily oil gas chemical power generation water management general industries requiring flow management products services equipment manufactured serviced us predominantly used industries deal difficulttohandle corrosive fluids well environments extreme temperatures pressure horsepower speed business affected economic conditions united states us countries products sold serviced cyclical nature competitive environment industries served relationship us dollar currencies demand pricing customers’ end products revision previously reported financial information previously disclosed quarterly report form 10q quarterly period ended june 30 2017 identified accounting errors focused mainly two nonus sites inventory accounts receivable cos sga balances prior periods first quarter 2017 assessed errors individually aggregate concluded material prior annual interim period however facilitate comparisons among periods revised previously issued audited consolidated financial information included 2016 annual report unaudited condensed consolidated financial information interim periods included form 10qa form 10q quarters ended march 31 2017 june 30 2017 respectively venezuela operations venezuela primarily consist service center performs service repair activities venezuelan subsidiarys sales year ended december 31 2017 represented less 05 consolidated sales assets december 31 2017 represented less 05 total consolidated assets primarily consisted united states us dollardenominated monetary assets bolivardenominated nonmonetary assets december 31 2017 addition certain operations countries sell equipment parts typically denominated us dollars directly venezuelan customers addition certain operations countries sell equipment parts typically denominated us dollars directly venezuelan customers third quarter 2016 recorded charge 735 million sga fully reserve potentially uncollectible accounts receivable classified assets net condensed consolidated balance sheet charge cos 19 million reserve related net inventory exposures continue pursue payments venezuelan customer 2017 collected approximately 2 million previously reserved accounts receivable principles consolidation consolidated financial statements include accounts company wholly majorityowned subsidiaries addition would consolidate variable interest entities deemed primary beneficiary noncontrolling interests nonaffiliated parties recognized majorityowned consolidated subsidiaries intercompany profitslosses transactions balances among consolidated entities eliminated consolidated financial statements investments unconsolidated affiliated companies represent noncontrolling ownership interests 20 50 accounted using equity method approximates equity interest underlying equivalent net book value accounting principles generally accepted us gaap investments interests less 20 investee accounted cost method whereby income recognized event dividend receipt investments accounted cost method tested impairment indicator present use estimates process preparing financial statements conformity us gaap requires us make estimates assumptions affect reported amounts certain assets liabilities revenues expenses believe estimates assumptions reasonable however actual results may differ materially estimates significant estimates assumptions used determining • timing amount revenue recognition • deferred taxes tax valuation allowances tax reserves • reserves contingent loss • pension postretirement benefits • valuation goodwill indefinitelived intangible assets longlived assets revenue recognition revenues product sales recognized risks rewards ownership transferred customers typically based contractual delivery terms agreed customer fulfillment inconsequential perfunctory actions addition policy requires persuasive evidence arrangement fixed determinable sales price reasonable assurance collectibility defer recognition revenue advance payments received customers performance obligations completed andor services performed freight charges billed customers included sales related shipping costs included cos consolidated statements income contracts typically include cancellation provisions require customers reimburse us costs incurred date cancellation well contractual cancellation penalties enter certain agreements multiple deliverables may include combination designing developing manufacturing modifying installing commissioning flow management equipment providing services related performance products delivery products services typically occurs within one twoyear period although many arrangements shortcycle type orders shorter timeframe delivery separate deliverables units accounting based whether deliverables standalone value customer impact general rights return immaterial contract value allocated ratably units accounting arrangement based relative selling prices determined deliverables sold separately revenues longterm contracts exceed certain internal thresholds regarding size duration project provide receipt progress billings customer recorded percentage completion method progress measured costtocost basis percentage completion revenue represented approximately 4 5 7 consolidated sales december 31 2017 2016 2015 respectively revenue service repair contracts recognized services agreed customer rendered revenues generated fixed fee service repair contracts recognized ratable basis term contract contracts range duration generally extend five years fixed fee service contracts represent approximately 1 consolidated sales year presented certain instances provide guaranteed completion dates terms contracts failure meet contractual delivery dates result late delivery penalties nonrecoverable costs instances payment costs deemed probable perform project profitability analysis accounting costs reduction realizable revenues could potentially cause estimated total project costs exceed projected total revenues realized project instances would record reserves cover excesses period determined circumstances total projected revenues still exceed total projected costs incurrence penalties nonrecoverable costs generally reduces profitability project time subsequent revenue recognition cash equivalents place temporary cash investments financial institutions policy invest institutions instruments minimal credit risk market risk investments original maturity three months less purchased classified cash equivalents highly liquid principal values subject significant risk change due interest rate fluctuations allowance doubtful accounts credit risk allowance doubtful accounts established based estimates amount uncollectible accounts receivable determined principally based upon aging accounts receivable also customer credit history industry market segment information economic trends conditions credit reports customer credit issues customer bankruptcies general economic conditions may also impact estimates credit risks mitigated diversity customer base across many different geographic regions industries performing creditworthiness analyses customers additionally mitigate credit risk letters credit advance payments received customers 2016 experienced increased aging slower collection receivables primary venezuelan customer due certain actions customer diminished activity business payments 2016 recorded charge sga fully reserve potential uncollectible accounts receivable charge cos reserve related net inventory exposures believe significant concentrations credit risk inventories related reserves inventories stated lower cost net realizable value cost determined firstin firstout method reserves excess obsolete inventories based upon assessment market conditions products determined historical usage estimated future demand due long life cycles products carry spare parts inventories historically low usage rates provide reserves inventory based demonstrated usage aging criteria income taxes deferred taxes tax valuation allowances tax reserves account income taxes asset liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases operating loss tax credit carryforwards deferred tax assets liabilities calculated using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized period includes enactment date record valuation allowances reflect estimated amount deferred tax assets may realized based upon analysis existing deferred tax assets net operating losses tax credits jurisdiction expectations ability utilize tax attributes review past current estimated future taxable income establishment tax strategies provide deferred taxes temporary differences associated investment foreign subsidiaries financial reporting basis exceeds tax basis unless assert permanent reinvestment foreign jurisdictions financial reporting basis tax basis differences investments foreign subsidiaries consist unremitted earnings losses well foreign currency translation adjustments amount income taxes pay subject ongoing audits federal state foreign tax authorities often result proposed assessments establish reserves open tax years uncertain tax positions may subject challenge various tax authorities consolidated tax provision related accruals include impact reasonably estimable losses related interest penalties deemed appropriate recognize tax benefit uncertain tax position likely tax position sustained examination taxing authorities determination based technical merits position presumes uncertain tax position examined relevant taxing authority full knowledge relevant information tax benefits recognized financial statements position measured based largest benefit greater fifty percent likelihood realized upon ultimate settlement legal environmental contingencies legal environmental reserves recorded based upon casebycase analysis relevant facts circumstances assessment potential legal obligations costs amounts relating legal environmental liabilities recorded probable loss incurred loss estimable assessments legal environmental costs based information obtained independent inhouse experts loss experience similar situations estimates updated applicable new information regarding facts circumstances matter becomes available legal fees associated legal environmental liabilities expensed incurred estimates liabilities unsettled asbestosrelated claims based known claims experience preceding two years claims filed settled dismissed adjustments events deemed unusual unlikely recur included retirement obligations liabilities consolidated balance sheets substantial majority asbestosrelated claims covered insurance indemnities estimated indemnities receivables insurance carriers unsettled claims receivables settlements legal fees paid us asbestosrelated claims estimated using historical experience insurance recovery rates estimates future recoveries include estimates coverage financial viability insurance carriers estimated receivables included assets net consolidated balance sheets claims pending certain insurers resolved favorably estimated future recoveries would result discrete gains applicable quarter currently unable estimate impact unasserted asbestosrelated claims although future claims would also subject existing indemnities insurance coverage warranty accruals warranty obligations based upon product failure rates materials usage service delivery costs analysis identified expected claims estimate cost resolve claims estimates expected claims generally factor historical claims known product issues warranty obligations based factors adjusted based historical sales trends preceding 24 months insurance accruals insurance accruals recorded wholly partially selfinsured risks medical benefits workers’ compensation based upon analysis claim loss history insurance deductibles policy limits relevant factors updated annually included accrued liabilities consolidated balance sheets estimates based upon information received actuaries insurance company adjusters independent claims administrators independent sources receivables insurance carriers estimated using historical experience insurance recovery rates estimates future recoveries include estimates coverage financial viability insurance carriers estimated receivables included accounts receivable net assets net applicable consolidated balance sheets pension postretirement obligations determination pension postretirement benefits obligations based estimates made management consultation independent actuaries investment advisors inherent valuations assumptions including discount rates expected rates return plan assets retirement rates mortality rates compensation increase factors reviewed annually updated necessary current market conditions including changes rates return interest rates medical inflation rates considered selecting assumptions actuarial gains losses prior service costs recognized accumulated comprehensive loss arise amortize costs net pension expense remaining expected service period property plant equipment depreciation property plant equipment stated historical cost less accumulated depreciation asset retirement obligations exist capitalized part carrying amount asset depreciated remaining useful life asset useful lives leasehold improvements lesser remaining lease term useful life improvement assets retired otherwise disposed costs related accumulated depreciation removed accounts resulting gains losses included income operations period depreciation computed straightline method based estimated useful lives depreciable assets case assets capital leases related lease turn generally estimated useful lives assets costs related routine repairs maintenance expensed incurred internally developed software capitalize certain costs associated development internaluse software generally costs related significant software development projects amortized estimated useful life typically three five years upon implementation software intangible assets intangible assets excluding trademarks considered indefinite life consist primarily engineering drawings patents existing customer relationships software distribution networks items amortized estimated useful lives generally ranging four 40 years assets reviewed impairment whenever events circumstances indicate impairment may occurred valuation goodwill indefinitelived intangible assets longlived assets value goodwill indefinitelived intangible assets tested impairment december 31 year whenever events circumstances indicate assets may impaired identification reporting units began operating segment level considered whether components one level operating segment levels identified reporting units purpose testing goodwill impairment based certain conditions included among factors extent component represents business ii aggregation economically similar components within operating segments resulted four reporting units factors considered determining whether aggregation components appropriate included similarity nature products services nature production processes methods distribution types industries served impairment loss goodwill recognized implied fair value goodwill less carrying value estimate fair value reporting units based income approach whereby calculate fair value reporting unit based present value estimated future cash flows discounted cash flow analysis requires us make various judgmental assumptions future sales operating margins growth rates discount rates based budgets business plans economic projections anticipated future cash flows market participants assumptions also made varying perpetual growth rates periods beyond longterm business plan period record impairment goodwill 2017 2016 2015 however estimated fair value epo ipd reporting units reduced significantly 2016 2015 due broadbased capital spending declines heightened pricing pressure experienced oil gas markets anticipated continue near midterm epo reporting unit component epd reporting segment primarily focused long lead time custom highlyengineered pumps pump systems december 31 2017 epo reporting unit approximately 159 million goodwill estimated fair value exceeded carrying value approximately 82 compared approximately 156 million goodwill estimated fair value exceeded carrying value approximately 45 december 31 2016 addition ipd reporting unit approximately 319 million goodwill fair value exceeded carrying value approximately 66 december 31 2017 compared approximately 298 million goodwill fair value exceeded carrying value approximately 70 december 31 2016 key assumptions used determining estimated fair value epo ipd reporting units included annual operating plan forecasted operating results successful execution current realignment programs identified strategic initiatives constant cost capital continued stabilization mid longterm improvement macroeconomic conditions oil gas market relatively stable global gross domestic product although concluded impairment goodwill associated epo ipd reporting units december 31 2017 continue closely monitor performance related market conditions future indicators potential impairment reassess accordingly also consider market capitalization evaluation fair value goodwill market capitalization decreased slightly compared 2016 indicate potential impairment goodwill december 31 2017 impairment losses indefinitelived intangible assets recognized whenever estimated fair value less carrying value fair values calculated trademarks using relief royalty method estimates fair value trademark determining present value estimated royalty payments avoided result owning trademark method includes judgmental assumptions sales growth discount rates significant impact fair value substantially consistent assumptions used determine fair value reporting units discussed record material impairment trademarks 2017 2016 2015 recoverable value longlived assets including property plant equipment finitelived intangible assets reviewed indicators potential impairments present recoverable value based upon assessment estimated future cash flows related assets utilizing assumptions similar goodwill additional considerations related longlived assets include expected maintenance improvements changes expected uses ongoing operating performance utilization deferred loan costs deferred loan costs consisting fees expenses associated debt financing amortized term associated debt using effective interest method additional amortization recorded periods optional prepayments debt made fair values financial instruments financial instruments presented fair value consolidated balance sheets exception longterm debt fair value defined price would received sell asset paid transfer liability orderly transaction market participants measurement date available fair value based observable market prices parameters derived prices parameters observable prices inputs available valuation models may applied assets liabilities recorded fair value consolidated balance sheets categorized based upon level judgment associated inputs used measure fair values hierarchical levels defined accounting standards codification asc 820 fair value measurements disclosures directly related amount subjectivity associated inputs fair valuation assets liabilities asset liability’s categorization within fair value hierarchy based lowest level significant input valuation hierarchical levels follows level inputs unadjusted quoted prices active markets identical assets liabilities measurement date level ii inputs quoted prices included level either directly indirectly observable asset liability correlation market data measurement date duration instrument’s anticipated life level iii inputs reflect management’s best estimate market participants would use pricing asset liability measurement date consideration given risk inherent valuation technique risk inherent inputs model recurring fair value measurements limited investments derivative instruments certain equity securities fair value measurements derivative instruments determined using models maximize use observable market inputs including interest rate curves forward spot prices currencies classified level ii fair value hierarchy fair values derivative instruments included note 6 fair value measurements investments equity securities determined using quoted market prices classified level fair values investments equity securities changes thereto immaterial consolidated financial position results operations derivatives hedging activities foreign currency derivatives hedging policy outlining conditions enter financial derivative transactions use derivative instruments trading speculative purposes derivative instruments recognized balance sheet fair values employ foreign currency economic hedging strategy mitigate certain financial risks resulting foreign currency exchange rate movements impact foreign currency denominated receivables payables firm committed transactions forecasted sales purchases changes fair values recognized immediately income expense net consolidated statements income see note 6 discussion forward exchange contracts exposed risk creditrelated losses resulting nonperformance counterparties financial instruments perform credit evaluations counterparties forward exchange contracts expect counterparties meet obligations necessary would adjust values derivative contracts counterparties’ credit risks foreign currency translation assets liabilities foreign subsidiaries translated us dollars exchange rates prevailing balance sheet date income expenses translated average rates month translation gains losses reported component accumulated comprehensive loss transactional currency gains losses arising transactions currencies sites’ functional currencies included consolidated results operations transaction translation gains losses arising intercompany balances reported component accumulated comprehensive loss underlying transaction stems longterm equity investment debt designated due foreseeable future otherwise recognize transaction gains losses arising intercompany transactions component income intercompany balances longterm investment related designated due beyond foreseeable future may mitigate risk associated foreign currency fluctuations entering forward exchange contracts stockbased compensation stockbased compensation measured grantdate fair value exercise price stock option awards value restricted share restricted share unit performancebased unit awards collectively referred restricted shares set closing price common stock new york stock exchange date grant date grants authorized board directors restricted share units performancebased units refer restricted awards voting rights accrue dividends forfeited vesting occur intrinsic value restricted shares typically product share price date grant number restricted shares granted amortized straightline basis compensation expense periods restrictions lapse based expected number shares vest account forfeitures occur resulting reversal cumulative expense previously recognized earnings per share use twoclass method calculating earnings per share eps determines earnings per share class common stock participating security earnings period distributed unvested restricted share awards earn nonforfeitable dividend rights qualify participating securities accordingly included basic computation unvested restricted shares participate equal basis common shares therefore difference undistributed earnings allocated participating security accordingly presentation prepared combined basis presented earnings per common share following reconciliation net earnings flowserve corporation weighted average shares calculating basic net earnings per common share earnings per weighted average common share outstanding calculated follows diluted earnings per share based upon weighted average number shares determined basic earnings per share plus shares potentially issuable conjunction stock options restricted share units performance share units research development expense research development costs charged expense incurred aggregate research development costs included sga 386 million 428 million 459 million 2017 2016 2015 respectively costs incurred research development primarily include salaries benefits consumable supplies well rent professional fees utilities depreciation property equipment used research development activities accounting developments pronouncements implemented july 2015 financial accounting standards board fasb issued asu 201511 inventory topic 330 simplifying measurement inventory previous issuance asu asc 330 required entity measure inventory lower cost market amendments asu 201511 updates “market” requirement “net realizable value” defined asu estimated selling prices ordinary course business less reasonably predictable costs completion disposal transportation adoption asu 201511 effective january 1 2017 impact consolidated financial condition results operations march 2016 fasb issued asu 201609 compensation stock compensation topic 718 improvements employee sharebased payment accounting asu affects accounting employee sharebased payment transactions relates accounting income taxes accounting forfeitures statutory tax withholding requirements adopted provisions asu 201609 january 1 2017 adoption resulted 30 million onetime cumulative adjustment beginning retained earnings related change accounting policy estimated forfeitures share cancellations additionally adoption resulted retrospective adjustments classification specific items statement cash flows specifically reclassified cash outflows employee taxes paid operating financing elected reclassify cash impacts due excess tax deficiencies benefits financing operating resulted net reclassification cash flows used operating financing approximately 129 million 227 million years ended december 31 2016 2015 respectively pronouncements yet implemented may 2014 fasb issued asu 201409 revenue contracts customers topic 606 supersedes revenue recognition requirements revenue recognition topic 605 standard principlebased provides fivestep model determine revenue recognized core principle company recognize revenue transfers promised goods services customers amount reflects consideration company expects entitled exchange goods services companies permitted adopt new standard using one two transition methods full retrospective method requirements new standard applied contracts prior reporting period presented cumulative effect applying standard recognized earliest period presented modified retrospective method requirements new standard applied contracts open january 1 2018 required date adoption cumulative effect applying standard recognized adjustment beginning retained earnings year standard also includes significantly expanded disclosure requirements revenue since 2014 fasb issued several updates topic 606 adopted new revenue guidance effective january 1 2018 using modified retrospective method transition applying guidance contracts completed date developed implemented framework accounting policies practices meet requirements standard reflects applicability key factors five step model aligning business processes systems controls support compliance standard requirements date assessment contracts customers new revenue standard indicates experience increase performance obligations satisfied “overtime” percentage completion “poc” method used primary measure progress toward satisfaction historically revenue recognized poc method 5 10 consolidated sales estimate adoption new revenue standard application performance obligations satisfied january 1 2018 result revenue recognized poc method approximately 30 40 consolidated sales driven primarily contract provisions transfer ownership overtime cancellation provisions require reimbursement costs incurred plus reasonable margin application contracts new revenue standard company still process final evaluation expect recognize total cumulative effect opening balance retained earnings january 1 2018 approximately 20 million mostly associated increase poc revenue recognition result initially applying standard also anticipate changes consolidated balance sheet related accounts receivable inventory contract assets accrued liabilities contract liabilities addition adoption new revenue standard significantly expand disclosure requirements specifically around quantitative qualitative information performance obligations pertains backlog changes contract assets liabilities disaggregation revenue january 2016 fasb issued asu 201601 financial instruments overall subtopic 82510 recognition measurement financial assets financial liabilities asu requires entities measure equity investments result consolidation accounted equity method fair value changes fair value recognized net income asu also requires entity present separately comprehensive income portion total change fair value liability resulting change instrumentspecific credit risk entity elected measure liability fair value accordance fair value option financial instruments requirement disclose methods significant assumptions used estimate fair value financial instruments measured amortized cost balance sheet eliminated asu effective fiscal years beginning december 15 2017 including interim periods within fiscal years adoption asu 201601 expected material impact consolidated financial condition results operations february 2016 fasb issued asu 201602 “leases topic 842” asu requires organizations lease assets recognize assets liabilities balance sheet rights obligations created leases asu affect presentation lease related expenses income statement cash flows increase required disclosures related leases asu effective annual periods beginning december 15 2018 including interim periods within fiscal years early adoption permitted currently evaluating impact asu 201602 related asus consolidated financial condition results operations although continuing evaluate upon initial qualitative evaluation believe key change upon adoption balance sheet recognition leased assets liabilities based qualitative evaluation date believe changes income statement recognition material june 2016 fasb issued asu 201613 financial instrumentscredit losses topic 326 measurement credit losses financial instruments amendments asu replace current incurred loss impairment methodology reflects expected credit losses requires consideration broader range reasonable supportable information inform credit loss estimates asu effective fiscal years beginning december 15 2019 including interim periods within fiscal years currently evaluating impact asu 201613 consolidated financial condition results operations august 2016 fasb issued asu 201615 “statement cash flows topic 230 classification certain cash receipts cash payments consensus fasb emerging issues task force” update issued objective reducing existing diversity practice certain cash receipts cash payments presented classified statement cash flows topic 230 topics asu effective fiscal years beginning december 15 2017 including interim periods within fiscal years adoption asu 201615 expected material impact consolidated statement cash flows october 2016 fasb issued asu 201616 income taxes topic 740 intraentity transfers assets inventory asu guidance requires recognition income tax consequences intercompany asset transfer transfers inventory transfer occurs intercompany transfers inventory income tax effects continue deferred inventory sold third party asu effective reporting periods beginning december 15 2017 early adoption permitted currently evaluating impact asu 201616 consolidated financial condition results operations november 2016 fasb issued asu 201618 statement cash flows topic 230 restricted cash amendments asu require statement cash flows explain change period total cash equivalents amounts generally described restricted cash restricted cash equivalents therefore amounts generally described restricted cash restricted cash equivalents included cash equivalents reconciling beginningofperiod endofperiod total amounts shown statement cash flows asu effective reporting periods beginning december 15 2017 including interim periods fiscal years adoption asu 201618 expected material impact consolidated statement cash flows january 2017 fasb issued asu 201701 business combinations topic 805 clarifying definition business asu clarifies definition business provides guidance evaluating whether transactions accounted acquisitions disposals assets businesses definition clarification outlined asu affects many areas accounting including acquisitions disposals goodwill consolidation amendments asu effective annual periods beginning december 15 2017 including interim periods within annual periods adoption asu 2017 01 expected material impact consolidated financial condition results operations january 2017 fasb issued asu 201704 intangibles goodwill topic 350 simplifying test goodwill impairment amendments asu allow companies apply onestep quantitative test record amount goodwill impairment excess reporting unit’s carrying amount fair value exceed total amount goodwill allocated reporting unit amendments asu effective annual interim goodwill impairment tests fiscal years beginning december 15 2019 early adoption permitted interim annual goodwill impairment tests performed testing dates january 1 2017 currently evaluating impact asu 2017 04 consolidated financial condition results operations february 2017 fasb issued asu 201705 income gains losses derecognition nonfinancial assets subtopic 61020 clarifying scope asset derecognition guidance accounting partial sales nonfinancial assets fasb issued asu clarify scope subtopic 61020 fasb failed define issuance asu 201409 revenue contracts customers topic 606 asu 201705 effective concurrently asu 201409 similar asu 201409 continuing evaluation asu 201705 determine impact consolidated financial condition results operations march 10 2017 fasb issued asu 201707 compensationretirement benefits topic 715 improving presentation net periodic pension cost net periodic postretirement benefit cost amendments asu provide additional guidance intended improve presentation net benefit costs pension costs net periodic postretirement costs amendments asu must applied annual reporting periods beginning december 15 2017 interim periods 2018 early adoption standard permitted adoption asu 2017 07 expected material impact consolidated financial condition results operations may 10 2017 fasb issued asu 201709 compensationstock compensation topic 718 scope modification accounting amendments asu provide guidance changes terms conditions sharebased payment award require entity apply modification accounting topic 718 amendments asu must applied annual reporting periods beginning december 15 2017 including interim periods within annual periods adoption asu 201709 expected material impact consolidated financial condition results operations august 28 2017 fasb issued asu 201712 derivatives hedging topic 815 targeted improvements accounting hedging activities purpose asu better align company’s risk management activities financial reporting hedging relationships additionally asu simplifies hedge accounting requirements improve disclosures hedging arrangements amendments asu must applied annual reporting periods beginning december 15 2018 including interim periods within annual periods early adoption standard permitted adoption asu 201712 expected material impact consolidated financial condition results operations february 2018 fasb issued asu 201802 income statement reporting comprehensive income topic 220 reclassification certain tax effects accumulated comprehensive income “aoci” asu amendments issued result enactment us tax cuts jobs act 2017 amendments asu address available options reclassify stranded tax effects within aoci retained earnings period effect change portion thereof recorded additionally asu outlines disclosure requirements releasing income tax effects aoci asu effective fiscal years beginning december 15 2018 interim periods within fiscal years early adoption permitted asu applied either period adoption retrospectively period periods effect change us federal corporate income tax rate tax cuts jobs act recognized currently evaluating impact asu 201802 consolidated financial condition results operations 2 dispositions acquisition vogt effective july 6 2017 sold fcds vogt product line related assets liabilities privately held company 280 million cash received closing sale resulted pretax gain 111 million recorded gain sale business consolidated statements income 2016 net sales related vogt business totaled approximately 17 million earnings interest taxes approximately 4 million gestra ag effective may 2 2017 sold fcds gestra ag gestra business leading provider steam system solutions 2036 million €1783 million included 1808 million €1583 million cash received closing net divested cash subsequent working capital adjustments 240 million €200 million previous escrow amounts collected fourth quarter 2017 sale resulted pretax gain 1302 million 794 million aftertax recorded gain sale business consolidated statements income sale included gestra’s manufacturing facility germany well related operations us united kingdom uk spain poland italy singapore portugal 2016 gestra recorded revenues approximately 101 million €92 million earnings interest taxes approximately 17 million €15 million sihi group bv effective january 7 2015 acquired inclusion ipd 100 sihi group bv sihi global provider engineered vacuum fluid pumps related services primarily servicing chemical market well pharmaceutical food beverage process industries stock purchase €2867 million 3415 million based exchange rates effect time acquisition closed net cash acquired cash acquisition funded using approximately 110 million available cash approximately 255 million initial borrowings revolving credit facility defined discussed note 10 subsequently paid portion net proceeds march 2015 offering 2022 eur senior notes defined discussed note 10 sihi based netherlands operations primarily europe lesser extent americas asia excess acquisition date fair value total purchase price estimated fair value net assets recorded goodwill 2011 million represents value expected obtained strengthening portfolio products services addition sihis engineered vacuum fluid pumps well associated aftermarket services parts goodwill related acquisition recorded ipd segment expected deductible tax purposes subsequent january 7 2015 revenues expenses sihi included consolidated statement income pro forma information provided due immateriality 3 goodwill intangible assets changes carrying amount goodwill years ended december 31 2017 2016 follows following table provides information intangible assets years ended december 31 2017 2016 1 engineering drawings represent estimated fair value associated specific acquired product component schematics 2 existing customer relationships acquired prior 2011 useful life five years 3 accumulated amortization indefinitelived intangible assets relates amounts recorded prior implementation date guidance issued asc 350 following schedule outlines actual amortization expense recognized 2017 estimate future amortization based upon finitelived intangible assets owned december 31 2017 amortization expense finitelived intangible assets 139 million 2016 220 million 2015 4 inventories net consisted following 2017 2016 2015 recognized expenses 229 million 146 million 202 million respectively excess obsolete inventory expenses included cos consolidated statements income second quarter 2017 recorded 169 million charge costs incurred related contract supply oil gas platform equipment end user latin america charge primarily related ipd reporting segment resulted decrease work process 5 stockbased compensation plans maintain flowserve corporation equity incentive compensation plan 2010 plan shareholderapproved plan authorizing issuance 8700000 shares common stock form incentive stock options nonstatutory stock options restricted shares restricted share units performancebased units collectively referred restricted shares stock appreciation rights bonus stock 8700000 shares common stock authorized 2010 plan 2619677 available issuance december 31 2017 longterm incentive program amended allow restricted shares granted january 1 2016 employees retire achieved least 55 years age ten years service continue vest original vesting period 5510 provision stock options granted officers employees directors allow purchase common shares market value stock date options granted options generally become exercisable three years options generally expire ten years date grant within short period time following termination employment cessation services option holder second quarter 2017 previous stock options outstanding may 4 2017 114943 stock options granted grant date fair value 20 million expected recognized weightedaverage period approximately two years options granted years ending december 31 2016 2015 stock options vested 2017 2016 2015 information related stock options issued officers employees directors plans presented following table weighted average remaining contractual life options outstanding december 31 2017 93 years weighted average remaining contractual life options outstanding december 31 2015 one year total intrinsic value stock options exercised 24 million 10 million periods ended december 31 2016 2015 respectively restricted shares generally restrictions restricted shares expire minimum one year maximum three years shares subject forfeiture restriction period typically restricted share grants staggered vesting periods one three years grant date intrinsic value restricted shares typically product share price date grant number restricted shares granted amortized straightline basis compensation expense periods restrictions lapse awards restricted shares valued closing market price common stock date grant unearned compensation amortized compensation expense vesting period restricted shares except awards related 5510 provision expensed granted unearned compensation amortized compensation expense vesting period restricted shares december 31 2017 2016 167 million 152 million respectively unearned compensation cost related unvested restricted shares expected recognized weightedaverage period approximately one year amounts recognized net earnings prospective periods awards vest total fair value restricted shares vested years ended december 31 2017 2016 2015 305 million 388 million 413 million respectively recorded stockbased compensation restricted shares follows following table summarizes information regarding restricted shares unvested restricted shares outstanding december 31 2017 includes approximately 830000 units performancebased vesting provisions performancebased units issuable common stock vest upon achievement predefined performance targets performancebased units granted prior 2017 performance targets based average annual return net assets threeyear period compared measure defined peer group period performancebased units granted 2017 performance targets based average return invested capital total shareholder return tsr threeyear period compared measures defined peer group period performance units granted three annual grants since january 1 2015 vesting percentage 0 200 depending achievement specific performance targets except shares granted 5510 provision compensation expense recognized ratably cliffvesting period 36 months based fair value common stock date grant adjusted actual forfeitures performance period earned unearned compensation expense adjusted based changes expected achievement performance targets performancebased units granted except tsrbased units vesting provisions range 0 approximately 1637000 shares based performance targets december 31 2017 estimate vesting approximately 565000 shares based expected achievement performance targets 6 derivatives hedging activities risk management foreign currency derivatives hedging policy specifies conditions may enter derivative contracts see note 1 additional information purpose entering derivatives overall risk management strategies enter foreign exchange forward contracts hedge cash flow risks associated transactions denominated currencies local currency operation engaging transaction second quarter 2017 discontinued program designate forward exchange contracts discontinuance program impact financial position december 31 2017 foreign exchange contracts designated hedging instruments notional values 2356 million 3932 million december 31 2017 2016 respectively december 31 2017 length foreign exchange contracts currently place ranged 4 days 24 months exposed risk creditrelated losses resulting nonperformance counterparties financial instruments perform credit evaluations counterparties forward exchange contracts expect counterparties meet obligations experienced credit losses counterparties fair values foreign exchange contracts summarized current noncurrent derivative assets reported consolidated balance sheets prepaid expenses assets net respectively current noncurrent derivative liabilities reported consolidated balance sheets accrued liabilities retirement obligations liabilities respectively impact net changes fair values foreign exchange contracts summarized gains losses recognized consolidated statements income foreign exchange contracts classified expense income net march 2015 designated €2557 million €5000 million 2022 eur senior notes discussed note 10 net investment hedge investments certain international subsidiaries use euro functional currency used spot method measure effectiveness net investment hedge method reporting period change carrying value 2022 eur senior notes due remeasurement effective portion reported accumulated comprehensive loss consolidated balance sheet remaining change carrying value ineffective portion recognized expense income net consolidated statements income evaluate effectiveness net investment hedge prospective basis beginning quarter record ineffectiveness year ended december 31 2017 7 fair value financial instruments fair value debt excluding senior notes described note 10 estimated using interest rates similar debt recently issued companies credit metrics similar classified level ii fair value hierarchy carrying value debt included note 10 except senior notes approximates fair value estimated fair value senior notes based level quoted market rates estimated fair value senior notes december 31 2017 14024 million compared carrying value 13886 million carrying amounts financial instruments ie cash equivalents accounts receivable net accounts payable approximated fair value due shortterm nature december 31 2017 december 31 2016 8 details certain consolidated balance sheet captions following tables present financial information certain consolidated balance sheet captions accounts receivable net accounts receivable net property plant equipment net property plant equipment net 1 adjusted 260 million impairment charge second quarter 2017 related manufacturing facility brazil accrued liabilities accrued liabilities accrued liabilities include professional fees lease obligations insurance interest freight accrued cash dividends payable legal environmental matters derivative liabilities restructuring reserves items none individually exceed 5 current liabilities retirement obligations liabilities retirement obligations liabilities 9 equity method investments occasionally enter joint venture arrangements local country partners preferred means entry countries barriers entry may exist similar consolidated subsidiaries unconsolidated joint ventures generally operate within primary businesses designing manufacturing assembling distributing fluid motion control products services agreements certain joint ventures restrict us otherwise entering respective market certain joint ventures produce andor sell products part broader product offering net earnings investments unconsolidated joint ventures reported net earnings affiliates consolidated statements income given integrated role unconsolidated joint ventures business net earnings affiliates presented component operating income december 31 2017 investments seven joint ventures one located chile india saudi arabia south korea united arab emirates two located china accounted using equity method immaterial disclosure purposes 10 debt lease obligations debt including capital lease obligations consisted scheduled maturities senior credit facility described well senior notes debt senior notes march 17 2015 completed public offering €5000 million euro senior notes aggregate principal amount due march 17 2022 eur senior notes 2022 eur senior notes bear interest rate 125 per year payable year march 17 2022 eur senior notes priced 99336 par value reflecting discount aggregate principal amount proceeds offering €4967 million 5263 million based exchange rates effect time offering closed used portion proceeds 2022 eur senior notes ultimately fund acquisition sihi described note 2 utilized remaining portion general corporate purposes november 1 2013 completed public offering 3000 million aggregate principal amount senior notes due november 15 2023 senior notes 2023 senior notes bear interest rate 400 per year payable may 15 november 15 year 2023 senior notes priced 99532 par value reflecting discount aggregate principal amount september 11 2012 completed public offering 5000 million aggregate principal amount senior notes due september 15 2022 senior notes 2022 senior notes bear interest rate 350 per year payable march 15 september 15 year 2022 senior notes priced 99615 par value reflecting discount aggregate principal amount right redeem 2022 senior notes 2023 senior notes time prior june 15 2022 august 15 2023 respectively whole part option redemption price equal greater 1 100 principal amount senior notes redeemed 2 sum present values remaining scheduled payments principal interest respect senior notes redeemed discounted redemption date semiannual basis applicable treasury rate plus 30 basis points 2022 senior notes plus 25 basis points 2023 senior notes addition time june 15 2022 senior notes august 15 2023 senior notes may redeem senior notes redemption price equal 100 principal amount senior notes redeemed case also pay accrued unpaid interest principal amount redeemed redemption date similarly right redeem 2022 eur senior notes december 17 2021 whole part option redemption price equal greater 1 100 principal amount senior notes redeemed 2 sum present values remaining scheduled payments principal interest respect senior notes redeemed exclusive interest accrued excluding date redemption discounted redemption date annual basis comparable german government bond rate plus 25 basis points senior credit facility credit agreement provides initial 4000 million term loan “term loan facility” 10 billion revolving credit facility “revolving credit facility” together term loan facility “senior credit facility” maturity october 14 2020 june 30 2017 amended existing senior credit facility amendment among changes includes following decrease revolving credit facility commitment 10 billion 800 million ii increase leverage ratio 350 400 times debt total consolidated ebitda june 30 2019 stepdown 375 fiscal quarter ending july 1 2019 iii addition new pricing level senior unsecured longterm debt ratings ba2bb increase interest rate margin libor loans 200 base rate loans 100 iv revision restrictions ability incur debt decreasing maximum principal amount priority debt allowed 15 75 consolidated tangible assets decrease maximum amount receivables could securitized 200 million 100 million subject certain conditions right increase amount term loan facility revolving credit facility aggregate amount exceed 4000 million material terms conditions senior credit facility remained unchanged december 31 2017 december 31 2016 revolving loans outstanding revolving credit facility outstanding letters credit 948 million 1026 million december 31 2017 december 31 2016 respectively together financial covenant limitations based terms senior credit facility contributed reduction borrowing capacity 6448 million 5535 million respectively senior credit facility contains among things covenants defining subsidiaries ability dispose assets merge pay dividends repurchase redeem capital stock indebtedness incur indebtedness guarantees create liens enter agreements negative pledge clauses make certain investments acquisitions enter transactions affiliates engage business activity existing business compliance financial covenants senior credit facility tested quarterly compliance covenants december 31 2017 repayment obligations may prepay loans senior credit facility whole part without premium penalty time commitment fee payable quarterly daily unused portions senior credit facility 020 per annum december 31 2017 made scheduled principal repayments term loan facility 600 million 2017 2016 450 million 2015 scheduled principal repayments 150 million due next four quarters 2018 term loan facility operating leases noncancellable operating leases certain offices service quick response centers certain manufacturing operating facilities machinery equipment automobiles rental expense relating operating leases 549 million 547 million 531 million 2017 2016 2015 respectively future minimum lease payments due noncancellable operating leases amounts thousands 11 pension postretirement benefits sponsor several noncontributory defined benefit pension plans covering substantially us employees certain nonus employees provide benefits based years service age job grade levels type compensation retirement benefits covered employees provided contributory pension plans cash balance pension plans governmentsponsored retirement programs funded defined benefit pension plans receive funding based independent actuarial valuations provide current service amount sufficient amortize unfunded prior service periods exceed 30 years funding falling within legal limits prescribed prevailing regulation also maintain unfunded defined benefit plans permitted local regulations receive funding benefits become due defined benefit plan strategy ensure current future benefit obligations adequately funded costeffective manner additionally investing objective achieve highest level investment performance compatible risk tolerance prudent investment practices longterm nature defined benefit plan liabilities funding strategy based longterm perspective formulating implementing investment policies evaluating investment performance asset allocation defined benefit plans reflects decision proportion investment equity fixed income securities appropriate various subasset classes least annually complete comprehensive review asset allocation policy underlying assumptions includes longterm capital markets rate return assumptions risk tolerances relative defined benefit plan liabilities expected rates return defined benefit plan assets derived review asset allocation strategy expected longterm performance asset classes risks factors adjusted specific investment strategy rates impacted changes general market conditions longterm nature shortterm market changes significantly impact rates us defined benefit plan assets consist balanced portfolio equity fixed income securities nonus defined benefit plan assets include significant concentration united kingdom uk fixed income securities monitor investment allocations manage plan assets maintain acceptable levels risk periods presented used measurement date december 31 us nonus pension plans postretirement medical plans us defined benefit plans maintain qualified nonqualified defined benefit pension plans us qualified plan provides coverage substantially fulltime us employees receive benefits earnings threshold specified us department labor nonqualified plans primarily cover small number employees including current former members senior management providing benefit levels equivalent participants otherwise limited us department labor rules us plans designed operate cash balance arrangements employee option take lump sum payment end service total accumulated benefit obligation equivalent total projected benefit obligation benefit obligation following assumptions related us defined benefit pension plans december 31 2017 compared december 31 2016 decreased discount rate 400 363 based analysis publiclytraded investment grade us corporate bonds lower yield due current market conditions determining 2017 expense expected rate return us plan assets remained constant 600 primarily based target allocations expected longterm asset returns longterm rate return assumption calculated using quantitative approach utilizes unadjusted historical returns asset allocation inputs calculation us plans adopted rp2006 mortality tables mp2017 improvement scale published october 2017 applied rp2006 tables based constituency plan population union nonunion participants adjusted improvement scale utilize 75 ultimate improvement rate consistent assumptions adopted social security administration trustees based longterm historical experience currently believe approach provides best estimate future obligation plan participants elect receive plan benefits lump sum end service rather annuity updated mortality tables immaterial effect pension obligation net pension expense us defined benefit pension plans including qualified nonqualified plans estimated prior service cost estimated net loss us defined benefit pension plans amortized accumulated comprehensive loss pension expense 2018 02 million 55 million respectively amortize estimated prior service benefits estimated net losses remaining expected service period following summarizes net pension liability us plans following summarizes amounts recognized balance sheet us plans following summary changes us defined benefit plans’ pension obligations 1 actuarial losses 2017 2016 primarily reflect impact changes discount rate following table summarizes expected cash benefit payments us defined benefit pension plans future amounts millions following table shows change accumulated comprehensive loss attributable components net cost change benefit obligations us plans net tax amounts recorded accumulated comprehensive loss consist following reconciliation us defined benefit pension plans’ assets contributed 238 million 225 million us defined benefit pension plans 2017 2016 respectively payments exceeded minimum funding requirements mandated us department labor rules estimated contribution 2018 expected approximately 20 million excluding direct benefits paid us defined benefit plan assets held qualified plan asset allocations qualified plan end 2017 2016 asset category follows none common stock directly held qualified plan investment strategy earn longterm rate return consistent acceptable degree risk minimize cash contributions life plan taking account liquidity needs plan preserve capital diversified investments high quality securities current allocation target invest approximately 48 plan assets equity securities 52 fixed income securities within investment category assets allocated various investment strategies professional money management firms manage assets engage consultant assist evaluating activities periodically review allocation target generally conjunction asset liability study consideration future cash flow needs regularly rebalance actual allocation target investment allocation plan assets invested commingled funds pension investment committee responsible setting investment strategy target asset allocation plans assets qualified plan approached fully funded status implemented liabilitydriven investing ldi strategy closely aligns duration plans assets duration liabilities ldi strategy results asset portfolio closely matches behavior liability thereby reducing volatility plans funded status plan’s financial instruments shown presented fair value see note 1 discussion hierarchical levels fair values plan’s investments determined fair values us defined benefit plan assets us large cap funds seek outperform russell 1000 r index investments large medium capitalization us companies represented russell 1000 r index composed largest 1000 us equities determined market capitalization b us small cap funds seek outperform russell 2000 r index investments medium small capitalization us companies represented russell 2000 r index composed smallest 2000 us equities determined market capitalization c international large cap funds seek outperform msci europe australia far east index investments developed nations world maintain high degree diversification among countries currencies emerging markets funds represent diversified portfolio seeks high longterm returns comparable investments emerging markets investing stocks newly developed emerging market economies e world equity funds seek outperform russell developed large cap index net full market cycle funds goal provide favorable total return relative benchmark primarily longterm capital appreciation f global equity fund seeks closely track performance msci country world index g global real asset funds seek provide exposure listed global real estate investment trusts reits infrastructure markets h diversified credit funds seek provide exposure high yield emerging markets bank loans securitized credit markets ldi funds seek invest high quality fixed income securities closely match found discount curves used value plans liabilities j longterm governmentcredit funds seek outperform bloomberg barclays capital us longterm governmentcredit index generating excess return variety diversified strategies securities longer durations sector rotation security selection tactical use highyield bonds nonus defined benefit plans maintain defined benefit pension plans cover employees following countries austria belgium canada france germany india italy mexico netherlands sweden switzerland uk assets uk two plans netherlands canada represent 94 total nonus plan assets nonus assets details countries’ plan assets provided due immateriality following assumptions related nonus defined benefit pension plans december 31 2017 compared december 31 2016 decreased average discount rate nonus plans 234 225 based analysis bonds publiclytraded instruments country lower yields due market conditions determine 2017 pension expense decreased average expected rate return plan assets 468 december 31 2016 388 december 31 2017 primarily based target allocations expected longterm asset returns expected rate return plan assets longterm nature shortterm market changes significantly impact rate many nonus defined benefit plans unfunded permitted local regulation expected longterm rate return assets funded plans determined assessing rates return asset class calculated using quantitative approach utilizes unadjusted historical returns asset allocation inputs calculation work actuaries determine reasonableness longterm rate return assumptions looking several factors including historical returns expected future returns asset allocation risks asset class items net pension expense nonus defined benefit pension plans 2018 significant estimated prior service cost amortized accumulated comprehensive loss pension expense nonus defined benefit pension plans estimated net loss nonus defined benefit pension plans amortized accumulated comprehensive loss pension expense 2018 37 million amortize estimated net losses remaining expected service period remaining expected lifetime inactive participants plans inactive participants following summarizes net pension liability nonus plans following summarizes amounts recognized balance sheet nonus plans following reconciliation nonus plans’ defined benefit pension obligations 1 2016 actuarial loss primarily reflects decrease discount rates uk eurozone 2 2017 currency translation impact reflects weakening us dollar significant currencies primarily euro british pound 2016 currency translation impact reflects strengthening us dollar significant currencies primarily euro british pound following table summarizes expected cash benefit payments nonus defined benefit plans future amounts millions following table shows change accumulated comprehensive loss attributable components net cost change benefit obligations nonus plans net tax amounts recorded accumulated comprehensive loss consist following reconciliation nonus plans’ defined benefit pension assets contributions nonus defined benefit pension plans 2018 expected approximately 10 million excluding direct benefits paid asset allocations nonus defined benefit pension plans end 2017 2016 follows none common stock held directly plans cases investment strategy plans earn longterm rate return consistent acceptable degree risk minimize cash contributions life plan taking account liquidity needs plan legal requirements particular country preserve capital diversified investments high quality securities asset allocation differs plan based upon plan’s benefit obligation participants well results asset liability studies conducted plan consideration future cash flow needs professional money management firms manage plan assets engage consultant uk assist evaluation activities assets uk plans overseen group trustees review investment strategy asset allocation fund selection assets passively managed invested index funds attempt match performance specified benchmark index fair values nonus assets north american companies represents us canadian large cap equity funds managed track respective benchmarks ftse allworld usa index ftse allworld canada index b global equity represents actively managed global equity funds taking topdown strategic view different regions analyzing companies based fundamentals marketdriven thematic quantitative factors generate alpha c uk government gilt index represents uk government issued fixed income investments passively managed track respective benchmarks uk corporate bond index represents uk corporate bond investments passively managed track iboxx 15 years £ nongilt index e global fixed income bond represents investment funds actively managed diversified invested traditional government bonds highquality corporate bonds asset backed securities emerging market debt f liability driven investment seeks invest fixed income securities closely match found discount curves used value plans liabilities g multiasset seeks attractive riskadjusted return investing diversified portfolio strategies including equities fixed income h buyin contract represents asset held netherlands plan whereby cost providing benefits funded contract fair value asset january 1 2017 209 million contributions currency adjustments resulting fair value 245 million december 31 2017 fair value asset based current present value accrued benefits fluctuate based changes obligations associated covered plan members well assumptions used present value calculation includes assets held plans outside united kingdom netherlands details including level iii rollforward details material defined benefit pension plans accumulated benefit obligations excess plan assets following summarizes key pension plan information regarding us nonus plans whose accumulated benefit obligations exceed fair value respective plan assets postretirement medical plans sponsor several defined benefit postretirement medical plans covering certain current retirees limited number future retirees us plans provide medical dental benefits administered insurance companies health maintenance organizations plans include participant contributions deductibles coinsurance provisions limitations integrated medicare group plans fund plans benefits health maintenance organization premiums paid plans hold assets period presented accordingly investment strategy targeted allocations plan assets benefits postretirement medical plans available new employees existing employees following assumptions related postretirement benefits assumed ranges annual rates increase medical costs used determine net expense 70 2017 75 2016 2015 gradual decrease 50 2025 future years net postretirement benefit cost postretirement medical plans estimated prior service cost expected amortized accumulated comprehensive loss us pension expense 2018 01 million estimated net gain postretirement medical plans amortized accumulated comprehensive loss us expense 2018 05 million following summarizes accrued postretirement benefits liability postretirement medical plans following summarizes amounts recognized balance sheet postretirement benefit obligation following reconciliation postretirement benefit obligation following presents expected benefit payments future periods amounts millions following table shows change accumulated comprehensive loss attributable components net cost change benefit obligations postretirement benefits net tax amounts recorded accumulated comprehensive loss consist made contributions postretirement medical plans pay benefits 25 million 2017 44 million 2016 51 million 2015 postretirement medical plans unfunded make contributions covered individuals’ claims approved payment accordingly contributions period directly correlated benefits paid assumed health care cost trend rates effect amounts reported postretirement medical plans onepercentage point change assumed health care cost trend rates would following effect 2017 reported amounts thousands defined contribution plans sponsor several defined contribution plans covering substantially us canadian employees certain nonus employees may contribute plans contributions matched varying amounts us including opportunities discretionary matching contributions us defined contribution plan expense 177 million 2017 172 million 2016 196 million 2015 12 legal matters contingencies asbestosrelated claims defendant substantial number lawsuits seek recover damages personal injury allegedly caused exposure asbestoscontaining products manufactured andor distributed heritage companies past overall number asbestosrelated claims generally declined recent years assurance trend continue average cost per claim increase asbestoscontaining materials incorporated products encapsulated used internal components process equipment believe significant emission asbestos fibers occurred use equipment practice vigorously contest resolve claims successful resolving majority claims little payment historically high percentage resolved claims covered applicable insurance indemnities companies believe substantial majority existing claims continue covered insurance indemnities accordingly recorded liability estimate likely settlement asserted claims related receivable insurers companies estimated recovery extent believe amounts recovery probable otherwise dispute unfavorable rulings judgments settlement terms regarding claims could material adverse impact business financial condition results operations cash flows currently believe likelihood remote additionally claims pending certain insurers resolved favorably reflected recorded receivables would result discrete gains applicable quarter currently unable estimate impact unasserted asbestosrelated claims although future claims would also subject existing indemnities insurance coverage united nations oilforfood program mid2006 french authorities began investigation 170 french companies one french subsidiaries included concerning suspected inappropriate activities conducted connection united nations oil food program previously disclosed french investigation french subsidiary formally opened first quarter 2010 french subsidiary filed formal response french court july 2012 french court ruled procedural motions challenge constitutionality charges quash indictment hearings occurred april 12 2015 company presented defense closing arguments june 18 2015 french court issued ruling dismissing case company defendants however july 1 2015 french prosecutor lodged appeal anticipate hearing appeal held 2018 currently expect incur additional case resolution costs material amount matter however french authorities ultimately take enforcement action french subsidiary regarding investigation may subject monetary nonmonetary penalties currently believe material adverse financial impact company currently involved potentially responsible party five former public waste disposal sites various stages evaluation remediation projected cost remediation sites well alleged fair share allocation remain uncertain studies completed parties either negotiated amicable resolution matter judicially resolved site many parties similarly identified many parties identified financially strong solvent companies appear able pay share remediation costs based information waste disposal practices sites environmental regulatory process general believe likely ultimate remediation liability costs site apportioned among liable parties including site owners waste transporters according volumes andor toxicity wastes shown disposed sites believe financial exposure existing disposal sites materially excess accrued reserves previously disclosed terminated employee overseas subsidiary uncovering actions violated code business conduct may violated foreign corrupt practices act completed internal investigation matter selfreported potential violation united states department justice “doj” sec continue cooperate doj sec previously received subpoena sec requesting additional information documentation related matter completed response subpoena currently believe matter material adverse financial impact company assurance company subjected monetary penalties additional costs also defendant number lawsuits including product liability claims insured subject applicable deductibles arising ordinary course business also involved uninsured routine litigation incidental business currently believe none litigation either individually aggregate material business operations overall financial condition however litigation inherently unpredictable resolutions dispositions claims lawsuits settlement otherwise could adverse impact financial position results operations cash flows reporting period resolution disposition occurs although none aforementioned potential liabilities quantified absolute certainty except otherwise indicated established reserves covering exposures relating contingencies extent believed reasonably estimable probable based past experience available facts additional exposures beyond reserves could exist currently cannot estimated continue evaluate update reserves necessary appropriate 13 warranty reserve recorded reserves product warranty claims included current liabilities following summary activity warranty reserve 14 shareholders’ equity dividends february 15 2016 board directors authorized increase payment quarterly dividends common stock 018 per share 019 per share payable beginning april 8 2016 february 16 2015 board directors authorized increase payment quarterly dividends common stock 016 per share 018 per share payable beginning april 10 2015 generally dividend dateofrecord last month quarter dividend paid following month subsequent dividends reviewed board directors declared discretion dependent assessment financial situation business outlook applicable time share repurchase program november 13 2014 board directors approved 5000 million share repurchase authorization share repurchase program expiration date reserve right limit terminate repurchase program time without notice repurchases shares outstanding common stock year ended december 31 2017 2016 compared share repurchases 6047839 3037 million 2015 december 31 2017 1607 million remaining capacity current share repurchase program 15 income taxes december 22 2017 us enacted tax cuts jobs act 2017 “act” significantly changed us tax law act among things lowered company’s us statutory federal income tax rate 35 21 effective january 1 2018 imposing deemed repatriation tax deferred foreign income implementing modified territorial tax system act provides territorial tax system beginning 2018 provides two new antibase erosion provisions global intangible lowtaxed income “gilti” provision baseerosion antiabuse tax “beat” provision effectively creates new minimum tax certain future foreign earnings company included reasonable estimates income tax effects applying provisions act accordance accounting standards codification topic 740 income taxes asc topic 740 following guidance sec staff accounting bulletin 118 “sab 118” result impacts act may differ primarily related deemed repatriated earnings associated withholding taxes provisional amounts possibly materially due among things additional analysis changes interpretations enacted assumptions company made additional regulatory guidance may issued actions company may take result act due timing act substantial changes brings sab 118 provides registrants measurement period report impact new us tax law financial reporting impact act expected completed later fourth quarter 2018 company elected account gilti provision period incurred impacts changes reflected 2017 provisional tax expense resulted net provisional charge 1153 million charge comprised 1205 million tax expense related deemed repatriation unremitted earnings foreign subsidiaries well associated local withholding taxes partially offset 52 million tax benefit relating changes pursuant act provision income taxes consists following provision income taxes differs statutory corporate rate due following 2017 tax rate differed federal statutory rate 35 primarily due impacts pursuant enactment act net impact foreign operations establishment valuation allowances deferred tax assets various foreign jurisdictions primarily mexico taxes related sales gestra vogt businesses effective tax rate 984 year ended december 31 2017 increased 363 2016 due tax impacts described 2016 tax rate differed federal statutory rate 35 primarily due net impact foreign operations tax impacts realignment programs losses certain foreign jurisdictions tax benefit provided 2015 tax rate differed federal statutory rate 35 primarily due tax impacts realignment programs nondeductible venezuelan exchange rate remeasurement loss establishment valuation allowance deferred tax assets brazil amount 126 million partially offset net impact foreign operations included impacts lower foreign tax rates changes reserves established uncertain tax positions connection act december 31 2017 assert permanent reinvestment foreign subsidiaries prior time asserted permanent reinvestment majority invested capital unremitted foreign earnings foreign subsidiaries however assert permanent reinvestment limited number foreign subsidiaries future distributions may occur two years reported period ended december 31 2016 recognize net deferred tax assets attributable excess foreign tax credits unremitted earnings foreign currency translation adjustments foreign subsidiaries excess financial reporting basis deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes significant components consolidated deferred tax assets liabilities 3239 million us foreign net operating loss carryforwards december 31 2017 total 324 million state net operating losses net operating losses generated us unused expire 2017 2027 majority nonus net operating losses carry forward without expiration additionally 75 million foreign tax credit carryforwards december 31 2017 expiring 2026 2027 valuation allowance 75 million recorded earnings income taxes comprised tabular reconciliation total gross amount unrecognized tax benefits excluding interest penalties follows millions amount gross unrecognized tax benefits december 31 2017 661 million includes 146 million accrued interest penalties amount 655 million recognized would favorably impact effective tax rate limited exception longer subject us federal income tax audits years 2015 state local income tax audits years 2011 nonus income tax audits years 2010 currently examination various years austria canada france germany india indonesia italy mexico saudi arabia singapore us venezuela reasonably possible within next 12 months effective tax rate impacted resolution matters audited various taxing authorities also reasonably possible statute limitations close various taxing jurisdictions within next 12 months estimate could record reduction tax expense approximately 8 million within next 12 months 16 business segment information business segments share focus industrial flow control technology high number common customers segments also complementary product offerings technologies often combined applications provide us net competitive advantage segments also benefit global footprint economies scale reducing administrative overhead costs serve customers cost effectively conduct operations three business segments based type product manage business • epd long lead time custom highlyengineered pumps pump systems mechanical seals auxiliary systems replacement parts related services • ipd engineered preconfigured industrial pumps pump systems related products services • fcd engineered industrial valves control valves actuators controls related services decisionmaking purposes chief executive officer ceo members senior executive management use financial information generated reported reportable segment level corporate headquarters constitute separate division business segment evaluate segment performance allocate resources based reportable segment’s operating income amounts classified eliminations include corporate headquarters costs minor entities constitute separate segments intersegment sales transfers recorded cost plus profit margin sales related margin sales eliminated consolidation following summary financial information reportable segments years ended december 31 2017 2016 2015 reconciled amounts reported consolidated financial statements geographic information attribute sales different geographic areas based facilities’ locations longlived assets classified based geographic area assets located exclude deferred taxes goodwill intangible assets prior period information updated conform current year presentation sales longlived assets geographic area follows 1 ema includes europe middle east africa 2017 2016 2015 germany accounted approximately 10 11 respectively consolidated longlived assets individual country within group represents 10 consolidated totals period presented 2 asia includes asia australia individual country within group represents 10 consolidated totals period presented 3 includes canada latin america individual country within group represents 10 consolidated totals period presented net sales international customers including export sales us represented approximately 64 total sales 2017 2016 66 2015 major customer information large number customers across large number manufacturing service facilities believe sales individual customer represent 10 consolidated sales years presented 17 accumulated comprehensive loss following presents components accumulated comprehensive loss aocl net related tax effects 1 includes foreign currency translation adjustments attributable noncontrolling interests 38 million 34 million 27 million december 31 2017 2016 2015 respectively year ended december 31 2017 foreign currency translation impacts primarily represented strengthening euro british pound indian rupee exchange rates versus us dollar period year ended december 31 2016 foreign currency translation impacts primarily represented weakening british pound euro mexican peso exchange rates versus us dollar period includes net investment hedge loss 225 million gain 14 million net deferred taxes year ended december 31 2017 2016 respectively amounts parentheses indicate debits following table presents reclassifications aocl 1 amounts parentheses indicate decreases income none reclassification amounts noncontrolling interest component 2 accumulated comprehensive loss components included computation net periodic pension cost see note 11 additional details 18 realignment programs first quarter 2015 initiated realignment program r1 realignment program reduce optimize certain nonstrategic qrcs manufacturing facilities sihi acquisition second quarter 2015 initiated second realignment program r2 realignment program better align costs improve longterm efficiency including manufacturing optimization consolidation facilities reduction workforce transfer activities highcost regions lowercost facilities divestiture certain nonstrategic assets r1 realignment program r2 realignment program collectively realignment programs consist restructuring nonrestructuring charges restructuring charges represent costs associated relocation reorganization certain business activities facility closures include related severance costs nonrestructuring charges primarily employee severance associated workforce reductions reduce redundancies expenses primarily reported cos sga applicable condensed consolidated statements income anticipate total investment programs approximately 360 million including projects still final evaluation anticipate majority remaining charges incurred throughout 2018 generally aforementioned charges paid cash except asset writedowns noncash charges following summary total charges net adjustments related realignment programs 1 income tax expense includes exit taxes well nondeductible costs following summary total inception date charges net adjustments related realignment programs 1 includes 495 million restructuring charges primarily cos related r1 realignment program 2 income tax expense includes exit taxes well nondeductible costs restructuring charges represent costs associated relocation reorganization certain business activities facility closures include costs related employee severance closed facilities contract termination costs asset writedowns costs severance costs primarily include costs associated involuntary termination benefits contract termination costs include costs related termination operating leases contract termination costs asset writedowns include accelerated depreciation fixed assets accelerated amortization intangible assets divestiture certain nonstrategic assets inventory writedowns costs generally include costs related employee relocation asset relocation vacant facility costs ie taxes insurance charges following summary restructuring charges net adjustments realignment programs 1 income tax expense includes exit taxes well nondeductible costs 1 income tax expense includes exit taxes well nondeductible costs following summary total inception date restructuring charges net adjustments related realignment programs 1 includes 495 million restructuring charges primarily cos related r1 realignment program 2 income tax expense includes exit taxes well nondeductible costs following represents activity primarily severance related restructuring reserve realignment programs 19 quarterly financial data unaudited following presents summary unaudited quarterly data 2017 2016 amounts millions except per share data 1 earnings per share computed independently quarters presented sum quarters may equal total year amount due impact changes weighted average quarterly shares outstanding item 9item 8 financial statements supplementary data report independent registered public accounting firm board directors shareholders flowserve corporation opinions financial statements internal control financial reporting audited accompanying consolidated balance sheets flowserve corporation subsidiaries “company” december 31 2018 2017 related consolidated statements income comprehensive income shareholders’ equity cash flows three years period ended december 31 2018 including related notes schedule valuation qualifying accounts three years period ended december 31 2018 listed index item 15a2 collectively referred “consolidated financial statements” also audited companys internal control financial reporting december 31 2018 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission coso opinion consolidated financial statements referred present fairly material respects financial position company december 31 2018 2017 results operations cash flows three years period ended december 31 2018 conformity accounting principles generally accepted united states america also opinion company maintained material respects effective internal control financial reporting december 31 2018 based criteria established internal control integrated framework 2013 issued coso change accounting principle discussed notes 1 2 consolidated financial statements company changed manner accounts sales contracts customers 2018 basis opinions companys management responsible consolidated financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report internal control financial reporting appearing item 9a responsibility express opinions company’s consolidated financial statements companys internal control financial reporting based audits public accounting firm registered public company accounting oversight board united states pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audits obtain reasonable assurance whether consolidated financial statements free material misstatement whether due error fraud whether effective internal control financial reporting maintained material respects audits consolidated financial statements included performing procedures assess risks material misstatement consolidated financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures consolidated financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation consolidated financial statements audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions definition limitations internal control financial reporting company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp pricewaterhousecoopers llp dallas texas february 20 2019 served company’s auditor since 2000 flowserve corporation consolidated balance sheets see accompanying notes consolidated financial statements flowserve corporation consolidated statements income see accompanying notes consolidated financial statements flowserve corporation consolidated statements comprehensive income see accompanying notes consolidated financial statements flowserve corporation consolidated statements shareholders’ equity flowserve corporation consolidated statements cash flows flowserve corporation notes consolidated financial statements december 31 2018 2017 three years ended december 31 2018 1 significant accounting policies accounting developments principally engaged worldwide design manufacture distribution service industrial flow management equipment provide long lead time custom highlyengineered pumps standardized generalpurpose pumps mechanical seals engineered industrial valves related automation products solutions primarily oil gas chemical power generation water management general industries requiring flow management products services equipment manufactured serviced us predominantly used industries deal difficulttohandle corrosive fluids well environments extreme temperatures pressure horsepower speed business affected economic conditions united states us countries products sold serviced cyclical nature competitive environment industries served relationship us dollar currencies demand pricing customers’ end products principles consolidation consolidated financial statements include accounts company wholly majorityowned subsidiaries addition would consolidate variable interest entities deemed primary beneficiary noncontrolling interests nonaffiliated parties recognized majorityowned consolidated subsidiaries intercompany profitslosses transactions balances among consolidated entities eliminated consolidated financial statements investments unconsolidated affiliated companies represent noncontrolling ownership interests 20 50 accounted using equity method approximates equity interest underlying equivalent net book value accounting principles generally accepted us gaap investments interests less 20 investee accounted cost method whereby income recognized event dividend receipt investments accounted cost method tested impairment indicator present use estimates process preparing financial statements conformity us gaap requires us make estimates assumptions affect reported amounts certain assets liabilities revenues expenses believe estimates assumptions reasonable however actual results may differ materially estimates significant estimates assumptions used determining • timing amount revenue recognition • deferred taxes tax valuation allowances tax reserves • reserves contingent loss • pension postretirement benefits • valuation goodwill indefinitelived intangible assets longlived assets argentina highly inflationary effective july 1 2018 argentina designated hyperinflationary result began using us dollar functional currency argentina argentinian subsidiarys sales year ended december 31 2018 represented approximately 1 consolidated sales assets december 31 2018 represented approximately 1 total consolidated assets primarily consisted us dollardenominated monetary assets argentinian pesodenominated nonmonetary assets december 31 2018 addition certain operations countries sell equipment parts typically denominated us dollars directly argentinian customers revenue recognition contracts customers often multiple commitments provide goods andor services including combination designing developing manufacturing modifying installing commissioning flow management equipment providing services parts related performance products recognize revenue satisfy performance obligation transferring control customer recognize revenue either time point time depending specific facts circumstances contract including terms conditions contract agreed customer nature products services provided primary method recognizing revenue time percentage completion “poc” method whereby progress towards completion measured applying input measure based costs incurred date relative total estimated costs completion control products andor services transfer time control transfers point time determine point time control transfers customer based evaluation specific indicators title transfer risk loss transfer customer acceptance physical possession detailed discussion related revenue recognition refer note 2 cash equivalents place temporary cash investments financial institutions policy invest institutions instruments minimal credit risk market risk investments original maturity three months less purchased classified cash equivalents highly liquid principal values subject significant risk change due interest rate fluctuations allowance doubtful accounts credit risk allowance doubtful accounts established based estimates amount uncollectible accounts receivable determined principally based upon aging accounts receivable also customer credit history industry market segment information economic trends conditions credit reports customer credit issues customer bankruptcies general economic conditions may also impact estimates credit risks mitigated diversity customer base across many different geographic regions industries performing creditworthiness analyses customers additionally mitigate credit risk letters credit advance payments received customers believe significant concentrations credit risk inventories related reserves inventories stated lower cost net realizable value cost determined firstin firstout method reserves excess obsolete inventories based upon assessment market conditions products determined historical usage estimated future demand due long life cycles products carry spare parts inventories historically low usage rates provide reserves inventory based demonstrated usage aging criteria income taxes deferred taxes tax valuation allowances tax reserves account income taxes asset liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases operating loss tax credit carryforwards deferred tax assets liabilities calculated using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized period includes enactment date record valuation allowances reflect estimated amount deferred tax assets may realized based upon analysis existing deferred tax assets net operating losses tax credits jurisdiction expectations ability utilize tax attributes review past current estimated future taxable income establishment tax strategies provide deferred taxes temporary differences associated investment foreign subsidiaries financial reporting basis exceeds tax basis unless assert permanent reinvestment foreign jurisdictions financial reporting basis tax basis differences investments foreign subsidiaries consist unremitted earnings losses well foreign currency translation adjustments amount income taxes pay subject ongoing audits federal state foreign tax authorities often result proposed assessments establish reserves open tax years uncertain tax positions may subject challenge various tax authorities consolidated tax provision related accruals include impact reasonably estimable losses related interest penalties deemed appropriate recognize tax benefit uncertain tax position likely tax position sustained examination taxing authorities determination based technical merits position presumes uncertain tax position examined relevant taxing authority full knowledge relevant information tax benefits recognized financial statements position measured based largest benefit greater fifty percent likelihood realized upon ultimate settlement legal environmental contingencies legal environmental reserves recorded based upon casebycase analysis relevant facts circumstances assessment potential legal obligations costs amounts relating legal environmental liabilities recorded probable loss incurred loss reasonably estimable assessments legal environmental costs based information obtained independent inhouse experts loss experience similar situations estimates updated applicable new information regarding facts circumstances matter becomes available legal fees associated legal environmental liabilities expensed incurred estimates liabilities unsettled asbestosrelated claims based known claims experience preceding two years claims filed settled dismissed adjustments events deemed unusual unlikely recur included retirement obligations liabilities consolidated balance sheets substantial majority asbestosrelated claims covered insurance indemnities estimated indemnities receivables insurance carriers unsettled claims receivables settlements legal fees paid us asbestosrelated claims estimated using historical experience insurance recovery rates estimates future recoveries include estimates coverage financial viability insurance carriers estimated receivables included assets net consolidated balance sheets claims pending certain insurers resolved favorably estimated future recoveries would result discrete gains applicable quarter currently unable estimate impact unasserted asbestosrelated claims although future claims would also subject existing indemnities insurance coverage warranty accruals warranty obligations based upon product failure rates materials usage service delivery costs analysis identified expected claims estimate cost resolve claims estimates expected claims generally factor historical claims known product issues warranty obligations based factors adjusted based historical sales trends preceding 24 months insurance accruals insurance accruals recorded wholly partially selfinsured risks medical benefits workers’ compensation based upon analysis claim loss history insurance deductibles policy limits relevant factors updated annually included accrued liabilities consolidated balance sheets estimates based upon information received actuaries insurance company adjusters independent claims administrators independent sources receivables insurance carriers estimated using historical experience insurance recovery rates estimates future recoveries include estimates coverage financial viability insurance carriers estimated receivables included accounts receivable net assets net applicable consolidated balance sheets pension postretirement obligations determination pension postretirement benefits obligations based estimates made management consultation independent actuaries investment advisors inherent valuations assumptions including discount rates expected rates return plan assets retirement rates mortality rates compensation increase factors reviewed annually updated necessary current market conditions including changes rates return interest rates medical inflation rates considered selecting assumptions actuarial gains losses prior service costs recognized accumulated comprehensive loss arise amortize costs net pension expense remaining expected service period property plant equipment depreciation property plant equipment stated historical cost less accumulated depreciation asset retirement obligations exist capitalized part carrying amount asset depreciated remaining useful life asset useful lives leasehold improvements lesser remaining lease term useful life improvement assets retired otherwise disposed costs related accumulated depreciation removed accounts resulting gains losses included income operations period depreciation computed straightline method based estimated useful lives depreciable assets case assets capital leases related lease turn generally estimated useful lives assets costs related routine repairs maintenance expensed incurred internally developed software capitalize certain costs associated development internaluse software generally costs related significant software development projects amortized estimated useful life typically three five years upon implementation software intangible assets intangible assets excluding trademarks considered indefinite life consist primarily engineering drawings patents existing customer relationships software distribution networks items amortized estimated useful lives generally ranging four 40 years assets reviewed impairment whenever events circumstances indicate impairment may occurred valuation goodwill indefinitelived intangible assets longlived assets value goodwill indefinitelived intangible assets tested impairment december 31 year whenever events circumstances indicate assets may impaired identification reporting units began operating segment level considered whether components one level operating segment levels identified reporting units purpose testing goodwill impairment based certain conditions included among factors extent component represents business ii aggregation economically similar components within operating segments resulted four reporting units factors considered determining whether aggregation components appropriate included similarity nature products services nature production processes methods distribution types industries served impairment loss goodwill recognized implied fair value goodwill less carrying value estimate fair value reporting units based income approach whereby calculate fair value reporting unit based present value estimated future cash flows discounted cash flow analysis requires us make various judgmental assumptions future sales operating margins growth rates discount rates based budgets business plans economic projections anticipated future cash flows market participants assumptions also made varying perpetual growth rates periods beyond longterm business plan period record impairment goodwill 2018 2017 2016 however estimated fair value epo ipd reporting units reduced significantly 2016 2015 due broadbased capital spending declines heightened pricing pressure experienced oil gas markets anticipated continue near midterm epo reporting unit component epd reporting segment primarily focused long lead time custom highlyengineered pump products systems december 31 2018 epo reporting unit approximately 158 million goodwill estimated fair value exceeded carrying value approximately 60 compared approximately 159 million goodwill estimated fair value exceeded carrying value approximately 82 december 31 2017 addition ipd reporting unit approximately 311 million goodwill fair value exceeded carrying value approximately 40 december 31 2018 compared approximately 319 million goodwill fair value exceeded carrying value approximately 66 december 31 2017 key assumptions used determining estimated fair value epo ipd reporting units included annual operating plan forecasted operating results successful execution current flowserve transformation 20 program identified strategic initiatives constant cost capital continued stabilization mid longterm improvement macroeconomic conditions oil gas market relatively stable global gross domestic product although concluded impairment goodwill associated epo ipd reporting units december 31 2018 continue closely monitor performance related market conditions future indicators potential impairment reassess accordingly considered market capitalization evaluation fair value goodwill market capitalization decreased slightly compared 2017 indicate potential impairment goodwill december 31 2018 impairment losses indefinitelived intangible assets recognized whenever estimated fair value less carrying value fair values calculated trademarks using relief royalty method estimates fair value trademark determining present value estimated royalty payments avoided result owning trademark method includes judgmental assumptions sales growth discount rates significant impact fair value substantially consistent assumptions used determine fair value reporting units discussed record material impairment trademarks 2018 2017 2016 recoverable value longlived assets including property plant equipment finitelived intangible assets reviewed indicators potential impairments present recoverable value based upon assessment estimated future cash flows related assets utilizing assumptions similar goodwill additional considerations related longlived assets include expected maintenance improvements changes expected uses ongoing operating performance utilization deferred loan costs deferred loan costs consisting fees expenses associated debt financing amortized term associated debt using effective interest method additional amortization recorded periods optional prepayments debt made fair values financial instruments financial instruments presented fair value consolidated balance sheets exception longterm debt fair value defined price would received sell asset paid transfer liability orderly transaction market participants measurement date available fair value based observable market prices parameters derived prices parameters observable prices inputs available valuation models may applied assets liabilities recorded fair value consolidated balance sheets categorized based upon level judgment associated inputs used measure fair values hierarchical levels defined accounting standards codification asc 820 fair value measurements disclosures directly related amount subjectivity associated inputs fair valuation assets liabilities asset liability’s categorization within fair value hierarchy based lowest level significant input valuation hierarchical levels follows level inputs unadjusted quoted prices active markets identical assets liabilities measurement date level ii inputs quoted prices included level either directly indirectly observable asset liability correlation market data measurement date duration instrument’s anticipated life level iii inputs reflect management’s best estimate market participants would use pricing asset liability measurement date consideration given risk inherent valuation technique risk inherent inputs model recurring fair value measurements limited investments derivative instruments certain equity securities fair value measurements derivative instruments determined using models maximize use observable market inputs including interest rate curves forward spot prices currencies classified level ii fair value hierarchy fair values derivative instruments included note 7 fair value measurements investments equity securities determined using quoted market prices classified level fair values investments equity securities changes thereto immaterial consolidated financial position results operations derivatives hedging activities foreign currency derivatives hedging policy outlining conditions enter financial derivative transactions use derivative instruments trading speculative purposes derivative instruments recognized balance sheet fair values employ foreign currency economic hedging strategy mitigate certain financial risks resulting foreign currency exchange rate movements impact foreign currency denominated receivables payables firm committed transactions forecasted sales purchases changes fair values recognized immediately expense net consolidated statements income see note 7 discussion forward exchange contracts exposed risk creditrelated losses resulting nonperformance counterparties financial instruments perform credit evaluations counterparties forward exchange contracts expect counterparties meet obligations necessary would adjust values derivative contracts counterparties’ credit risks foreign currency translation assets liabilities foreign subsidiaries translated us dollars exchange rates prevailing balance sheet date income expenses translated average rates month translation gains losses reported component accumulated comprehensive loss transactional currency gains losses arising transactions currencies sites’ functional currencies included consolidated results operations transaction translation gains losses arising intercompany balances reported component accumulated comprehensive loss underlying transaction stems longterm equity investment debt designated due foreseeable future otherwise recognize transaction gains losses arising intercompany transactions component income intercompany balances longterm investment related designated due beyond foreseeable future may mitigate risk associated foreign currency fluctuations entering forward exchange contracts stockbased compensation stockbased compensation measured grantdate fair value exercise price stock option awards value restricted share restricted share unit performancebased unit awards collectively referred restricted shares set closing price common stock new york stock exchange date grant date grants authorized board directors restricted share units performancebased units refer restricted awards voting rights accrue dividends forfeited vesting occur intrinsic value restricted shares typically product share price date grant number restricted shares granted amortized straightline basis compensation expense periods restrictions lapse based expected number shares vest account forfeitures occur resulting reversal cumulative expense previously recognized earnings per share use twoclass method calculating earnings per share eps determines earnings per share class common stock participating security earnings period distributed unvested restricted share awards earn nonforfeitable dividend rights qualify participating securities accordingly included basic computation unvested restricted shares participate equal basis common shares therefore difference undistributed earnings allocated participating security accordingly presentation prepared combined basis presented earnings per common share following reconciliation net earnings flowserve corporation weighted average shares calculating basic net earnings per common share earnings per weighted average common share outstanding calculated follows diluted earnings per share based upon weighted average number shares determined basic earnings per share plus shares potentially issuable conjunction stock options restricted share units performance share units research development expense research development costs charged expense incurred aggregate research development costs included sga 396 million 386 million 428 million 2018 2017 2016 respectively costs incurred research development primarily include salaries benefits consumable supplies well rent professional fees utilities depreciation property equipment used research development activities accounting developments pronouncements implemented may 2014 fasb issued accounting standards update asu 201409 revenue contracts customers topic 606 new revenue standard asc 606 supersedes revenue recognition requirements revenue recognition topic 605 topic 605 january 1 2018 adopted new revenue standard using modified retrospective method transition applying guidance contracts completed date according method transition adjusted cumulative effect changes made consolidated balance sheet recorded cumulative effect adjustment increase retained earnings approximately 20 million mostly associated increase poc method revenue result initially applying standard modified accounting policies practices business processes systems controls support compliance new revenue standard revenue recognition related financial information annual report based requirements asc 606 accordingly periods prior january 1 2018 presented accordance topic 605 refer note 2 discussion adoption new revenue standard january 2016 fasb issued asu 201601 financial instruments overall subtopic 82510 recognition measurement financial assets financial liabilities asu requires entities measure equity investments result consolidation accounted equity method fair value changes fair value recognized net income asu also requires entity present separately comprehensive income portion total change fair value liability resulting change instrumentspecific credit risk entity elected measure liability fair value accordance fair value option financial instruments requirement disclose methods significant assumptions used estimate fair value financial instruments measured amortized cost balance sheet eliminated asu february 2018 fasb issued asu 201803 technical corrections improvements financial instrumentsoverall subtopic 82510 clarify certain aspects asu 201601 adoption asu 201601 asu 201803 effective january 1 2018 impact consolidated financial condition results operations august 2016 fasb issued asu 201615 “statement cash flows topic 230 classification certain cash receipts cash payments consensus fasb emerging issues task force” update issued objective reducing existing diversity practice certain cash receipts cash payments presented classified statement cash flows topic 230 topics adoption asu 201615 effective january 1 2018 material impact consolidated statement cash flows october 2016 fasb issued asu 201616 income taxes topic 740 intraentity transfers assets inventory asu guidance requires recognition income tax consequences intercompany asset transfer transfers inventory transfer occurs intercompany transfers inventory income tax effects continue deferred inventory sold third party adoption asu 201616 effective january 1 2018 material impact consolidated financial condition results operations march 2017 fasb issued asu 201707 compensationretirement benefits topic 715 improving presentation net periodic pension cost net periodic postretirement benefit cost asu requires entities disaggregate current service cost component components net benefit cost present current compensation costs related employees income statement present components net benefit cost elsewhere income statement outside operating income entities required retrospectively apply requirement separate presentation income statement service costs components net benefit cost adopted income statement presentation aspects new guidance retrospective basis following reconciliation effect reclassification net postretirement benefit cost sales cos selling general administrative expenses sga expense net consolidated statement income years ended december 31 2017 2016 1 elected practical expedient allows us use amounts disclosed prior comparative periods’ pension postretirement plan footnotes basis retrospective application new income statement presentation requirements refer note 12 additional information components net periodic cost retirement postretirement benefits plans may 2017 fasb issued asu 201709 compensationstock compensation topic 718 scope modification accounting asu provides guidance types changes terms conditions sharebased payment awards entity would required apply modification accounting asu applied prospectively awards modified effective date adoption asu 201709 effective january 1 2018 impact consolidated financial condition results operations pronouncements yet implemented february 2016 fasb issued asu 201602 “leases topic 842” asu requires organizations lease assets recognize assets liabilities balance sheet rights obligations created leases asu affect presentation leaserelated expenses income statement cash flows increase required disclosures related leases asu effective annual periods beginning december 15 2018 including interim periods within fiscal years early adoption permitted evaluation asu 201602 related asus formed project team assess critical components requirements new guidance included review leasing contracts completeness assessment lease population support requirements new standard implemented lease administration system modified changes business processes systems controls effective january 1 2019 adopted new standard modified retrospective approach applying currentperiod adjustment method transition guidance modified retrospective approach number optional practical expedients elected apply among things include carryforward historical lease classification previous standard hindsight practical expedient result shortening lease terms certain existing leases corresponding leasehold improvements policy election keep leases initial term 12 months less balance sheet still process final evaluation expect adoption standard result recognition additional net lease assets lease liabilities approximately 220 million january 1 2019 currently believe standard material impact results operations additionally believe new standard notable impact liquidity impact debtcovenant compliance current agreements june 2016 fasb issued asu 201613 financial instrumentscredit losses topic 326 measurement credit losses financial instruments asu requires among things use new current expected credit loss cecl model order determine allowances doubtful accounts respect accounts receivable contract assets cecl model requires estimate lifetime expected credit loss respect receivables contract assets record allowances deducted balance receivables represent net amounts expected collected also required disclose information developed allowances including changes factors influenced estimate expected credit losses reasons changes amendments asu effective fiscal years beginning december 15 2019 including interim periods within fiscal years currently evaluating impact asu 201613 consolidated financial condition results operations january 2017 fasb issued asu 201704 intangibles goodwill topic 350 simplifying test goodwill impairment amendments asu allow companies apply onestep quantitative test record amount goodwill impairment excess reporting unit’s carrying amount fair value exceed total amount goodwill allocated reporting unit amendments asu effective annual interim goodwill impairment tests fiscal years beginning december 15 2019 early adoption permitted interim annual goodwill impairment tests performed testing dates january 1 2017 currently evaluating impact asu 201704 consolidated financial condition results operations july 13 2017 fasb issued asu 201711 “earnings per share topic 260 distinguishing liabilities equity topic 480 derivatives hedging topic 815 part accounting certain financial instruments round features part ii replacement indefinite deferral mandatory redeemable financial instruments certain nonpublic entities certain mandatory redeemable noncontrolling interests scope exception” asu amends guidance fasb accounting standards codification asc 260 earnings per share fasb asc 480 distinguishing liabilities equity fasb asc 815 derivatives hedging amendments part asu change classification analysis certain equitylinked financial instruments embedded features round features amendments part ii asu recharacterize indefinite deferral certain provisions topic 480 presented pending content codification scope exception amendments asu must applied annual reporting periods beginning december 15 2018 early adoption permitted adoption asu 201711 impact consolidated financial condition results operations august 28 2017 fasb issued asu 201712 related asus derivatives hedging topic 815 targeted improvements accounting hedging activities purpose asu better align company’s risk management activities financial reporting hedging relationships additionally asu simplifies hedge accounting requirements improve disclosures hedging arrangements amendments asu must applied annual reporting periods beginning december 15 2019 early adoption permitted currently evaluating impact asu 201712 consolidated financial condition results operations february 2018 fasb issued asu 201802 income statement reporting comprehensive income topic 220 reclassification certain tax effects accumulated comprehensive income “aoci” asu amendments issued result enactment us tax cuts jobs act 2017 amendments asu address available options reclassify stranded tax effects within aoci retained earnings period effect change portion thereof recorded additionally asu outlines disclosure requirements releasing income tax effects aoci asu effective fiscal years beginning december 15 2018 interim periods within fiscal years early adoption permitted asu applied either period adoption retrospectively period periods effect change us federal corporate income tax rate tax cuts jobs act recognized currently evaluating impact asu 201802 consolidated financial condition results operations july 2018 fasb issued asu 201807 compensation stock compensation topic 718 improvements nonemployee sharebased payment accounting amendments asu apply sharebased payment transactions nonemployees grantor acquires goods services used consumed grantor’s operations accounted asc 50550 equitybased payments nonemployees amendments asu 201807 guidance compensation nonemployees would aligned requirements shared based payments granted employees topic 718 asu effective fiscal years beginning december 15 2018 interim periods within fiscal years early adoption permitted adoption asu 201807 impact consolidated financial condition results operations august 2018 fasb issued asu 201813 fair value measurement topic 820 disclosure frameworkchanges disclosure requirements fair value measurement amendments asu modify disclosure requirements fair value measurements removing modifying adding certain disclosure information requirements assets liabilities measured fair value statement financial position disclosed notes financial statements asu effective fiscal years interim periods within fiscal years beginning december 15 2019 early adoption permitted removed disclosures delayed adoption fiscal year 2020 permitted new disclosures removed modified disclosures adopted retrospective basis new disclosures adopted prospective basis currently evaluating impact asu 201813 consolidated financial condition results operations august 2018 fasb issued asu 201814 compensationretirement benefitsdefined benefit plansgeneral subtopic 71520 disclosure frameworkchanges disclosure requirements defined benefit plans asu amends disclosure requirements adding clarifying removing certain disclosures sponsor defined benefit pension postretirement plans amendments effective fiscal years ending december 15 2020 amendments applied retrospectively periods presented currently evaluating impact asu 201814 consolidated financial condition results operations august 2018 fasb issued asu 201815 intangiblesgoodwill otherinternaluse software subtopic 35040 customer’s accounting implementation costs incurred cloud computing arrangement service contract asu addresses entities account costs associated implementing cloud computing arrangement considered service contract per amendments asu implementation costs incurred cloud computing arrangement service contract accounted manner implementation costs incurred develop obtain software internal use prescribed guidance asc35040 asu requires implementation costs incurred cloud computing arrangement capitalized rather expensed asu specifies method amortization costs incurred implementation manner unamortized portion capitalized implementation costs evaluated impairment asu also provides guidance present implementation costs financial statements also creates additional disclosure requirements amendments effective fiscal years beginning december 15 2019 including interim periods early adoption asu requirements permitted including adoption interim period amendments asu applied either retrospectively prospectively implementation costs incurred date adoption currently evaluating impact asu 201815 consolidated financial condition results operations october 2018 fasb issued asu 201817 consolidation topic 810 targeted improvements related party guidance variable interest entities vies standard reduces cost complexity financial reporting associated vies new standard amends guidance determining whether decisionmaking fee vie amendments require organizations consider indirect interests held related parties common control proportional basis rather equivalent direct interest entirety currently required gaap amendments asu effective fiscal years beginning december 15 2019 interim periods within fiscal years currently evaluating impact asu 201817 consolidated financial condition results operations november 2018 fasb issued asu 201818 collaborative arrangements topic 808 clarifying interaction topic 808 topic 606 asu clarifies interaction guidance certain collaborative arrangements new revenue standard amendments asu provide guidance assess whether certain transactions collaborative arrangement participants accounted within new revenue standard asu also provides comparability presentation revenue certain transactions collaborative arrangement participants parts collaborative arrangement purview revenue recognition standard presented separately amendments effective fiscal years beginning december 15 2019 interim periods within fiscal years early adoption permitted currently evaluating impact asu 201818 consolidated financial condition results operations 2 revenue recognition enter contracts customers often multiple commitments goods services including combination designing developing manufacturing modifying installing commissioning flow management equipment providing services parts related performance products evaluate commitments contracts customers determine commitments capable distinct context contract order identify performance obligations recognize revenue satisfy performance obligation transferring control performance obligation customer control performance obligation may transfer customer either time point time depending evaluation specific facts circumstances contract including terms conditions contract agreed customer well nature products services provided larger contracts typically completed within one threeyear period many contracts “short cycle” contracts shorter timeframe revenue recognition control transfers time customer able direct use obtain substantially benefits work perform typically occurs products alternative use right payment performance completed date including reasonable profit margin contracts often include cancellation provisions require customer reimburse us costs incurred date cancellation contracts also provide reimbursement profit upon cancellation addition costs incurred date primary method recognizing revenue time poc method measure progress towards completion applying input measure based costs incurred date relative total estimated costs completion ie costtocost method provides reasonable depiction transfer control products services customers ensures efforts towards satisfying performance obligation reflected costs incurred included measure progress used recognition revenue costs generally include direct labor direct material manufacturing overhead costs contribute towards control transfer generally immaterial excluded measure progress event significant historically revenue recognized poc method 5 10 consolidated sales new revenue standard experienced increase amount revenue recognized time increase primarily due application new “transfer control” model revenue recognition model revenue performance obligations subject contractual transfer control manufacturing process recognized time includes contracts cancellation provisions require reimbursement costs incurred plus reasonable margin performance obligation alternative use revenue products services transferred customers time accounted approximately 22 4 6 total revenue years ended december 31 2018 2017 2016 respectively control transfer time control transfers point time recognize revenue point time level performance obligation based evaluation certain indicators control transfer title transfer risk loss transfer customer acceptance physical possession revenue products services transferred customers point time accounted approximately 78 96 94 total revenue years ended december 31 2018 2017 2016 respectively contract modification “change order” occurs existing enforceable rights obligations contract change scope price terms conditions account change order new accounting contract change order limited adding new distinct products services priced amount consistent standalone selling price change orders accounted modification existing accounting contract change order occurs contract inprocess time performance obligations effect change order transaction price measure progress performance obligations relates recognized adjustment revenue either increase reduction revenue cumulative catchup basis freight charges billed customers included sales related shipping costs included cost sales consolidated statements income shipping activities performed customer obtains control product apply policy election account shipping activity fulfill promise transfer product customer apply policy election exclude transaction taxes collected customers sales tax imposed concurrent specific revenueproducing transaction certain instances provide guaranteed completion dates terms contracts failure meet contractual delivery dates result late delivery penalties liquidated damages event transaction price contract probable experiencing significant reversal due penalty constrain portion transaction price reduction transaction price could potentially cause estimated total contract costs exceed transaction price case record provision estimated loss period loss first projected circumstances transaction price still exceeds total projected costs estimated penalty generally reduces profitability contract time subsequent revenue recognition incremental costs obtain contract limited sales commissions apply practical expedient expense commissions incurred contracts duration one year less sales commissions related contracts duration greater one year immaterial financial statements also expensed incurred identified material costs fulfill contract qualify capitalization asc 34040 performance obligations performance obligation promise contract transfer distinct good service customer unit account recognition revenue many contracts multiple performance obligations promise transfer individual goods services certain groups goods services separately identifiable promises contract allocate transaction price contract performance obligations basis standalone selling price recognize revenue control performance obligation transfers customer standard products identify standalone selling price based directly observable information customized unique products services apply cost plus margin approach estimate standalone selling price method forecast expected costs satisfying performance obligation add appropriate standalone market margin distinct good service elected use practical expedient adjust transaction price contract effects significant financing component inception contract expect period transfer promised good service customer pays good service one year less material product warranty exists customer specifically requested negotiated warranty period significantly longer standard warranty period ie “servicetype warranty” warranty obligation material context contract common contracts contain material product warranties however warranty exists account separate performance obligation estimate standalone selling price warranty obligation utilizing cost plus margin approach allocate portion transaction price warranty performance obligation basis estimated standalone selling price recognize revenue warranty performance obligations time straight line basis extended warranty period material right option benefit provided customer current contract option receive future products services free significant discount incremental benefits widely available similar customers enter specific contract common contracts contain material right options however material right option exists accounted separate performance obligation portion transaction price allocated performance obligation based estimated standalone selling price option revenue recognized customer exercises right acquire future products andor services december 31 2018 aggregate transaction price allocated unsatisfied partially unsatisfied performance obligations related contracts original expected duration excess one year approximately 450 million estimate recognition approximately 361 million amount revenue 2019 additional 89 million 2020 thereafter revenue recognized performance obligations satisfied partially satisfied prior periods year ended december 31 2018 material asc 606 adoption impact applied asc 606 contracts substantially complete january 1 2018 reflected aggregate impact contract modifications “change orders” occurred beginning earliest period presented accounting modified contracts transition following table presents cumulative effect changes made consolidated balance sheet january 1 2018 related adoption new revenue standard 1 adjusted contract assets accounted delivery based methods previously reported receivables net 2 represents revenue recognized advance contractual right bill customer 3 adjusted contract assets accounted time method previously reported inventories net 4 adjusted deferred revenue previously reported accrued liabilities reclassified contract assets contract liabilities 5 represents contractual billings excess revenue recognized contract level previously reported accrued liabilities modified retrospective approach requires dual reporting presentation disclosed year adoption dual reporting requirement outlines impact amount financial statement line affected current reporting period adoption new revenue standard compared previous standard effect adoption following tables present dual reporting requirements disaggregated revenue conduct operations three business segments based type product manage business • engineered product division epd long lead time custom highlyengineered pumps pump systems mechanical seals auxiliary systems replacement parts related services • industrial product division ipd engineered preconfigured industrial pumps pump systems related products services • flow control division fcd engineered industrial valves control valves actuators controls related services revenue sources derived original equipment manufacturing aftermarket sales services original equipment revenues generally related originally designed manufactured distributed installed equipment range preconfigured shortcycle products customized highlyengineered equipment original equipment aftermarket sales services derived sales replacement equipment well maintenance advanced diagnostic repair retrofitting services aftermarket three business segments generate original equipment aftermarket revenues following table presents customer revenues disaggregated revenue source 1 prior periods presented accordance topic 605 customer sales diversified geographically following table presents revenues disaggregated geography based shipping addresses customers 1 north america represents united states canada latin america includes mexico 2 prior periods presented accordance topic 605 contract balances receive payment customers based contractual billing schedule specific performance requirements established contracts record billings accounts receivable unconditional right consideration exists contract asset represents revenue recognized advance right bill customer terms contract liability represents contractual billings advance revenue recognized contract following table presents opening closing balances contract assets contract liabilities current longterm year ended december 31 2018 1 included assets net 2 included retirement obligations liabilities 3 dispositions ipd business divestiture june 29 2018 pursuant plan sale approved management executed agreement divest two ipd locations associated product lines including related assets liabilities transaction meet criteria classification assets held sale june 30 2018 due contingency could potentially impacted final terms andor timing divestiture sale transaction completed august 9 2018 twelve months ended december 31 2018 recorded pretax charge 251 million including pretax charge 174 million second quarter 2018 loss sale business 77 million third quarter 2018 second quarter 2018 pretax charge related writedowns inventory longlived assets estimated fair value 77 million recorded cos 97 million recorded sga third quarter 2018 pretax charge primarily related working capital changes since second quarter 2018 net cash transferred closing date 37 million sale included manufacturing facility germany related assembly facility france 2017 net sales related business totaled approximately 42 million although business produced operating loss last two fiscal years vogt effective july 6 2017 sold fcds vogt product line related assets liabilities privately held company 280 million cash received closing sale resulted pretax gain 111 million recorded gain sale business consolidated statements income 2016 net sales related vogt business totaled approximately 17 million earnings interest taxes approximately 4 million gestra ag effective may 2 2017 sold fcds gestra ag gestra business leading provider steam system solutions 2036 million €1783 million included 1808 million €1583 million cash received closing net divested cash subsequent working capital adjustments 240 million €200 million previous escrow amounts collected fourth quarter 2017 sale resulted pretax gain 1302 million 794 million aftertax recorded gain sale business consolidated statements income sale included gestra’s manufacturing facility germany well related operations us united kingdom uk spain poland italy singapore portugal 2016 gestra recorded revenues approximately 101 million €92 million earnings interest taxes approximately 17 million €15 million 4 goodwill intangible assets changes carrying amount goodwill years ended december 31 2018 2017 follows following table provides information intangible assets years ended december 31 2018 2017 1 engineering drawings represent estimated fair value associated specific acquired product component schematics 2 existing customer relationships acquired prior 2011 useful life five years 3 accumulated amortization indefinitelived intangible assets relates amounts recorded prior implementation date guidance issued asc 350 following schedule outlines actual amortization expense recognized 2018 estimate future amortization based upon finitelived intangible assets owned december 31 2018 amortization expense finitelived intangible assets 153 million 2017 139 million 2016 5 inventories net consisted following 1 second quarter 2017 recorded 169 million charge costs incurred related contract supply oil gas platform equipment end user latin america charge primarily related ipd reporting segment resulted decrease work process 2 second quarter 2018 recorded 77 million charge related divestiture two ipd locations related product lines resulted decrease finished goods refer note 3 discussion 2018 2017 2016 recognized expenses 162 million 229 million 146 million respectively excess obsolete inventory expenses included cos consolidated statements income part adoption new revenue standard certain work process inventory progress billings associated poc contracts recognized cost sales reclassified contract assets contract liabilities refer note 2 discussion 6 stockbased compensation plans maintain flowserve corporation equity incentive compensation plan 2010 plan shareholderapproved plan authorizing issuance 8700000 shares common stock form incentive stock options nonstatutory stock options restricted shares restricted share units performancebased units collectively referred restricted shares stock appreciation rights bonus stock 8700000 shares common stock authorized 2010 plan 2089079 available issuance december 31 2018 longterm incentive program amended allow restricted shares granted january 1 2016 employees retire achieved least 55 years age ten years service continue vest original vesting period 5510 provision stock options granted officers employees directors allow purchase common shares market value stock date options granted options generally become exercisable three years options generally expire ten years date grant within short period time following termination employment cessation services option holder stock options granted year ended december 31 2018 compared 114943 stock options granted period 2017 stock options granted period 2016 december 31 2018 114943 stock options outstanding grant date fair value 20 million expected recognized weightedaverage period approximately one year stock options vested years ended december 31 2018 2017 2016 information related stock options issued officers employees directors plans presented following table weighted average remaining contractual life options outstanding december 31 2018 2017 83 years 93 years respectively total intrinsic value stock options exercised year ended december 31 2016 24 million restricted shares generally restrictions restricted shares expire minimum one year maximum three years shares subject forfeiture restriction period typically restricted share grants staggered vesting periods one three years grant date intrinsic value restricted shares typically product share price date grant number restricted shares granted amortized straightline basis compensation expense periods restrictions lapse awards restricted shares valued closing market price common stock date grant unearned compensation amortized compensation expense vesting period restricted shares except awards related 5510 provision expensed granted unearned compensation amortized compensation expense vesting period restricted shares december 31 2018 2017 243 million 167 million respectively unearned compensation cost related unvested restricted shares expected recognized weightedaverage period approximately one year amounts recognized net earnings prospective periods awards vest total fair value restricted shares vested years ended december 31 2018 2017 2016 143 million 305 million 388 million respectively recorded stockbased compensation restricted shares follows following table summarizes information regarding restricted shares unvested restricted shares outstanding december 31 2018 includes approximately 767000 units performancebased vesting provisions performancebased units issuable common stock vest upon achievement predefined performance targets performancebased units granted prior 2017 performance targets based average annual return net assets threeyear period compared measure defined peer group period performancebased units granted 2017 2018 performance targets based average return invested capital total shareholder return tsr threeyear period units granted three annual grants since january 1 2016 vesting percentage 0 200 depending achievement specific performance targets except shares granted 5510 provision compensation expense recognized ratably cliffvesting period 36 months based fair value common stock date grant adjusted actual forfeitures performance period earned unearned compensation expense adjusted based changes expected achievement performance targets performancebased units granted except tsrbased units vesting provisions range 0 approximately 1534000 shares based performance targets december 31 2018 estimate vesting approximately 615000 shares based expected achievement performance targets 7 derivatives hedging activities risk management foreign currency derivatives hedging policy specifies conditions may enter derivative contracts see note 1 additional information purpose entering derivatives overall risk management strategies enter foreign exchange forward contracts hedge cash flow risks associated transactions denominated currencies local currency operation engaging transaction foreign exchange contracts notional values 2809 million 2356 million december 31 2018 2017 respectively december 31 2018 length foreign exchange contracts currently place ranged 4 days 21 months second quarter 2017 discontinued program designate forward exchange contracts discontinuance program impact financial position december 31 2017 exposed risk creditrelated losses resulting nonperformance counterparties financial instruments perform credit evaluations counterparties forward exchange contracts expect counterparties meet obligations experienced credit losses counterparties fair values foreign exchange contracts summarized current noncurrent derivative assets reported consolidated balance sheets prepaid expenses assets net respectively current noncurrent derivative liabilities reported consolidated balance sheets accrued liabilities retirement obligations liabilities respectively impact net changes fair values foreign exchange contracts summarized gains losses recognized consolidated statements income foreign exchange contracts classified expense net march 2015 designated €2557 million €5000 million 2022 eur senior notes discussed note 11 net investment hedge investments certain international subsidiaries use euro functional currency used spot method measure effectiveness net investment hedge method reporting period change carrying value 2022 eur senior notes due remeasurement effective portion reported accumulated comprehensive loss consolidated balance sheet remaining change carrying value ineffective portion recognized expense net consolidated statements income evaluate effectiveness net investment hedge prospective basis beginning quarter record ineffectiveness years ended december 31 2018 2017 2016 8 fair value financial instruments fair value debt excluding senior notes described note 11 estimated using interest rates similar debt recently issued companies credit metrics similar classified level ii fair value hierarchy carrying value debt included note 11 except senior notes approximates fair value estimated fair value senior notes based level quoted market rates estimated fair value senior notes december 31 2018 13625 million compared carrying value 13648 million carrying amounts financial instruments ie cash equivalents accounts receivable net accounts payable approximated fair value due shortterm nature december 31 2018 december 31 2017 9 details certain consolidated balance sheet captions following tables present financial information certain consolidated balance sheet captions accounts receivable net accounts receivable net property plant equipment net property plant equipment net 1 second quarter 2018 recorded 97 million charge related divestiture two ipd locations related product lines second quarter 2017 recorded 260 million impairment charge related manufacturing facility brazil accrued liabilities accrued liabilities part adoption new revenue standard customer advance payments progress billings excess accumulated costs reclassified contract assets contract liabilities refer note 2 annual report discussion accrued liabilities include professional fees lease obligations insurance interest freight accrued cash dividends payable legal environmental matters derivative liabilities restructuring reserves items none individually exceed 5 current liabilities retirement obligations liabilities retirement obligations liabilities 10 equity method investments occasionally enter joint venture arrangements local country partners preferred means entry countries barriers entry may exist similar consolidated subsidiaries unconsolidated joint ventures generally operate within primary businesses designing manufacturing assembling distributing fluid motion control products services agreements certain joint ventures restrict us otherwise entering respective market certain joint ventures produce andor sell products part broader product offering net earnings investments unconsolidated joint ventures reported net earnings affiliates consolidated statements income given integrated role unconsolidated joint ventures business net earnings affiliates presented component operating income december 31 2018 investments seven joint ventures one located chile india saudi arabia south korea united arab emirates two china accounted using equity method immaterial disclosure purposes 11 debt lease obligations debt including capital lease obligations consisted scheduled maturities senior credit facility described well senior notes debt senior notes march 17 2015 completed public offering €5000 million euro senior notes aggregate principal amount due march 17 2022 eur senior notes 2022 eur senior notes bear interest rate 125 per year payable year march 17 2022 eur senior notes priced 99336 par value reflecting discount aggregate principal amount november 1 2013 completed public offering 3000 million aggregate principal amount senior notes due november 15 2023 senior notes 2023 senior notes bear interest rate 400 per year payable may 15 november 15 year 2023 senior notes priced 99532 par value reflecting discount aggregate principal amount september 11 2012 completed public offering 5000 million aggregate principal amount senior notes due september 15 2022 senior notes 2022 senior notes bear interest rate 350 per year payable march 15 september 15 year 2022 senior notes priced 99615 par value reflecting discount aggregate principal amount right redeem 2022 senior notes 2023 senior notes time prior june 15 2022 august 15 2023 respectively whole part option redemption price equal greater 1 100 principal amount senior notes redeemed 2 sum present values remaining scheduled payments principal interest respect senior notes redeemed discounted redemption date semiannual basis applicable treasury rate plus 30 basis points 2022 senior notes plus 25 basis points 2023 senior notes addition time june 15 2022 senior notes august 15 2023 senior notes may redeem senior notes redemption price equal 100 principal amount senior notes redeemed case also pay accrued unpaid interest principal amount redeemed redemption date similarly right redeem 2022 eur senior notes december 17 2021 whole part option redemption price equal greater 1 100 principal amount senior notes redeemed 2 sum present values remaining scheduled payments principal interest respect senior notes redeemed exclusive interest accrued excluding date redemption discounted redemption date annual basis comparable german government bond rate plus 25 basis points senior credit facility amended credit agreement provides 1950 million term loan “term loan facility” 8000 million revolving credit facility “revolving credit facility” together term loan facility “senior credit facility” maturity october 14 2020 current senior credit facility includes following leverage ratio 400 times debt total consolidated ebitda june 30 2019 stepdown 375 fiscal quarter ending july 1 2019 iia pricing level senior unsecured longterm debt ratings ba2bb interest rate margin libor loans 200 base rate loans 100 iii maximum principal amount priority debt 75 consolidated tangible assets maximum amount receivables securitized 100 million subject certain conditions including lender approval right increase amount term loan facility revolving credit facility aggregate amount exceed 4000 million december 31 2018 december 31 2017 revolving loans outstanding revolving credit facility outstanding letters credit 929 million 948 million december 31 2018 december 31 2017 respectively together financial covenant limitations based terms senior credit facility contributed reduction borrowing capacity 5137 million 6448 million respectively senior credit facility contains among things covenants defining subsidiaries ability dispose assets merge pay dividends repurchase redeem capital stock indebtedness incur indebtedness guarantees create liens enter agreements negative pledge clauses make certain investments acquisitions enter transactions affiliates engage business activity existing business compliance financial covenants senior credit facility tested quarterly compliance covenants december 31 2018 repayment obligations may prepay loans senior credit facility whole part without premium penalty time commitment fee payable quarterly daily unused portions senior credit facility 020 per annum december 31 2018 made scheduled principal repayments term loan facility 600 million 2018 2017 2016 scheduled principal repayments 150 million due next four quarters 2019 term loan facility operating leases noncancellable operating leases certain offices service quick response centers manufacturing operating facilities machinery equipment automobiles rental expense relating operating leases 537 million 549 million 547 million 2018 2017 2016 respectively future minimum lease payments due noncancellable operating leases amounts thousands 12 pension postretirement benefits sponsor several noncontributory defined benefit pension plans covering substantially us employees certain nonus employees provide benefits based years service age job grade levels type compensation retirement benefits covered employees provided contributory pension plans cash balance pension plans governmentsponsored retirement programs funded defined benefit pension plans receive funding based independent actuarial valuations provide current service amount sufficient amortize unfunded prior service periods exceed 30 years funding falling within legal limits prescribed prevailing regulation also maintain unfunded defined benefit plans permitted local regulations receive funding benefits become due defined benefit plan strategy ensure current future benefit obligations adequately funded costeffective manner additionally investing objective achieve highest level investment performance compatible risk tolerance prudent investment practices longterm nature defined benefit plan liabilities funding strategy based longterm perspective formulating implementing investment policies evaluating investment performance asset allocation defined benefit plans reflects decision proportion investment equity fixed income securities appropriate various subasset classes least annually complete comprehensive review asset allocation policy underlying assumptions includes longterm capital markets rate return assumptions risk tolerances relative defined benefit plan liabilities expected rates return defined benefit plan assets derived review asset allocation strategy expected longterm performance asset classes risks factors adjusted specific investment strategy rates impacted changes general market conditions longterm nature shortterm market changes significantly impact rates us defined benefit plan assets consist balanced portfolio equity fixed income securities nonus defined benefit plan assets include significant concentration united kingdom uk fixed income securities monitor investment allocations manage plan assets maintain acceptable levels risk periods presented used measurement date december 31 us nonus pension plans postretirement medical plans us defined benefit plans maintain qualified nonqualified defined benefit pension plans us qualified plan provides coverage substantially fulltime us employees receive benefits earnings threshold specified us department labor nonqualified plans primarily cover small number employees including current former members senior management providing benefit levels equivalent participants otherwise limited us department labor rules us plans designed operate cash balance arrangements employee option take lump sum payment end service total accumulated benefit obligation equivalent total projected benefit obligation benefit obligation following assumptions related us defined benefit pension plans december 31 2018 compared december 31 2017 increased discount rate 363 434 based analysis publiclytraded investment grade us corporate bonds higher yield due current market conditions determining 2018 expense expected rate return us plan assets remained constant 600 primarily based target allocations expected longterm asset returns longterm rate return assumption calculated using quantitative approach utilizes unadjusted historical returns asset allocation inputs calculation us plans adopted rp2006 mortality tables mp2018 improvement scale published october 2018 applied rp2006 tables based constituency plan population union nonunion participants adjusted improvement scale utilize 75 ultimate improvement rate consistent assumptions adopted social security administration trustees based longterm historical experience currently believe approach provides best estimate future obligation plan participants elect receive plan benefits lump sum end service rather annuity updated mortality tables immaterial effect pension obligation net pension expense us defined benefit pension plans including qualified nonqualified plans estimated prior service cost estimated net loss us defined benefit pension plans amortized accumulated comprehensive loss pension expense 2019 02 million 35 million respectively amortize estimated prior service benefits estimated net losses remaining expected service period following summarizes net pension liability asset us plans following summarizes amounts recognized balance sheet us plans following summary changes us defined benefit plans’ pension obligations 1 actuarial gain loss 2018 2017 primarily reflect impact changes discount rate following table summarizes expected cash benefit payments us defined benefit pension plans future amounts millions following table shows change accumulated comprehensive loss attributable components net cost change benefit obligations us plans net tax amounts recorded accumulated comprehensive loss consist following reconciliation us defined benefit pension plans’ assets contributed 233 million 238 million us defined benefit pension plans 2018 2017 respectively payments exceeded minimum funding requirements mandated us department labor rules estimated contribution 2019 expected approximately 20 million excluding direct benefits paid us defined benefit plan assets held qualified plan asset allocations qualified plan end 2018 2017 asset category follows none common stock directly held qualified plan investment strategy earn longterm rate return consistent acceptable degree risk minimize cash contributions life plan taking account liquidity needs plan preserve capital diversified investments high quality securities current allocation target invest approximately 43 plan assets equity securities 57 fixed income securities within investment category assets allocated various investment strategies professional money management firms manage assets engage consultant assist evaluating activities periodically review allocation target generally conjunction asset liability study consideration future cash flow needs regularly rebalance actual allocation target investment allocation plan assets invested commingled funds pension investment committee responsible setting investment strategy target asset allocation plans assets qualified plan approached fully funded status implemented liabilitydriven investing ldi strategy closely aligns duration plans assets duration liabilities ldi strategy results asset portfolio closely matches behavior liability thereby reducing volatility plans funded status plan’s financial instruments shown presented fair value see note 1 discussion hierarchical levels fair values plan’s investments determined fair values us defined benefit plan assets global equity fund seeks closely track performance msci country world index b global real asset funds seek provide exposure listed global real estate investment trusts reits infrastructure markets c diversified credit funds seek provide exposure high yield emerging markets bank loans securitized credit markets ldi funds seek invest high quality fixed income securities collectively closely match found discount curves used value plans liabilities nonus defined benefit plans maintain defined benefit pension plans cover employees following countries austria belgium canada france germany india italy mexico netherlands sweden switzerland uk assets plans uk two plans netherlands canada represent 100 total nonus plan assets nonus assets details countries’ plan assets provided due immateriality following assumptions related nonus defined benefit pension plans december 31 2018 compared december 31 2017 increased average discount rate nonus plans 225 242 based analysis bonds publiclytraded instruments country higher yields due market conditions determine 2018 pension expense decreased average expected rate return plan assets 388 december 31 2017 362 december 31 2018 primarily based target allocations expected longterm asset returns expected rate return plan assets longterm nature shortterm market changes significantly impact rate many nonus defined benefit plans unfunded permitted local regulation expected longterm rate return assets funded plans determined assessing rates return asset class calculated using quantitative approach utilizes unadjusted historical returns asset allocation inputs calculation work actuaries determine reasonableness longterm rate return assumptions looking several factors including historical returns expected future returns asset allocation risks asset class items net pension expense nonus defined benefit pension plans 2019 03 million estimated prior service cost amortized accumulated comprehensive loss pension expense nonus defined benefit pension plans estimated net loss nonus defined benefit pension plans amortized accumulated comprehensive loss pension expense 2019 30 million amortize estimated net losses remaining expected service period remaining expected lifetime inactive participants plans inactive participants following summarizes net pension liability nonus plans following summarizes amounts recognized balance sheet nonus plans following reconciliation nonus plans’ defined benefit pension obligations 1 2018 actuarial gain primarily reflects increase discount rates uk eurozone mexico 2 2018 currency translation impact reflects strengthening us dollar significant currencies primarily euro british pound 2017 currency translation impact reflects weakening us dollar significant currencies primarily euro british pound following table summarizes expected cash benefit payments nonus defined benefit plans future amounts millions following table shows change accumulated comprehensive loss attributable components net cost change benefit obligations nonus plans net tax amounts recorded accumulated comprehensive loss consist following reconciliation nonus plans’ defined benefit pension assets contributions nonus defined benefit pension plans 2019 expected approximately 9 million excluding direct benefits paid asset allocations nonus defined benefit pension plans end 2018 2017 follows none common stock held directly plans cases investment strategy plans earn longterm rate return consistent acceptable degree risk minimize cash contributions life plan taking account liquidity needs plan legal requirements particular country preserve capital diversified investments high quality securities asset allocation differs plan based upon plan’s benefit obligation participants well results asset liability studies conducted plan consideration future cash flow needs professional money management firms manage plan assets engage consultant uk assist evaluation activities assets uk plans overseen group trustees review investment strategy asset allocation fund selection assets passively managed invested index funds attempt match performance specified benchmark index fair values nonus assets north american companies represents us canadian large cap equity funds managed track respective benchmarks ftse allworld usa index ftse allworld canada index b global equity represents actively managed global equity funds taking topdown strategic view different regions analyzing companies based fundamentals marketdriven thematic quantitative factors generate alpha c uk government gilt index represents uk government issued fixed income investments passively managed track respective benchmarks uk corporate bond index represents uk corporate bond investments passively managed track iboxx 15 years £ nongilt index e global fixed income bond represents investment funds actively managed diversified invested traditional government bonds highquality corporate bonds assetbacked securities emerging market debt f liabilitydriven investment seeks invest fixed income securities collectively closely match found discount curves used value plans liabilities g multiasset seeks attractive riskadjusted return investing diversified portfolio strategies including equities fixed income h buyin contract represents asset held netherlands plan whereby cost providing benefits funded contract fair value asset january 1 2018 245 million contributions currency adjustments resulting fair value 236 million december 31 2018 fair value asset based current present value accrued benefits fluctuate based changes obligations associated covered plan members well assumptions used present value calculation includes assets held plans outside united kingdom netherlands details including level iii rollforward details material defined benefit pension plans accumulated benefit obligations excess plan assets following summarizes key pension plan information regarding us nonus plans whose accumulated benefit obligations exceed fair value respective plan assets postretirement medical plans sponsor several defined benefit postretirement medical plans covering certain current retirees limited number future retirees us plans provide medical dental benefits administered insurance companies health maintenance organizations plans include participant contributions deductibles coinsurance provisions limitations integrated medicare group plans fund plans benefits health maintenance organization premiums paid plans hold assets period presented accordingly investment strategy targeted allocations plan assets benefits postretirement medical plans available new employees existing employees following assumptions related postretirement benefits assumed ranges annual rates increase medical costs used determine net expense 70 2018 70 2017 75 2016 gradual decrease 50 2029 future years net postretirement benefit cost postretirement medical plans estimated prior service cost expected amortized accumulated comprehensive loss us pension expense 2019 01 million estimated net gain postretirement medical plans amortized accumulated comprehensive gain us expense 2019 02 million following summarizes accrued postretirement benefits liability postretirement medical plans following summarizes amounts recognized balance sheet postretirement benefit obligation following reconciliation postretirement benefit obligation following presents expected benefit payments future periods amounts millions following table shows change accumulated comprehensive loss attributable components net cost change benefit obligations postretirement benefits net tax amounts recorded accumulated comprehensive loss consist made contributions postretirement medical plans pay benefits 32 million 2018 25 million 2017 44 million 2016 postretirement medical plans unfunded make contributions covered individuals’ claims approved payment accordingly contributions period directly correlated benefits paid assumed health care cost trend rates effect amounts reported postretirement medical plans onepercentage point change assumed health care cost trend rates would following effect 2018 reported amounts thousands defined contribution plans sponsor several defined contribution plans covering substantially us canadian employees certain nonus employees may contribute plans contributions matched varying amounts us including opportunities discretionary matching contributions us defined contribution plan expense 187 million 2018 177 million 2017 172 million 2016 13 legal matters contingencies asbestosrelated claims defendant substantial number lawsuits seek recover damages personal injury allegedly caused exposure asbestoscontaining products manufactured andor distributed heritage companies past overall number asbestosrelated claims generally declined recent years assurance trend continue average cost per claim increase asbestoscontaining materials incorporated products encapsulated used internal components process equipment believe significant emission asbestos fibers occurred use equipment practice vigorously contest resolve claims successful resolving majority claims little payment historically high percentage resolved claims covered applicable insurance indemnities companies believe substantial majority existing claims continue covered insurance indemnities whole part accordingly recorded liability estimate likely settlement asserted claims related receivable insurers companies estimated recovery extent believe amounts recovery probable unfavorable rulings judgments settlement terms regarding claims could material adverse impact business financial condition results operations cash flows currently believe likelihood remote additionally claims pending certain insurers resolved favorably reflected recorded receivables would result discrete gains applicable quarter currently unable estimate impact unasserted asbestosrelated claims although expect future claims would also subject existing indemnities insurance coverage currently involved potentially responsible party five former public waste disposal sites various stages evaluation remediation projected cost remediation sites well alleged fair share allocation remain uncertain studies completed parties either negotiated amicable resolution matter judicially resolved site many parties similarly identified many parties identified financially strong solvent companies appear able pay share remediation costs based information waste disposal practices sites environmental regulatory process general believe likely ultimate remediation liability costs site apportioned among liable parties including site owners waste transporters according volumes andor toxicity wastes shown disposed sites believe financial exposure existing disposal sites materially excess accrued reserves previously disclosed terminated employee overseas subsidiary uncovering actions violated code business conduct may violated foreign corrupt practices act completed internal investigation matter selfreported potential violation united states department justice “doj” sec continue cooperate doj sec previously received subpoena sec requesting additional information documentation related matter completed response subpoena currently believe matter material adverse financial impact company assurance company subjected monetary penalties additional costs also defendant number lawsuits including product liability claims insured subject applicable deductibles arising ordinary course business also involved uninsured routine litigation incidental business currently believe none litigation either individually aggregate material business operations overall financial condition however litigation inherently unpredictable resolutions dispositions claims lawsuits settlement otherwise could adverse impact financial position results operations cash flows reporting period resolution disposition occurs although none aforementioned potential liabilities quantified absolute certainty except otherwise indicated established reserves covering exposures relating contingencies extent believed reasonably estimable probable based past experience available facts additional exposures beyond reserves could exist currently cannot estimated continue evaluate update reserves necessary appropriate 14 warranty reserve recorded reserves product warranty claims included current liabilities following summary activity warranty reserve 15 shareholders’ equity dividends generally dividend dateofrecord last month quarter dividend paid following month subsequent dividends reviewed board directors declared discretion dependent assessment financial situation business outlook applicable time dividends per share 076 years ending december 31 2018 2017 2016 february 15 2016 board directors authorized increase payment quarterly dividends common stock 018 per share 019 per share payable beginning april 8 2016 share repurchase program november 13 2014 board directors approved 5000 million share repurchase authorization share repurchase program expiration date reserve right limit terminate repurchase program time without notice repurchases shares outstanding common stock year ended december 31 2018 2017 2016 december 31 2018 1607 million remaining capacity current share repurchase program 16 income taxes december 22 2017 us enacted tax cuts jobs act 2017 “tax reform act” significantly changed us tax law tax reform act among things lowered company’s us statutory federal income tax rate 35 21 effective january 1 2018 imposing deemed repatriation tax deferred foreign income implementing modified territorial tax system tax reform act also provides onetime transition tax “transition tax” certain foreign earnings well prospective changes began 2018 including repeal domestic manufacturing deduction capitalization research development expenditures additional limitations executive compensation limitations deductibility interest company recognized provisional income tax effects tax reform act previously issued financial statements accordance staff accounting bulletin sab 118 provides sec staff guidance application asc topic 740 income taxes respect recording certain tax impacts tax reform act company finalized accounting income tax effects tax reform act fourth quarter 2018 material adjustments previously recorded provisional amounts impacts changes reflected 2017 provisional tax expense 1153 million 2018 tax benefit 57 million provision income taxes consists following provision income taxes differs statutory corporate rate due following 2017 tax rate differed federal statutory rate 35 primarily due impacts pursuant enactment tax reform act net impact foreign operations establishment valuation allowance deferred tax assets various foreign jurisdictions primarily germany mexico taxes related sale gestra vogt businesses years ended december 31 2016 prior company asserted permanent reinvestment majority invested capital unremitted foreign earnings foreign subsidiaries year ended december 31 2017 assert permanent reinvestment foreign subsidiaries result recorded deferred taxes approximately 754 million cumulative unrepatriated earnings connection tax reform act year ended december 31 2018 company asserted permanent reinvestment earnings certain foreign subsidiaries end december 31 2018 company still recorded 703 million deferred tax liabilities associated earnings previously deemed available repatriation referenced deferred tax liabilities primarily relate foreign withholding taxes would due upon repatriation designated earnings us deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes significant components consolidated deferred tax assets liabilities 3940 million us foreign net operating loss carryforwards december 31 2018 total 424 million state net operating losses net operating losses generated us unused expire 2024 2026 tax years majority nonus net operating losses carry forward without expiration additionally 161 million foreign tax credit carryforwards december 31 2018 expiring 2026 2028 tax years valuation allowance 161 million recorded earnings income taxes comprised tabular reconciliation total gross amount unrecognized tax benefits excluding interest penalties follows millions amount gross unrecognized tax benefits december 31 2018 541 million includes 129 million accrued interest penalties amount 536 million recognized would favorably impact effective tax rate limited exception longer subject us federal income tax audits years 2016 state local income tax audits years 2012 nonus income tax audits years 2011 currently examination various years austria canada france germany india indonesia italy japan mexico philippines saudi arabia singapore thailand us venezuela reasonably possible within next 12 months effective tax rate impacted resolution matters audited various taxing authorities also reasonably possible statute limitations close various taxing jurisdictions within next 12 months estimate could record reduction tax expense approximately 16 million within next 12 months 17 business segment information business segments share focus industrial flow control technology high number common customers segments also complementary product offerings technologies often combined applications provide us net competitive advantage segments also benefit global footprint economies scale reducing administrative overhead costs serve customers cost effectively conduct operations three business segments based type product manage business • epd long lead time custom highlyengineered pumps pump systems mechanical seals auxiliary systems replacement parts related services • ipd engineered preconfigured industrial pumps pump systems related products services • fcd engineered industrial valves control valves actuators controls related services decisionmaking purposes chief executive officer ceo members senior executive management use financial information generated reported reportable segment level corporate headquarters constitute separate division business segment evaluate segment performance allocate resources based reportable segment’s operating income amounts classified eliminations include corporate headquarters costs minor entities constitute separate segments intersegment sales transfers recorded cost plus profit margin sales related margin sales eliminated consolidation following summary financial information reportable segments years ended december 31 2018 2017 2016 reconciled amounts reported consolidated financial statements latter part 2018 connection flowserve 20 transformation determined meaningful operational synergies benefits combining epd ipd reportable segments one reportable segment flowserve pump division fpd reorganization effective january 1 2019 result beginning 2019 report two operating segment structure fpd fcd prior periods retrospectively adjusted reflect new reportable segment structure discussion flowserve 20 transformation program refer note 19 geographic information attribute sales different geographic areas based facilities’ locations longlived assets classified based geographic area assets located exclude deferred taxes goodwill intangible assets prior period information updated conform current year presentation sales longlived assets geographic area follows 1 ema includes europe middle east africa 2018 2017 2016 germany accounted approximately 7 10 respectively consolidated longlived assets individual country within group represents 10 consolidated totals period presented 2 asia includes asia australia individual country within group represents 10 consolidated totals period presented 3 includes canada latin america individual country within group represents 10 consolidated totals period presented net sales international customers including export sales us represented approximately 63 total sales 2018 2017 64 2016 major customer information large number customers across large number manufacturing service facilities sales individual customer represent 10 consolidated sales years presented 18 accumulated comprehensive loss following presents components accumulated comprehensive loss aocl net related tax effects 1 includes foreign currency translation adjustments attributable noncontrolling interests 45 million 38 million 34 million december 31 2018 2017 2016 respectively year ended december 31 2018 foreign currency translation impacts primarily represented weakening euro argentinian peso indian rupee british pound exchange rates versus us dollar period year ended december 31 2017 foreign currency translation impacts primarily represented weakening euro british pound indian rupee exchange rates versus us dollar period includes net investment hedge cumulative losses 172 million 225 million net deferred taxes december 31 2018 2017 respectively amounts parentheses indicate debits following table presents reclassifications aocl 1 amounts parentheses indicate decreases income none reclassification amounts noncontrolling interest component 2 accumulated comprehensive loss components included computation net periodic pension cost see note 12 additional details 19 realignment transformation programs second quarter 2018 launched committed resources flowserve 20 transformation flowserve 20 transformation program designed transform business model drive operational excellence reduce complexity accelerate growth expand margins increase capital efficiency improve organizational health anticipate flowserve 20 transformation result restructuring charges nonrestructuring charges related transformation expenses primarily professional services project management related travel expenses year ended december 31 2018 incurred flowserve 20 transformation related expenses 412 million primarily consisting professional services project management costs recorded sga currently evaluating total investment various initiatives associated program 2015 initiated realignment programs consisting r1 realignment program related sihi acquisition r2 realignment program better align costs improve longterm efficiency including manufacturing optimization consolidation facilities reduction workforce divestiture certain nonstrategic assets “realignment programs” realignment programs substantially completed estimate total investment programs approximately 360 million realignment programs consist restructuring nonrestructuring charges restructuring charges represent costs associated relocation reorganization certain business activities facility closures include related severance costs nonrestructuring charges primarily employee severance associated workforce reductions reduce redundancies expenses primarily reported cos sga applicable consolidated statements income generally aforementioned charges paid cash except asset writedowns noncash charges following summary total charges net adjustments related realignment programs flowserve 20 transformation charges 1 income tax benefit expense includes exit taxes well nondeductible costs following summary total inception date charges net adjustments related realignment programs 1 income tax expense includes exit taxes well nondeductible costs restructuring charges represent costs associated relocation reorganization certain business activities facility closures include costs related employee severance closed facilities contract termination costs asset writedowns costs severance costs primarily include costs associated involuntary termination benefits contract termination costs include costs related termination operating leases contract termination costs asset writedowns include accelerated depreciation fixed assets accelerated amortization intangible assets divestiture certain nonstrategic assets inventory writedowns costs generally include costs related employee relocation asset relocation vacant facility costs ie taxes insurance charges following summary restructuring charges net adjustments realignment programs 1 income tax benefit expense includes exit taxes well nondeductible costs following summary total inception date restructuring charges net adjustments related realignment programs 1 income tax expense includes exit taxes well nondeductible costs following represents activity primarily severance related restructuring reserve realignment programs years ended december 31 2018 2017 1 includes reduction severance accruals associated divestiture two ipd locations associated product lines 2018 refer note 3 annual report discussion 2 reserve r1 realignment program 126 million substantially paid period 20 quarterly financial data unaudited following presents summary unaudited quarterly data 2018 2017 amounts millions except per share data 1 earnings per share computed independently quarters presented sum quarters may equal total year amount due impact changes weighted average quarterly shares outstanding item 9item 8 financial statements supplementary data report independent registered public accounting firm board directors shareholders flowserve corporation opinions financial statements internal control financial reporting audited accompanying consolidated balance sheets flowserve corporation subsidiaries “company” december 31 2019 2018 related consolidated statements income comprehensive income shareholders equity cash flows three years period ended december 31 2019 including related notes schedule valuation qualifying accounts three years period ended december 31 2019 listed index appearing item 15a2 collectively referred “consolidated financial statements” also audited companys internal control financial reporting december 31 2019 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission coso opinion consolidated financial statements referred present fairly material respects financial position company december 31 2019 2018 results operations cash flows three years period ended december 31 2019 conformity accounting principles generally accepted united states america also opinion company maintained material respects effective internal control financial reporting december 31 2019 based criteria established internal control integrated framework 2013 issued coso change accounting principle discussed notes 1 2 consolidated financial statements company changed manner accounts sales contracts customers 2018 basis opinions companys management responsible consolidated financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report internal control financial reporting appearing item 9a responsibility express opinions company’s consolidated financial statements companys internal control financial reporting based audits public accounting firm registered public company accounting oversight board united states pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audits obtain reasonable assurance whether consolidated financial statements free material misstatement whether due error fraud whether effective internal control financial reporting maintained material respects audits consolidated financial statements included performing procedures assess risks material misstatement consolidated financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures consolidated financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation consolidated financial statements audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions definition limitations internal control financial reporting company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate critical audit matters critical audit matters communicated matters arising current period audit consolidated financial statements communicated required communicated audit committee relate accounts disclosures material consolidated financial statements ii involved especially challenging subjective complex judgments communication critical audit matters alter way opinion consolidated financial statements taken whole communicating critical audit matters providing separate opinions critical audit matters accounts disclosures relate goodwill impairment test described notes 1 5 consolidated financial statements company’s consolidated goodwill balance 11930 million december 31 2019 company conducts impairment test december 31 year whenever events circumstances indicate goodwill may impaired impairment loss goodwill recognized implied fair value goodwill less carrying value fair value estimated using discounted cash flow analysis requires management make various judgmental assumptions future sales operating margins growth rates discount rates principal considerations determination performing procedures relating goodwill impairment test critical audit matter significant judgment management determining fair value reporting units using discounted cash flow analysis turn led high degree auditor judgment subjectivity effort performing procedures evaluating management’s discounted cash flow analysis including significant assumptions future sales operating margins growth rates discount rates addition audit effort included involvement professionals specialized skill knowledge assist performing procedures evaluating audit evidence obtained addressing matter involved performing procedures evaluating audit evidence connection forming overall opinion consolidated financial statements procedures included testing effectiveness controls relating management’s goodwill impairment test including controls determination fair value company’s reporting units procedures also included among others testing management’s process developing fair value estimate ii evaluating appropriateness discounted cash flow analysis iii testing completeness accuracy relevance underlying data used analysis iv evaluating significant assumptions used discounted cash flow analysis management developing fair value estimate including future sales operating margins growth rates discount rates evaluating management’s assumptions related future sales operating margins growth rates involved evaluating whether assumptions used management reasonable considering current past performance reporting units whether assumptions consistent evidence obtained areas audit professionals specialized skill knowledge used assist evaluating reasonableness discount rates income tax valuation allowances deferred tax assets described notes 1 17 consolidated financial statements company’s consolidated net deferred tax assets 113 million includes valuation allowances 266 million primarily related deferred tax assets established us foreign tax credit carryforwards 291 million foreign capital loss carryforwards 1026 million foreign deferred tax assets 1347 million management records valuation allowances reduce carrying value deferred tax assets amounts likely realized management assesses existing deferred tax assets net operating losses tax credits jurisdiction expectations company’s ability utilize tax attributes review past current estimated future taxable income establishment tax planning strategies principal considerations determination performing procedures relating income tax valuation allowances deferred tax assets critical audit matter significant judgment management estimating future taxable income including tax planning strategies turn led high degree auditor judgment subjectivity effort performing procedures evaluating audit evidence relating future taxable income including tax planning strategies application foreign tax regulations addition audit effort involved use professionals specialized skill knowledge assist performing procedures evaluating audit evidence obtained addressing matter involved performing procedures evaluating audit evidence connection forming overall opinion consolidated financial statements procedures included testing effectiveness controls relating valuation allowances deferred tax assets including controls review management’s analysis jurisdiction cumulative taxable income loss controls management’s estimate jurisdiction future taxable income procedures also included among others testing underlying historical data used calculating cumulative taxable income loss ii assessing effect events past company transactions iii testing management’s estimate future taxable income included evaluating reasonableness significant assumptions appropriateness available tax planning strategies professionals specialized skill knowledge used assist evaluating management’s analysis including cumulative taxable income loss well reasonableness management’s judgments estimates including management’s application foreign tax regulations pricewaterhousecoopers llp pricewaterhousecoopers llp dallas texas february 17 2020 served company’s auditor since 2000 flowserve corporation consolidated balance sheets see accompanying notes consolidated financial statements flowserve corporation consolidated statements income see accompanying notes consolidated financial statements flowserve corporation consolidated statements comprehensive income see accompanying notes consolidated financial statements flowserve corporation consolidated statements shareholders’ equity flowserve corporation consolidated statements cash flows flowserve corporation notes consolidated financial statements december 31 2019 2018 three years ended december 31 2019 1 significant accounting policies accounting developments principally engaged worldwide design manufacture distribution service industrial flow management equipment provide long lead time custom highlyengineered pumps standardized generalpurpose pumps mechanical seals engineered industrial valves related automation products services solutions primarily oil gas chemical power generation water management general industries requiring flow management products services equipment manufactured serviced us predominantly used industries deal difficulttohandle corrosive fluids well environments extreme temperatures pressure horsepower speed business affected economic conditions united states us countries products sold serviced cyclical nature competitive environment industries served relationship us dollar currencies demand pricing customers’ end products resegmentation determined meaningful operational synergies benefits combining previously reported engineered product division epd industrial product division ipd segments one reportable segment flowserve pump division fpd first quarter 2019 implemented reorganization operating segments result report financial information reflecting two operating segments fpd flow control division fcd reorganization segments reflects chief operating decision maker chief executive officer regularly reviews financial information allocate resources assess performance prior periods financial information retrospectively adjusted conform new reportable segment composition principles consolidation consolidated financial statements include accounts company wholly majorityowned subsidiaries addition would consolidate variable interest entities deemed primary beneficiary noncontrolling interests nonaffiliated parties recognized majorityowned consolidated subsidiaries intercompany profitslosses transactions balances among consolidated entities eliminated consolidated financial statements investments unconsolidated affiliated companies represent noncontrolling ownership interests 20 50 accounted using equity method approximates equity interest underlying equivalent net book value accounting principles generally accepted us gaap investments interests less 20 investee accounted cost method whereby income recognized event dividend receipt investments accounted cost method tested impairment indicator present use estimates process preparing financial statements conformity us gaap requires us make estimates assumptions affect reported amounts certain assets liabilities revenues expenses believe estimates assumptions reasonable however actual results may differ materially estimates significant estimates assumptions used determining • timing amount revenue recognition • deferred taxes tax valuation allowances tax reserves • reserves contingent loss • pension postretirement benefits • valuation goodwill indefinitelived intangible assets longlived assets argentina highly inflationary effective july 1 2018 argentina designated hyperinflationary result began using us dollar functional currency argentina argentinian subsidiarys sales year ended december 31 2019 represented approximately 1 consolidated sales assets december 31 2019 represented approximately 2 total consolidated assets primarily consisted us dollardenominated monetary assets argentinian pesodenominated nonmonetary assets december 31 2019 addition certain operations countries sell equipment parts typically denominated us dollars directly argentinian customers revenue recognition adopted accounting standards update asu 201409 revenue contracts customers topic 606 new revenue standard january 1 2018 using modified retrospective method transition periods prior january 1 2018 presented accordance revenue recognition topic 605 topic 605 majority revenues relate customer orders typically contain single commitment goods services lead times year longer lead time complex contracts customers typically multiple commitments goods services including combination designing developing manufacturing modifying installing commissioning flow management equipment providing services parts related performance products recognize revenue satisfy performance obligation transferring control customer transfer control evaluated based customer’s ability direct use obtain substantially benefits performance obligation revenue recognized either time point time depending specific facts circumstances contract including terms conditions contract agreed customer nature products services provided primary method recognizing revenue time percentage completion “poc” method whereby progress towards completion measured applying input measure based costs incurred date relative total estimated costs completion control products andor services transfer time control transfers point time determine point time control transfers customer based evaluation specific indicators title transfer risk loss transfer customer acceptance physical possession detailed discussion related revenue recognition refer note 2 cash equivalents place temporary cash investments financial institutions policy invest institutions instruments minimal credit risk market risk investments original maturity three months less purchased classified cash equivalents highly liquid principal values subject significant risk change due interest rate fluctuations allowance doubtful accounts credit risk allowance doubtful accounts established based estimates amount uncollectible accounts receivable determined principally based upon aging accounts receivable also customer credit history industry market segment information economic trends conditions credit reports customer credit issues customer bankruptcies general economic conditions may also impact estimates credit risks mitigated diversity customer base across many different geographic regions industries performing creditworthiness analyses customers additionally mitigate credit risk letters credit advance payments received customers believe significant concentrations credit risk inventories related reserves inventories stated lower cost net realizable value cost determined firstin firstout method reserves excess obsolete inventories based upon assessment market conditions products determined historical usage estimated future demand due long life cycles products carry spare parts inventories historically low usage rates provide reserves inventory based demonstrated usage aging criteria income taxes deferred taxes tax valuation allowances tax reserves account income taxes asset liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases operating loss tax credit carryforwards deferred tax assets liabilities calculated using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized period includes enactment date record valuation allowances reduce carrying value deferred tax assets amounts expect likely realized assess existing deferred tax assets net operating losses tax credits jurisdiction expectations ability utilize tax attributes review past current estimated future taxable income establishment tax planning strategies provide deferred taxes temporary differences associated investment foreign subsidiaries financial reporting basis exceeds tax basis unless assert permanent reinvestment foreign jurisdictions financial reporting basis tax basis differences investments foreign subsidiaries consist unremitted earnings losses well foreign currency translation adjustments amount income taxes pay subject ongoing audits federal state foreign tax authorities often result proposed assessments establish reserves open tax years uncertain tax positions may subject challenge various tax authorities consolidated tax provision related accruals include impact reasonably estimable losses related interest penalties deemed appropriate recognize tax benefit uncertain tax position likely tax position sustained examination taxing authorities determination based technical merits position presumes uncertain tax position examined relevant taxing authority full knowledge relevant information tax benefits recognized financial statements position measured based largest benefit greater fifty percent likelihood realized upon ultimate settlement legal environmental contingencies legal environmental reserves recorded based upon casebycase analysis relevant facts circumstances assessment potential legal obligations costs amounts relating legal environmental liabilities recorded probable loss incurred loss reasonably estimable assessments legal environmental costs based information obtained independent inhouse experts loss experience similar situations estimates updated applicable new information regarding facts circumstances matter becomes available legal fees associated legal environmental liabilities expensed incurred estimates liabilities unsettled asbestosrelated claims based known claims experience preceding two years claims filed settled dismissed adjustments events deemed unusual unlikely recur included retirement obligations liabilities consolidated balance sheets substantial majority asbestosrelated claims covered insurance indemnities estimated indemnities receivables insurance carriers unsettled claims receivables settlements legal fees paid us asbestosrelated claims estimated using historical experience insurance recovery rates estimates future recoveries include estimates coverage financial viability insurance carriers estimated receivables included assets net consolidated balance sheets claims pending certain insurers resolved favorably estimated future recoveries would result discrete gains applicable quarter currently unable estimate impact unasserted asbestosrelated claims although future claims would also subject existing indemnities insurance coverage warranty accruals warranty obligations based upon product failure rates materials usage service delivery costs analysis identified expected claims estimate cost resolve claims estimates expected claims generally factor historical claims known product issues warranty obligations based factors adjusted based historical sales trends preceding 24 months insurance accruals insurance accruals recorded wholly partially selfinsured risks medical benefits workers’ compensation based upon analysis claim loss history insurance deductibles policy limits relevant factors updated annually included accrued liabilities consolidated balance sheets estimates based upon information received actuaries insurance company adjusters independent claims administrators independent sources receivables insurance carriers estimated using historical experience insurance recovery rates estimates future recoveries include estimates coverage financial viability insurance carriers estimated receivables included accounts receivable net assets net applicable consolidated balance sheets pension postretirement obligations determination pension postretirement benefits obligations based estimates made management consultation independent actuaries investment advisors inherent valuations assumptions including discount rates expected rates return plan assets retirement rates mortality rates compensation increase factors reviewed annually updated necessary current market conditions including changes rates return interest rates medical inflation rates considered selecting assumptions actuarial gains losses prior service costs recognized accumulated comprehensive loss arise amortize costs net pension expense remaining expected service period property plant equipment depreciation property plant equipment stated historical cost less accumulated depreciation asset retirement obligations exist capitalized part carrying amount asset depreciated remaining useful life asset useful lives leasehold improvements lesser remaining lease term useful life improvement assets retired otherwise disposed costs related accumulated depreciation removed accounts resulting gains losses included income operations period depreciation computed straightline method based estimated useful lives depreciable assets case assets finance leases related lease term generally estimated useful lives assets costs related routine repairs maintenance expensed incurred leases operating finance leases certain manufacturing facilities offices service quick response centers machinery equipment automobiles leases remaining lease terms 34 years terms conditions leases may include options extend terminate lease considered included lease term options reasonably certain exercise determine contract contains lease inception evaluating whether contract conveys right control use identified asset classes leased assets account nonlease components contract together related lease component unit account lease contracts containing one lease component allocate contract consideration lease components basis relative standalone prices order identify lease payments lease component rou assets lease liabilities recognized consolidated balance sheets commencement date based present value remaining lease payments lease term additionally rou assets include lease payments made commencement date well initial direct costs incurred reduced lease incentives received detailed discussion related leases refer note 4 internally developed software capitalize certain costs associated development internaluse software generally costs related significant software development projects amortized estimated useful life typically three five years upon implementation software intangible assets intangible assets excluding trademarks considered indefinite life consist primarily engineering drawings patents existing customer relationships software distribution networks items amortized estimated useful lives generally ranging four 40 years assets reviewed impairment whenever events circumstances indicate impairment may occurred valuation goodwill indefinitelived intangible assets longlived assets value goodwill indefinitelived intangible assets tested impairment december 31 year whenever events circumstances indicate assets may impaired identification reporting units began operating segment level considered whether components one level operating segment levels identified reporting units purpose testing goodwill impairment based certain conditions included among factors extent component represents business ii aggregation economically similar components within operating segments resulted four reporting units factors considered determining whether aggregation components appropriate included similarity nature products services nature production processes methods distribution types industries served impairment loss goodwill recognized implied fair value goodwill less carrying value estimate fair value reporting units based income approach whereby calculate fair value reporting unit based present value estimated future cash flows discounted cash flow analysis requires us make various judgmental assumptions future sales operating margins growth rates discount rates based budgets business plans economic projections anticipated future cash flows market participants record impairment goodwill 2019 2018 2017 also considered market capitalization evaluation fair value goodwill market capitalization increased compared 2018 indicate potential impairment goodwill december 31 2019 impairment losses indefinitelived intangible assets recognized whenever estimated fair value less carrying value fair values calculated trademarks using relief royalty method estimates fair value trademark determining present value estimated royalty payments avoided result owning trademark method includes judgmental assumptions sales growth discount rates significant impact fair value substantially consistent assumptions used determine fair value reporting unit discussed record material impairment trademarks 2019 2018 2017 recoverable value longlived assets including property plant equipment finitelived intangible assets reviewed indicators potential impairments present recoverable value based upon assessment estimated future cash flows related assets utilizing assumptions similar goodwill additional considerations related longlived assets include expected maintenance improvements changes expected uses ongoing operating performance utilization deferred loan costs deferred loan costs consisting fees expenses associated debt financing amortized term associated debt using effective interest method additional amortization recorded periods optional prepayments debt made fair values financial instruments financial instruments presented fair value consolidated balance sheets exception longterm debt fair value defined price would received sell asset paid transfer liability orderly transaction market participants measurement date available fair value based observable market prices parameters derived prices parameters observable prices inputs available valuation models may applied assets liabilities recorded fair value consolidated balance sheets categorized based upon level judgment associated inputs used measure fair values hierarchical levels defined accounting standards codification asc 820 fair value measurements disclosures directly related amount subjectivity associated inputs fair valuation assets liabilities asset liability’s categorization within fair value hierarchy based lowest level significant input valuation hierarchical levels follows level inputs unadjusted quoted prices active markets identical assets liabilities measurement date level ii inputs quoted prices included level either directly indirectly observable asset liability correlation market data measurement date duration instrument’s anticipated life level iii inputs reflect management’s best estimate market participants would use pricing asset liability measurement date consideration given risk inherent valuation technique risk inherent inputs model recurring fair value measurements limited investments derivative instruments certain equity securities fair value measurements derivative instruments determined using models maximize use observable market inputs including interest rate curves forward spot prices currencies classified level ii fair value hierarchy fair values derivative instruments included note 8 fair value measurements investments equity securities determined using quoted market prices classified level fair values investments equity securities changes thereto immaterial consolidated financial position results operations derivatives hedging activities foreign currency derivatives hedging policy outlining conditions enter financial derivative transactions use derivative instruments trading speculative purposes derivative instruments recognized balance sheet fair values employ foreign currency economic hedging strategy mitigate certain financial risks resulting foreign currency exchange rate movements impact foreign currency denominated receivables payables firm committed transactions forecasted sales purchases changes fair values recognized immediately income expense net consolidated statements income see note 8 discussion forward exchange contracts exposed risk creditrelated losses resulting nonperformance counterparties financial instruments perform credit evaluations counterparties forward exchange contracts expect counterparties meet obligations necessary would adjust values derivative contracts counterparties’ credit risks foreign currency translation assets liabilities foreign subsidiaries translated us dollars exchange rates prevailing balance sheet date income expenses translated average rates month translation gains losses reported component accumulated comprehensive loss transactional currency gains losses arising transactions currencies sites’ functional currencies included consolidated results operations transaction translation gains losses arising intercompany balances reported component accumulated comprehensive loss underlying transaction stems longterm equity investment debt designated due foreseeable future otherwise recognize transaction gains losses arising intercompany transactions component income intercompany balances longterm investment related designated due beyond foreseeable future may mitigate risk associated foreign currency fluctuations entering forward exchange contracts stockbased compensation stockbased compensation measured grantdate fair value exercise price stock option awards value restricted share restricted share unit performancebased unit awards collectively referred restricted shares set closing price common stock new york stock exchange date grant date grants authorized board directors restricted share units performancebased units refer restricted awards voting rights accrue dividends forfeited vesting occur intrinsic value restricted shares typically product share price date grant number restricted shares granted amortized straightline basis compensation expense periods restrictions lapse based expected number shares vest account forfeitures occur resulting reversal cumulative expense previously recognized earnings per share use twoclass method calculating earnings per share eps determines earnings per share class common stock participating security earnings period distributed unvested restricted share awards earn nonforfeitable dividend rights qualify participating securities accordingly included basic computation unvested restricted shares participate equal basis common shares therefore difference undistributed earnings allocated participating security accordingly presentation prepared combined basis presented earnings per common share following reconciliation net earnings flowserve corporation weighted average shares calculating net earnings per common share diluted earnings per share based upon weighted average number shares determined basic earnings per share plus shares potentially issuable conjunction stock options restricted shares restricted share units performance share units research development expense research development costs charged expense incurred aggregate research development costs included sga 420 million 396 million 386 million 2019 2018 2017 respectively costs incurred research development primarily include salaries benefits consumable supplies well rent professional fees utilities depreciation property equipment used research development activities accounting developments pronouncements implemented february 2016 financial accounting standards board fasb issued accounting standards update asu 201602 leases topic 842 new lease standard new lease standard increases transparency comparability requiring lessees recognize rightofuse “rou” assets lease liabilities operating leases consolidated balance sheets additionally expanded disclosures required enable users financial statements understand amount timing uncertainty cash flows arising leases adopted new lease standard effective january 1 2019 utilizing modified retrospective approach elected initial application date january 1 2019 adoption resulted increase total assets liabilities due recording lease rou assets lease liabilities approximately 225 million january 1 2019 adoption materially impact consolidated results operations cash flows refer note 4 discussion adoption new lease standard july 13 2017 fasb issued asu 201711 “earnings per share topic 260 distinguishing liabilities equity topic 480 derivatives hedging topic 815 part accounting certain financial instruments round features part ii replacement indefinite deferral mandatory redeemable financial instruments certain nonpublic entities certain mandatory redeemable noncontrolling interests scope exception” asu amends guidance fasb accounting standards codification asc 260 earnings per share fasb asc 480 distinguishing liabilities equity fasb asc 815 derivatives hedging amendments part asu change classification analysis certain equitylinked financial instruments embedded features round features amendments asu must applied annual reporting periods beginning december 15 2018 adoption asu 201711 effective january 1 2019 impact consolidated financial condition results operations august 28 2017 fasb issued asu 201712 derivatives hedging topic 815 targeted improvements accounting hedging activities purpose asu better align company’s risk management activities financial reporting hedging relationships additionally asu simplifies hedge accounting requirements improve disclosures hedging arrangements amendments asu must applied annual reporting periods beginning december 15 2019 early adoption permitted adoption asu 201712 effective january 1 2019 impact consolidated financial condition results operations february 2018 fasb issued asu 201802 income statement reporting comprehensive income topic 220 reclassification certain tax effects accumulated comprehensive income “aoci” asu amendments issued result enactment us tax cuts jobs act 2017 amendments asu address available options reclassify stranded tax effects within aoci retained earnings period effect change portion thereof recorded additionally asu outlines disclosure requirements releasing income tax effects aoci asu effective fiscal years beginning december 15 2018 asu applied either period adoption retrospectively period periods effect change us federal corporate income tax rate tax cuts jobs act recognized adopted asu effective january 1 2019 elected reclassify income tax effects tax cuts jobs act accumulated comprehensive income retained earnings july 2018 fasb issued asu 201807 compensation stock compensation topic 718 improvements nonemployee sharebased payment accounting amendments asu apply sharebased payment transactions nonemployees grantor acquires goods services used consumed grantor’s operations accounted asc 50550 equitybased payments nonemployees amendments asu 201807 guidance compensation nonemployees would aligned requirements shared based payments granted employees topic 718 asu effective fiscal years beginning december 15 2018 adoption asu 20180712 effective january 1 2019 impact consolidated financial condition results operations pronouncements yet implemented june 2016 fasb issued asu 201613 financial instrumentscredit losses topic 326 measurement credit losses financial instruments asu requires among things use new current expected credit loss cecl model order determine allowances doubtful accounts respect accounts receivable contract assets leased assets guarantees cecl model requires estimate lifetime expected credit loss respect receivables contract assets record allowances deducted balance receivables represent net amounts expected collected evaluation asu 201613 related asus formed project team assess requirements new guidance included review financial assets measured amortized cost basis associated methodology development reserves support requirements new standard related asus modified accounting policies processes adopted new standard prospective basis january 1 2020 adoption asu 201613 expected material impact consolidated financial condition results operations january 2017 fasb issued asu 201704 intangibles goodwill topic 350 simplifying test goodwill impairment amendments asu allow companies apply onestep quantitative test record amount goodwill impairment excess reporting unit’s carrying amount fair value exceed total amount goodwill allocated reporting unit amendments asu effective annual interim goodwill impairment tests fiscal years beginning december 15 2019 early adoption permitted interim annual goodwill impairment tests performed testing dates january 1 2017 adoption asu 201704 expected material impact consolidated financial condition results operations august 2018 fasb issued asu 201813 fair value measurement topic 820 disclosure frameworkchanges disclosure requirements fair value measurement amendments asu modify disclosure requirements fair value measurements removing modifying adding certain disclosure information requirements assets liabilities measured fair value statement financial position disclosed notes financial statements asu effective fiscal years interim periods within fiscal years beginning december 15 2019 early adoption permitted removed disclosures delayed adoption fiscal year 2020 permitted new disclosures removed modified disclosures adopted retrospective basis new disclosures adopted prospective basis adoption asu 201813 expected material impact consolidated financial condition results operations august 2018 fasb issued asu 201814 compensationretirement benefitsdefined benefit plansgeneral subtopic 71520 disclosure frameworkchanges disclosure requirements defined benefit plans asu amends disclosure requirements adding clarifying removing certain disclosures sponsor defined benefit pension postretirement plans amendments effective fiscal years ending december 15 2020 amendments applied retrospectively periods presented adoption asu 201814 expected material impact consolidated financial condition results operations august 2018 fasb issued asu 201815 intangiblesgoodwill otherinternaluse software subtopic 35040 customer’s accounting implementation costs incurred cloud computing arrangement service contract asu addresses entities account costs associated implementing cloud computing arrangement considered service contract per amendments asu implementation costs incurred cloud computing arrangement service contract accounted manner implementation costs incurred develop obtain software internal use prescribed guidance asc35040 asu requires implementation costs incurred cloud computing arrangement capitalized rather expensed asu specifies method amortization costs incurred implementation manner unamortized portion capitalized implementation costs evaluated impairment asu also provides guidance present implementation costs financial statements also creates additional disclosure requirements amendments effective fiscal years beginning december 15 2019 including interim periods amendments asu applied either retrospectively prospectively implementation costs incurred date adoption asu 201815 expected material impact consolidated financial condition results operations october 2018 fasb issued asu 201817 consolidation topic 810 targeted improvements related party guidance variable interest entities vies standard reduces cost complexity financial reporting associated vies new standard amends guidance determining whether decisionmaking fee vie amendments require organizations consider indirect interests held related parties common control proportional basis rather equivalent direct interest entirety currently required gaap amendments asu effective fiscal years beginning december 15 2019 interim periods within fiscal years adoption asu 201817 expected material impact consolidated financial condition results operations november 2018 fasb issued asu 201818 collaborative arrangements topic 808 clarifying interaction topic 808 topic 606 new revenue standard asu clarifies interaction guidance certain collaborative arrangements new revenue standard amendments asu provide guidance assess whether certain transactions collaborative arrangement participants accounted within new revenue standard asu also provides comparability presentation revenue certain transactions collaborative arrangement participants parts collaborative arrangement purview revenue recognition standard presented separately amendments effective fiscal years beginning december 15 2019 interim periods within fiscal years early adoption permitted adoption asu 201818 expected material impact consolidated financial condition results operations december 2019 fasb issued asu 201912 “income taxes topic 740 simplifying accounting income taxes” topic 740 asu intends simplify various aspects related accounting income taxes removes certain exceptions general principles standard additionally asu clarifies amends existing guidance improve consistent application requirements amendments asu effective fiscal years beginning december 15 2020 interim periods within fiscal years early adoption permitted adoption asu 201912 expected material impact consolidated financial condition results operations 2 revenue recognition enter contracts customers often multiple commitments goods services including combination designing developing manufacturing modifying installing commissioning flow management equipment providing services parts related performance products evaluate commitments contracts customers determine commitments capable distinct context contract order identify performance obligations recognize revenue satisfy performance obligation transferring control performance obligation customer control performance obligation may transfer customer either time point time depending evaluation specific facts circumstances contract including terms conditions contract agreed customer well nature products services provided larger contracts typically completed within one threeyear period many contracts “short cycle” contracts shorter timeframe revenue recognition control transfers time customer able direct use obtain substantially benefits work perform typically occurs products alternative use right payment performance completed date including reasonable profit margin contracts often include cancellation provisions require customer reimburse us costs incurred date cancellation contracts also provide reimbursement profit upon cancellation addition costs incurred date primary method recognizing revenue time poc method measure progress towards completion applying input measure based costs incurred date relative total estimated costs completion ie costtocost method provides reasonable depiction transfer control products services customers ensures efforts towards satisfying performance obligation reflected costs incurred included measure progress used recognition revenue costs generally include direct labor direct material manufacturing overhead costs contribute towards control transfer generally immaterial excluded measure progress event significant prior adoption new revenue standard effective january 1 2018 revenue recognized poc method 4 10 consolidated sales new revenue standard experienced increase amount revenue recognized time increase primarily due application new “transfer control” model revenue recognition model revenue performance obligations subject contractual transfer control manufacturing process recognized time includes contracts cancellation provisions require reimbursement costs incurred plus reasonable margin performance obligation alternative use revenue products services transferred customers time accounted approximately 19 22 4 total revenue years ended december 31 2019 2018 2017 respectively control transfer time control transfers point time recognize revenue point time level performance obligation based evaluation certain indicators control transfer title transfer risk loss transfer customer acceptance physical possession revenue products services transferred customers point time accounted approximately 81 78 96 total revenue years ended december 31 2019 2018 2017 respectively contract modification “change order” occurs existing enforceable rights obligations contract change scope price terms conditions account change order new accounting contract change order limited adding new distinct products services priced amount consistent standalone selling price change orders accounted modification existing accounting contract change order occurs contract inprocess time performance obligations effect change order transaction price measure progress performance obligations relates recognized adjustment revenue either increase reduction revenue cumulative catchup basis freight charges billed customers included sales related shipping costs included cost sales cos consolidated statements income shipping activities performed customer obtains control product apply policy election account shipping activity fulfill promise transfer product customer apply policy election exclude transaction taxes collected customers sales tax imposed concurrent specific revenueproducing transaction certain instances provide guaranteed completion dates terms contracts failure meet contractual delivery dates result late delivery penalties liquidated damages event transaction price contract probable experiencing significant reversal due penalty constrain portion transaction price reduction transaction price could potentially cause estimated total contract costs exceed transaction price case record provision estimated loss period loss first projected circumstances transaction price still exceeds total projected costs estimated penalty generally reduces profitability contract time subsequent revenue recognition incremental costs obtain contract limited sales commissions apply practical expedient expense commissions incurred contracts duration one year less sales commissions related contracts duration greater one year immaterial financial statements also expensed incurred performance obligations performance obligation promise contract transfer distinct good service customer unit account recognition revenue many contracts multiple performance obligations promise transfer individual goods services certain groups goods services separately identifiable promises contract allocate transaction price contract performance obligations basis standalone selling price recognize revenue control performance obligation transfers customer standard products identify standalone selling price based directly observable information customized unique products services apply cost plus margin approach estimate standalone selling price method forecast expected costs satisfying performance obligation add appropriate standalone market margin distinct good service elected use practical expedient adjust transaction price contract effects significant financing component inception contract expect period transfer promised good service customer pays good service one year less december 31 2019 aggregate transaction price allocated unsatisfied partially unsatisfied performance obligations related contracts original expected duration excess one year approximately 709 million estimate recognition approximately 593 million amount revenue 2020 additional 116 million 2021 thereafter disaggregated revenue conduct operations two business segments based type product manage business • flowserve pump division fpd custom highlyengineered pumps preconfigured industrial pumps pump systems mechanical seals auxiliary systems replacement parts related services • flow control division fcd engineered industrial valves control valves actuators controls related services revenue sources derived original equipment manufacturing aftermarket sales services original equipment revenues generally related originally designed manufactured distributed installed equipment range preconfigured shortcycle products customized highlyengineered equipment original equipment aftermarket sales services derived sales replacement equipment well maintenance advanced diagnostic repair retrofitting services aftermarket two business segments generate original equipment aftermarket revenues following table presents customer revenues disaggregated revenue source 1 presented accordance topic 605 customer sales diversified geographically following table presents revenues disaggregated geography based shipping addresses customers 1 north america represents united states canada latin america includes mexico 2 presented accordance topic 605 contract balances receive payment customers based contractual billing schedule specific performance requirements established contracts record billings accounts receivable unconditional right consideration exists contract asset represents revenue recognized advance right bill customer terms contract liability represents contractual billings advance revenue recognized contract following table presents opening closing balances contract assets contract liabilities current longterm years ended december 31 2019 2018 1 included assets net 2 included retirement obligations liabilities 3 dispositions fpd business divestiture june 29 2018 pursuant plan sale approved management executed agreement divest two fpd locations associated product lines including related assets liabilities transaction meet criteria classification assets held sale june 30 2018 due contingency could potentially impacted final terms andor timing divestiture sale transaction completed august 9 2018 twelve months ended december 31 2018 recorded pretax charge 251 million including pretax charge 174 million second quarter 2018 loss sale business 77 million third quarter 2018 second quarter 2018 pretax charge related writedowns inventory longlived assets estimated fair value 77 million recorded cos 97 million recorded sga third quarter 2018 pretax charge primarily related working capital changes since second quarter 2018 net cash transferred closing date 37 million sale included manufacturing facility germany related assembly facility france 2017 net sales related business totaled approximately 42 million although business produced operating loss 2016 2015 vogt effective july 6 2017 sold fcds vogt product line related assets liabilities privately held company 280 million cash received closing sale resulted pretax gain 111 million recorded gain sale business consolidated statements income 2016 net sales related vogt business totaled approximately 17 million earnings interest taxes approximately 4 million gestra ag effective may 2 2017 sold fcds gestra ag gestra business leading provider steam system solutions 2036 million €1783 million cash received 2017 sale resulted pretax gain 1302 million 794 million aftertax recorded gain sale business consolidated statements income sale included gestra’s manufacturing facility germany well related operations us united kingdom uk spain poland italy singapore portugal 2016 gestra recorded revenues approximately 101 million €92 million earnings interest taxes approximately 17 million €15 million 4 leases adopted new lease standard effective january 1 2019 utilizing modified retrospective approach elected initial application date january 1 2019 adoption new lease standard resulted increase total assets liabilities due recording lease rou assets lease liabilities approximately 225 million january 1 2019 adoption new lease standard included modification certain accounting policies practices business processes systems controls order support compliance requirements elected package three practical expedients transition include carry forward leases without reassessing whether contracts leases contain leases lease classification initial direct costs elected transition practical expedient apply hindsight determining lease term assessing impairment rou assets adoption date allows us update assessments according new information changes facts circumstances occurred since lease inception certain land easements historically accounted finitelived intangible assets elected practical expedient related land easements allowing us carry forward accounting treatment land easements existing agreements intangible assets new modified land easements accounted leases new lease standard presentation leases operating finance leases certain manufacturing facilities offices service quick response centers machinery equipment automobiles leases remaining lease terms 34 years terms conditions leases may include options extend terminate lease considered included lease term options reasonably certain exercise determine contract contains lease inception evaluating whether contract conveys right control use identified asset classes leased assets elected practical expedient account nonlease components contract together related lease component unit account lease contracts containing one lease component allocate contract consideration lease components basis relative standalone prices order identify lease payments lease component rou assets lease liabilities recognized consolidated balance sheets commencement date based present value remaining lease payments lease term additionally rou assets include lease payments made commencement date well initial direct costs incurred reduced lease incentives received operating leases provide implicit rate apply incremental countryspecific borrowing rate determine present value remaining lease payments incremental borrowing countryspecific rate determined based information available commencement date lease operating leases included operating lease rightofuse assets net operating lease liabilities consolidated balance sheets finance leases included property plant equipment debt due within one year longterm debt due one year consolidated balance sheets classes leased assets applied accounting policy election exclude shortterm leases recognition consolidated balance sheets shortterm lease term 12 months less commencement date include purchase option reasonably certain exercise recognize shortterm lease expense consolidated income statements straightline basis lease term shortterm lease expense shortterm lease commitments december 31 2019 immaterial certain lease contracts terms conditions provide variability payment amount based changes facts circumstances occurring commencement date variable lease payments recognized consolidated income statements obligation incurred certain lease contracts provide guarantee lessor value underlying asset least specified amount end lease estimated amounts expected paid residual value guarantees included lease liabilities rou assets december 31 2019 347 million legally binding minimum lease payments operating leases signed yet commenced material subleases leases imposed significant restrictions covenants material related party leases saleleaseback arrangements information related leases follows 1 included property plant equipment net 2 included debt due within one year longterm debt due one year accordingly 3 included cost sales selling general administrative expense accordingly 4 included interest expense supplemental cash flows information year ended december 31 2019 1 included consolidated statement cash flows operating activities prepaid expenses assets net retirement obligations 2 included consolidated statement cash flows financing activities payments financing arrangements future undiscounted lease payments operating finance leases december 31 2019 follows amounts thousands 5 goodwill intangible assets changes carrying amount goodwill years ended december 31 2019 2018 follows following table provides information intangible assets years ended december 31 2019 2018 1 engineering drawings represent estimated fair value associated specific acquired product component schematics 2 existing customer relationships acquired prior 2011 useful life five years 3 accumulated amortization indefinitelived intangible assets relates amounts recorded prior implementation date guidance issued asc 350 following schedule outlines actual amortization expense recognized 2019 estimate future amortization based upon finitelived intangible assets owned december 31 2019 amortization expense finitelived intangible assets 141 million 2018 153 million 2017 6 inventories net consisted following 2019 2018 2017 recognized expenses 171 million 162 million 229 million respectively excess obsolete inventory expenses included cos consolidated statements income 7 stockbased compensation plans year ended december 31 2019 maintained flowserve corporation equity incentive compensation plan 2010 plan shareholderapproved plan authorizing issuance 8700000 shares common stock form restricted shares restricted share units performancebased units collectively referred restricted shares incentive stock options nonstatutory stock options stock appreciation rights bonus stock 8700000 shares common stock authorized 2010 plan 1611332 available issuance december 31 2019 shareholders approved flowserve corporation 2020 longterm incentive plan “2020 plan” became effective january 1 2020 following expiration 2010 plan december 31 2019 shareholderapproved plan authorizes issuance 12500000 shares common stock form incentive stock options nonstatutory stock options restricted shares stock appreciation rights bonus stock addition shares available issuance subject forfeiture 2010 plan expiration december 31 2019 plan begin using 2020 plan 2020 intended replace 2010 plan longterm incentive program allows restricted shares granted january 1 2016 employees retire achieved least 55 years age ten years service continue vest original vesting period 5510 provision stock options granted officers employees directors allow purchase common shares market value stock date options granted options generally become exercisable three years options generally expire ten years date grant within short period time following termination employment cessation services option holder december 31 2019 114943 stock options outstanding grant date fair value 20 million recognized three years remaining unearned compensation 03 million stock options vested years ended december 31 2019 2018 2017 information related stock options issued officers employees directors plans presented following table weighted average remaining contractual life options outstanding december 31 2019 2018 73 years 83 years respectively restricted shares generally restrictions restricted shares expire minimum one year maximum three years shares subject forfeiture restriction period typically restricted share grants staggered vesting periods one three years grant date intrinsic value restricted shares typically product share price date grant number restricted shares granted amortized straightline basis compensation expense periods restrictions lapse awards restricted shares valued closing market price common stock date grant unearned compensation amortized compensation expense vesting period restricted shares except awards related 5510 provision expensed granted december 31 2019 2018 234 million 243 million respectively unearned compensation cost related unvested restricted shares expected recognized weightedaverage period approximately one year total fair value restricted shares vested years ended december 31 2019 2018 2017 168 million 143 million 305 million respectively recorded stockbased compensation restricted shares follows following table summarizes information regarding restricted shares unvested restricted shares outstanding december 31 2019 includes approximately 647000 units performancebased vesting provisions performancebased units issuable common stock vest upon achievement predefined performance targets performancebased units performance targets based average return invested capital total shareholder return tsr threeyear period unvested units granted three annual grants since january 1 2017 vesting percentage 0 200 depending achievement specific performance targets except shares granted 5510 provision compensation expense recognized ratably cliffvesting period 36 months based fair value common stock date grant adjusted actual forfeitures performance period earned unearned compensation expense adjusted based changes expected achievement performance targets performancebased units granted except tsrbased units vesting provisions range 0 approximately 1294000 shares based performance targets december 31 2019 estimate vesting approximately 466000 shares based expected achievement performance targets 8 derivatives hedging activities risk management foreign currency derivatives hedging policy specifies conditions may enter derivative contracts see note 1 additional information purpose entering derivatives overall risk management strategies enter foreign exchange forward contracts hedge cash flow risks associated transactions denominated currencies local currency operation engaging transaction foreign exchange contracts notional values 3985 million 2809 million december 31 2019 2018 respectively december 31 2019 length foreign exchange contracts currently place ranged 17 days 32 months exposed risk creditrelated losses resulting nonperformance counterparties financial instruments perform credit evaluations counterparties forward exchange contracts expect counterparties meet obligations experienced credit losses counterparties fair values foreign exchange contracts summarized current noncurrent derivative assets reported consolidated balance sheets prepaid expenses assets net respectively current noncurrent derivative liabilities reported consolidated balance sheets accrued liabilities retirement obligations liabilities respectively impact net changes fair values foreign exchange contracts summarized gains losses recognized consolidated statements income foreign exchange contracts classified income expense net march 2015 designated €2557 million €5000 million 2022 eur senior notes discussed note 12 net investment hedge investments certain international subsidiaries use euro functional currency use spot method measure effectiveness net investment hedge method reporting period change carrying value euro senior notes due remeasurement effective portion reported accumulated comprehensive loss consolidated balance sheet remaining change carrying value ineffective portion recognized income expense net consolidated statement income evaluate effectiveness net investment hedge prospective basis beginning quarter record ineffectiveness years ended december 31 2019 2018 2017 9 fair value financial instruments fair value debt excluding senior notes described note 12 estimated using interest rates similar debt recently issued companies credit metrics similar classified level ii fair value hierarchy carrying value debt included note 12 except senior notes approximates fair value estimated fair value senior notes based level quoted market rates estimated fair value senior notes december 31 2019 13812 million compared carrying value 13541 million carrying amounts financial instruments ie cash equivalents accounts receivable net accounts payable approximated fair value due shortterm nature december 31 2019 december 31 2018 10 details certain consolidated balance sheet captions following tables present financial information certain consolidated balance sheet captions accounts receivable net accounts receivable net property plant equipment net property plant equipment net accrued liabilities accrued liabilities accrued liabilities include professional fees lease obligations insurance interest freight accrued cash dividends payable legal environmental matters derivative liabilities restructuring reserves items none individually exceed 5 current liabilities retirement obligations liabilities retirement obligations liabilities 11 equity method investments occasionally enter joint venture arrangements local country partners preferred means entry countries barriers entry may exist similar consolidated subsidiaries unconsolidated joint ventures generally operate within primary businesses designing manufacturing assembling distributing fluid motion control products services agreements certain joint ventures restrict us otherwise entering respective market certain joint ventures produce andor sell products part broader product offering net earnings investments unconsolidated joint ventures reported net earnings affiliates consolidated statements income given integrated role unconsolidated joint ventures business net earnings affiliates presented component operating income december 31 2019 investments six joint ventures one located chile china india saudi arabia south korea united arab emirates accounted using equity method immaterial disclosure purposes 12 debt finance lease obligations debt including finance lease obligations consisted scheduled maturities senior notes debt amounts thousands senior notes march 17 2015 completed public offering €5000 million euro senior notes aggregate principal amount due march 17 2022 eur senior notes 2022 eur senior notes bear interest rate 125 per year payable year march 17 2022 eur senior notes priced 99336 par value reflecting discount aggregate principal amount november 1 2013 completed public offering 3000 million aggregate principal amount senior notes due november 15 2023 senior notes 2023 senior notes bear interest rate 400 per year payable may 15 november 15 year 2023 senior notes priced 99532 par value reflecting discount aggregate principal amount september 11 2012 completed public offering 5000 million aggregate principal amount senior notes due september 15 2022 senior notes 2022 senior notes bear interest rate 350 per year payable march 15 september 15 year 2022 senior notes priced 99615 par value reflecting discount aggregate principal amount right redeem 2022 senior notes 2023 senior notes time prior june 15 2022 august 15 2023 respectively whole part option redemption price equal greater 1 100 principal amount senior notes redeemed 2 sum present values remaining scheduled payments principal interest respect senior notes redeemed discounted redemption date semiannual basis applicable treasury rate plus 30 basis points 2022 senior notes plus 25 basis points 2023 senior notes addition time june 15 2022 senior notes august 15 2023 senior notes may redeem senior notes redemption price equal 100 principal amount senior notes redeemed case also pay accrued unpaid interest principal amount redeemed redemption date similarly right redeem 2022 eur senior notes time prior december 17 2021 whole part option redemption price equal greater 1 100 principal amount senior notes redeemed 2 sum present values remaining scheduled payments principal interest respect senior notes redeemed exclusive interest accrued excluding date redemption discounted redemption date annual basis comparable german government bond rate plus 25 basis points time december 17 2021 may redeem 2022 eur senior notes whole part time option redemption price equal 100 principal amount notes redeemed case also pay accrued unpaid interest principal amount redeemed redemption date senior credit facility july 16 2019 entered new credit agreement credit agreement” bank america na administrative agent lenders party thereto credit agreement provides 8000 million unsecured senior credit facility maturity date july 16 2024 “senior credit facility” senior credit facility includes 7500 million sublimit issuance letters credit 300 million sublimit swing line loans right increase amount senior credit facility aggregate amount exceed 4000 million subject certain conditions including lenders approval providing increase july 16 2019 approximately 750 million borrowed senior credit facility repay outstanding indebtedness previous senior credit facility connection repayment outstanding letters credit previous senior credit facility transferred senior credit facility terminated previous senior credit facility september 16 2019 750 million borrowed senior credit facility paid full interest rates per annum applicable senior credit facility respect swing line loans libor plus 1000 1750 depending debt rating either moody’s investors service inc standard poor’s financial services llc sp ratings option base rate defined senior credit agreement plus 0000 0750 depending debt rating either moody’s investors service inc sp global ratings december 31 2019 interest rate senior credit facility libor plus 1375 case libor loans base rate plus 0375 case base rate loans addition commitment fee payable quarterly arrears daily unused portions senior credit facility commitment fee 0090 0300 unused amounts senior credit facility depending debt rating either moody’s investors service inc sp’s ratings commitment fee 020 per annum period ended december 31 2019 december 31 2019 december 31 2018 revolving loans outstanding senior credit facility outstanding letters credit 885 million 929 million december 31 2019 december 31 2018 respectively amount available borrowings senior credit facility 7115 million december 31 2019 december 31 2018 due financial covenant previous senior credit facility amount available borrowings facility effectively limited 5137 million repayment obligations year ended december 31 2019 paid 1050 million outstanding principal balance previous senior credit facility including 300 million scheduled principal repayments 2018 2017 paid 600 million scheduled principal repayments previous senior credit facility financial covenants compliance financial covenants senior notes senior credit facility tested quarterly compliance covenants december 31 2019 13 pension postretirement benefits sponsor several noncontributory defined benefit pension plans covering substantially us employees certain nonus employees provide benefits based years service age job grade levels type compensation retirement benefits covered employees provided contributory pension plans cash balance pension plans governmentsponsored retirement programs funded defined benefit pension plans receive funding based independent actuarial valuations provide current service amount sufficient amortize unfunded prior service periods exceed 30 years funding falling within legal limits prescribed prevailing regulation also maintain unfunded defined benefit plans permitted local regulations receive funding benefits become due defined benefit plan strategy ensure current future benefit obligations adequately funded costeffective manner additionally investing objective achieve highest level investment performance compatible risk tolerance prudent investment practices longterm nature defined benefit plan liabilities funding strategy based longterm perspective formulating implementing investment policies evaluating investment performance asset allocation defined benefit plans reflects decision proportion investment equity fixed income securities appropriate various subasset classes least annually complete comprehensive review asset allocation policy underlying assumptions includes longterm capital markets rate return assumptions risk tolerances relative defined benefit plan liabilities expected rates return defined benefit plan assets derived review asset allocation strategy expected longterm performance asset classes risks factors adjusted specific investment strategy rates impacted changes general market conditions longterm nature shortterm market changes significantly impact rates us defined benefit plan assets consist balanced portfolio equity fixed income securities nonus defined benefit plan assets include significant concentration united kingdom uk fixed income securities monitor investment allocations manage plan assets maintain acceptable levels risk periods presented used measurement date december 31 us pension plans nonus pension plans postretirement medical plans us defined benefit plans maintain qualified nonqualified defined benefit pension plans us qualified plan provides coverage substantially fulltime us employees receive benefits earnings threshold specified us department labor nonqualified plans primarily cover small number employees including current former members senior management providing benefit levels equivalent participants otherwise limited us department labor rules us plans designed operate cash balance arrangements employee option take lump sum payment end service difference total accumulated benefit obligation total projected benefit obligation benefit obligation immaterial following assumptions related us defined benefit pension plans december 31 2019 compared december 31 2018 decreased discount rate 434 341 based analysis publiclytraded investment grade us corporate bonds lower yield due current market conditions determining 2019 expense expected rate return us plan assets remained constant 600 primarily based target allocations expected longterm asset returns longterm rate return assumption calculated using quantitative approach utilizes unadjusted historical returns asset allocation inputs calculation us plans adopted pri2012 mortality tables mp2019 improvement scale published october 2019 applied pri2012 tables based constituency plan population union nonunion participants adjusted improvement scale utilize 75 ultimate improvement rate consistent assumptions adopted social security administration trustees based longterm historical experience currently believe approach provides best estimate future obligation plan participants elect receive plan benefits lump sum end service rather annuity updated mortality tables immaterial effect pension obligation net pension expense us defined benefit pension plans including qualified nonqualified plans estimated prior service cost estimated net loss us defined benefit pension plans amortized accumulated comprehensive loss pension expense 2020 02 million 66 million respectively amortize estimated prior service costs estimated net losses remaining expected service period following summarizes net pension liability asset us plans following summarizes amounts recognized balance sheet us plans following summary changes us defined benefit plans’ pension obligations 1 actuarial losses gain 2019 2018 primarily reflect impact changes discount rate following table summarizes expected cash benefit payments us defined benefit pension plans future amounts millions following table shows change accumulated comprehensive loss attributable components net cost change benefit obligations us plans net tax amounts recorded accumulated comprehensive loss consist following reconciliation us defined benefit pension plans’ assets contributed 206 million 233 million us defined benefit pension plans 2019 2018 respectively payments exceeded minimum funding requirements mandated us department labor rules estimated contribution 2020 expected approximately 20 million excluding direct benefits paid us defined benefit plan assets held qualified plan asset allocations qualified plan end 2019 2018 asset category follows none common stock directly held qualified plan investment strategy earn longterm rate return consistent acceptable degree risk minimize cash contributions life plan taking account liquidity needs plan preserve capital diversified investments high quality securities current allocation target invest approximately 43 plan assets equity securities 57 fixed income securities within investment category assets allocated various investment strategies professional money management firms manage assets engage consultant assist evaluating activities periodically review allocation target generally conjunction asset liability study consideration future cash flow needs regularly rebalance actual allocation target investment allocation plan assets invested commingled funds pension investment committee responsible setting investment strategy target asset allocation plans assets qualified plan approached fully funded status implemented liabilitydriven investing ldi strategy closely aligns duration plans assets duration liabilities ldi strategy results asset portfolio closely matches behavior liability thereby reducing volatility plans funded status plan’s financial instruments shown presented fair value see note 1 discussion hierarchical levels fair values plan’s investments determined fair values us defined benefit plan assets global equity fund seeks closely track performance msci country world index b global real asset funds seek provide exposure listed global real estate investment trusts reits infrastructure markets c diversified credit funds seek provide exposure high yield emerging markets bank loans securitized credit markets liabilitydriven investment ldi funds seek invest high quality fixed income securities collectively closely match found discount curves used value plans liabilities nonus defined benefit plans maintain defined benefit pension plans cover employees following countries austria belgium canada france germany india italy japan mexico netherlands sweden switzerland uk assets plans uk two plans netherlands canada represent 94 total nonus plan assets nonus assets details countries’ plan assets provided due immateriality following assumptions related nonus defined benefit pension plans december 31 2019 compared december 31 2018 decreased average discount rate nonus plans 242 161 based analysis bonds publiclytraded instruments country lower yields due market conditions determine 2019 pension expense decreased average expected rate return plan assets 362 december 31 2018 337 december 31 2019 primarily based target allocations expected longterm asset returns expected rate return plan assets longterm nature shortterm market fluctuations significantly impact rate many nonus defined benefit plans unfunded permitted local regulation expected longterm rate return assets funded plans determined assessing rates return asset class calculated using quantitative approach utilizes unadjusted historical returns asset allocation inputs calculation work actuaries determine reasonableness longterm rate return assumptions looking several factors including historical returns expected future returns asset allocation risks asset class items net pension expense nonus defined benefit pension plans estimated net loss prior service cost nonus defined benefit pension plans amortized accumulated comprehensive loss pension expense 2020 43 million 03 million respectively amortize estimated net losses remaining expected service period remaining expected lifetime inactive participants plans inactive participants following summarizes net pension liability nonus plans following summarizes amounts recognized balance sheet nonus plans following reconciliation nonus plans’ defined benefit pension obligations 1 2019 actuarial loss primarily reflects decrease discount rates plans 2 2019 currency translation loss reflects weakening us dollar british pound partially offset strengthening us dollar euro 2018 currency translation gain reflected strengthening us dollar significant currencies primarily euro british pound following table summarizes expected cash benefit payments nonus defined benefit plans future amounts millions following table shows change accumulated comprehensive loss attributable components net cost change benefit obligations nonus plans net tax amounts recorded accumulated comprehensive loss consist following reconciliation nonus plans’ defined benefit pension assets contributions nonus defined benefit pension plans 2020 expected approximately 2 million excluding direct benefits paid asset allocations nonus defined benefit pension plans end 2019 2018 follows none common stock held directly plans cases investment strategy plans earn longterm rate return consistent acceptable degree risk minimize cash contributions life plan taking account liquidity needs plan legal requirements particular country preserve capital diversified investments high quality securities asset allocation differs plan based upon plan’s benefit obligation participants well results asset liability studies conducted plan consideration future cash flow needs professional money management firms manage plan assets engage consultant uk assist evaluation activities assets uk plans overseen group trustees review investment strategy asset allocation fund selection assets passively managed invested index funds attempt match performance specified benchmark index fair values nonus assets north american companies represents us canadian large cap equity funds managed track respective benchmarks ftse allworld usa index ftse allworld canada index b global equity represents actively managed global equity funds taking topdown strategic view different regions analyzing companies based fundamentals marketdriven thematic quantitative factors generate alpha c uk government gilt index represents uk government issued fixed income investments passively managed track respective benchmarks ldi seeks invest fixed income securities collectively closely match found discount curves used value plans liabilities e multiasset seeks attractive riskadjusted return investing diversified portfolio strategies including equities fixed income f buyin contracts contract contracts represent assets held plans whereby cost providing benefits plan participants funded contract contracts held plans benefit plan participants netherlands uk fair value assets based current present value accrued benefits fluctuate based changes obligations associated covered plan members well assumptions used present value calculation fair value asset held netherlands contract january 1 2019 236 million contributions currency adjustments resulting fair value 259 million december 31 2019 august 29 2019 established contract uk plan participants initial investment 274 million contributions currency adjustments resulting fair value 286 million december 31 2019 g includes assets held plans outside united kingdom netherlands canada details provided due immateriality defined benefit pension plans accumulated benefit obligations excess plan assets following summarizes key pension plan information regarding us nonus plans whose accumulated benefit obligations exceed fair value respective plan assets postretirement medical plans sponsor several defined benefit postretirement medical plans covering certain current retirees limited number future retirees us plans provide medical dental benefits administered insurance companies health maintenance organizations plans include participant contributions deductibles coinsurance provisions limitations integrated medicare group plans fund plans benefits health maintenance organization premiums paid plans hold assets period presented accordingly investment strategy targeted allocations plan assets benefits postretirement medical plans available new employees existing employees following assumptions related postretirement benefits assumed ranges annual rates increase medical costs used determine net expense 75 2019 70 2018 7 2017 gradual decrease 50 2029 future years december 31 2019 onepercentage point change assumed medical cost trend rates would material effect reported amounts net postretirement benefit cost postretirement medical plans estimated actuarial net gain estimated prior service cost defined benefit postretirement medical plans expected amortized accumulated comprehensive loss net pension expense 2020 immaterial following summarizes accrued postretirement benefits liability postretirement medical plans following summarizes amounts recognized balance sheet postretirement benefit obligation following reconciliation postretirement benefit obligation following presents expected benefit payments future periods amounts millions following table shows change accumulated comprehensive loss attributable components net cost change benefit obligations postretirement benefits net tax amounts recorded accumulated comprehensive loss consist made contributions postretirement medical plans pay benefits 29 million 2019 32 million 2018 25 million 2017 postretirement medical plans unfunded make contributions covered individuals’ claims approved payment accordingly contributions period directly correlated benefits paid defined contribution plans sponsor several defined contribution plans covering substantially us canadian employees certain nonus employees may contribute plans contributions matched varying amounts us including opportunities discretionary matching contributions us defined contribution plan expense 204 million 2019 187 million 2018 177 million 2017 14 legal matters contingencies asbestosrelated claims defendant substantial number lawsuits seek recover damages personal injury allegedly caused exposure asbestoscontaining products manufactured andor distributed heritage companies past overall number asbestosrelated claims generally declined recent years assurance trend continue average cost per claim increase asbestoscontaining materials incorporated products encapsulated used internal components process equipment believe significant emission asbestos fibers occurred use equipment practice vigorously contest resolve claims successful resolving majority claims little payment historically high percentage resolved claims covered applicable insurance indemnities companies believe substantial majority existing claims continue covered insurance indemnities whole part accordingly recorded liability estimate likely settlement asserted claims related receivable insurers companies estimated recovery extent believe amounts recovery probable unfavorable rulings judgments settlement terms regarding claims could material adverse impact business financial condition results operations cash flows currently believe likelihood remote additionally claims pending certain insurers resolved favorably reflected recorded receivables would result discrete gains applicable quarter currently unable estimate impact unasserted asbestosrelated claims although expect future claims would also subject existing indemnities insurance coverage currently involved potentially responsible party five former public waste disposal sites various stages evaluation remediation projected cost remediation sites well alleged fair share allocation remain uncertain studies completed parties either negotiated amicable resolution matter judicially resolved site many parties similarly identified many parties identified financially strong solvent companies appear able pay share remediation costs based information waste disposal practices sites environmental regulatory process general believe likely ultimate remediation liability costs site apportioned among liable parties including site owners waste transporters according volumes andor toxicity wastes shown disposed sites believe financial exposure existing disposal sites materially excess accrued reserves also defendant number lawsuits including product liability claims insured subject applicable deductibles arising ordinary course business also involved uninsured routine litigation incidental business currently believe none litigation either individually aggregate material business operations overall financial condition however litigation inherently unpredictable resolutions dispositions claims lawsuits settlement otherwise could adverse impact financial position results operations cash flows reporting period resolution disposition occurs although none aforementioned potential liabilities quantified absolute certainty except otherwise indicated established adjusted reserves covering exposures relating contingencies extent believed reasonably estimable probable based past experience available facts additional exposures beyond reserves could exist currently cannot estimated continue evaluate update reserves necessary appropriate 15 warranty reserve recorded reserves product warranty claims included current liabilities following summary activity warranty reserve 16 shareholders’ equity dividends generally dividend dateofrecord last month quarter dividend paid following month dividends per share 076 years ending december 31 2019 2018 2017 share repurchase program november 13 2014 board directors approved 5000 million share repurchase authorization share repurchase program expiration date reserve right limit terminate repurchase program time without notice repurchased 324889 shares outstanding common stock 150 million year ended december 31 2019 repurchases shares outstanding common stock years ended december 31 2018 2017 december 31 2019 1457 million remaining capacity current share repurchase program 17 income taxes december 22 2017 us enacted tax cuts jobs act 2017 “tax reform act” significantly changed us tax law tax reform act among things lowered us statutory federal income tax rate 35 21 effective january 1 2018 imposing deemed repatriation tax deferred foreign income implementing modified territorial tax system tax reform act also provides onetime transition tax “transition tax” certain foreign earnings well prospective changes began 2018 including repeal domestic manufacturing deduction capitalization research development expenditures additional limitations executive compensation limitations deductibility interest recognized provisional income tax effects tax reform act previously issued financial statements accordance staff accounting bulletin sab 118 provides sec staff guidance application asc topic 740 income taxes respect recording certain tax impacts tax reform act finalized accounting income tax effects tax reform act fourth quarter 2018 material adjustments previously recorded provisional amounts impacts changes reflected 2018 tax benefit 57 million 2017 provisional tax expense 1153 million provision income taxes consists following provision income taxes differs statutory corporate rate due following 2017 tax rate differed federal statutory rate 35 primarily due impacts pursuant enactment tax reform act net impact foreign operations establishment valuation allowance deferred tax assets various foreign jurisdictions primarily germany mexico taxes related sale gestra vogt businesses year ended december 31 2017 assert permanent reinvestment foreign subsidiaries result recorded deferred tax liabilities approximately 754 million cumulative unrepatriated earnings connection tax reform act deferred tax liabilities primarily relate foreign withholding taxes would due upon repatriation designated earnings us years ended december 31 2019 december 31 2018 asserted permanent reinvestment certain earnings foreign subsidiaries december 31 2019 recorded 679 million deferred tax liabilities associated predecember 31 2017 earnings deemed available repatriation referenced deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes significant components consolidated deferred tax assets liabilities 4173 million us foreign net operating loss carryforwards december 31 2019 total 380 million state net operating losses net operating losses generated us unused expire 2024 2026 tax years majority foreign net operating losses carry forward without expiration additionally 291 million foreign tax credit carryforwards december 31 2019 foreign tax credit carryforwards unused expire 2026 2028 2029 tax years valuation allowances primarily relate deferred tax assets established us foreign tax credit carryforwards 291 million foreign capital loss carryforward 1026 million foreign deferred tax assets 1347 million foreign capital loss carryforward result reorganization certain foreign subsidiaries current year due capital nature uncertain loss utilized within ten year carryforward period therefore full valuation allowance earnings income taxes comprised tabular reconciliation total gross amount unrecognized tax benefits excluding interest penalties follows millions amount gross unrecognized tax benefits december 31 2019 542 million includes 136 million accrued interest penalties amount 536 million recognized would favorably impact effective tax rate limited exception longer subject us federal income tax audits years 2016 state local income tax audits years 2013 foreign income tax audits years 2012 currently examination various years austria canada china france germany india indonesia italy mexico netherlands philippines saudi arabia singapore us venezuela vietnam reasonably possible within next 12 months effective tax rate impacted resolution matters audited various taxing authorities also reasonably possible statute limitations close various taxing jurisdictions within next 12 months estimate could record reduction tax expense approximately 5 million within next 12 months 18 business segment information connection flowserve 20 transformation program discussed defined note 20 determined meaningful operational synergies benefits combining previously reported epd ipd segments one reportable segment fpd first quarter 2019 implemented reorganization operating segments reorganization segments reflects chief operating decision maker chief executive officer regularly reviews financial information allocate resources assess performance prior periods financial information retrospectively adjusted conform new reportable segment composition business segments share focus industrial flow control technology high number common customers segments also complementary product offerings technologies often combined applications provide us net competitive advantage segments also benefit global footprint economies scale reducing administrative overhead costs serve customers cost effectively conduct operations two business segments based type product manage business • fpd custom highlyengineered pumps preconfigured industrial pumps pump systems mechanical seals auxiliary systems replacement parts related services • fcd engineered industrial valves control valves actuators controls related services corporate headquarters constitute separate division business segment amounts classified eliminations include corporate headquarters costs minor entities constitute separate segments intersegment sales transfers recorded cost plus profit margin sales related margin sales eliminated consolidation following summary financial information reportable segments years ended december 31 2019 2018 2017 reconciled amounts reported consolidated financial statements geographic information attribute sales different geographic areas based facilities’ locations longlived assets classified based geographic area assets located exclude deferred taxes goodwill intangible assets prior period information updated conform current year presentation sales longlived assets geographic area follows includes rou assets recorded operating finance leases based adoption new lease standard discussed note 4 1 ema includes europe middle east africa 2019 2018 2017 germany accounted approximately 6 7 10 respectively consolidated longlived assets individual country within group represents 10 consolidated totals period presented 2 asia includes asia australia individual country within group represents 10 consolidated totals period presented 3 includes canada latin america individual country within group represents 10 consolidated totals period presented net sales international customers including export sales us represented approximately 63 total sales 2019 2018 64 2017 major customer information large number customers across large number manufacturing service facilities sales individual customer represent 10 consolidated sales years presented 19 accumulated comprehensive loss following presents components accumulated comprehensive loss aocl net related tax effects 1 includes foreign currency translation adjustments attributable noncontrolling interests 51 million 45 million 38 million december 31 2019 2018 2017 respectively year ended december 31 2019 foreign currency translation impacts primarily represented weakening euro british pound chinese yuan indian rupee exchange rates versus us dollar period year ended december 31 2018 foreign currency translation impacts primarily represented weakening euro argentine peso indian rupee british pound exchange rates versus us dollar period includes net investment hedge cumulative losses 121 million 172 million net deferred taxes december 31 2019 2018 respectively amounts parentheses indicate debits following table presents reclassifications aocl 1 amounts parentheses indicate decreases income none reclassification amounts noncontrolling interest component 2 accumulated comprehensive loss components included computation net periodic pension cost see note 13 additional details 20 realignment transformation programs second quarter 2018 launched committed resources flowserve 20 transformation flowserve 20 transformation program designed transform business model drive operational excellence reduce complexity accelerate growth improve organizational health better leverage existing global platform years ended december 31 2019 2018 incurred flowserve 20 transformation related expenses 280 million 412 million respectively flowserve 20 transformation expenses incurred primarily consist professional services project management related travel costs recorded sga 2015 initiated realignment programs better align costs improve longterm efficiency including manufacturing optimization consolidation facilities reduction workforce divestiture certain nonstrategic assets “realignment programs” realignment programs consist restructuring nonrestructuring charges restructuring charges represent costs associated relocation reorganization certain business activities facility closures include related severance costs nonrestructuring charges primarily employee severance associated workforce reductions reduce redundancies expenses primarily reported cos sga applicable consolidated statements income realignment programs substantially completed december 31 2019 incurred charges 3517 million date generally aforementioned charges paid cash except asset writedowns noncash charges following summary total charges net adjustments related realignment flowserve 20 transformation program charges 1 includes gains sales nonstrategic manufacturing facilities included realignment programs 2 income tax expense benefit includes exit taxes 1 income tax expense benefit includes exit taxes well nondeductible costs following summary total inception date charges net adjustments related realignment programs 1 income tax expense benefit includes exit taxes well nondeductible costs restructuring charges represent costs associated relocation reorganization certain business activities facility closures include costs related employee severance closed facilities contract termination costs asset writedowns costs severance costs primarily include costs associated involuntary termination benefits contract termination costs include costs related termination operating leases contract termination costs asset writedowns include accelerated depreciation fixed assets accelerated amortization intangible assets divestiture certain nonstrategic assets inventory writedowns costs generally include costs related employee relocation asset relocation vacant facility costs ie taxes insurance charges following summary restructuring charges net adjustments realignment programs 1 primarily consists gains sales nonstrategic manufacturing facilities included realignment programs 2 income tax expense benefit includes exit taxes 1 income tax expense benefit includes exit taxes well nondeductible costs following summary total inception date restructuring charges net adjustments related realignment programs 1 income tax expense benefit includes exit taxes well nondeductible costs following represents activity primarily severance related restructuring reserve realignment programs years ended december 31 2019 2018 1 includes reduction severance accruals associated divestiture two fpd locations associated product lines 2018 refer note 3 annual report discussion 21 quarterly financial data unaudited following presents summary unaudited quarterly data 2019 2018 amounts millions except per share data 1 earnings per share computed independently quarters presented sum quarters may equal total year amount due impact changes weighted average quarterly shares outstanding item 9item 8financial statements supplementary data report independent registered public accounting firm board directors shareholders flowserve corporation opinions financial statements internal control financial reporting audited accompanying consolidated balance sheets flowserve corporation subsidiaries “company” december 31 2020 2019 related consolidated statements income comprehensive income shareholders equity cash flows three years period ended december 31 2020 including related notes financial statement schedule listed index appearing item 15a2 collectively referred “consolidated financial statements” also audited companys internal control financial reporting december 31 2020 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission coso opinion consolidated financial statements referred present fairly material respects financial position company december 31 2020 2019 results operations cash flows three years period ended december 31 2020 conformity accounting principles generally accepted united states america also opinion company maintained material respects effective internal control financial reporting december 31 2020 based criteria established internal control integrated framework 2013 issued coso change accounting principle discussed note 1 consolidated financial statements company changed manner accounts sales contracts customers 2018 basis opinions companys management responsible consolidated financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report internal control financial reporting appearing item 9a responsibility express opinions company’s consolidated financial statements companys internal control financial reporting based audits public accounting firm registered public company accounting oversight board united states pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audits obtain reasonable assurance whether consolidated financial statements free material misstatement whether due error fraud whether effective internal control financial reporting maintained material respects audits consolidated financial statements included performing procedures assess risks material misstatement consolidated financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures consolidated financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation consolidated financial statements audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions definition limitations internal control financial reporting company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate critical audit matters critical audit matter communicated matter arising current period audit consolidated financial statements communicated required communicated audit committee relates accounts disclosures material consolidated financial statements ii involved especially challenging subjective complex judgments communication critical audit matters alter way opinion consolidated financial statements taken whole communicating critical audit matter providing separate opinion critical audit matter accounts disclosures relates goodwill impairment test pump reporting unit described notes 1 6 consolidated financial statements company’s consolidated goodwill balance 12249 million december 31 2020 goodwill associated pump reporting unit 4827 million value goodwill tested impairment december 31 year whenever events circumstances indicate goodwill may impaired carrying value reporting unit exceeds fair value goodwill reporting unit impaired impairment loss recorded equal excess carrying value fair value fair value estimated using discounted cash flow analysis requires management make various judgmental assumptions future sales operating margins growth rates discount rates principal considerations determination performing procedures relating goodwill impairment assessment pump reporting unit critical audit matter significant judgment management estimating fair value reporting unit ii high degree auditor judgment subjectivity effort performing procedures evaluating management’s significant assumptions related operating margins growth rate discount rate iii audit effort involved use professionals specialized skill knowledge addressing matter involved performing procedures evaluating audit evidence connection forming overall opinion consolidated financial statements procedures included testing effectiveness controls relating management’s goodwill impairment test including controls valuation company’s reporting units procedures also included among others testing management’s process estimating fair value pump reporting unit ii evaluating appropriateness discounted cash flow analysis iii testing completeness accuracy underlying data used analysis iv evaluating significant assumptions used management related operating margins growth rate discount rate evaluating management’s assumptions related operating margins growth rate involved evaluating whether assumptions reasonable considering current past performance reporting unit ii whether assumptions consistent evidence obtained areas audit professionals specialized skill knowledge used assist evaluation company’s discounted cash flow analysis assumption related discount rate pricewaterhousecoopers llp dallas texas february 23 2021 served company’s auditor since 2000 flowserve corporation consolidated balance sheets see accompanying notes consolidated financial statements flowserve corporation consolidated statements income see accompanying notes consolidated financial statements flowserve corporation consolidated statements comprehensive income see accompanying notes consolidated financial statements flowserve corporation consolidated statements shareholders’ equity flowserve corporation consolidated statements cash flows flowserve corporation notes consolidated financial statements december 31 2020 2019 three years ended december 31 2020 1significant accounting policies accounting developments principally engaged worldwide design manufacture distribution service industrial flow management equipment provide long lead time custom highlyengineered pumps standardized generalpurpose pumps mechanical seals engineered industrial valves related automation products services solutions primarily oil gas chemical power generation water management general industries requiring flow management products services equipment manufactured serviced us predominantly used industries deal difficulttohandle corrosive fluids well environments extreme temperatures pressure horsepower speed business affected economic conditions united states us countries products sold serviced cyclical nature competitive environment industries served relationship us dollar currencies demand pricing customers’ end products revision previously reported financial information conjunction close process third quarter 2020 identified accounting errors related recognition liability unasserted asbestos claims adjustments primarily related incurred reported ibnr liability associated unasserted asbestos claims also included adjustments related associated receivables expected insurance proceeds asbestos settlement defense costs insurance coverage recognition expense related legal fees previously estimated recoverable insurance carriers coverage currently sufficient following recognition ibnr periods beginning year ended december 31 2014 second quarter 2020 correct certain previously identified immaterial errors assessed errors individually aggregate concluded material prior periods however aggregate amount prior period errors would material consolidated statements income full year results therefore revised previously issued audited consolidated financial information fiscal years ended december 31 2019 2018 interim periods threemonths ended march 31 2020 three sixmonths ended june 30 2020 revised connection corresponding 2021 interim filings refer note 2 consolidated financial statements included annual report additional information coronavirus pandemic covid19 oil gas market past year challenged macroeconomics global economic impacts based disruption uncertainties caused covid19 emanating impacts pandemic pricing dampened demand oil resulting instability volatility oil commodity prices date covid19 pandemic widespread implications worldwide caused substantial economic uncertainty challenging operational conditions example year conditions drove announcement significant broadbased decreases customer planned capital spending result many large customers announced executed doubledigit capital expenditure budget decreases 2020 resulting lower bookings 2020 compared prior year principles consolidation consolidated financial statements include accounts company wholly majorityowned subsidiaries addition would consolidate variable interest entities deemed primary beneficiary noncontrolling interests nonaffiliated parties recognized majorityowned consolidated subsidiaries intercompany profitslosses transactions balances among consolidated entities eliminated consolidated financial statements ordinary course operations worldwide entered joint ventures interests collectively referred “affiliates” provide greater flexibility delivering products services gain access markets geographical locations reduce exposure diversify risk investments affiliate companies noncontrolling ownership interests 20 50 unconsolidated accounted using equity method approximates equity interest underlying equivalent net book value accounting principles generally accepted us gaap equity method investments reviewed impairment whenever events conditions indicate decrease value investment occurred temporary impaired impairment loss representing difference carrying value fair value recorded investment written new carrying value investment affiliate companies less 20 accounted cost method whereby income recognized event dividend receipt investments accounted cost method tested impairment indicator present use estimates process preparing financial statements conformity us gaap requires us make estimates assumptions affect reported amounts certain assets liabilities revenues expenses believe estimates assumptions reasonable however actual results may differ materially estimates full extent covid19 pandemic directly indirectly impacts business results operations financial condition including sales expenses allowance expected credit losses stock based compensation carrying value goodwill longlived assets financial assets valuation allowances tax assets depend future developments highly uncertain including result new information may emerge concerning covid19 actions taken contain treat well economic impact local regional national international customers suppliers markets made estimates impact covid19 within financial statements may changes estimates near midterm new information becomes available significant estimates assumptions used determining •timing amount revenue recognition •deferred taxes tax valuation allowances tax reserves •reserves contingent loss •pension postretirement benefits •valuation goodwill indefinitelived intangible assets longlived assets argentina highly inflationary effective july 1 2018 argentina designated hyperinflationary result began using us dollar functional currency argentina argentinian subsidiarys sales assets year ended december 31 2020 represented approximately 1 consolidated sales total consolidated assets december 31 2020 assets primarily consisted us dollardenominated monetary assets argentinian pesodenominated nonmonetary assets december 31 2020 addition certain operations countries sell equipment parts typically denominated us dollars directly argentinian customers revenue recognition adopted accounting standards update asu 201409 revenue contracts customers topic 606 new revenue standard january 1 2018 using modified retrospective method transition resulted cumulative adjustment opening retained earnings january 1 2018 majority revenues relate customer orders typically contain single commitment goods services lead times year longer lead time complex contracts customers typically multiple commitments goods services including combination designing developing manufacturing modifying installing commissioning flow management equipment providing services parts related performance products recognize revenue satisfy performance obligation transferring control customer transfer control evaluated based customer’s ability direct use obtain substantially benefits performance obligation revenue recognized either time point time depending specific facts circumstances contract including terms conditions contract agreed customer nature products services provided primary method recognizing revenue time percentage completion “poc” method whereby progress towards completion measured applying input measure based costs incurred date relative total estimated costs completion control products andor services transfer time control transfers point time determine point time control transfers customer based evaluation specific indicators title transfer risk loss transfer customer acceptance physical possession detailed discussion related revenue recognition refer note 3 cash equivalents place temporary cash investments financial institutions policy invest institutions instruments minimal credit risk market risk investments original maturity three months less purchased classified cash equivalents highly liquid principal values subject significant risk change due interest rate fluctuations accounts receivable allowance doubtful accounts credit risk trade accounts receivables recorded invoiced amount bear interest establish allowance expected credit losses aging schedule according historical losses determined billings collections history additionally consider factors specific customers’ credit risk financial difficulties liquidity issues insolvency country political risk also consider current forecasted direction macroeconomic conditions reporting date estimating expected credit losses receivables written allowance period receivable deemed uncollectible subsequent recoveries amounts previously written reflected reduction credit impairment losses income statement credit risks mitigated diversity customer base across many different geographic regions industries performing creditworthiness analyses customers additionally mitigate credit risk letters credit advance payments received customers believe significant concentrations credit risk inventories related reserves inventories stated lower cost net realizable value cost determined firstin firstout method reserves excess obsolete inventories based upon assessment market conditions products determined historical usage estimated future demand due long life cycles products carry spare parts inventories historically low usage rates provide reserves inventory based demonstrated usage aging criteria income taxes deferred taxes tax valuation allowances tax reserves account income taxes asset liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases operating loss tax credit carryforwards deferred tax assets liabilities calculated using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized period includes enactment date record valuation allowances reduce carrying value deferred tax assets amounts expect likely realized assess existing deferred tax assets net operating losses tax credits jurisdiction expectations ability utilize tax attributes review past current estimated future taxable income establishment tax planning strategies provide deferred taxes temporary differences associated investment foreign subsidiaries financial reporting basis exceeds tax basis unless assert permanent reinvestment foreign jurisdictions financial reporting basis tax basis differences investments foreign subsidiaries consist unremitted earnings losses well foreign currency translation adjustments amount income taxes pay subject ongoing audits federal state foreign tax authorities often result proposed assessments establish reserves open tax years uncertain tax positions may subject challenge various tax authorities consolidated tax provision related accruals include impact reasonably estimable losses related interest penalties deemed appropriate recognize tax benefit uncertain tax position likely tax position sustained examination taxing authorities determination based technical merits position presumes uncertain tax position examined relevant taxing authority full knowledge relevant information tax benefits recognized financial statements position measured based largest benefit greater fifty percent likelihood realized upon ultimate settlement legal environmental contingencies legal environmental reserves recorded based upon casebycase analysis relevant facts circumstances assessment potential legal obligations costs amounts relating legal environmental liabilities recorded probable loss incurred loss reasonably estimable assessments legal environmental costs based information obtained independent inhouse experts loss experience similar situations estimates updated applicable new information regarding facts circumstances matter becomes available legal fees associated legal environmental liabilities expensed incurred defendant number lawsuits seek recover damages personal injury allegedly resulting exposure asbestoscontaining products formerly manufactured andor distributed heritage companies company estimated liability pending future claims yet asserted probable estimable could experienced 2049 represents expected end asbestos liability exposure ongoing claims expected beyond date estimate based companys historical claim experience estimates number resolution cost potential future claims may filed based anticipated levels unique plaintiff asbestosrelated claims us tort system defendants diminished volatility consistency observable claims data period time elapsed since stopped manufacturing products contained encapsulated asbestos expected downward trend claims due average age claimants estimate discounted present value light uncertainties variables inherent longterm projection total asbestos liability part ongoing review asbestos claims year reassess projected liability unasserted asbestos claims filed 2049 continually reassess time horizon reasonable estimate unasserted claims projected assess sufficiency estimated liability pending future claims ongoing basis evaluating actual experience regarding claims filed settled dismissed amounts paid settlements addition claims settlement experience consider additional quantitative qualitative factors changes legislation legal environment companys defense strategy connection ongoing review asbestosrelated claims also reviewed amount potential insurance coverage claims taking account remaining limits coverage number amount claims insurance coinsured parties ongoing litigation company’s insurers potential remaining recoveries insolvent insurers impact previous insurance settlements coverage available solvent insurers party coverage litigation continuously review ongoing insurance coverage available significant amount potential future asbestosrelated claims future could secure additional insurance coverage deemed necessary study companys actuary based data september 30 2020 provided range possible future liability approximately 801 million 1317 million company believe amount within range potential outcomes represents better estimate another given many factors assumptions inherent projections therefore company recorded liability actuarial central estimate approximately 995 million december 31 2020 addition company recorded estimated insurance receivables approximately 695 million december 31 2020 amounts recorded asbestosrelated liability related insurance receivables based facts known time number assumptions however projecting future events number new claims filed year length time takes defend resolve otherwise dispose claims coverage issues among insurers continuing solvency various insurance companies well numerous uncertainties surrounding asbestos litigation united states could cause actual liability insurance recoveries us higher lower projected recorded additionally claims pending certain insurers resolved favorably reflected recorded receivables would result discrete gains applicable year changes recorded estimated liability estimated insurance recovery based projections asbestos litigation corresponding insurance coverage result recognition additional expense income discussion pertaining activity related asbestos claims refer note 16 warranty accruals warranty obligations based upon product failure rates materials usage service delivery costs analysis identified expected claims estimate cost resolve claims estimates expected claims generally factor historical claims known product issues warranty obligations based factors adjusted based historical sales trends preceding 24 months insurance accruals insurance accruals recorded wholly partially selfinsured risks medical benefits workers’ compensation based upon analysis claim loss history insurance deductibles policy limits relevant factors updated annually included accrued liabilities consolidated balance sheets estimates based upon information received actuaries insurance company adjusters independent claims administrators independent sources receivables insurance carriers estimated using historical experience insurance recovery rates estimates future recoveries include estimates coverage financial viability insurance carriers estimated receivables included accounts receivable net assets net applicable consolidated balance sheets pension postretirement obligations determination pension postretirement benefits obligations based estimates made management consultation independent actuaries investment advisors inherent valuations assumptions including discount rates expected rates return plan assets retirement rates mortality rates compensation increase factors reviewed annually updated necessary current market conditions including changes rates return interest rates medical inflation rates considered selecting assumptions actuarial gains losses prior service costs recognized accumulated comprehensive loss arise amortize costs net pension expense remaining expected service period property plant equipment depreciation property plant equipment stated historical cost less accumulated depreciation asset retirement obligations exist capitalized part carrying amount asset depreciated remaining useful life asset useful lives leasehold improvements lesser remaining lease term useful life improvement assets retired otherwise disposed costs related accumulated depreciation removed accounts resulting gains losses included income operations period depreciation computed straightline method based estimated useful lives depreciable assets case assets finance leases related lease term generally estimated useful lives assets costs related routine repairs maintenance expensed incurred leases operating finance leases certain manufacturing facilities offices service quick response centers machinery equipment automobiles leases remaining lease terms 33 years terms conditions leases may include options extend terminate lease considered included lease term options reasonably certain exercise determine contract contains lease inception evaluating whether contract conveys right control use identified asset classes leased assets account nonlease components contract together related lease component unit account lease contracts containing one lease component allocate contract consideration lease components basis relative standalone prices order identify lease payments lease component rightofuse rou assets lease liabilities recognized consolidated balance sheets commencement date based present value remaining lease payments lease term additionally rou assets include lease payments made commencement date well initial direct costs incurred reduced lease incentives received detailed discussion related leases refer note 5 internally developed software capitalize certain costs associated development internaluse software generally costs related significant software development projects amortized estimated useful life typically three five years upon implementation software also capitalize certain costs incurred application development stage implementation cloud computing arrangements amounts capitalized cloud arrangements amortized straightline basis period three seven years reported component longterm assets intangible assets intangible assets excluding trademarks considered indefinite life consist primarily engineering drawings patents existing customer relationships software distribution networks items amortized estimated useful lives generally ranging four 40 years assets reviewed impairment whenever events circumstances indicate impairment may occurred valuation goodwill indefinitelived intangible assets longlived assets value goodwill indefinitelived intangible assets tested impairment december 31 year whenever events circumstances indicate assets may impaired identification reporting units began operating segment level considered whether components one level operating segment levels identified reporting units purpose testing goodwill impairment based certain conditions included among factors extent component represents business ii aggregation economically similar components within operating segments resulted three reporting units factors considered determining whether aggregation components appropriate included similarity nature products services nature production processes methods distribution types industries served accounting standards codification asc 350 allows optional qualitative assessment prior quantitative assessment test determine whether likely fair value reporting unit exceeds carrying amount generally attempt qualitative assessment proceed directly quantitative test carrying value reporting unit exceeds fair value goodwill reporting unit impaired impairment loss recorded equal excess carrying value fair value estimate fair value reporting units based income approach whereby calculate fair value reporting unit based present value estimated future cash flows discounted cash flow analysis requires us make various judgmental assumptions future sales operating margins growth rates discount rates based budgets business plans economic projections anticipated future cash flows market participants record impairment goodwill 2020 2019 2018 however estimated fair value pump reporting unit reduced moderately year due decreased broadbased capital spending resulting ongoing covid19 pandemic lesser extent heightened pricing pressure experienced oil gas markets anticipated continue near midterm pump reporting unit component epd reporting segment primarily focused highly engineered custom preconfigured pump products systems december 31 2020 pump reporting unit approximately 4827 million goodwill estimated fair value exceeded carrying value approximately 46 compared approximately 4688 million goodwill estimated fair value exceeded carrying value approximately 131 december 31 2019 key factors considered determining estimated fair value reporting units included annual operating plan forecasted operating results successful execution current continuous improvement identified strategic initiatives constant cost capital continued stabilization mid longterm improvement macroeconomic conditions oil gas market relatively stable global gross domestic product although concluded impairment goodwill associated pump reporting unit december 31 2020 continue closely monitor performance related market conditions future indicators potential impairment reassess accordingly also considered market capitalization evaluation fair value goodwill market capitalization decreased compared 2019 however indicate potential impairment goodwill december 31 2020 impairment losses indefinitelived intangible assets recognized whenever estimated fair value less carrying value fair values calculated trademarks using relief royalty method estimates fair value trademark determining present value estimated royalty payments avoided result owning trademark method includes judgmental assumptions sales growth discount rates significant impact fair value substantially consistent assumptions used determine fair value reporting unit discussed record material impairment trademarks 2020 2019 2018 recoverable value longlived assets including property plant equipment finitelived intangible assets reviewed indicators potential impairments present recoverable value based upon assessment estimated future cash flows related assets utilizing assumptions similar goodwill additional considerations related longlived assets include expected maintenance improvements changes expected uses ongoing operating performance utilization deferred loan costs deferred loan costs consisting fees expenses associated debt financing amortized term associated debt using effective interest method additional amortization recorded periods optional prepayments debt made fair values financial instruments financial instruments presented fair value consolidated balance sheets exception longterm debt fair value defined price would received sell asset paid transfer liability orderly transaction market participants measurement date available fair value based observable market prices parameters derived prices parameters observable prices inputs available valuation models may applied assets liabilities recorded fair value consolidated balance sheets categorized based upon level judgment associated inputs used measure fair values hierarchical levels defined asc 820 fair value measurements disclosures directly related amount subjectivity associated inputs fair valuation assets liabilities asset liability’s categorization within fair value hierarchy based lowest level significant input valuation hierarchical levels follows level inputs unadjusted quoted prices active markets identical assets liabilities measurement date level ii inputs quoted prices included level either directly indirectly observable asset liability correlation market data measurement date duration instrument’s anticipated life level iii inputs reflect management’s best estimate market participants would use pricing asset liability measurement date consideration given risk inherent valuation technique risk inherent inputs model recurring fair value measurements limited investments derivative instruments certain equity securities fair value measurements derivative instruments determined using models maximize use observable market inputs including interest rate curves forward spot prices currencies classified level ii fair value hierarchy fair values derivative instruments included note 9 fair value measurements investments equity securities determined using quoted market prices classified level fair values investments equity securities changes thereto immaterial consolidated financial position results operations derivatives hedging activities foreign currency derivatives hedging policy outlining conditions enter financial derivative transactions use derivative instruments trading speculative purposes derivative instruments recognized balance sheet fair values employ foreign currency economic hedging strategy mitigate certain financial risks resulting foreign currency exchange rate movements impact foreign currency denominated receivables payables firm committed transactions forecasted sales purchases changes fair values recognized immediately income expense net consolidated statements income see note 9 discussion forward exchange contracts exposed risk creditrelated losses resulting nonperformance counterparties financial instruments perform credit evaluations counterparties forward exchange contracts expect counterparties meet obligations necessary would adjust values derivative contracts counterparties’ credit risks foreign currency translation assets liabilities foreign subsidiaries translated us dollars exchange rates prevailing balance sheet date income expenses translated average rates month translation gains losses reported component accumulated comprehensive loss transactional currency gains losses arising transactions currencies sites’ functional currencies included consolidated results operations transaction translation gains losses arising intercompany balances reported component accumulated comprehensive loss underlying transaction stems longterm equity investment debt designated due foreseeable future otherwise recognize transaction gains losses arising intercompany transactions component income intercompany balances longterm investment related designated due beyond foreseeable future may mitigate risk associated foreign currency fluctuations entering forward exchange contracts stockbased compensation stockbased compensation measured grantdate fair value exercise price stock option awards value restricted share restricted share unit performancebased unit awards collectively referred restricted shares set closing price common stock new york stock exchange date grant date grants authorized board directors restricted share units performancebased units refer restricted awards voting rights accrue dividends forfeited vesting occur intrinsic value restricted shares typically product share price date grant number restricted shares granted amortized straightline basis compensation expense periods restrictions lapse based expected number shares vest account forfeitures occur resulting reversal cumulative expense previously recognized earnings per share use twoclass method calculating earnings per share eps determines earnings per share class common stock participating security earnings period distributed unvested restricted share awards earn nonforfeitable dividend rights qualify participating securities accordingly included basic computation unvested restricted shares participate equal basis common shares therefore difference undistributed earnings allocated participating security research development expense research development costs charged expense incurred aggregate research development costs included sga 361 million 420 million 396 million 2020 2019 2018 respectively costs incurred research development primarily include salaries benefits consumable supplies well rent professional fees utilities depreciation property equipment used research development activities accounting developments pronouncements implemented june 2016 financial accounting standards board fasb issued accounting standards update asu 201613 financial instrumentscredit losses topic 326 measurement credit losses financial instruments cecl asu requires among things use new current expected credit loss model order determine allowance expected credit losses respect financial assets instruments held cecl model requires estimate lifetime expected credit loss financial assets held reporting date based historical experience current conditions reasonable supportable forecasts january 1 2020 adopted asu prospective basis determine allowance credit losses accordance requirements topic 326 modified accounting policy processes facilitate approach result adoption asu recorded noncash cumulative effect aftertax adjustment retained earnings 73 million opening consolidated balance sheet primary exposure financial assets within scope cecl trade receivables contract assets financial assets record allowance expected credit losses deducted gross asset balance presents net amount expected collected estimate allowance based aging schedule according historical losses determined billings collections history additionally adjust allowance factors specific customers’ credit risk financial difficulties liquidity issues insolvency country political risk also consider current forecasted direction macroeconomic conditions reporting date cecl model requires consideration reasonable supportable forecasts future economic conditions estimate expected credit losses adjust allowance recognize adjustments income statement period trade receivables written allowance period receivable deemed uncollectible subsequent recoveries amounts previously written reflected reduction credit impairment losses income statement allowance expected credit losses shortterm receivables december 31 2020 752 million compared 534 million december 31 2019 2020 activity included 69 million adoption cecl model january 1 2020 149 million current period adjustments longterm receivables included assets net represent receivables collection periods longer 12 months balance primarily consists amounts collected insurance companies fullyreserved receivables associated national oil company venezuela december 31 2020 1053 million longterm receivables compared 1400 million december 31 2019 allowance expected credit losses longterm receivables december 31 2020 961 million compared 1014 million december 31 2019 exposure credit losses offbalance sheet exposures financial guarantees standby letters credit believe risk loss immaterial financial statements december 31 2020 january 2017 fasb issued asu 201704 intangibles goodwill topic 350 simplifying test goodwill impairment amendments asu allow companies apply onestep quantitative test record amount goodwill impairment excess reporting unit’s carrying amount fair value exceed total amount goodwill allocated reporting unit amendments asu effective annual interim goodwill impairment tests fiscal years beginning december 15 2019 adoption asu 201704 effective january 1 2020 impact consolidated financial condition results operations august 2018 fasb issued asu 201813 fair value measurement topic 820 disclosure frameworkchanges disclosure requirements fair value measurement amendments asu modify disclosure requirements fair value measurements removing modifying adding certain disclosure requirements assets liabilities measured fair value statement financial position disclosed notes financial statements asu effective fiscal years interim periods within fiscal years beginning december 15 2019 early adoption permitted removed disclosures delayed adoption fiscal year 2020 permitted new disclosures removed modified disclosures adopted retrospective basis new disclosures adopted prospective basis adoption asu 201813 effective january 1 2020 impact disclosures august 2018 fasb issued asu 201814 compensationretirement benefitsdefined benefit plansgeneral subtopic 71520 disclosure frameworkchanges disclosure requirements defined benefit plans asu amends disclosure requirements adding clarifying removing certain disclosures sponsor defined benefit pension postretirement plans amendments effective fiscal years ending december 15 2020 amendments applied retrospectively periods presented adopted standard required disclosure reflected annual disclosures companys noncontributory defined benefit pension plans august 2018 fasb issued asu 201815 intangiblesgoodwill otherinternaluse software subtopic 35040 customer’s accounting implementation costs incurred cloud computing arrangement service contract asu addresses entities account costs associated implementing cloud computing arrangement considered service contract per amendments asu implementation costs incurred cloud computing arrangement service contract accounted manner implementation costs incurred develop obtain software internal use prescribed guidance asc 35040 asu requires implementation costs incurred cloud computing arrangement capitalized rather expensed asu specifies method amortization costs incurred implementation manner unamortized portion capitalized implementation costs evaluated impairment asu also provides guidance present implementation costs financial statements also creates additional disclosure requirements amendments effective fiscal years beginning december 15 2019 amendments asu applied either retrospectively prospectively implementation costs incurred date adoption asu 201815 effective january 1 2020 prospective basis material impact consolidated financial condition results operations october 2018 fasb issued asu 201817 consolidation topic 810 targeted improvements related party guidance variable interest entities vies standard reduces cost complexity financial reporting associated vies new standard amends guidance determining whether decisionmaking fee vie amendments require organizations consider indirect interests held related parties common control proportional basis rather equivalent direct interest entirety currently required us generally accepted accounting principles gaap amendments asu effective fiscal years beginning december 15 2019 adoption asu 201817 effective january 1 2020 impact consolidated financial condition results operations november 2018 fasb issued asu 201818 collaborative arrangements topic 808 clarifying interaction topic 808 topic 606 asu clarifies interaction guidance certain collaborative arrangements asu 201409 revenue contracts customers topic 606 adopted january 1 2018 amendments asu provide guidance assess whether certain transactions collaborative arrangement participants accounted within asu 201409 asu also provides comparability presentation revenue certain transactions collaborative arrangement participants parts collaborative arrangement purview revenue recognition standard presented separately amendments effective fiscal years beginning december 15 2019 adoption asu 201818 effective january 1 2020 impact consolidated financial condition results operations december 2019 fasb issued asu 201912 “income taxes topic 740 simplifying accounting income taxes” asu intends simplify various aspects related accounting income taxes removes certain exceptions general principles standard additionally asu clarifies amends existing guidance improve consistent application requirements early adopted asu 201912 effective january 1 2020 prospective basis adoption impact consolidated financial condition results operations pronouncements yet implemented march 2020 fasb issued asu 202004 reference rate reform topic 848 facilitation effects reference rate reform financial reporting asu provides guidance designed enable process migrating away reference rates london interbank offered rate libor others new reference rates amendments asu provides optional expedients exceptions applying us gaap contract modifications hedging relationships subject meeting certain criteria reference libor another reference rate expected discontinued amendments effective march 12 2020 december 31 2022 applied prospectively periods presented evaluated impact asu 202004 related asus anticipate adoption asus material impact consolidated financial condition results operations october 2020 fasb issued asu 202010 codification improvements amendments fasb accounting standards codification amendments asu change gaap therefore expected result significant change practice rather amendments intended improve codification guidance disclosure requirements companys financial statements notes financial statements amendments effective annual periods beginning december 15 2020 amendments applied retrospectively periods presented currently evaluating impact asu 201010 anticipate adoption asu material impact consolidated financial condition results operations net cash flows 2revision previously reported financial information conjunction close process third quarter 2020 identified accounting errors related recognition liability unasserted asbestos claims adjustments primarily relate incurred reported “ibnr” liability associated unasserted asbestos claims also include adjustments related associated receivables expected insurance proceeds asbestos settlement defense costs insurance coverage recognition expense related legal fees previously estimated recoverable insurance carriers coverage currently sufficient following recognition ibnr correct certain previously identified immaterial misstatements prior periods presented herein revised applicable future filings following table presents impact correcting errors previously discussed affected line items consolidated balance sheet december 31 2019 1 adjustment related misclassification software service arrangements property plant equipment rather assets net prescribed asu 201815 2 adjustment related associated receivables expected insurance proceeds asbestos settlements defense costs 3 adjustment related one sites correction contract position caused errors estimated costs time revenue recognition model 4 adjustment primarily relates ibnr reserves associated unasserted asbestos claims 5 adjustments retained earnings represents cumulative effect immaterial errors corrected periods prior december 31 2019 following table presents impact correcting errors previously discussed affected line items consolidated statement income year ended december 31 2019 1 adjustment related one sites related errors estimated costs time revenue recognition model 2 adjustment primarily related asbestos settlement defense costs insurance coverage expense related legal fees 3 adjustment related tax impacts matters described notes 1 2 following table presents impact correcting errors previously discussed affected line items consolidated statement income year ended december 31 2018 1 adjustment related one sites related errors estimated costs time revenue recognition model 2 adjustment primarily related asbestos settlement defense costs insurance coverage expense related legal fees broadbased annual incentive compensation 3 adjustment related tax impacts matters described notes 1 2 consolidated statements shareholders equity consolidated statements comprehensive income periods ending december 31 2020 2019 2018 also revised reflect impacts net earnings impact errors arising periods commencing prior january 1 2018 reflected reduction opening retained earnings amount 288 million consolidated statement shareholders equity except described 1 effect adjustments consolidated statements cash flows period ended december 31 2019 primarily related net earnings including noncontrolling interests change net earnings table offset primarily impacts changes operating assets liabilities following table presents impact correcting errors previously discussed affected line items consolidated statement cash flows years ended december 31 2019 2018 1 primarily related adjustments resulting misclassification software service arrangements property plant equipment rather assets net prescribed asu 201815 adjustments related international operations’ exposure fluctuations foreign currency exchange rates resulting argentinian subsidiarys change using us dollar functional currency argentina effects prior period revisions consolidated statements cash flows year ended december 31 2018 primarily change net earnings well changes net cash flows provided used operating activities limited prepaid expenses assets net accounts payable accrued liabilities income taxes payable retirement obligations deferred tax movements accordingly changes subtotals within 2018 consolidated statement cash flows impacts revisions reflected throughout financial statements including applicable footnotes appropriate 3revenue recognition majority revenues relate customer orders typically contain single commitment goods services lead times year longer lead time complex contracts customers typically multiple commitments goods services including combination designing developing manufacturing modifying installing commissioning flow management equipment providing services parts related performance products control transfers time customer able direct use obtain substantially benefits work perform primary method recognizing revenue time percentage completion poc method revenue products services transferred customers time accounted approximately 22 19 22 total revenue years ended december 31 2020 2019 2018 respectively control transfer time control transfers point time recognize revenue point time level performance obligation based evaluation certain indicators control transfer title transfer risk loss transfer customer acceptance physical possession revenue products services transferred customers point time accounted approximately 78 81 78 total revenue years ended december 31 2020 2019 2018 respectively disaggregated revenue conduct operations two business segments based type product manage business •flowserve pump division fpd custom highlyengineered pumps preconfigured industrial pumps pump systems mechanical seals auxiliary systems replacement parts related services •flow control division fcd engineered industrial valves control valves actuators controls related services revenue sources derived original equipment manufacturing aftermarket sales services original equipment revenues generally related originally designed manufactured distributed installed equipment range preconfigured shortcycle products customized highlyengineered equipment original equipment aftermarket sales services derived sales replacement equipment well maintenance advanced diagnostic repair retrofitting services aftermarket two business segments generate original equipment aftermarket revenues following table presents customer revenues disaggregated revenue source customer sales diversified geographically following table presents revenues disaggregated geography based shipping addresses customers 1 north america represents united states canada latin america includes mexico december 31 2020 aggregate transaction price allocated unsatisfied partially unsatisfied performance obligations related contracts original expected duration excess one year approximately 541 million estimate recognition approximately 412 million amount revenue 2021 additional 129 million 2022 thereafter contract balances receive payment customers based contractual billing schedule specific performance requirements established contracts record billings accounts receivable unconditional right consideration exists contract asset represents revenue recognized advance right bill customer terms contract liability represents contractual billings advance revenue recognized contract following table presents opening closing balances contract assets contract liabilities current longterm years ended december 31 2020 2019 1 included assets net 2 included retirement obligations liabilities 4dispositions fpd business divestiture june 29 2018 pursuant plan sale approved management executed agreement divest two fpd locations associated product lines including related assets liabilities transaction meet criteria classification assets held sale june 30 2018 due contingency could potentially impacted final terms andor timing divestiture sale transaction completed august 9 2018 twelve months ended december 31 2018 recorded pretax charge 251 million including pretax charge 174 million second quarter 2018 loss sale business 77 million third quarter 2018 second quarter 2018 pretax charge related writedowns inventory longlived assets estimated fair value 77 million recorded cos 97 million recorded sga third quarter 2018 pretax charge primarily related working capital changes since second quarter 2018 net cash transferred closing date 37 million sale included manufacturing facility germany related assembly facility france 5leases operating finance leases certain manufacturing facilities offices service quick response centers machinery equipment automobiles leases remaining lease terms 33 years terms conditions leases may include options extend terminate lease considered included lease term options reasonably certain exercise determine contract contains lease inception evaluating whether contract conveys right control use identified asset classes leased assets elected practical expedient account nonlease components contract together related lease component unit account lease contracts containing one lease component allocate contract consideration lease components basis relative standalone prices order identify lease payments lease component rou assets lease liabilities recognized consolidated balance sheets commencement date based present value remaining lease payments lease term additionally rou assets include lease payments made commencement date well initial direct costs incurred reduced lease incentives received operating leases provide implicit rate apply incremental countryspecific borrowing rate determine present value remaining lease payments incremental borrowing countryspecific rate determined based information available commencement date lease operating leases included operating lease rightofuse assets net operating lease liabilities consolidated balance sheets finance leases included property plant equipment debt due within one year longterm debt due one year consolidated balance sheets classes leased assets applied accounting policy election exclude shortterm leases recognition consolidated balance sheets shortterm lease term 12 months less commencement date include purchase option reasonably certain exercise recognize shortterm lease expense consolidated income statements straightline basis lease term shortterm lease expense shortterm lease commitments december 31 2020 immaterial certain lease contracts terms conditions provide variability payment amount based changes facts circumstances occurring commencement date variable lease payments recognized consolidated income statements obligation incurred certain lease contracts provide guarantee lessor value underlying asset least specified amount end lease estimated amounts expected paid residual value guarantees included lease liabilities rou assets 04 million 347 million legally binding minimum lease payments operating leases signed yet commenced december 31 2020 2019 material subleases leases imposed significant restrictions covenants material related party leases saleleaseback arrangements information related leases follows 1 included property plant equipment net 2 included debt due within one year longterm debt due one year accordingly 3 included cost sales selling general administrative expense accordingly 4 included interest expense supplemental cash flows information related leases follows 1 included consolidated statement cash flows operating activities prepaid expenses assets net retirement obligations 2 included consolidated statement cash flows financing activities payments financing arrangements future undiscounted lease payments operating finance leases december 31 2020 follows amounts thousands 6goodwill intangible assets changes carrying amount goodwill years ended december 31 2020 2019 follows following table provides information intangible assets years ended december 31 2020 2019 1engineering drawings represent estimated fair value associated specific acquired product component schematics 2existing customer relationships acquired prior 2011 useful life five years 3accumulated amortization indefinitelived intangible assets relates amounts recorded prior implementation date guidance issued asc 350 following schedule outlines actual amortization expense recognized 2020 estimate future amortization based upon finitelived intangible assets owned december 31 2020 amortization expense finitelived intangible assets 138 million 2019 141 million 2018 7inventories inventories net consisted following 2020 2019 2018 recognized expenses 149 million 171 million 162 million respectively excess obsolete inventory expenses included cos consolidated statements income 8stockbased compensation plans effective january 1 2020 shareholders approved flowserve corporation 2020 longterm incentive plan “2020 plan” 2020 plan replaces supersedes flowserve corporation equity incentive compensation plan 2010 plan entirety 2020 plan authorizes issuance 12500000 shares common stock form restricted shares restricted share units performancebased units collectively referred restricted shares incentive stock options nonstatutory stock options stock appreciation rights bonus stock addition shares available issuance subject forfeiture 2010 plan expiration december 31 2019 shares common stock authorized 2020 plan remaining shares 2010 plan 13606725 available issuance december 31 2020 restricted shares primarily vest three year period restricted shares granted employees retire achieved least 55 years age 10 years service continue vest original vesting period 5510 provision stock options granted officers employees directors allow purchase common shares market value stock date options granted options generally become exercisable three years options generally expire ten years date grant within short period time following termination employment cessation services option holder december 31 2020 114943 stock options outstanding exercisable grant date fair value 20 million recognized three years weighted average exercise price 4863 december 31 2020 compensation associated stock options fully earned using blackscholes option pricing model estimate fair value option award december 31 2020 total fair value stock options vested 20 million stock option exercisable years ended december 31 2019 2018 stock options granted canceled vested years ended december 31 2020 2019 2018 weighted average remaining contractual life options outstanding december 31 2020 2019 2018 63 years 73 years 83 years respectively restricted shares generally restrictions restricted shares expire minimum one year maximum three years shares subject forfeiture restriction period typically restricted share grants staggered vesting periods one three years grant date intrinsic value restricted shares typically product share price date grant number restricted shares granted amortized straightline basis compensation expense periods restrictions lapse awards restricted shares valued closing market price common stock date grant unearned compensation amortized compensation expense vesting period restricted shares except awards related 5510 provision expensed granted december 31 2020 2019 187 million 234 million respectively unearned compensation cost related unvested restricted shares expected recognized weightedaverage period approximately one year total fair value restricted shares vested years ended december 31 2020 2019 2018 264 million 168 million 143 million respectively recorded stockbased compensation restricted shares follows following table summarizes information regarding restricted shares unvested restricted shares outstanding december 31 2020 includes approximately 539000 units performancebased vesting provisions performancebased units issuable common stock vest upon achievement predefined performance targets performancebased units performance targets based average return invested capital total shareholder return tsr threeyear period unvested units granted three annual grants since january 1 2018 vesting percentage 0 200 depending achievement specific performance targets except shares granted 5510 provision compensation expense recognized ratably cliffvesting period 36 months based fair value common stock date grant adjusted actual forfeitures performance period earned unearned compensation expense adjusted based changes expected achievement performance targets performancebased units granted except tsrbased units vesting provisions range 0 approximately 1078000 shares based performance targets december 31 2020 estimate vesting approximately 537000 shares based expected achievement performance targets 9derivatives hedging activities risk management foreign currency derivatives hedging policy specifies conditions may enter derivative contracts see note 1 additional information purpose entering derivatives overall risk management strategies enter foreign exchange forward contracts hedge cash flow risks associated transactions denominated currencies local currency operation engaging transaction foreign exchange contracts notional values 3881 million 3985 million december 31 2020 2019 respectively december 31 2020 length foreign exchange contracts currently place ranged 15 days 20 months exposed risk creditrelated losses resulting nonperformance counterparties financial instruments perform credit evaluations counterparties forward exchange contracts expect counterparties meet obligations experienced credit losses counterparties fair values foreign exchange contracts summarized current noncurrent derivative assets reported consolidated balance sheets prepaid expenses assets net respectively current noncurrent derivative liabilities reported consolidated balance sheets accrued liabilities retirement obligations liabilities respectively impact net changes fair values foreign exchange contracts summarized gains losses recognized consolidated statements income foreign exchange contracts classified income expense net september 22 2020 means managing volatility foreign currency exposure eurous dollar exchange rate entered crosscurrency swap associated euro investment certain international subsidiaries designated net investment hedge exclude interest accruals swap assessment hedge effectiveness recognize interest accruals earnings within interest expense reporting period change fair value swap attributable changes spot rate differences change fair value excluded components amounts recognized earnings swap accrual process reported accumulated comprehensive loss consolidated balance sheet december 31 2020 notional value swap €1632 million early termination date september 2025 swap included retirement obligations liabilities consolidated balance sheet december 31 2020 fair value 181 million classified level ii fair value hierarchy period ending december 31 2020 interest accrual 06 million recognized income expense net consolidated statements income cumulative net investment hedge loss net deferred taxes crosscurrency swap recorded accumulated comprehensive loss aocl consolidated balance sheet summarized march 2015 designated €2557 million 125 eur senior notes due 2022 euro senior notes discussed note 13 net investment hedge euro investment certain international subsidiaries september 22 2020 increased designated hedged value 2022 euro senior notes €3363 million reflects remaining balance 2022 euro senior notes following closing previously announced tender offer 2022 euro senior notes date reporting period change carrying value due remeasurement effective portion reported accumulated comprehensive loss consolidated balance sheet remaining change carrying value ineffective portion recognized income expense net consolidated statement income cumulative impact recorded aocl consolidated balance sheet change carrying value due remeasurement effective portion net investment hedge summarized use spot method measure effectiveness net investment hedges evaluate effectiveness prospective basis beginning quarter record ineffectiveness years ended december 31 2020 2019 2018 10fair value financial instruments financial instruments presented fair value consolidated balance sheets fair value defined price would received sell asset paid transfer liability orderly transaction market participants measurement date available fair value based observable market prices parameters derived prices parameters observable prices inputs available valuation models may applied assets liabilities recorded fair value consolidated balance sheets categorized based upon level judgment associated inputs used measure fair values recurring fair value measurements limited investments derivative instruments equity securities fair value measurements derivative instruments determined using models maximize use observable market inputs including interest rate curves forward spot prices currencies classified level ii fair value hierarchy fair values derivatives included note 9 fair value measurements investments equity securities determined using quoted market prices classified level fair values investments equity securities changes thereto immaterial consolidated financial position results operations carrying value debt included note 13 except senior notes approximates fair value estimated fair value senior notes based level quoted market rates estimated fair value senior notes december 31 2020 17784 million compared carrying value 17015 million carrying amounts financial instruments ie cash equivalents accounts receivable net accounts payable approximated fair value due shortterm nature december 31 2020 december 31 2019 11details certain consolidated balance sheet captions following tables present financial information certain consolidated balance sheet captions accounts receivable net accounts receivable net property plant equipment net property plant equipment net accrued liabilities accrued liabilities accrued liabilities include professional fees lease obligations insurance interest freight accrued cash dividends payable legal environmental matters derivative liabilities restructuring reserves items none individually exceed 5 current liabilities retirement obligations liabilities retirement obligations liabilities 12equity method investments occasionally enter joint venture arrangements local country partners preferred means entry countries barriers entry may exist similar consolidated subsidiaries unconsolidated joint ventures generally operate within primary businesses designing manufacturing assembling distributing fluid motion control products services agreements certain joint ventures restrict us otherwise entering respective market certain joint ventures produce andor sell products part broader product offering net earnings investments unconsolidated joint ventures reported net earnings affiliates consolidated statements income given integrated role unconsolidated joint ventures business net earnings affiliates presented component operating income december 31 2020 investments six joint ventures one located chile china india saudi arabia south korea united arab emirates accounted using equity method immaterial disclosure purposes 13debt finance lease obligations debt including finance lease obligations consisted scheduled maturities senior notes debt amounts thousands senior notes september 14 2020 completed public offering 5000 million aggregate principal amount senior notes due october 1 2030 senior notes 2030 senior notes bear interest rate 350 per year payable april 1 october 1 year commencing april 1 2021 2030 senior notes priced 99656 par value reflecting discount aggregate principal amount used portion net proceeds 2030 senior notes offering fund partial tender offer 2022 euro senior notes third quarter 2020 tendered 1914 million 2022 euro senior notes recorded interest expense early extinguishment loss 12 million february 17 2021 announced redeem outstanding balance 2022 euro senior notes march 19 2021 use remaining net proceeds public offering 2030 senior notes redemption march 17 2015 completed public offering €5000 million euro senior notes aggregate principal amount due march 17 2022 euro senior notes bear interest rate 125 per year payable year march 17 2022 euro senior notes priced 99336 par value reflecting discount aggregate principal amount november 1 2013 completed public offering 3000 million aggregate principal amount senior notes due november 15 2023 senior notes 2023 senior notes bear interest rate 400 per year payable may 15 november 15 year 2023 senior notes priced 99532 par value reflecting discount aggregate principal amount september 11 2012 completed public offering 5000 million aggregate principal amount senior notes due september 15 2022 senior notes 2022 senior notes bear interest rate 350 per year payable march 15 september 15 year 2022 senior notes priced 99615 par value reflecting discount aggregate principal amount right redeem 2022 senior notes 2023 senior notes 2030 senior notes time prior june 15 2022 august 15 2023 july 1 2030 respectively whole part option redemption price equal greater 1 100 principal amount senior notes redeemed 2 sum present values remaining scheduled payments principal interest respect senior notes redeemed discounted redemption date semiannual basis applicable treasury rate plus 30 basis points 2022 senior notes plus 25 basis points 2023 senior notes plus 45 basis points 2030 senior notes addition time june 15 2022 senior notes august 15 2023 senior notes july 1 2030 senior notes may redeem senior notes redemption price equal 100 principal amount senior notes redeemed case also pay accrued unpaid interest principal amount redeemed redemption date right redeem 2022 euro senior notes time prior december 17 2021 whole part option redemption price equal greater 1 100 principal amount senior notes redeemed 2 sum present values remaining scheduled payments principal interest respect senior notes redeemed exclusive interest accrued excluding date redemption discounted redemption date annual basis comparable german government bond rate plus 25 basis points time december 17 2021 may redeem 2022 euro senior notes whole part time option redemption price equal 100 principal amount notes redeemed senior credit facility september 4 2020 amended credit agreement bank america na administrative agent lenders party thereto amended credit agreement provide greater flexibility maintaining adequate liquidity event need access available borrowings senior credit facility credit facility credit agreement provides 8000 million unsecured senior credit facility maturity date july 16 2024 “senior credit facility” senior credit facility includes 7500 million sublimit issuance letters credit 300 million sublimit swing line loans right increase amount senior credit facility aggregate amount exceed 4000 million subject certain conditions including lenders approval providing increase amended credit agreement among things replaces existing leverage ratio financial covenant “existing leverage covenant” leverage ratio financial covenant requires company’s ratio consolidated funded indebtedness minus amount cash equivalents balance sheet excess 2500 million company’s consolidated ebitda exceed 400 100 last day quarter including december 31 2021 “covenant relief period” ii amends existing leverage covenant provide tested quarter ending march 31 2022 iii provides existing leverage covenant beginning march 31 2022 cannot exceed 400 100 increased 450 100 connection certain acquisitions iv limits company’s ability pay dividends repurchase shares common stock par value 125 covenant relief period amount exceed 115 total amount dividends share repurchases made period commencing january 1 2019 including june 30 2020 interest rates per annum applicable senior credit facility respect swing line loans libor plus 1000 1750 depending debt rating either moody’s investors service inc standard poor’s financial services llc sp ratings option base rate defined senior credit agreement plus 0000 0750 depending debt rating either moody’s investors service inc sp global ratings december 31 2020 interest rate senior credit facility libor plus 1375 case libor loans base rate plus 0375 case base rate loans addition commitment fee payable quarterly arrears daily unused portions senior credit facility commitment fee 0090 0300 unused amounts senior credit facility depending debt rating either moody’s investors service inc sp global ratings commitment fee 020 per annum period ended december 31 2020 december 31 2020 december 31 2019 revolving loans outstanding senior credit facility outstanding letters credit 581 million 885 million december 31 2020 december 31 2019 respectively amount available borrowings senior credit facility 7419 million compared 7115 million december 31 2019 financial covenants compliance financial covenants senior notes senior credit facility tested quarterly compliance covenants december 31 2020 14pension postretirement benefits sponsor several noncontributory defined benefit pension plans covering substantially us employees certain nonus employees provide benefits based years service age job grade levels type compensation retirement benefits covered employees provided contributory pension plans cash balance pension plans governmentsponsored retirement programs funded defined benefit pension plans receive funding based independent actuarial valuations provide current service amount sufficient amortize unfunded prior service periods exceed 30 years funding falling within legal limits prescribed prevailing regulation also maintain unfunded defined benefit plans permitted local regulations receive funding benefits become due defined benefit plan strategy ensure current future benefit obligations adequately funded costeffective manner additionally investing objective achieve highest level investment performance compatible risk tolerance prudent investment practices longterm nature defined benefit plan liabilities funding strategy based longterm perspective formulating implementing investment policies evaluating investment performance asset allocation defined benefit plans reflects decision proportion investment equity fixed income securities appropriate various subasset classes least annually complete comprehensive review asset allocation policy underlying assumptions includes longterm capital markets rate return assumptions risk tolerances relative defined benefit plan liabilities expected rates return defined benefit plan assets derived review asset allocation strategy expected longterm performance asset classes risks factors adjusted specific investment strategy rates impacted changes general market conditions longterm nature shortterm market changes significantly impact rates us defined benefit plan assets consist balanced portfolio equity fixed income securities nonus defined benefit plan assets include significant concentration united kingdom uk fixed income securities monitor investment allocations manage plan assets maintain acceptable levels risk periods presented used measurement date december 31 us pension plans nonus pension plans postretirement medical plans us defined benefit plans maintain qualified nonqualified defined benefit pension plans us qualified plan provides coverage substantially fulltime us employees receive benefits earnings threshold specified us department labor nonqualified plans primarily cover small number employees including current former members senior management providing benefit levels equivalent participants otherwise limited us department labor rules us plans designed operate cash balance arrangements employee option take lump sum payment end service difference total accumulated benefit obligation total projected benefit obligation benefit obligation immaterial following assumptions related us defined benefit pension plans december 31 2020 compared december 31 2019 decreased discount rate 341 262 based analysis publiclytraded investment grade us corporate bonds lower yield due current market conditions determining 2020 expense expected rate return us plan assets remained constant 600 primarily based target allocations expected longterm asset returns longterm rate return assumption calculated using quantitative approach utilizes unadjusted historical returns asset allocation inputs calculation us plans adopted pri2012 mortality tables mp2020 improvement scale published october 2020 applied pri2012 tables based constituency plan population union nonunion participants adjusted improvement scale utilize proxy ssa long term improvement rates ltir consistent assumptions adopted social security administration trustees based longterm historical experience currently believe approach provides best estimate future obligation plan participants elect receive plan benefits lump sum end service rather annuity updated mortality tables immaterial effect pension obligation net pension expense us defined benefit pension plans including qualified nonqualified plans following summarizes net pension liability asset us plans following summarizes amounts recognized balance sheet us plans following summary changes us defined benefit plans’ pension obligations 1the actuarial losses 2020 2019 primarily reflect impact changes discount rate following table summarizes expected cash benefit payments us defined benefit pension plans future amounts millions following table shows change accumulated comprehensive loss attributable components net cost change benefit obligations us plans net tax amounts recorded accumulated comprehensive loss consist following reconciliation us defined benefit pension plans’ assets contributed 14 million 206 million us defined benefit pension plans 2020 2019 respectively payments exceeded minimum funding requirements mandated us department labor rules estimated contribution 2021 expected approximately 20 million excluding direct benefits paid us defined benefit plan assets held qualified plan asset allocations qualified plan end 2020 2019 asset category follows none common stock directly held qualified plan investment strategy earn longterm rate return consistent acceptable degree risk minimize cash contributions life plan taking account liquidity needs plan preserve capital diversified investments high quality securities current allocation target invest approximately 43 plan assets equity securities 57 fixed income securities within investment category assets allocated various investment strategies professional money management firms manage assets engage consultant assist evaluating activities periodically review allocation target generally conjunction asset liability study consideration future cash flow needs regularly rebalance actual allocation target investment allocation plan assets invested commingled funds pension investment committee responsible setting investment strategy target asset allocation plans assets qualified plan approached fully funded status implemented liabilitydriven investing ldi strategy closely aligns duration plans assets duration liabilities ldi strategy results asset portfolio closely matches behavior liability thereby reducing volatility plans funded status plan’s financial instruments shown presented fair value see note 1 discussion hierarchical levels fair values plan’s investments determined fair values us defined benefit plan assets aglobal equity fund seeks closely track performance msci country world index bglobal real asset funds seek provide exposure listed global real estate investment trusts reits infrastructure markets cdiversified credit funds seek provide exposure high yield emerging markets bank loans securitized credit markets dliabilitydriven investment ldi funds seek invest high quality fixed income securities collectively closely match found discount curves used value plans liabilities nonus defined benefit plans maintain defined benefit pension plans cover employees following countries austria belgium canada france germany india italy japan mexico netherlands sweden switzerland uk assets plans uk two plans netherlands canada represent 94 total nonus plan assets nonus assets details countries’ plan assets provided due immateriality following assumptions related nonus defined benefit pension plans december 31 2020 compared december 31 2019 decreased average discount rate nonus plans 161 123 based analysis bonds publiclytraded instruments country lower yields due market conditions determine 2020 pension expense decreased average expected rate return plan assets 337 december 31 2019 237 december 31 2020 primarily based target allocations expected longterm asset returns expected rate return plan assets longterm nature shortterm market fluctuations significantly impact rate many nonus defined benefit plans unfunded permitted local regulation expected longterm rate return assets funded plans determined assessing rates return asset class calculated using quantitative approach utilizes unadjusted historical returns asset allocation inputs calculation work actuaries determine reasonableness longterm rate return assumptions looking several factors including historical returns expected future returns asset allocation risks asset class items net pension expense nonus defined benefit pension plans following summarizes net pension liability nonus plans following summarizes amounts recognized balance sheet nonus plans following reconciliation nonus plans’ defined benefit pension obligations 1the 2019 actuarial loss primarily reflects decrease discount rates plans 2in 2020 currency translation loss reflects weakening us dollar euro british pound 2019 currency translation loss reflects weakening us dollar british pound partially offset strengthening us dollar euro following table summarizes expected cash benefit payments nonus defined benefit plans future amounts millions following table shows change accumulated comprehensive loss attributable components net cost change benefit obligations nonus plans net tax amounts recorded accumulated comprehensive loss consist following reconciliation nonus plans’ defined benefit pension assets 2020 2019 increase nonus plan assets due strong asset returns uk assets contributions nonus defined benefit pension plans 2021 expected approximately 2 million excluding direct benefits paid asset allocations nonus defined benefit pension plans end 2020 2019 follows none common stock held directly plans cases investment strategy plans earn longterm rate return consistent acceptable degree risk minimize cash contributions life plan taking account liquidity needs plan legal requirements particular country preserve capital diversified investments high quality securities asset allocation differs plan based upon plan’s benefit obligation participants well results asset liability studies conducted plan consideration future cash flow needs professional money management firms manage plan assets engage consultant uk assist evaluation activities assets uk plans overseen group trustees review investment strategy asset allocation fund selection assets passively managed invested index funds attempt match performance specified benchmark index fair values nonus assets anorth american companies represents us canadian large cap equity funds managed track respective benchmarks ftse allworld usa index ftse allworld canada index bglobal equity represents actively managed global equity funds taking topdown strategic view different regions analyzing companies based fundamentals marketdriven thematic quantitative factors generate alpha cuk government gilt index represents uk government issued fixed income investments passively managed track respective benchmarks dldi seeks invest fixed income securities collectively closely match found discount curves used value plans liabilities emultiasset seeks attractive riskadjusted return investing diversified portfolio strategies including equities fixed income fthe buyin contracts contract contracts represent assets held plans whereby cost providing benefits plan participants funded contract contracts held plans benefit plan participants netherlands uk fair value assets based current present value accrued benefits fluctuate based changes obligations associated covered plan members well assumptions used present value calculation fair value asset held netherlands contract january 1 2020 259 million contributions currency adjustments resulting fair value 274 million december 31 2020 similarly fair value asset held uk plan contract january 1 2020 286 million contributions currency adjustments resulting fair value 318 million december 31 2020 gincludes assets held plans outside united kingdom netherlands canada details provided due immateriality defined benefit pension plans accumulated benefit obligations excess plan assets following summarizes key pension plan information regarding us nonus plans whose accumulated benefit obligations exceed fair value respective plan assets postretirement medical plans sponsor several defined benefit postretirement medical plans covering certain current retirees limited number future retirees us plans provide medical dental benefits administered insurance companies health maintenance organizations plans include participant contributions deductibles coinsurance provisions limitations integrated medicare group plans fund plans benefits health maintenance organization premiums paid plans hold assets period presented accordingly investment strategy targeted allocations plan assets benefits postretirement medical plans available new employees existing employees following assumptions related postretirement benefits assumed ranges annual rates increase medical costs used determine net expense 70 2020 75 2019 7 2018 gradual decrease 50 2029 future years net postretirement benefit cost postretirement medical plans following summarizes accrued postretirement benefits liability postretirement medical plans following summarizes amounts recognized balance sheet postretirement benefit obligation following reconciliation postretirement benefit obligation following presents expected benefit payments future periods amounts millions following table shows change accumulated comprehensive loss attributable components net cost change benefit obligations postretirement benefits net tax amounts recorded accumulated comprehensive loss consist made contributions postretirement medical plans pay benefits 32 million 2020 29 million 2019 32 million 2018 postretirement medical plans unfunded make contributions covered individuals’ claims approved payment accordingly contributions period directly correlated benefits paid defined contribution plans sponsor several defined contribution plans covering substantially us canadian employees certain nonus employees may contribute plans contributions matched varying amounts us including opportunities discretionary matching contributions us defined contribution plan expense 200 million 2020 204 million 2019 187 million 2018 15earnings per share following reconciliation net earnings flowserve corporation weighted average shares calculating net earnings per common share earnings per weighted average common share outstanding calculated follows diluted earnings per share based upon weighted average number shares determined basic earnings per share plus shares potentially issuable conjunction stock options restricted shares restricted share units performance share units years ended ending december 31 2020 2019 2018 unvested restricted shares 375203 140459 88656 respectively excluded computation diluted earnings per share effect exercise would antidilutive 16legal matters contingencies asbestosrelated claims defendant substantial number lawsuits seek recover damages personal injury allegedly caused exposure asbestoscontaining products manufactured andor distributed heritage companies past typically lawsuits brought multiple defendants state federal courts overall number asbestosrelated claims predecessors named generally declined recent years assurance trend continue average cost per claim us increase asbestoscontaining materials incorporated products encapsulated used internal components process equipment believe significant emission asbestos fibers occurred use equipment practice vigorously contest resolve claims successful resolving majority claims little payment legal fees activity related asbestos claims periods indicated follows 1 beginning ending claims data period excludes inactive claims company considers unlikely inactive cases pursued respective plaintiffs claim classified inactive either due inactivity period time designated inactive applicable court 2 represents net change claims result reclassification active cases inactive cases active period indicated cases moved active inactive status removed claims count without accounted resolved claim cases moved inactive status active status added back claims count without accounted “new claim” company incurred expenses approximately 155 million 218 million 248 million periods ending december 31 2020 2019 2018 respectively defend resolve otherwise dispose outstanding claims including legal related expenses included within sga consolidated statements income company cash inflowsoutflows net insurance andor indemnity defend resolve otherwise dispose outstanding claims including legal related expenses approximately 55 million 122 million 126 million periods ending december 31 2020 2019 2018 respectively historically high percentage resolved claims covered applicable insurance indemnities companies believe substantial majority existing claims continue covered insurance indemnities whole part believe reserve asbestos claims receivable recoveries insurance carriers recorded claims reflects reasonable probable estimates amounts estimate ultimate exposure asbestos claims however subject significant uncertainties including timing number types new claims unfavorable court rulings judgments settlement terms ultimate costs settle additionally including continued viability carriers may also impact amount probable insurance recoveries believe uncertainties could material adverse impact business financial condition results operations cash flows though currently believe likelihood remote additionally claims pending certain insurers future periods resolved favorably reflected recorded receivables would result discrete gains applicable year currently involved potentially responsible party four former public waste disposal sites various stages evaluation remediation projected cost remediation sites well alleged fair share allocation remain uncertain studies completed parties either negotiated amicable resolution matter judicially resolved site many parties similarly identified many parties identified financially strong solvent companies appear able pay share remediation costs based information waste disposal practices sites environmental regulatory process general believe likely ultimate remediation liability costs site apportioned among liable parties including site owners waste transporters according volumes andor toxicity wastes shown disposed sites believe financial exposure existing disposal sites materially excess accrued reserves also defendant number lawsuits including product liability claims insured subject applicable deductibles arising ordinary course business also involved uninsured routine litigation incidental business currently believe none litigation either individually aggregate material business operations overall financial condition however litigation inherently unpredictable resolutions dispositions claims lawsuits settlement otherwise could adverse impact financial position results operations cash flows reporting period resolution disposition occurs although none aforementioned potential liabilities quantified absolute certainty except otherwise indicated established adjusted reserves covering exposures relating contingencies extent believed reasonably estimable probable based past experience available facts additional exposures beyond reserves could exist currently cannot estimated continue evaluate update reserves necessary appropriate 17warranty reserve recorded reserves product warranty claims included current liabilities following summary activity warranty reserve 18shareholders’ equity dividends generally dividend dateofrecord last month quarter dividend paid following month subsequent dividends reviewed board directors declared discretion dividends declared per share follows share repurchase program 2014 board directors approved 5000 million share repurchase authorization share repurchase program expiration date reserve right limit terminate repurchase program time without notice repurchased 1057115 shares outstanding common stock 321 million 324889 shares outstanding common stock 150 million year ended december 31 2020 2019 respectively repurchases shares outstanding common stock year ended december 31 2018 december 31 2020 1136 million remaining capacity current share repurchase program 19income taxes provision income taxes consists following provision income taxes differs statutory corporate rate due following response covid19 pandemic many governments enacted contemplating measures provide aid economic stimulus measures may include deferring due dates tax payments changes income nonincomebased tax laws coronavirus aid relief economic security act “cares act” enacted march 27 2020 us includes measures assist companies including temporary changes income nonincomebased tax laws year ended december 31 2020 material tax impacts condensed consolidated financial statements relate cares act global covid19 measures continue monitor additional guidance issued us treasury department internal revenue service others years ended december 31 2020 2019 2018 asserted indefinite reinvestment certain earnings foreign subsidiaries december 31 2020 recorded approximately 191 million deferred tax liabilities associated remaining unremitted earnings considered indefinitely reinvested primarily related foreign withholding taxes would due upon repatriation designated earnings us deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes significant components consolidated deferred tax assets liabilities 4817 million us foreign net operating loss carryforwards december 31 2020 total 331 million state net operating losses net operating losses generated us unused expire 2024 2026 tax years majority foreign net operating losses carry forward without expiration additionally 359 million foreign tax credit carryforwards december 31 2020 foreign tax credit carryforwards unused expire 2026 20282030 tax years valuation allowances primarily relate deferred tax assets established us foreign tax credit carryforwards 359 million foreign capital loss carryforward 978 million foreign deferred tax assets 1541 million foreign capital loss carryforward result reorganization certain foreign subsidiaries current year due capital nature uncertain loss utilized within ten year carryforward period therefore full valuation allowance earnings income taxes comprised tabular reconciliation total gross amount unrecognized tax benefits excluding interest penalties follows millions amount gross unrecognized tax benefits december 31 2020 734 million includes 186 million accrued interest penalties amount 623 million recognized would favorably impact effective tax rate limited exception longer subject us federal income tax audits years 2017 state local income tax audits years 2014 foreign income tax audits years 2013 currently examination various years canada germany india indonesia italy mexico netherlands philippines saudi arabia us venezuela reasonably possible within next 12 months effective tax rate impacted resolution matters audited various taxing authorities also reasonably possible statute limitations close various taxing jurisdictions within next 12 months estimate could record reduction tax expense approximately 8 million within next 12 months 20business segment information business segments share focus industrial flow control technology high number common customers segments also complementary product offerings technologies often combined applications provide us net competitive advantage segments also benefit global footprint economies scale reducing administrative overhead costs serve customers cost effectively conduct operations two business segments based type product manage business •fpd custom highlyengineered pumps preconfigured industrial pumps pump systems mechanical seals auxiliary systems replacement parts related services •fcd engineered industrial valves control valves actuators controls related services corporate headquarters constitute separate division business segment amounts classified eliminations include corporate headquarters costs minor entities constitute separate segments intersegment sales transfers recorded cost plus profit margin sales related margin sales eliminated consolidation following summary financial information reportable segments years ended december 31 2020 2019 2018 reconciled amounts reported consolidated financial statements geographic information attribute sales different geographic areas based facilities’ locations longlived assets classified based geographic area assets located exclude deferred taxes goodwill intangible assets sales longlived assets geographic area follows 1ema includes europe middle east africa germany accounted approximately 7 2020 6 2019 7 2018 consolidated longlived assets individual country within group represents 10 consolidated totals period presented 2asia includes asia australia individual country within group represents 10 consolidated totals period presented 3other includes canada latin america individual country within group represents 10 consolidated totals period presented net sales international customers including export sales us represented approximately 65 total sales 2020 63 total sales 2019 2018 major customer information large number customers across large number manufacturing service facilities sales individual customer represent 10 consolidated sales years presented 21accumulated comprehensive loss following presents components accumulated comprehensive loss aocl net related tax effects 1includes foreign currency translation adjustments attributable noncontrolling interests 59 million 51 million 45 million december 31 2020 2019 2018 respectively year ended december 31 2020 foreign currency translation impacts primarily represented strengthening euro chinese yuan british pound canadian dollar exchange rates versus us dollar period year ended december 31 2019 foreign currency translation impacts primarily represented weakening euro british pound chinese yuan indian rupee exchange rates versus us dollar period includes net investment hedge cumulative losses 488 million 121 million net deferred taxes december 31 2020 2019 respectively amounts parentheses indicate debits following table presents reclassifications aocl 1 amounts parentheses indicate decreases income none reclassification amounts noncontrolling interest component 2 accumulated comprehensive loss components included computation net periodic pension cost see note 14 additional details 22realignment transformation programs second quarter 2020 identified initiated certain realignment activities resulting flowserve 20 transformation program defined rightsize organizational operations based current business environment overall objective reduce workforce costs including manufacturing optimization consolidation certain facilities 2020 realignment program realignment activities consist restructuring nonrestructuring charges restructuring charges represent costs associated relocation certain business activities facility closures include related severance costs nonrestructuring charges primarily employee severance associated workforce reductions expenses primarily reported cost sales cos selling general administrative sga applicable consolidated statements income anticipate total investment initiated realignment activities approximately 80 million majority charges incurred 2020 remainder incurred early 2021 certain realignment activities currently evaluated yet finalized realignment programs initiated 2015 realignment programs consisted restructuring nonrestructuring charges substantially complete march 31 2020 resulting 3624 million total charges incurred completion programs second quarter 2018 launched committed resources flowserve 20 transformation flowserve 20 transformation program designed transform business model drive operational excellence reduce complexity accelerate growth improve organizational health better leverage existing global platform flowserve 20 transformation expenses incurred primarily consist professional services project management related travel costs recorded sga generally aforementioned charges paid cash except asset writedowns noncash charges following summary total charges net adjustments related realignment activities flowserve 20 transformation charges realignment charges incurred 2020 related 2020 realignment program realignment charges incurred 2019 related 2015 realignment programs 1 includes gains sales nonstrategic manufacturing facilities included realignment programs 2 income tax expense benefit includes exit taxes following summary total inception date charges net adjustments related 2020 realignment program initiated 2020 restructuring charges represent costs associated relocation reorganization certain business activities facility closures include costs related employee severance closed facilities contract termination costs asset writedowns costs severance costs primarily include costs associated involuntary termination benefits contract termination costs include costs related termination operating leases contract termination costs asset writedowns include accelerated depreciation fixed assets accelerated amortization intangible assets divestiture certain nonstrategic assets inventory writedowns costs generally include costs related employee relocation asset relocation vacant facility costs ie taxes insurance charges following summary restructuring charges net adjustments restructuring activities restructuring charges incurred 2020 related 2020 realignment program restructuring charges incurred 2019 related 2015 realignment programs 1 primarily consists gains sales nonstrategic manufacturing facilities included realignment programs 2 income tax expense benefit includes exit taxes well nondeductible costs following summary total inception date charges net adjustments related 2020 realignment program initiated 2020 following represents activity primarily severance related restructuring reserve realignment programs years ended december 31 2020 2019 23quarterly financial data unaudited following presents summary unaudited quarterly data 2020 2019 amounts millions except per share data 1earnings per share computed independently quarters presented sum quarters may equal total year amount due impact changes weighted average quarterly shares outstanding revised consolidated financial statements annual periods 2019 2018 herein correct errors discussed note 2 consolidated financial statements previously revised consolidated financial statements quarterly period ended september 30 2019 connection filing form 10q period ended september 30 2020 filed november 9 2020 periods derived quarterly reports form 10q filed respective period case adjusted reflect impact revisions described note 2 annual report consolidated financial statements quarterly periods ended march 31 2020 june 30 2020 revised connection filing respective period 2021 item 9item 8 financial statements supplementary data consolidated statement income dollars thousands except per share data see accompanying notes consolidated statement shareholders equity dollars thousands except share data see accompanying notes consolidated balance sheet dollars thousands see accompanying notes consolidated statement cash flows dollars thousands see accompanying notes unaudited quarterly financial data dollars thousands except per share data historical financial information restated reflect merger durametallic pooling interests method accounting see note 3 consolidated financial statements b net earnings fourth quarter 1995 include transaction expenses 44 million tax 18 per share related merger durametallic excluding transaction expenses 1995 fourth quarter net earnings 103 million 42 per share net earnings year ended december 31 1995 351 million 142 per share see note 3 consolidated financial statements notes consolidated financial statements dollars presented tables thousands except per share data 1 organization duriron company inc company incorporated laws state new york may 1 1912 company headquartered dayton ohio principally engaged design manufacture marketing fluid handling equipment primarily pumps valves mechanical seals industries utilize difficult handle often corrosive fluids manufacturing processes based upon analysis trade association data market information company considers leading supplier corrosion resistant fluid movement control equipment basic chemical industry company markets products global basis respect majority products companys domestic operations supply companys foreign manufacturing subsidiaries components subassemblies 2 significant accounting policies principles consolidation consolidated financial statements include accounts company wholly majorityowned subsidiaries significant intercompany transactions eliminated investments unconsolidated affiliated companies represent nonmajority ownership interests carried equity basis approximates companys equity underlying net book value business combinations business combinations accounted pooling interests method accounting combine assets liabilities stockholders equity acquired entity companys respective accounts recorded values prior period financial statements restated give effect merger business combinations accounted purchase method accounting include results operations acquired business date acquisition net assets companies acquired recorded fair value company date acquisition cash equivalents cash equivalents represent shortterm investments original maturity three months less purchased highly liquid principal values subject significant risk change due interest rate fluctuations accounts receivable accounts receivable stated net allowance doubtful accounts 1408000 1470000 december 31 1995 1994 respectively inventories stated lowerofcost market cost determined domestic inventories lastin firstout lifo method foreign inventories firstin firstout fifo method financial instruments gains losses hedges existing assets liabilities included carrying amounts assets liabilities ultimately recognized income part carrying amounts gains losses related hedges anticipated transactions recognized income transactions occur carrying amounts companys financial instruments approximate fair value defined sfas 107 fair value estimated reference quoted prices financial institutions well valuation techniques retirement benefit costs defined benefit pension expense postretirement benefit expense based independent actuarial valuations assuming current prior service costs recognized employees expected service periods property plant equipment depreciation property plant equipment stated basis cost depreciation computed straightline method based estimated useful lives depreciable assets cost accelerated methods income tax purposes intangibles assets excess cost fair value net assets acquired goodwill generally amortized straightline basis 1540 years carrying value goodwill reviewed facts circumstances suggest may impaired review indicates goodwill recoverable determined based undiscounted cash flows entity acquired remaining amortization period companys carrying value goodwill reduced estimated shortfall cash flows company early adopted provisions sfas 121 accounting impairment longlived assets longlived assets disposed believes impact adopting standard immaterial results operations foreign currency translation assets liabilities companys foreign affiliates located highly inflationary countries translated current exchange rates income expenses translated average rates period entities highly inflationary countries combination current historical rates used determine currency gains losses resulting financial statement translation resulting transactions translation gains losses reported component stockholders equity except associated highly inflationary countries reported directly consolidated statements income use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect amounts reported financial statements accompanying notes actual results could differ estimates discontinued operations 1992 durametallic negotiated sale 80 percent interest leap technologies inc note receivable leap engaged design manufacture sale injection molds parts plastics industry part sale agreement durametallic committed contingently guaranty bank debt acquiring company sale resulted pretax gain 1992 recognized consolidated statement income due concern significant financial leverage acquiring company 1993 acquiring company defaulted payment bank loan guaranty enforced bank durametallic made full payment loan addition note receivable sale leap deferred gain written transactions resulted loss 1993 29 million net tax 4 million 3 mergers acquisitions pooling transaction november 30 1995 durametallic corporation merged subsidiary company durametallic privately held corporation headquartered kalamazoo michigan leading manufacturer mechanical seals sealing systems company exchanged 5344868 shares common stock outstanding shares durametallic additionally 125283 shares companys common stock reserved outstanding stock options issued durametallic assumed company merger accounted pooling interests method accounting accordingly accompanying consolidated financial statements restated periods prior acquisition include financial position results operations cash flows durametallic net sales net earnings individual entities follows connection merger company durametallic merger transaction expenses 4399000 tax 18 per share recognized 1995 1992 company early complied sfas 106 employers accounting postretirement benefits durametallics financial results restated reflect compliance accounting policy 1992 compared compliance 1993 reported financial statements issued prior acquisition duriron dividends per share 31 per share 29 per share nine months ended september 30 1995 1994 respectively purchase transactions august 31 1995 durametallic purchased pacseal two affiliated companies pacseal located burr ridge illinois manufacturer mechanical seals used primarily water pump applications acquisition funded combination internal cash longterm borrowings april 28 1994 company purchased sereg vannes sa automatic control valve company headquartered thiers france acquisition funded combination internal cash longterm borrowings january 5 1994 company purchased valve actuator business mecair spa milan italy associated companies limburg germany alton hampshire england gennevilliers france acquisition funded utilization internal cash aforementioned 1995 1994 purchase transactions material either individually aggregate year therefore pro forma information presented acquisitions 4 inventories december 31 1995 1994 method determining cost follows lifo inventories current cost 36127000 34991000 higher reported december 31 1995 1994 respectively 1993 certain inventory quantities reduced resulted liquidation lifo inventory quantities carried lower costs prevailing prior years effect 1993 liquidation increase net earnings 2792000 5 property plant equipment property plant equipment december 31 1995 1994 follows 6 intangibles assets intangibles assets december 31 1995 1994 follows 7 accrued liabilities accrued liabilities december 31 1995 1994 follows 8 debt dividend restrictions longterm debt including capital lease obligations december 31 1995 1994 follows interest paid amounted 4957000 4418000 4554000 1995 1994 1993 respectively maturities longterm debt including capital lease obligation four years subsequent 1996 follows 1997 9747 1998 10355 1999 11892 2000 6428 894 loan us dollar private placement effectively converted deutsche mark obligation currency swap agreement currency swap hedge net investment german subsidiary unrealized gains losses hedge recognized income shown cumulative translation adjustment account included shareholders equity related amounts due counterparty included longterm debt maturity repayment terms swap match precisely maturity repayment term underlying debt longterm debt agreements require company maintain specified levels tangible net worth restrict payment cash dividends approximately 28543000 24828000 consolidated retained earnings unrestricted payment dividends december 31 1995 1994 respectively dividends limited 15000000 plus common stock issued 50 defined net earnings subsequent january 1 1992 december 31 1995 1994 company short term credit facilities available banks could borrow local market rates 32830000 33096000 respectively facilities company 3723000 5905000 borrowings outstanding december 31 1995 1994 respectively weighted average interest rate borrowings december 31 1995 1994 53 77 respectively years borrowings used primarily support operations foreign subsidiaries additionally december 31 1995 company 18035000 available revolving credit facilities 9 postretirement benefits deferred items deferred postretirement benefits deferred items december 31 1995 1994 follows 10 leases rentals assets subject capitalized leases included property plant equipment cost amounted 7320000 1995 7871000 1994 accumulated amortization capitalized leases amounted 6019000 1995 6313000 1994 minimum rental commitments december 31 1995 noncancelable leases follows total rental expense amounted 8490000 8065000 7449000 1995 1994 1993 respectively 11 contingencies company involved potentially responsible partyat five former public waste disposal sites may subject remediation pending government procedures sites various stages evaluation federal state environmental authorities projected cost remediating sites well companys alleged fair share allocation uncertain speculative studies completed parties either negotiated amicable resolution matter judicially resolved site many parties similarly identified identification location additional parties continuing applicable federal state law many parties identified financially strong solvent companies appear able pay share remediation costs based companys preliminary information waste disposal practices sites environmental regulatory process general company believes likely ultimate remediation liability costs site apportioned among liable parties including site owners waste transporters according volumes andor toxicity wastes shown disposed sites 1995 company successful terminating applicable consent decree completing remedial activities former foundry landfill site nominal additional expense additionally company ended involvement nominal cost two waste disposal sites governmental remediation regulation company defendant numerous pending lawsuits include many cases multiple claimants seek recover damages alleged personal injury allegedly resulting exposure asbestos containing products formerly manufactured distributed company high percentage claims assumed company 1995 result merger durametallic corporation products used within selfcontained process equipment management believe emission ambient asbestos fiber use equipment company resolved numerous claims average 120 per claim cost fully paid insurance company continues substantial amount available insurance financially solvent carriers cover cost defending resolving claims company also defendant several products liability lawsuits insured subject applicable deductibles certain noninsured lawsuits received ordinary course business company fully accrued estimated loss reserve lawsuit insurance recovery projected insured claims management currently believes resolved within applicable deductibles although none aforementioned gives rise additional liability reasonably estimated possible company could incur additional costs range 250000 1000000 upcoming five years fully resolve matters although company accrued minimum end range precaution management current reason believe increase probable quantifiable company continue evaluate contingent loss exposures develop recognize expense soon losses reasonably estimated 12 shareholders equity 1995 company increased authorized 125 par value common stock 30000000 60000000 shares december 31 1995 1994 1000000 shares 100 preferred stock authorized march 1994 company distributed stock dividend effect threefortwo stock split per share data appropriate restated reflect stock split share companys common stock contains preferred stock purchase right rights currently exercisable trade tandem common stock rights general become exercisable trade separately event certain significant changes common stock ownership commencement certain tender offers either case may lead change control company upon becoming exercisable rights provide shareholders opportunity acquire new series company preferred stock automatically issued preestablished price event certain forms acquisition company rights also provide company shareholders opportunity purchase shares acquiring companys common stock acquirer 50 discount current market value rights redeemable 022 per right company time prior becoming exercisable expire august 1996 december 31 1995 approximately 1395000 shares common stock reserved exercise stock options grants restricted stock 13 stock plans company maintains shareholder approved stock option plans provide grant options purchase shares companys common stock options granted officers employees purchase shares common stock price less fair market value date grant generally options become exercisable staggered periods may exercised 10 years date grant plan provides option may include stock appreciation right however none granted since 1989 impact stock appreciation rights earnings three years ending december 31 1995 material 1995 options 212537 shares became exercisable average price 1357 december 31 1995 1994 1993 aggregate number options exercisable 570601 455139 367560 respectively restricted stock plan approved shareholders 1989 plan authorized grant 337500 shares companys common stock restricted shares directors employees company general shares cannot transferred period less one ten years subject forfeiture restriction period market value shares awarded plan amortized compensation expense periods restrictions lapse restricted stock grants 4100 2400 19686 shares made 1995 1994 1993 respectively average market value 1607 per share statement financial accounting standards 123 accounting stock based compensation issued october 1995 effective years beginning december 15 1995 statement establishes financial accounting reporting standards stock based compensation plans companies may elect account plans fair value method continue previous accounting disclose proforma net earnings per share fair value method applied company reached conclusion regarding adoption statement 14 income taxes earnings income taxes consist following components significant components provision income taxes attributable continuing operations follows income taxes paid amounted 19508000 13476000 19167000 1995 1994 1993 respectively reasons differences effective tax rate us federal income tax rate follows deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes significant components companys deferred tax assets liabilities december 31 1995 1994 follows company recorded valuation allowances reflect estimated amount deferred tax assets may realized due expiration net operating loss foreign tax credit capital loss carryforwards change valuation allowances year ended december 31 1995 follows undistributed earnings companys foreign subsidiaries amounted approximately 35000000 december 31 1995 earnings considered indefinitely reinvested accordingly additional united states income taxes foreign withholding taxes provided 15 research development research development expense amounted 7965000 8642000 7784000 1995 1994 1993 respectively 16 retirement benefits company sponsors several noncontributory defined benefit pension plans covering approximately 40 domestic employees provide benefits based years service compensation retirement benefits employees provided defined contribution pension plans government sponsored retirement programs defined benefit pension plans funded based independent actuarial valuations provide current service amount sufficient amortize unfunded prior service periods exceed thirty years net defined benefit pension income 1995 1994 1993 included following components following table presents defined benefit pension plan funded status amounts recognized companys consolidated balance sheet december 31 1995 1994 average discount rate assumed rate increase future compensation levels used determining actuarial present value benefit obligations 75 50 respectively expected longterm rate return plan assets 80 plan assets include marketable equity securities corporate government debt securities insurance company contracts real estate company sponsors several defined contribution pension plans covering substantially domestic canadian employees certain foreign employees may contribute plans contributions matched varying amounts company may also make additional contributions eligible employees defined contribution pension expense company 5966000 4236000 4972000 1995 1994 1993 respectively company also sponsors several defined benefit postretirement health care plans covering approximately 65 future retirees current retirees united states medical dental benefits provided insurance companies health maintenance organizations include participant contributions deductibles coinsurance provisions limitations integrated medicare group plans funded insured benefits health maintenance organization premiums incurred net postretirement benefit expense 1995 1994 1993 included following components following table presents postretirement benefit amounts recognized companys consolidated balance sheet december 31 1995 1994 average discount rate used determining accumulated postretirement benefit obligations 75 assumed annual rates increase per capita costs periods prior medicare 95 1995 9 1996 gradual decrease 6 2002 future years periods medicare 75 1995 7 1996 gradual decrease 5 2000 future years increasing assumed rate increase postretirement benefit costs 1 year would increase net postretirement benefit expense approximately 362000 accumulated postretirement benefit obligations 3441000 17 postemployment benefits sfas 112 effective january 1 1993 company early adopted sfas 112 employers accounting postemployment benefits accounting workers compensation health care continuation benefits cumulative effect january 1 1993 change accounting principle decrease net earnings 945000 04 per share prior january 1 1993 company recognized cost providing benefits cash basis new method accounting company accrues benefits becomes probable benefits paid sufficient information exists make reasonable estimates amounts paid required statement prior year financial statements restated reflect change accounting principle effect change 1995 1994 1993 income cumulative effect change material 18 foreign currency translation foreign currency translation equity adjustments consist following 19 operations identified geographic area company operates predominately one business segment fluid movement control equipment pumps valves seals related equipment transfers geographic areas accounted primarily cost plus profit margin operating profit consists revenues less certain costs expenses determining operating profit none following items added deducted unallocated general corporate expense interest expense income taxes identifiable assets company identifiable operations geographic area unallocated general corporate assets principally reflect future tax benefits individual country within listed geographic segments represents 10 consolidated companys revenues sales unafilliated customers identifiable assets geographic segment includes canada latin south america asia pacific export sales united states foreign unaffiliated customers 27068000 27143000 37014000 1995 1994 1993 respectively financial information geographic area follows 1995 1994 1993 foreign currency transaction gainslosses approximately 217000 1150000 152000 respectively included earnings income taxes report independent auditors board directors shareholders duriron company inc audited accompanying consolidated balance sheet duriron company inc december 31 1995 1994 related consolidated statements income shareholders equity cash flows three years period ended december 31 1995 audits also included financial statement schedule listed index item 14a financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position duriron company inc december 31 1995 1994 consolidated results operations cash flows three years period ended december 31 1995 conformity generally accepted accounting principles discussed note 17 consolidated financial statements effective january 1 1993 company changed method accounting postemployment benefits ernst young llp dayton ohio january 30 1996 report management companys management prepared responsible consolidated financial statements information included annual report financial statements prepared accordance generally accepted accounting principles present fairly companys financial position results operations statements necessarily include amounts based judgements estimates management internal accounting control systems designed implemented years transactions executed accordance managements authorizations internal control systems provide reasonable assurance financial statements information included report properly reflect transactions company also maintains internal auditing function evaluates formally reports adequacy effectiveness internal accounting controls policies procedures board directors auditfinance committee composed five members nonemployee directors company auditfinance committee met total three times 1995 committee regularly meets jointly separately representatives independent auditors internal auditors management companys consolidated financial statements audited ernst young llp expressed opinion respect fairness statements audit included review internal controls testing transactions records consider necessary circumstances william jordan bruce e hines president chief senior vice president executive officer chief administrative officer item 9item 8 financial statements supplementary data financial statements together report thereon ernst young llp dated february 20 1998 supplementary data appearing pages 19 38 1997 annual report shareholders incorporated herein reference item 9item 8 financial statements supplementary data report independent registered public accounting firm board directors shareholders flowserve corporation completed integrated audits flowserve corporation’s 2005 2004 consolidated financial statements internal control financial reporting december 31 2005 audit 2003 consolidated financial statements accordance standards public company accounting oversight board united states opinions based audits presented consolidated financial statements financial statement schedule opinion consolidated financial statements listed index appearing item 15a1 present fairly material respects financial position flowserve corporation subsidiaries company december 31 2005 2004 results operations cash flows three years period ended december 31 2005 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed index appearing item 15a2 presents fairly material respects information set forth therein read conjunction related consolidated financial statements financial statements financial statement schedule responsibility company’s management responsibility express opinion financial statements financial statement schedule based audits conducted audits statements accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit financial statements includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion internal control financial reporting also audited management’s assessment included management’s report internal control financial reporting appearing item 9a flowserve corporation maintain effective internal control financial reporting december 31 2005 company maintain 1 effective controls periodend financial reporting processes including monitoring 2 effective segregation duties automated manual transaction processes 3 effective controls completeness accuracy validity revenue 4 effective controls completeness accuracy validity valuation inventory related cost sales transactions 5 effective controls completeness accuracy validity accounts payable related disbursements 6 effective controls accounting certain derivative transactions 7 effective controls completeness accuracy valuation stockbased employee compensation expense based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso company’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinions management’s assessment effectiveness company’s internal control financial reporting based audit conducted audit internal control financial reporting accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit internal control financial reporting includes obtaining understanding internal control financial reporting evaluating management’s assessment testing evaluating design operating effectiveness internal control performing procedures consider necessary circumstances believe audit provides reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate material weakness control deficiency combination control deficiencies results remote likelihood material misstatement annual interim financial statements prevented detected following material weaknesses identified included management’s assessment december 31 2005 1 company maintain effective controls periodend financial reporting processes including monitoring resulted following material weaknesses company maintain effective controls ensure journal entries recurring nonrecurring consistently reviewed approved timely manner ensure validity completeness accuracy recorded entries control deficiency affects substantially financial statement accounts resulted adjustments including audit adjustments company’s annual interim consolidated financial statements 2005 b company maintain effective controls completeness accuracy supporting schedules account reconciliations account reconciliations consistently documented reviewed approved timely manner control deficiency affects substantially financial statement accounts resulted adjustments company’s annual interim consolidated financial statements 2005 c company maintain effective controls accuracy disclosure debt obligations specifically controls effective ensure amounts due within one year properly classified current liabilities related disclosures appropriately reflected timing future mandatory debt repayments control deficiency affects debt due within one year longterm debt due one year resulted audit adjustments company’s annual consolidated financial statements 2005 company maintain effective controls completeness accuracy validity spreadsheets used company’s period end financial reporting process ensure access restricted appropriate personnel unauthorized modification data formulas within spreadsheets prevented control deficiency affects substantially financial statement accounts resulted adjustments including audit adjustments company’s annual interim consolidated financial statements 2005 e company maintain effective controls completeness accuracy timely recording accrued liabilities part accounting close process specifically effective controls designed place ensure relevant information communicated timely manner order assess record financial effects certain loss contingencies control deficiency primarily affects accrued liabilities related operating expense accounts resulted adjustments including audit adjustments company’s annual interim consolidated financial statements 2005 2 company maintain effective segregation duties automated manual transaction processes specifically company maintain effective controls granting maintenance monitoring access financial systems data certain information technology personnel unrestricted access financial applications programs data beyond needed perform individual job responsibilities without independent monitoring addition certain financial personnel incompatible duties allowed creation review processing certain financial data without independent review authorization control deficiency affects substantially financial statement accounts however control deficiency result adjustments company’s annual interim consolidated financial statements 2005 3 company maintain effective controls completeness accuracy validity revenue specifically effective controls designed place ensure invoices complete accurate valid recorded proper period additionally effective controls designed place ensure validity accuracy sales orders control deficiency primarily affects revenue accounts receivable resulted adjustments company’s annual interim consolidated financial statements 2005 4 company maintain effective controls completeness accuracy validity valuation company’s inventory related cost sales transactions specifically controls respect accuracy product costing job order costing cost accumulation certain inventory management processes effective additionally controls effective ensure accurate timely recording inventory shipments receipts control deficiency primarily affects inventory cost sales resulted adjustments including audit adjustments company’s annual interim consolidated financial statements 2005 5 company maintain effective controls completeness accuracy validity company’s accounts payable related disbursements specifically effective controls designed place ensure matching purchase orders receiving documentation invoices occurred prior disbursement control deficiency primarily affects accounts payable resulted adjustments company’s annual interim consolidated financial statements 2005 6 company maintain effective controls accounting certain derivative transactions specifically company adequately document criteria measuring hedge effectiveness inception certain derivative transactions control deficiency primarily affects accounts receivable expense comprehensive income accumulated comprehensive income however control deficiency result adjustments company’s annual interim consolidated financial statements 2005 7 company maintain effective controls completeness accuracy valuation stockbased employee compensation expense specifically company maintain effective controls ensure stockbased employee compensation expense arising modification terms affect exercise period employee stock option awards determined recognized proper period control deficiency primarily affects compensation expense paidincapital resulted audit adjustments company’s annual june 30 2005 interim consolidated financial statements 2005 control deficiencies described items 1 7 could result misstatement aforementioned account balances disclosures would result material misstatement annual interim consolidated financial statements would prevented detected management determined control deficiencies items 1 7 constitutes material weakness company’s internal control financial reporting december 31 2005 material weaknesses considered determining nature timing extent audit tests applied audit 2005 consolidated financial statements opinion regarding effectiveness company’s internal control financial reporting affect opinion consolidated financial statements opinion management’s assessment flowserve corporation maintain effective internal control financial reporting december 31 2005 fairly stated material respects based criteria established internal control integrated framework issued coso also opinion effects material weaknesses described achievement objectives control criteria flowserve corporation maintained effective internal control financial reporting december 31 2005 based criteria established internal control integrated framework issued coso pricewaterhousecoopers llp dallas texas june 30 2006 flowserve consolidated balance sheets see accompanying notes consolidated financial statements flowserve consolidated statements operations see accompanying notes consolidated financial statements flowserve consolidated statements comprehensive income loss see accompanying notes consolidated financial statements flowserve consolidated statements shareholders’ equity see accompanying notes consolidated financial statements flowserve consolidated statements cash flows see accompanying notes consolidated financial statements flowserve notes consolidated financial statements december 31 2005 2004 three years ended december 31 2005 1 significant accounting policies accounting developments produce engineered industrial pumps industrial valves control valves nuclear valves valve actuators precision mechanical seals provide range related flow management services worldwide primarily process industries equipment manufactured serviced us predominantly used industries deal difficulttohandle corrosive fluids well environments extreme temperatures pressure horsepower speed businesses affected economic conditions us countries products sold serviced cyclical nature petroleum chemical power water industries served relationship us dollar currencies demand pricing customers’ products certain reclassifications made prior period amounts conform current period presentation principles consolidation consolidated financial statements include accounts company wholly majorityowned subsidiaries minority interests recognized majorityowned consolidated subsidiaries intercompany profits transactions balances among consolidated entities eliminated investments unconsolidated affiliated companies represent noncontrolling ownership interests 20 50 accounted using equitymethod basis approximates equity interest underlying equivalent net book value accounting principles generally accepted united states america “gaap” investments interests owned less 20 investee accounted cost method whereby income recognized event dividend receipt investments accounted cost method tested annually impairment use estimates process preparing financial statements conformity gaap requires management make estimates assumptions affect reported amounts certain assets liabilities revenues expenses management believes estimates assumptions reasonable however actual results may differ materially estimates significant estimates assumptions made management used determining • revenue recognition net liquidated damages delivery penalties • allowance doubtful accounts credit risk • inventories related reserves • income taxes deferred taxes tax valuation allowances tax reserves • restructuring integration expense • legal environmental accruals • warranty accruals • insurance accruals • retirement postretirement benefits • valuation goodwill indefinitelived intangible assets longlived assets revenue recognition revenues recognized based shipping terms agreed customer fulfillment inconsequential perfunctory actions required generally point title transfer customer order requires formal acceptance revenue recognized formal acceptance received contracts containing multiple products separable value generally recognize revenue individual product shipments equal shipped products’ pro rata share contract’s fair value upon fulfillment inconsequential perfunctory actions individual product shipment multiple deliverables single contract arrangement product delivery installation separate fair value product installation recognize revenue element independently upon fulfillment inconsequential perfunctory actions estimates mainly relate fair value determination underlying services products shipping charges billed customers included sales related shipping costs included cost sales consolidated statements operations revenue service contracts recognized services rendered accepted customer addition policy requires prior shipment persuasive evidence arrangement fixed determinable sales price reasonable assurance collectibility revenue longterm contracts includes contracts longer ninemonths duration contract values 750000 progress billings customer recorded percentage completion method calculated costtocost basis percentage completion revenue represents less 5 consolidated revenues year presented revenues generated fixed fee service repair contracts recognized straightline basis term contract contracts range duration generally extend five years fixed fee service repair contracts represent less 5 consolidated revenue year presented certain instances provide guaranteed completion dates terms contracts failure meet schedule agreed upon delivery dates result unrealized incentive fees nonrecoverable costs instances payments costs likely perform project profitability analysis using costs reduce revenues realizable could cause estimated project costs exceed projected revenues realized project instances would record reserves cover excesses period determined would adversely affect results operations financial position instances reduced revenues still exceed costs incurrence costs generally reduces profitability project time subsequent revenue recognition reported results would change different estimates used contract costs different estimates used contractual contingencies cash equivalents place temporary cash investments financial institutions policy invest institutions instruments minimal credit risk market risk investments original maturity three months less purchased classified cash equivalents highly liquid principal values subject significant risk change due interest rate fluctuations restricted cash represents cash restricted factoring agreements certain contracts small portion payments received progress bills available use project reaches completion allowance doubtful accounts credit risk allowance doubtful accounts established based estimates amount uncollectible accounts receivable determined principally based upon aging receivable also customer credit history industry market segment information economic trends conditions credit reports customer financial condition customer credit issues customer bankruptcies general economic conditions also affect estimates credit risks mitigated diversity customers customer base across many different geographic regions performing creditworthiness analyses customers additionally maintained late 2004 credit insurance policy european subsidiaries policy generally received funds third party insurer net deductible instances customer receivables covered policy went unpaid terminated policy 2004 due minimal claims sought december 31 2005 2004 believe significant concentrations credit risk inventories related reserves inventories stated lowerofcost market cost determined principally us inventories lastin firstout “lifo” method nonus inventories firstin firstout “fifo” method reserves excess obsolete inventories based upon assessment market conditions products determined historical usage estimated future demand due long life cycle products carry spare parts inventories historically low usage rates provide reserves inventory based demonstrated usage income taxes deferred taxes tax valuation allowances account income taxes asset liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases operating loss tax credit carryforwards deferred tax assets liabilities calculated using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized period includes enactment date valuation allowances reflect likelihood recoverability assets record valuation allowances reflect estimated amount deferred tax assets may realized based upon analysis existing deferred tax assets net operating losses tax credits jurisdiction expectations ability utilize tax attributes review past current estimated future taxable income establishment tax strategies estimates could impacted changes amount geographical source future income results implementation alteration tax planning strategies statement financial accounting standards “sfas” 109 “accounting income taxes” requires us provide deferred taxes temporary differences associated investment foreign subsidiaries financial reporting basis exceeds tax basis unless assert permanent reinvestment foreign jurisdictions pursuant accounting principles board opinion “apb” 23 “accounting income taxes special areas” financial reporting basis tax basis differences investments foreign subsidiaries consist unremitted earnings losses well foreign currency translation adjustments assert permanent reinvestment apb 23 basis differences three years reported period ended december 31 2005 recognized net deferred tax assets attributable unremitted earnings foreign currency translation adjustments foreign subsidiaries due estimated excess foreign tax credits attributes october 22 2004 american jobs creation act 2004 “2004 act” signed law creating temporary incentive us multinationals repatriate accumulated income earned outside us effective tax rate 525 versus us federal statutory rate 35 although repatriated dividends 2004 pursuant dividend reinvestment plan recognized lower tax rate dividends financial statements due uncertainties surrounding realizability benefit extent uncertainty favorably resolved future reporting period benefit associated dividends recognized period tax reserves amount income taxes pay subject ongoing audits federal state foreign tax authorities often result proposed assessments significant judgment required determining income tax provisions evaluating tax positions establish reserves open tax years certain positions subject challenge various tax authorities consolidated tax provision related accruals include impact reasonably estimable losses related interest deemed appropriate believe adequately provided reasonably foreseeable outcome related matters extent likely tax outcome matters changes estimate impact income tax provision period determination made restructuring integration expense restructuring integration expenses generally recognized conjunction acquisitions expenses reflect many estimates including costs pertaining employee severance payments fulfillment outstanding contractual obligations matters associated exiting facility restructuring costs related facilities employees acquired businesses generally become component goodwill whereas nonacquisition related restructuring costs recorded restructuring expense consolidated statements operations integration costs recognized reduction results operations component current earnings reserves created restructuring plan assessed quarterly adjusted revisions cost estimates changes planned restructuring activities prior january 1 2003 recognized restructuring reserves related restructuring plans approved communicated affected employees conjunction adopting sfas 146 “accounting costs associated exit disposal activities” january 1 2003 record restructuring reserves related liability incurred legal environmental accruals legal environmental reserves recorded based upon casebycase analysis facts circumstances legal obligations related costs relating legal environmental liabilities recorded probable loss incurred loss estimable assessments legal environmental costs based information obtained independent inhouse experts loss experience similar situations estimates may change future due new developments regarding facts circumstances matter warranty accruals warranty obligations based upon product failure rates materials usage service delivery costs analysis identified expected claims estimate cost resolve claims estimates expected claims generally factor historical claims known product issues warranty obligations based factors adjusted based historical sales trends preceding 24 months changes claim rates differences actual expected warranty costs sales trends facility rationalization activities could impact warranty obligation estimates might adverse effects consolidated results operations financial position insurance accruals insurance accruals recorded wholly partially selfinsured risks medical benefits workers’ compensation based upon analysis claim loss history insurance deductibles policy limits factors estimates based upon information received actuaries insurance company adjusters independent claims administrators independent sources changes claims differences actual expected claim losses could impact future accruals retirement postretirement benefits determination retirement postretirement benefits obligations based estimates made management consultation independent actuaries investment advisors inherent valuations key assumptions including discount rates expected return plan assets life expectancy assumed rate increase wages health care costs current market conditions including changes rates returns interest rates medical inflation rates considered selecting assumptions changes related retirement postretirement benefit costs may occur future due changes assumptions used actual results valuation goodwill indefinitelived intangible assets longlived assets value goodwill indefinitelived intangible assets tested impairment december 31 whenever events circumstances indicate assets may impaired test goodwill impairment involves significant judgment estimating projections fair value using present value estimated future cash flows generated future performance reporting units correlate operating segments consider operating segments constitute business discrete financial information management regularly reviews test impairment indefinitelived intangibles involves estimating projections future sales levels net realizable value longlived assets including property plant equipment reviewed periodically indicators potential impairments present based upon assessment estimated future cash flows related assets due uncertain market conditions potential changes strategy product portfolio possible forecasts used support asset carrying values may change future could result noncash charges would adversely affect consolidated results operations financial condition property plant equipment depreciation property plant equipment stated historical cost less accumulated depreciation asset retirement obligations capitalized part carrying amount asset depreciated remaining useful life asset useful lives leasehold improvements lesser remaining lease term useful life improvement assets retired otherwise disposed costs related accumulated depreciation removed accounts resulting gains losses included operations period depreciation computed straightline method based estimated useful lives depreciable assets generally estimated useful lives assets costs related repairs maintenance expensed incurred intangible assets intangible assets excluding trademarks considered indefinite life consist primarily engineering drawings distribution networks software patents items amortized estimated useful lives generally ranging 3 40 years assets reviewed impairment whenever events circumstances indicate impairment may occurred deferred loan costs deferred loan costs consisting fees expenses associated debt financing amortized term related debt using effective interest method additional amortization recorded periods optional mandatory repayments debt made fair values financial instruments carrying amounts financial instruments approximate fair value december 31 2005 2004 except debt carrying value estimated fair value 6651 million december 31 2005 carrying value 7018 million estimated fair value 7361 million december 31 2004 determine fair value fixed rate debt applying open market discount premium principal outstanding consider variable rate debt fair values approximate carrying value based upon assessment underlying borrowing spreads derivatives hedging activities part risk management strategy enter derivative contracts mitigate certain financial risks related foreign currencies interest rates riskmanagement derivatives policy outlining conditions enter financial derivative transactions employ foreign currency economic hedging strategy minimize potential losses earnings cash flows unfavorable foreign currency exchange rate movements strategy also minimizes potential gains favorable exchange rate movements foreign currency exposures arise transactions including firm commitments anticipated transactions denominated currency entity’s functional currency foreigndenominated income expense translated us dollars primary currencies exposure euro british pound canadian dollar mexican peso japanese yen singapore dollar brazilian real australian dollar argentinean peso venezuelan bolivar enter interest rate swap agreements purpose hedging exposure floating interest rates certain portions debt also entered compound interest rate foreign currency financial derivative mitigates risk associated interest rate foreign exchange volatility another portion debt denominated currency functional currency entity holding debt policy requires us document relationships hedging instruments hedged items well risk management objective strategy entering economic hedges process includes linking derivatives designated fair value cash flow foreign currency hedges 1 specific assets liabilities balance sheet 2 specific firm commitments forecasted transactions also assess inception hedge ongoing basis whether derivatives used hedging transactions highly effective offsetting changes fair value cash flows hedged items whether derivatives may expected remain highly effective future periods failure demonstrate effectiveness offsetting exposures retroactively prospectively would cause us deem hedge ineffective derivatives recognized balance sheet fair values inception new derivative contract policy requires us designate derivative 1 hedge forecasted transaction b variability cash flows received paid connection recognized asset liability “cash flow” hedge 2 foreign currency fair value “foreign currency” hedge changes fair value derivative highly effective documented designated qualified cash flow hedge extent hedge effective recorded comprehensive loss earnings affected variability cash flows hedged transaction changes fair value foreign currency hedges recorded comprehensive income loss since satisfy accounting criteria cash flow hedge ineffectiveness represents amount changes fair value derivative mirror change cash flow forecasted transaction recorded current period earnings effective hedges changes value hedged item also recorded component comprehensive income loss underlying recognized balance sheet upon settlement realized gains losses recognized expense net consolidated statements operations certain financial derivatives qualify hedge accounting changes fair values derivative recognized expense net consolidated statements operations periods presented discontinue hedge accounting • deem hedge ineffective determine designation derivative hedging instrument longer appropriate • derivative longer effectively offsets changes cash flows hedged item firm commitments contracts • derivative expires terminates sold • occurrence contracted committed transaction longer probable occur originally expected period hedge accounting discontinued derivative remains outstanding carry derivative estimated fair value balance sheet recognizing changes fair value current period earnings cash flow hedge becomes ineffective deferred gains losses cash flow hedge remain accumulated comprehensive loss exposure relating item underlying hedge recognized becomes probable hedged forecasted transaction occur deferred gains losses hedging instrument recognized earnings immediately foreign currency translation assets liabilities foreign affiliates translated us dollars exchange rates prevailing balance sheet date income expenses translated average rates month translation gains losses generally reported component accumulated comprehensive loss transaction translation gains losses arising intercompany balances reported component accumulated comprehensive loss underlying transaction stems longterm equity investment debt designated due foreseeable future otherwise recognize transaction gains losses arising intercompany transactions component income intercompany balances longterm investment related designated due beyond foreseeable future may mitigate risk associated foreign currency fluctuations entering forward exchange contracts see note 9 discussion forward exchange contracts transactional currency gains losses arising transactions currencies sites’ functional currencies changes fair value forward exchange contracts qualify hedge accounting included consolidated results operations years ended december 31 2005 2004 2003 recognized losses 70 million 110 million 19 million amounts expense net accompanying consolidated statements operations stockbased compensation december 31 2005 several stockbased employee compensation plans account recognition measurement principles apb 25 “accounting stock issued employees” related interpretations policy set exercise price stock options closing price common stock new york stock exchange date grants authorized board directors 2005 prior years stockbased employee compensation cost reflected net earnings stock option grants options granted plans exercise price equal excess market value underlying common stock date grant elect modify existing stock option awards apb 25 interpreted financial accounting standards board “fasb” financial interpretation “fin” 44 “accounting certain transactions involving stock compensation” requires us recognize intrinsic value underlying options date modification becomes effective modifications could include accelerated vesting reduction exercise prices extension exercise period see note 8 discussion stock modifications awards restricted stock valued market price common stock grant date recorded unearned compensation within shareholders equity unearned compensation amortized compensation expense vesting period restricted stock unearned compensation 91 million 52 million 09 million december 31 2005 2004 2003 respectively amounts recognized net earnings prospective periods following table illustrates effect net earnings per share applied fair value recognition provisions sfas 123 “accounting stockbased compensation” stockbased employee compensation calculated using blackscholes optionpricing model pro forma disclosures may representative effects future years since determination fair value stock options granted includes expected volatility factor additional option grants expected made year see note 8 additional discussion assumptions inherent calculation stockbased employee compensation expense table earnings per share basic diluted earnings per share calculated follows options outstanding exercise price greater average market price common stock included computation diluted earnings per share weighted average number options totaled 02 million 11 million 26 million 2005 2004 2003 respectively research development expense research development costs charged expense incurred aggregate research development costs included selling general administrative expenses 243 million 252 million 249 million 2005 2004 2003 respectively costs incurred research development primarily include salaries benefits consumable supplies well rent professional fees utilities depreciation property equipment used research development activities business combinations business combinations referred financial statements used purchase method accounting allocate purchase price identifiable tangible intangible assets recognizing goodwill purchase price exceeds fair value identifiable assets accounting developments pronouncements implemented december 2004 fasb issued sfas 153 “exchanges nonmonetary assets” addresses measurement exchanges nonmonetary assets sfas 153 eliminates exception fair value measurement nonmonetary exchanges similar productive assets previously provided apb 29 “accounting nonmonetary transactions” replaces exception exchanges commercial substance sfas 153 specifies nonmonetary exchange commercial substance future cash flows entity expected change significantly result exchange sfas 153 effective nonmonetary asset exchanges occurring fiscal periods beginning june 15 2005 adoption sfas 153 2005 impact consolidated financial position results operations april 2005 fasb issued fin 47 “accounting conditional asset retirement obligations” fin 47 clarifies term conditional asset retirement obligation used sfas 143 “accounting asset retirement obligations” requiring companies recognize liability fair value asset retirement obligation may conditional future event fair value liability reasonably estimated fin 47 effective end fiscal years ending december 15 2005 adoption fin 47 effective first quarter 2005 material impact consolidated financial position results operations pronouncements yet implemented december 2004 fasb issued sfas 123r “sharebased payment” sfas 123r requires compensation costs related sharebased payment transactions recognized financial statements limited exceptions amount compensation cost measured based grantdate fair value equity liability instruments issued addition liability awards remeasured reporting period compensation cost recognized period employee provides service exchange award sfas 123r revision sfas 123 “accounting stockbased compensation” amended sfas 148 “accounting stockbased compensation transition disclosure” supersedes apb 25 sfas 123r effective public companies first interim annual reporting period first fiscal year beginning june 15 2005 adopted sfas 123r effective january 1 2006 using modified prospective transition method specific magnitude impact adoption sfas 123r cannot predicted time depend levels sharebased incentive awards granted future well effect pending modification discussed note 8 however adopted sfas 123r prior periods impact would approximated impact sfas 123 described disclosure pro forma net income earnings per share “stockbased compensation” november 2004 fasb issued sfas 151 “inventory costs amendment accounting research bulletin 43 chapter 4” sfas 151 amends accounting research bulletin “arb” 43 chapter 4 seeks clarify accounting abnormal amounts idle facility expense freight handling costs wasted materials requiring items recognized current period charges additionally sfas 151 requires fixed production overheads allocated conversion costs based normal capacity production facilities sfas 151 effective prospectively inventory costs incurred fiscal years beginning june 15 2005 expect adoption sfas 151 material effect consolidated financial position results operations may 2005 fasb issued sfas 154 “accounting changes error corrections” sfas 154 establishes new standards accounting changes accounting principles changes must accounted retrospective application financial statements prior periods unless impracticable sfas 154 replaces apb 20 “accounting changes” sfas 3 “reporting accounting changes interim periods” however carries forward guidance pronouncements respect accounting changes estimates changes reporting entity correction errors sfas 154 effective accounting changes error corrections made fiscal years beginning december 15 2005 early adoption permitted changes corrections made years beginning june 1 2005 application sfas 154 affect transition provisions existing pronouncements including transition phase effective date sfas 154 expect adoption sfas 154 material effect consolidated financial position results operations february 2006 fasb issued sfas 155 “accounting certain hybrid financial instruments” amends sfas 133 “accounting derivative instruments hedging activities” sfas 140 “accounting transfers servicing financial assets extinguishments liabilities” sfas 155 improves financial reporting certain hybrid financial instruments simplifies accounting instruments particular sfas 155 • permits fair value remeasurement hybrid financial instrument contains embedded derivative otherwise would require bifurcation • clarifies interestonly principalonly strips subject requirements sfas 133 • establishes requirement evaluate interests securitized financial assets identify interests freestanding derivatives hybrid financial instruments contain embedded derivative requiring bifurcation • clarifies concentrations credit risk form subordination embedded derivatives • amends sfas 140 eliminate prohibition qualifying specialpurpose entity holding derivative financial instrument pertains beneficial interest another derivative financial instrument sfas 155 effective financial instruments acquired issued beginning entity’s fiscal year begins september 15 2006 currently evaluating impact sfas 155 consolidated financial position results operations march 2006 fasb issued sfas 156 “accounting servicing financial assets amendment statement 140” sfas 156 clarifies obligation service financial assets separately recognized servicing asset servicing liability requires separately recognized servicing asset servicing liability initially measured fair value permits entity separately recognized servicing asset servicing liability choose either amortization method fair value method subsequent measurement sfas 156 effective separately recognized servicing assets liabilities acquired issued beginning entity’s fiscal year begins september 15 2006 expect adoption sfas 156 material impact financial position results operations although final pronouncements recently issued adopted expect impact reported financial information disclosures accounting promulgating bodies number pending projects may directly impact us continue evaluate status projects become final provide disclosures regarding likelihood magnitude impact 2 discontinued operations general services group effective december 31 2005 sold certain noncore service operations collectively called general services group “gsg” furmanite unit dallasbased xanser corporation first quarter 2005 made definitive decision divest gsg accordingly evaluated impairment pursuant held sale concept opposed previously held used concept also first quarter 2005 allocated 123 million goodwill gsg based relative fair value total reporting unit’s estimated fair value recognized impairment charges aggregating 301 million 2005 relating gsg number potential buyers diminished one purchaser bidding process business underperformed year due pending sale gsg sold approximately 16 million gross cash proceeds including 20 million held escrow pending final settlement subject final working capital adjustments excluding approximately 12 million net accounts receivable generating pretax loss 38 million used approximately 11 million net cash proceeds reduce indebtedness allocated estimated interest expense related repayment period presented based upon prevailing interest rates result sale presented results operations gsg discontinued operations periods presented gsg generated following results operations 1 pretax loss sale gsg subject final working capital adjustments remain negotiation outcome negotiations could result change ultimate loss sale period resolution gsg’s assets liabilities reclassified prepaid expenses assets net accounts payable reflect discontinued operations december 31 2004 gsg’s assets liabilities consisted following 1 excludes 123 million goodwill allocated gsg 2005 upon classification gsg assets held sale 2 excludes 109 million debt retired net proceeds sale gsg government marine business unit november 2004 sold government marine business unit “gmbu” business within flowserve pump division “fpd” curtisswright electromechanical corporation approximately 28 million generating pretax gain 74 million allocation approximately 8 million goodwill 1 million intangible assets gmbu provided pump technology service us navy submarines aircraft carriers serve core market represented small part total pump business used net proceeds disposition gmbu reduce outstanding indebtedness result sale presented assets liabilities results operations gmbu discontinued operations periods included gmbu generated following results operations 3 acquisitions acquired remaining 75 interest thompsons kelly lewis pty ltd “tkl” australian manufacturer supplier pumps march 2004 incremental interests acquired accounted step acquisition tkl’s results operations consolidated since date acquisition estimated fair value net assets acquired including approximately 22 million cash acquired exceeded cash paid 12 million accordingly goodwill recognized 2004 consolidated statement operations includes 2004 tkl sales 35 million 2004 consolidated balance sheet includes tkl assets approximately 31 million december 31 2004 4 goodwill intangible assets goodwill indefinitelived intangible assets tested impairment december 31 whenever events circumstances indicate impairment may exist impairment goodwill indefinitelived intangibles assessed reporting unit level consider three operating segments constitute distinct reporting units therefore assess impairment operating segment level following table provides information changes 2005 intangible assets following table provides information changes 2004 intangible assets 1 engineering drawings represent estimated fair value associated specific product component schematics assets recognized result acquisitions ifc idp valued based upon independent third party appraisals 2 accumulated amortization indefinitelived intangible assets relates amounts recorded prior implementation date sfas 142 “goodwill intangible assets” 3 2005 flow solutions division acquired certain intangible assets 4 2004 evaluated fair value trademarks recorded impairment charge 979000 related one trademarks acquired ifc charge included selling general administrative expense accompanying consolidated statement operations 5 certain patents finitelived intangible assets 2004 reclassified assets net consolidated balance sheet result presentation gsg discontinued operation see note 2 following schedule outlines actual amortization recognized 2005 estimate future amortization based upon finitelived intangible assets owned december 31 2005 changes carrying amount goodwill years ended december 31 2005 2004 follows 5 factoring accounts receivable european subsidiaries engage nonrecourse factoring certain accounts receivable various agreements different terms including options renewal mutual termination clauses 2000 credit facilities described note 11 factoring generally limited 50 million based due date factored receivables limit factoring raised 75 million new credit facilities entered august 2005 fully described note 11 aggregate factoring receivables agreements totaled 461 million 454 million december 31 2005 2004 respectively represents factor’s purchase 493 million 518 million receivables respectively one agreements determined represent leveraged borrowing 2004 opposed sale receivables accordingly reported aggregate cash received facility component shortterm debt amount 64 million december 31 2004 agreement restructured fourth quarter 2005 allow transfer ownership underlying receivable bank 2005 factoring agreements worldwide recognized losses approximately 23 million factoring receivables compares total loss 20 million 16 million 2004 2003 respectively 6 inventories stated lower cost market cost determined principally us inventories lifo method nonus inventories fifo method inventories method determining costs 2005 2004 2003 recognized expenses 91 million 250 million 224 million respectively obsolete excess inventory expenses included cost sales consolidated statements operations 7 restructuring acquisition related charges restructuring costs ifc conjunction acquisition invensys plc’s flow control division “ifc” 2002 initiated restructuring program designed reduce costs eliminate excess capacity closing 18 valve facilities including 10 service facilities reducing sales related support personnel actions approved committed 2002 remaining actions approved committed 2003 resulted gross reduction 847 positions net reduction 633 positions net position eliminations represent gross positions eliminated closed facilities offset positions added receiving facilities required produce products transferred receiving facilities established restructuring program reserve upon acquisition ifc based upon revised forecasts costs incurred recognized reduction 23 million ifc restructuring reserve 2004 since portion reserve affected estimate created goodwill recognition reduction reserve recorded via decrease goodwill cash expenditures accrual 17 million 2005 34 million 2004 remaining accrual 19 million reflects payments made 2006 beyond severance obligations due terminated personnel europe 13 million well lease contract termination exit costs 06 million cumulative costs 72 million associated closure facilities december 31 2003 recognized restructuring expense operating results whereas cumulative costs associated closure ifc facilities 179 million including related deferred taxes 62 million became part purchase price allocation transaction effect closure costs increased amount goodwill otherwise recognizable result ifc acquisition following illustrates activity related ifc restructuring reserve integration costs ifc also incurred acquisitionrelated integration expense 2003 conjunction ifc summarized approximately 40 million integration expense year ended december 31 2003 included discontinued operations consolidated statements operations acquisitionrelated activities resulted integration costs categorized defined follows personnel related costs include payroll benefits consulting fees retention integration performance bonuses paid employees contractors development management execution integration plan transfer product lines includes costs associated transfer product lines well realignment required receiving facilities asset impairments reflect loss disposal property plant equipment ifc facilities closed disposal inventory discontinued product lines remaining facilities combined category includes costs associated information technology integration legal entity consolidations legal entity name changes signage new product literature others none integration expense items individually exceeded 05 million remaining restructuring integration costs ifc largely completed restructuring integration programs related ifc except payments certain outstanding european activities expect incur additional restructuring integration expenses connection programs payments restructuring accrual continue 2006 beyond due timing severance obligations committed europe 8 stockbased compensation plans restricted stock option plans flowserve corporation 2004 stock compensation plan “2004 plan” established april 21 2004 authorized issuance 3500000 shares common stock grants restricted stock options equitybased awards 3500000 shares common stock authorized 2004 plan 2525376 remain available issuance addition 2004 plan maintain shareholderapproved plans permit issuance common stock grants various equitybased awards december 31 2005 approximately 122851 shares common stock remained available stock option grants plans options granted officers employees directors allow purchase common shares fair market value stock date options granted although options granted fair market value policy set exercise price stock options closing price common stock new york stock exchange date grants authorized board generally options whether granted 2004 plan one previously approved plans become exercisable staggered period ranging one five years typically one three years options generally expire ten years date grant within short period time following termination employment cessation services option holder however described greater detail expiration provisions relating certain outstanding option awards modified 2005 information concerning stock options issued officers employees directors plans presented following table weighted average remaining contractual life options outstanding december 31 2005 42 years additional information relating ranges options outstanding december 31 2005 follows disclosure pro forma information regarding net earnings per share accounted stock options granted subsequent december 31 1994 fair value method presented note 1 options granted weighted average fair value per share grant date 1462 2005 1083 2004 893 2003 purposes pro forma disclosure estimated fair value options amortized expense options’ vesting periods “fair value” options date grant estimated using blackscholes option pricing model assumptions used calculating expense stock option awards follows since determination fair value options granted includes expected volatility factor additional option grants expected year pro forma disclosures may representative effects future years restricted stock plans addition 2004 plan also restricted stock plans authorize us grant 185 additional shares common stock units rights commensurate restricted stock employees nonemployee directors general restrictions shares units expire minimum one year maximum ten years subject forfeiture restriction period typically restricted share grants staggered vesting periods one three years grant date intrinsic value shares units typically product share price date grant number shares units granted amortized straightline basis compensation expense periods restrictions lapse cumulative recognized expense related restricted stock units forfeited reversed upon forfeiture time forfeited grant recorded treasury stock following table summarizes information regarding restricted stock plans modifications 2005 made number modifications stock plans including acceleration certain restricted stock grants outstanding options well extension exercise period associated certain outstanding options modifications resulted severance agreements former executives decision temporarily suspend option exercises result modifications primarily associated severance agreements former executives recorded additional stockbased compensation expense 2005 72 million based upon intrinsic values awards dates modifications made june 1 2005 took action extend december 31 2006 regular term certain options granted employees including executive officers qualified retirees directors scheduled expire 2005 subsequently took action november 4 2005 extend exercise date options expiring 2006 january 1 2009 thereafter concluded however recent regulatory guidance issued section 409a internal revenue code might cause recipients extended options become subject unintended adverse tax consequences section 409a accordingly effective december 14 2005 organization compensation committee board directors partially rescinded accordance regulations extensions regular term options provide follows regular term options otherwise expiring 2005 expire 30 days options first become exercisable sec filings become current effective sec form s8 registration statement filed sec ii regular term options otherwise expiring 2006 expire later 1 75 days regular term option originally granted expires 2 december 31 2006 assuming options become exercisable 2006 reasons included extensions subject shareholders approving certain applicable plan amendments next annual shareholder’s meeting tentatively scheduled august 2006 shareholders approve plan amendments currently posed proxy statement extension actions become void plan amendments approved next annual shareholder meeting extensions considered stock modification financial reporting purposes subject recognition noncash compensation charge accordance sfas 123r earlier extension actions also extended option exercise period available following separation employment reasons death disability termination cause certain voluntary separations separate extensions partially rescinded december 14 2005 meeting organization compensation committee board directors revised currently effective subject shareholder approval exercise period available following employment separations extended later 30 days options first became exercisable sec filings become current effective sec form s8 registration statement filed sec ii period available exercise following separation employment terms option originally granted extension considered financial reporting purposes stock modification subject recognition noncash compensation charge accordance apb 25 10 million 2005 extension exercise period following separation employment apply option exercise periods governed separate separation contract agreement 9 derivatives hedging activities enter forward contracts hedge risks associated transactions denominated currencies local currency operation engaging transaction risk management derivatives policy specifies conditions may enter derivative contracts december 31 2005 2004 approximately 2360 million 139 million respectively notional amount outstanding forward contracts third parties december 31 2005 maximum length forward contract currently place 20 months certain forward contracts qualify hedge accounting fair value outstanding forward contracts december 31 2005 2004 net liability 23 million net asset 34 million respectively unrealized gains losses changes fair value forward contracts approximately 52 million 25 million 16 million years ended december 31 2005 2004 2003 respectively included expense income net consolidated statements operations fair value outstanding forward contracts qualifying hedge accounting net liability 7000 23 million december 31 2005 2004 respectively unrealized gains losses changes fair value qualifying forward contracts associated underlying exposures 35000 02 million 05 million net tax december 31 2005 2004 2003 respectively included comprehensive income expense consolidated statements shareholders’ equity also part risk management program enter interest rate swap agreements hedge exposure floating interest rates term loans december 31 2005 2004 3250 million 1250 million respectively notional amount outstanding interest rate swaps third parties december 31 2005 maximum length interest rate contract currently place approximately three years december 31 2005 2004 fair value interest rate swap agreements net asset 09 million net liability 34 million respectively 2004 entered compound derivative contract hedge exposure currency translation interest rate risks associated european investment bank “eib” loan notional amount derivative 85 million served convert floating rate interest rate risk fixed rate well us dollar currency risk euros derivative matures 2011 december 31 2005 2004 fair value derivative net liability 28 million 159 million respectively unrealized gain loss derivative offset foreign transaction gain underlying loan aggregate 02 million 51 million years ended december 31 2005 2004 respectively included expense income net consolidated statements operations exposed risk creditrelated losses resulting nonperformance counterparties financial instruments perform credit evaluations counterparties forward contracts interest rate swap agreements expect counterparties meet obligations experienced credit losses counterparties hedging related transactions recorded comprehensive income expense net deferred taxes summarized following amounts net deferred taxes represent expected recognition earnings hedging contracts based fair values december 31 2005 10 details certain consolidated balance sheet captions following tables present financial information certain consolidated balance sheet captions accounts receivable net accounts receivable net 2004 35 million allowance doubtful accounts included accounts receivable sold securitization program fully described note 11 property plant equipment net property plant equipment net depreciation expense continuing operations amount 469 million 447 million 426 million years ended december 31 2005 2004 2003 respectively included cost sales consolidated statements operations remaining depreciation expense included selling general administrative expense assets net assets net accrued liabilities accrued liabilities accrued liabilities includes restructuring costs professional fees derivative liabilities lease obligations freight items none individually exceed 5 current liabilities retirement postretirement benefits liabilities retirement obligations liabilities noncurrent liabilities includes minority interest reserves legal environmental matters reserves uncertain tax positions items none individually exceed 5 total liabilities 11 debt lease obligations debt including capital lease obligations consisted scheduled maturities new credit facilities described eib credit facility described well capital lease obligations next five years beyond made mandatory repayment 109 million january 2006 using net cash proceeds sale gsg make mandatory repayment 09 million july 2006 using excess cash flows new credit facilities august 12 2005 entered new credit facilities comprised 600 million term loan expiring august 10 2012 400 million revolving line credit utilized provide 300 million letters credit expiring august 12 2010 refer credit facilities collectively new credit facilities proceeds borrowings new credit facilities used call 1225 senior subordinated notes retire indebtedness outstanding 2000 credit facilities also replaced letter credit agreement guaranteeing obligations eib credit facility described letter credit issued new revolving line credit 2005 made scheduled principal payments 15 million optional principal prepayments 200 million incurred 93 million fees related new credit facilities 08 million expensed 2005 prior refinancing 118 million unamortized deferred loan costs related 2000 credit facilities senior subordinated notes based upon final syndicate financial institutions new credit facilities expensed 105 million unamortized deferred loan costs 2005 addition total loan costs 113 million expensed recorded charge 164 million premiums paid call senior subordinated notes total loss extinguishment 277 million recorded 2005 remaining 85 million fees related new credit facilities capitalized combined remaining 13 million previously unamortized deferred loan costs total 98 million deferred loan costs included assets net costs amortized term new credit facilities borrowings new credit facilities bear interest rate equal option either 1 base rate based greater prime rate recently announced administrative agent new credit facilities federal funds rate plus 050 2 london interbank offered rate “libor” plus applicable margin determined reference ratio total debt consolidated earnings interest taxes depreciation amortization “ebitda” december 31 2005 175 libor borrowings addition pay lenders new credit facilities commitment fee equal percentage determined reference ratio total debt consolidated ebitda unutilized portion revolving line credit letter credit fees respect financial standby letter credit outstanding new credit facilities equal percentage based applicable margin effect libor borrowings new revolving line credit fee performance standby letters credit 05 lower fee financial standby letters credit december 31 2005 amounts outstanding revolving line credit outstanding letters credit 1658 million december 31 2005 reduced borrowing capacity 2342 million connection new credit facilities 2005 entered 275 million notional amount interest rate swaps hedge exposure floating interest rates total notional amount 275 million 130 million carried start date september 30 2005 145 million carried start date december 30 2005 swaps combined 135 million interest rates swaps held us time refinancing total 410 million notional amount interest rate swaps outstanding december 31 2005 obligations new credit facilities unconditionally guaranteed jointly severally substantially existing subsequently acquired organized domestic subsidiaries 65 capital stock certain foreign subsidiaries addition prior obtaining maintaining investment grade credit ratings guarantors’ obligations new credit facilities collateralized substantially guarantors’ assets loans new credit facilities subject mandatory repayment general • 100 net cash proceeds asset sales • unless attain maintain investment grade credit ratings 75 excess cash flow subject reduction based ratio total debt consolidated ebitda 50 proceeds equity offerings 100 proceeds debt issuances subject certain exceptions may prepay loans new credit facilities whole part without premium penalty new credit facilities contain among things covenants restricting subsidiaries’ ability dispose assets merge pay dividends repurchase redeem capital stock indebtedness incur indebtedness guarantees create liens enter agreements negative pledge clauses make certain investments acquisitions enter sale leaseback transactions enter transactions affiliates make capital expenditures engage business activity existing business new credit facilities also contain covenants requiring us deliver lenders audited annual unaudited quarterly financial statements leverage interest coverage financial covenants new credit facilities require delivery december 31 2005 audited annual financial statements may 30 2006 received waiver lenders deliver december 31 2005 audited annual financial statements july 31 2006 required furnish within 50 days end interim quarter year unaudited consolidated balance sheet related statements operations shareholders’ equity cash flows leverage covenant maximum permitted leverage ratio steps beginning fourth quarter 2006 stepdown beginning fourth quarter 2007 interest coverage covenant minimum required interest coverage ratio steps beginning fourth quarter 2006 stepup beginning fourth quarter 2007 compliance financial covenants new credit facilities tested quarterly receiving waiver discussed complied covenants december 31 2005 new credit facilities include events default usual types credit facilities including nonpayment principal interest violation covenants incorrectness representations warranties cross defaults cross acceleration bankruptcy material judgments erisa events actual asserted invalidity guarantees security documents certain changes control company occurrence event default could result acceleration guarantors’ obligations new credit facilities eib credit facility april 14 2004 one european subsidiaries flowserve bv entered agreement eib pursuant eib agreed loan us 70 million ability draw funds multiple currencies finance part specified research development projects undertaken us europe borrowings eib credit facility bear interest fixed floating rate interest agreed us eib respect borrowing facility loans eib credit facility subject mandatory repayment eib’s discretion upon occurrence certain events including change control prepayment certain indebtedness addition eib credit facility contains covenants among things limit ability dispose assets related financed project require us deliver eib audited annual financial statements within 30 days publication obligations eib credit facility guaranteed letter credit outstanding new credit facilities august 2004 borrowed 85 million floating interest rate based 3month us libor resets quarterly december 31 2005 interest rate 442 maturity amount drawn june 15 2011 may repaid time without penalty concurrent borrowing 85 million entered derivative contract third party financial institution swapped principal amount 706 million fixed libor portion interest rate fixed interest rate 419 scheduled repayment date applied hedge accounting derivative contract unrealized gain loss derivative offset foreign currency translation gain underlying loan aggregate 02 million 51 million december 31 2005 2004 respectively included expense income net consolidated statements operations 2000 credit facilities december 31 2004 2003 credit facilities comprised 300 million revolving line credit tranche c term loans tranche consisted us dollar denominated tranche euro denominated tranche latter term note due 2006 refer credit facilities collectively 2000 credit facilities 2004 made scheduled principal payments 275 million mandatory principal repayments 1679 million optional principal prepayments 1600 million since typically result payments advance scheduled payments mandatory repayments optional prepayments cause us recognize loss early writeoff prepaid financing costs borrowings 2000 credit facilities bore interest rate equal option either 1 base rate based prime rate recently announced administrative agent 2000 credit facilities federal funds rate plus 050 2 libor plus case tranche term loan loans revolving line credit applicable margin determined reference ratio total debt consolidated ebitda case tranche c term loan applicable margin based longterm debt ratings addition paid lenders revolving line credit commitment fee 050 per annum unutilized portion revolving line credit letter credit fees respect standby letter credit outstanding 2000 credit facilities equal spread based applicable margin effect libor borrowings revolving line credit december 31 2004 amounts outstanding revolving line credit outstanding letters credit 513 million december 31 2004 reduced borrowing capacity 2487 million 2000 credit facilities collateralized substantially us assets pledge 65 stock certain foreign subsidiaries tranche c loans amended restated connection ifc acquisition final maturities june 2006 june 2009 respectively senior subordinated notes december 31 2004 1885 million 650 million equivalent approximately 88 million december 31 2004 exchange rates face value senior subordinated notes outstanding senior subordinated notes originally issued 2000 discount yield 1250 coupon rate 1225 interest notes payable semiannually february august 2005 remaining senior subordinated notes outstanding called us 106125 face value specified loan agreement repaid along accrued interest accounts receivable securitization october 2004 flowserve us inc one wholly owned subsidiaries flowserve receivables corporation “frc” wholly owned subsidiary flowserve us inc entered receivables purchase agreement “rpa” jupiter securitization corporation “jupiter” jpmorgan chase bank na successor merger bank one na whereby frc could obtain 75 million financing revolving basis securitizing certain usbased trade receivables obtain financing flowserve us inc transferred certain receivables frc formed solely accounts receivable securitization program pursuant rpa frc sold undivided purchaser interests receivables jupiter pooled interests unrelated interests issued shortterm commercial paper repaid cash flows generated collections receivables flowserve us inc continued service receivables servicing fee 05 average net receivable balance servicing liability recognized december 31 2004 amount immaterial due shortterm average collection period securitized receivables frc recourse flowserve us inc failure debtors pay due december 31 2004 frc secured 60 million financing program proceeds used repay 16 million 44 million tranche c bank term loans respectively outstanding 2000 credit facilities accounted transaction accordance sfas 140 “accounting transfers servicing financial assets extinguishment liabilities replacement fasb statement 125” guidance conjunction initial transaction flowserve us inc transferred 1214 million receivables net allowance doubtful accounts 60 million included 29 million longterm receivables net allowance doubtful accounts 32 million frc incurred loss 02 million subsequent sale purchaser interests jupiter time purchaser interests sold jupiter 487 million receivables transferred frc removed frc’s financial statements frc recorded shortterm debt 113 million borrowings facility excess 113 million excluded debt balance consolidated balance sheets december 31 2004 frc retained subordinate interest receivables represents amount excess purchaser interests transferred jupiter shortterm portion 806 million subordinate interest included accounts receivable net consolidated balance sheet december 31 2004 longterm portion 29 million subordinate interest included assets net consolidated balance sheet december 31 2004 frc’s subordinate interest receivables time initial transaction 616 million 29 million classified longterm retained interest receivables recorded present value estimated net realizable value calculation retained interest receivables time initial transaction december 31 2004 based assumed days sales outstanding “dso” 60 days discount rate 47 based borrowing rate 2000 credit facilities 2004 flowserve us inc transferred 3762 million net allowance doubtful accounts 67 million receivables frc sold undivided purchaser interests receivables jupiter 2004 frc collected 2325 million cash used purchase additional receivables flowserve us inc return invested capital flowserve us inc losses sales purchaser interests totaled 06 million 2004 frc also recorded interest expense 01 million 2004 related 113 million debt recognized pursuant sfas 140 varying dso assumption discount rate assumption 20 resulted immaterial change retained interest loss sale october 31 2005 terminated rpa connection borrowed approximately 48 million new credit facilities repurchased outstanding receivable interests jupiter frc recorded loss 20 million purchaser interests sold 2005 recognized interest expense 03 million related 113 million debt recorded pursuant sfas 140 accounts receivable factoring one manufacturing plants europe maintains receivable factoring program local bank 2004 factoring program structured whereby ownership underlying receivable transferred bank thus amounts advanced us program treated shortterm debt eurodenominated amounts total 64 million december 31 2004 paid interest rate 233 program restructured fourth quarter 2005 allow transfer ownership underlying receivable bank description receivables factoring agreements fully presented note 5 following summarizes repayment obligations various credit facilities 1 optional prepayment excludes proceeds new credit facilities used repay outstanding obligations 2000 credit facilities 1225 senior subordinated notes operating leases noncancelable operating leases certain offices service quick response centers certain manufacturing operating facilities machinery equipment automobiles rental expense relating operating leases 221 million 2005 197 million 2004 220 million 2003 future minimum lease payments due noncancelable operating leases 12 retirement postretirement benefits sponsor several noncontributory defined benefit pension plans covering substantially us employees certain nonus employees provide benefits based years service job grade levels type compensation retirement benefits covered employees provided contributory pension plans cash balance pension plans governmentsponsored retirement programs funded defined benefit pension plans receive funding based independent actuarial valuations provide current service amount sufficient amortize unfunded prior service periods exceed 30 years funding falling within legal limits proscribed prevailing regulation also maintain unfunded defined benefit plans permitted local regulations receive funding benefits become due use measurement date december 31 worldwide pension plans postretirement medical plans us defined benefit plans maintain qualified nonqualified defined benefit pension plans us qualified plan provides coverage substantially fulltime us employees receive benefits earnings threshold specified us department labor qualified plan designed operate “cash balance” arrangement accumulated benefit obligation equivalent projected benefit obligation nonqualified plans primarily cover small number employees including current former members senior management providing benefit levels equivalent participants otherwise limited us department labor rules net defined benefit pension expense us defined benefit pension plans including qualified nonqualified plans settlement curtailment expense 2005 associated sale gsg discussed note 2 partially offset departure former executives settlement curtailment expense 2004 associated number employees eligible nonqualified plan leaving company following table reconciles us defined benefit plans’ funded status amounts recognized consolidated balance sheets following assumptions related us defined benefit pension plans expected longterm rate return assets determined assessing rates return targeted asset class return premiums generated active portfolio management comparison rates utilized companies 2005 increased minimum pension liability 120 million net tax compared increase 2004 54 million net tax component comprehensive income expense increase liability primarily resulted increase accumulated benefit obligations due lower discount rates along lower anticipated plan asset returns 2005 based results pension plan asset returns 2005 anticipated future return decreased assumed rate return assets 875 2004 825 2005 also reduced discount rate 575 december 31 2004 550 december 31 2005 reflect current interest rate environment expected benefit payment streams regularly evaluate assumptions asset returns discount rates based variety factors following summary changes us defined benefit plans’ pension obligations following reconciliation us defined benefit pension plans’ assets contributed 448 million 153 million us defined benefit pension plans 2005 2004 respectively payments exceeded minimum funding requirements mandated us department labor rules 2005 2004 returns pension plan assets less anticipated although still working actuaries determine estimated funding beyond 2005 following table summarizes expected cash activity us defined benefit pension plans future millions asset allocation us defined benefit pension plans end 2005 2004 target allocation 2006 asset category follows believe common stock directly held plans investment strategy invest various securities order pay retirement benefits plan participants minimizing cash contributions life plan accomplished preserving capital diversified investments high quality instruments earning longterm rate return consistent acceptable degree risk taking account liquidity needs plan investment policy invest approximately 65 plan assets equity securities 25 fixed income securities 10 assets within investment category assets allocated various investment styles professional money management firms manage assets engage consultant assist evaluating activities periodically review investment policy generally conjunction asset liability study also regularly rebalance actual allocation target investment allocation nonus defined benefit plans maintain defined benefit pension plans cover employees following countries austria canada france germany india japan mexico netherlands sweden united kingdom net defined benefit pension expense nonus pension plans following summarizes net pension liability nonus plans following table reconciles nonus pension plans’ funded status amounts recognized consolidated balance sheets following assumptions related nonus defined benefit pension plans many nonus defined benefit plans unfunded permitted local regulation expected longterm rate return assets funded plans determined assessing rates return asset class return premiums generated active investment management 2005 increased nonus minimum pension liability 191 million net tax compared 28 million net deferred tax increase 2004 component comprehensive income expense increase liability resulted primarily increase accumulated benefit obligation due lower discount rates 2005 following reconciliation nonus plans’ defined benefit pension obligations following reconciliation nonus plans’ defined benefit pension assets 1 acquisitions represent obligations transfers former ifc employees flowserve plans formally occurred 2004 following table summarizes expected cash activity nonus defined benefit plans future millions asset allocations nonus defined benefit pension plans end 2005 2004 follows believe common stock held directly plans 2004 funded nonus defined benefit pension plans principally located canada united kingdom cases investment strategy plans invest various securities order pay retirement benefits plan participants minimizing required cash contributions life plan accomplished preserving capital diversification high quality investments earning longterm rate return consistent acceptable degree risk legal requirements particular country taking account liquidity needs plan asset allocation differs plan based upon plan’s projected benefit obligation participants well results asset liability studies conducted plan professional money management firms manage plan assets engage consultants country assist evaluation activities defined benefit plans accumulated benefit obligations excess plan assets following summarizes key pension plan information regarding plans whose accumulated benefit obligations exceed fair value respective plan assets postretirement medical plans sponsor several defined benefit postretirement health care plans covering current retirees limited number future retirees us plans provide medical dental benefits administered insurance companies health maintenance organizations plans include participant contributions deductibles coinsurance provisions limitations integrated medicare group plans fund plans benefits paid incur health maintenance organization premiums plans hold assets period presented accordingly investment strategy targeted allocations plan assets benefits postretirement medical plans available new employees existing employees net postretirement benefit expense comprised following reconciliation accumulated postretirement benefits obligations 1 plan amendment 2005 represents decrease full coverage capped amount two facilities 2 increase actuarial gain 2005 compared 2004 primarily reflects higher expected decrease plan participants following table presents components postretirement benefit amounts recognized consolidated balance sheets following presents expected benefit payments future periods following assumptions related postretirement benefits assumed ranges annual rates increase per capita costs periods prior medicare 80 2005 90 2004 100 2003 gradual decrease 50 2007 future years assumed heath care cost trend rates effect amounts reported postretirement medical plans onepercentage point change assumed health care cost trend rates would following effect 2005 reported amounts made contributions postretirement medical plans pay benefits 82 million 2005 86 million 2004 83 million 2003 postretirement medical plans unfunded make contributions covered individuals’ claims approved payment accordingly contributions period directly correlated benefits paid defined contribution plans sponsor several defined contribution plans covering substantially us canadian employees certain nonus employees may contribute plans contributions matched varying amounts us including opportunities discretionary matching contributions us defined contribution plan expense 76 million 2005 68 million 2004 36 million 2003 participants us defined contribution plan option invest common stock discretionary contributions us typically funded common stock therefore plans assets include holdings common stock 13 legal matters contingencies defendant large number pending lawsuits include many cases multiple claimants seek recover damages personal injury allegedly caused exposure asbestoscontaining products manufactured andor distributed us past products encapsulated used components process equipment believe emission respirable asbestoscontaining fibers occurred use equipment believe high percentage applicable claims covered applicable insurance indemnities companies february 4 2004 received informal inquiry sec requesting voluntary production documents information related february 3 2004 announcement would restate financial results nine months ended september 30 2003 full years 2002 2001 2000 june 2 2004 advised sec issued formal order private investigation issues regarding restatement issues arise investigation may 31 2006 informed staff sec concluded investigation without recommending enforcement action us quarter ended september 30 2003 related lawsuits filed federal court northern district texas “court” alleging violated federal securities laws since filing cases consolidated lead plaintiff amended complaint several times lead plaintiff’s current pleading fifth consolidated amended complaint “complaint” complaint alleges federal securities violations occurred february 6 2001 september 27 2002 names defendants company c scott greer former chairman president chief executive officer renée j hornbaker former vice president chief financial officer pricewaterhousecoopers llp independent registered public accounting firm banc america securities llc credit suisse first boston llc served underwriters two public stock offerings relevant period complaint asserts claims sections 10b 20a securities exchange act 1934 rule 10b5 thereunder sections 11 15 securities act 1933 lead plaintiff seeks unspecified compensatory damages forfeiture mr greer ms hornbaker unspecified incentivebased equitybased compensation profits stock sales recovery costs november 22 2005 court entered order denying defendants’ motions dismiss complaint case currently set trial march 27 2007 continue believe lawsuit without merit vigorously defending case october 6 2005 shareholder derivative lawsuit filed purportedly behalf 193rd judicial district dallas county texas lawsuit names defendants mr greer ms hornbaker current board members hugh k coble george haymaker jr william c rusnack michael f johnston charles rampacek kevin e sheehan diane c harris james rollans christopher bartlett named nominal defendant based primarily purported misstatements alleged abovedescribed federal securities case plaintiff asserts claims defendants breach fiduciary duty abuse control gross mismanagement waste corporate assets unjust enrichment plaintiff alleges purported violations state law occurred april 2000 date suit plaintiff seeks behalf unspecified amount damages injunctive relief andor imposition constructive trust defendants’ assets disgorgement compensation profits benefits received defendants us recovery attorneys’ fees costs strongly believe suit improperly filed motion seeking dismissal case february 7 2006 received subpoena sec regarding goods services certain foreign subsidiaries delivered iraq 1996 2003 united nations oilforfood program investigation includes review whether inappropriate payments made iraqi officials violation foreign corrupt practices act investigation includes periods prior well subsequent acquisition foreign operations involved investigation may subject liabilities violations found regardless whether relate periods subsequent acquisition addition one foreign subsidiary’s operations cooperating foreign governmental investigation site’s involvement united nations oilforfood program cooperation included responding investigative trip foreign authorities foreign subsidiary’s site providing relevant documentation authorities answering questions unable predict foreign authorities pursue matter future believe sec foreign authority investigating companies actions arising united nations oilforfood program process reviewing responding sec subpoena assessing implications foreign investigation including continuation thorough internal investigation early stages included include detailed review contracts iraqi government period question certain payments associated therewith additionally continue conduct interviews employees knowledge contracts payments question early phases internal investigation result unable make definitive determination whether inappropriate payments made accordingly unable predict ultimate outcome matter continue fully cooperate sec foreign investigations progress point incomplete accordingly sec andor foreign authorities take enforcement action regard investigations may required pay fines consent injunctions future conduct suffer penalties could potentially materially impact business financial statements cash flows march 14 2006 shareholder derivative lawsuit filed purportedly behalf federal court northern district texas lawsuit names defendants mr greer ms hornbaker current board members mr coble mr haymaker jr lewis kling mr rusnack mr johnston mr rampacek mr sheehan ms harris mr rollans mr bartlett named nominal defendant based primarily certain purported misstatements alleged abovedescribed federal securities case plaintiff asserts claims defendants breaches fiduciary duty plaintiff alleges purported breaches fiduciary duty occurred 2000 2004 plaintiff seeks behalf unspecified amount damages disgorgement mr greer ms hornbaker salaries bonuses restricted stock options recovery attorneys’ fees costs strongly believe suit improperly filed motion seeking dismissal case march 2006 initiated process determine compliance posture respect us export control laws regulations upon initial investigation appears product transactions technology transfers may technically compliance us export control laws regulations require review assistance outside counsel currently involved systematic process conduct review believe take 18 months complete given complexity export laws scope investigation potential violations us export control laws regulations identified may result civil criminal penalties including fines andor penalties review issue ongoing currently unable determine full extent potential violations nature amount potential penalties might subject future given resolution matter uncertain time able reasonably estimate maximum amount liability could result final resolution matter cannot currently predict whether ultimate resolution matter material adverse effect business including ability business outside united states financial condition may 1 2005 due noncurrent status financial filings sec registration statements form s8 longer available cover offers sales securities employees persons since date acquisition interests common stock fund 401k plan participants may subject registration requirements securities act 1933 applicable state securities laws may qualified available exemption requirements federal securities laws generally provide oneyear rescission right investor acquires unregistered securities transaction subject registration exemption available investor successfully asserting rescission right oneyear time period right require issuer repurchase securities acquired investor price paid investor securities security disposed receive damages respect loss disposition plus interest date acquisition rights may apply affected participants 401k plan based current stock price believe current potential liability rescission claims material financial condition results operations however potential liability could become material future stock price fall participants’ acquisition prices interest stock fund oneyear period following unregistered acquisitions involved potentially responsible party “prp” former public waste disposal sites may subject remediation pending government procedures sites various stages evaluation federal state environmental authorities projected cost remediation sites well alleged “fair share” allocation uncertain speculative studies completed parties either negotiated amicable resolution matter judicially resolved site many parties similarly identified identification location additional parties continuing applicable federal state law many parties identified financially strong solvent companies appear able pay share remediation costs based information waste disposal practices sites environmental regulatory process general believe likely ultimate remediation liability costs site apportioned among liable parties including site owners waste transporters according volumes andor toxicity wastes shown disposed sites believe exposure existing disposal sites less 100000 also defendant several lawsuits including product liability claims insured subject applicable deductibles arising ordinary course business based currently available information believe adequately accrued estimated probable losses lawsuits also involved substantial number labor claims including one case confidential settlement reflected 2004 results although none aforementioned potential liabilities quantified absolute certainty except otherwise indicated established reserves covering exposures extent probable estimable believe reasonable based past experience available facts additional exposures beyond reserves could exist currently cannot estimated continue evaluate potential contingent loss exposures develop recognize expense soon losses become probable reasonably estimated also involved ordinary routine litigation incidental business none believe material business operations overall financial condition however resolutions dispositions claims lawsuits settlement otherwise could significant impact operating results reporting period resolution disposition occurs consequence legal matters including settlements publicly disclosed litigation otherwise recognized expense approximately 7 million 2005 17 million 2004 25 million 2003 14 warranty reserve recorded reserves product warranty claims included current noncurrent liabilities following summary activity warranty reserve 15 shareholders’ equity share common stock contains preferred stock purchase right rights currently exercisable trade tandem common stock rights become exercisable trade separately event certain significant changes common stock ownership commencement certain tender offers either case may lead change control upon becoming exercisable rights provide shareholders opportunity acquire new series preferred stock automatically issued preestablished price event certain forms acquisition rights also provide shareholders opportunity purchase shares acquirer’s common stock acquirer 50 discount current market value rights redeemable 0022 per right us time prior becoming exercisable expire august 2006 16 income taxes provision benefit income taxes consists following provision benefit income taxes differs statutory corporate rate due following 2005 effective tax rate differed federal statutory rate 35 primarily due extraterritorial income “eti” exclusion benefits 19 million state income tax benefits 27 million resulting primarily net reductions valuation allowances 127 million net tax impact foreign operations 2004 effective tax rate differed federal statutory rate 35 primarily due eti exclusion benefits 49 million 220 million net tax impact foreign operations resulting primarily approximately 85 million foreign earnings repatriation pay us debt 2003 effective tax rate differed federal statutory rate 35 primarily due eti exclusion benefits 25 million changes valuation allowances 55 million primarily relating foreign tax credits net impact nonus operations 28 million sfas 109 requires us provide deferred taxes temporary differences associated investment foreign subsidiaries financial reporting basis exceeds tax basis unless assert permanent reinvestment foreign jurisdictions pursuant apb 23 financial reporting basis tax basis differences investments foreign subsidiaries consist unremitted earnings losses well foreign currency translation adjustments assert permanent reinvestment apb 23 three years reported period ended december 31 2005 recognized net deferred tax assets attributable unremitted earnings foreign currency translation adjustments foreign subsidiaries excess financial reporting basis due estimated excess foreign tax credits attributes cash deemed dividend distributions foreign subsidiaries resulted recognition approximately 12 million 185 million income tax expense years ended december 31 2005 2004 respectively recorded benefit excess foreign tax credits associated deemed repatriation unremitted earnings credits available offset liability associated dividends october 22 2004 american jobs creation act 2004 “2004 act” signed law creating temporary incentive us multinationals repatriate accumulated income earned outside us pursuant qualified dividend reinvestment plans effective tax rate 525 versus us federal statutory rate 35 2004 repatriated approximately 46 million part 85 million discussed respectively pursuant dividend reinvestment plan recognized lower tax rate dividends financial statements due uncertainties surrounding realization benefit interpretation 2004 act extent uncertainty favorably resolved future reporting period benefit associated dividends recognized period 2004 act also provides phase existing eti exclusion foreign export sales viewed inconsistent international trade protocols set european union phase provides benefit otherwise qualifying export sales 2005 2006 limited approximately 80 60 respectively replacement loss eti export incentive 2004 act provides deduction income qualified domestic production activities phased 2005 2010 realized benefit internal revenue code section 199 manufacturing deduction 2005 impact future tax rate yet quantified guidance fsp fas 1091 “application fasb statement 109 tax deduction qualified production activities provided american jobs creation act 2004” tax deduction qualified production activities treated special deduction described sfas 109 special deduction reported period deduction claimed tax return record valuation allowances reflect estimated amount deferred tax assets may realized based upon analysis existing deferred tax assets net operating losses tax credits jurisdiction expectations ability utilize tax attributes review past current estimated future taxable income establishment tax strategies net decrease state valuation allowances 26 million december 31 2005 net increase 46 million december 31 2004 reflected net state impacts rate reconciliations similarly changes valuation allowances related foreign net operating losses deferred tax assets reported portion net foreign impact overall effective tax rate 2005 2004 significant changes foreign valuation allowances decreased valuation allowances 20 million foreign tax credit carryforwards result utilization credits 2004 due extension carryover period 10 years pursuant 2004 act deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes significant components consolidated deferred tax assets liabilities approximately 257 million us foreign net operating loss carryforwards december 31 2005 total 165 million state net operating losses reserved valuation allowance net operating losses generated us unused begin expire 2006 majority expiring 2021 majority nonus net operating losses carry forward without expiration additionally approximately 213 million foreign tax credit carryforwards december 31 2005 expiring 2010 2015 valuation allowance reserves recorded earnings loss income taxes comprised 17 business segment information principally engaged worldwide design manufacture distribution service industrial flow management equipment provide pumps valves mechanical seals primarily petroleum industry chemicalprocessing industry powergeneration industry water industry general industry industries requiring flow management products following three divisions constitutes business segment • flowserve pump division • flow solutions division • flow control division manufactures different products defined type products services provided division president reports directly chief executive officer division controller reports directly chief accounting officer decisionmaking purposes chief executive officer members senior executive management use financial information generated reported division level corporate headquarters constitute separate division business segment evaluate segment performance allocate resources based segment’s operating income excluding special items restructuring integration costs related ifc acquisition believe special items indicative efforts integrate acquired companies ifc business reflect ongoing business results believe investors users financial statements better evaluate analyze historical future business trends special items excluded segment’s operating income operating income special items recognized measure gaap viewed alternative better indicator gaap measures performance amounts classified include corporate headquarters costs minor entities constitute separate segments intersegment sales transfers recorded cost plus profit margin sales eliminated consolidation following summary financial information reportable segments reconciled amounts reported consolidated financial statements year ended december 31 2005 year ended december 31 2004 year ended december 31 2003 1 special items 2005 2004 2 special items reflect costs incurred flow control division association ifc acquisition including integration expense 158 million restructuring expense 21 million 3 depreciation amortization 2004 2003 exclude 31 million 39 million respectively depreciation amortization expense included discontinued operations consolidated statements operations segment operating income special items reconciled consolidated amounts follows geographic information attribute sales different geographic areas based facilities’ locations longlived assets classified based geographic area assets located exclude deferred tax assets categorized noncurrent sales longlived assets geographic area follows 1 includes canada south america asia pacific individual geographic segment within group represents 10 consolidated totals net sales international customers including export sales united states represented 65 68 60 total sales 2005 2004 2003 respectively major customer information large number customers across large number manufacturing service facilities believe sales individual customer represent 10 consolidated sales years presented 18 accumulated comprehensive loss following presents components accumulated comprehensive loss net related tax effects 1 increase foreign currency translation adjustments 2005 due primarily devaluation euro british pound versus us dollar 2 increase minimum pension liability 2005 primarily result decreased discount rate following tables present summary changes accumulated comprehensive loss years ended december 31 2005 2004 2003 19 quarterly financial data unaudited following presents summary unaudited quarterly data 2005 2004 1 amounts reclassified reflect results gsg discontinued operations see note 2 significant fourth quarter adjustments 2005 pretax record asset impairment related sale gsg 65 million included discontinued operations ii annual bonus accrual finalization increase 107 million significant fourth quarter adjustments 2004 pretax record litigation accrual 48 million ii unclaimed property 40 million iii sales tax reserve 36 million iv charge cost sales increase inventory reserves 139 million v annual bonus reserve finalization increase 55 million 20 subsequent events updates legal matters existence december 31 2005 new legal matters arisen since december 31 2005 discussed note 13 item 9item 8 financial statements supplementary data report independent registered public accounting firm board directors shareholders flowserve corporation opinion consolidated financial statements listed index appearing item 15a1 present fairly material respects financial position flowserve corporation subsidiaries december 31 2011 2010 results operations cash flows three years period ended december 31 2011 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed accompanying index appearing item 15a2 presents fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintained material respects effective internal control financial reporting december 31 2011 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso companys management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included managements report internal control financial reporting appearing item 9a responsibility express opinions financial statements financial statement schedule companys internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions companys internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles companys internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate flowserve corporation consolidated balance sheets see accompanying notes consolidated financial statements flowserve corporation consolidated statements income see accompanying notes consolidated financial statements flowserve corporation consolidated statements comprehensive income see accompanying notes consolidated financial statements flowserve corporation consolidated statements shareholders’ equity flowserve corporation consolidated statements cash flows flowserve corporation notes consolidated financial statements december 31 2011 2010 three years ended december 31 2011 1 significant accounting policies accounting developments principally engaged worldwide design manufacture distribution service industrial flow management equipment provide long leadtime custom highly engineered pumps standardized general purpose pumps mechanical seals industrial valves related automation products solutions primarily oil gas chemical power generation water management general industries requiring flow management products services equipment manufactured serviced us predominantly used industries deal difficulttohandle corrosive fluids well environments extreme temperatures pressure horsepower speed business affected economic conditions united states us countries products sold serviced cyclical nature competitive environment oil gas chemical power generation water management industries served relationship us dollar currencies demand pricing customers’ end products european sovereign debt crisis december 31 2011 direct investments european sovereign nonsovereign debt however certain defined benefit plans hold investments european equity fixed income securities discussed note 12 broad macrolevel economic impacts experience direct measurable disruptions 2011 due european sovereign debt crisis continue monitor evaluate impact future developments region current business customers suppliers state global economy additional adverse developments could potentially impact customers’ exposures sovereign nonsovereign european debt could soften level capital investment demand products services ongoing events north africa middle east japan ongoing political economic conditions north africa caused us experience shipment delays region estimate shipments region delayed resulted lost delayed opportunities operating income 112 million 2011 preponderance physical assets region located kingdom saudi arabia united arab emirates date significantly affected unrest elsewhere region continue assess conditions potential adverse impacts earthquake tsunami japan early 2011 particular relate customers suppliers impacted regions well announced potential regulatory impacts global nuclear power market 2011 experience significant adverse impacts due shipment delays collection issues supply chain disruptions also closely monitoring effects japan crisis global nuclear power industry difficult estimate longterm effect fukushima plant shutdown global nuclear power market continued ship nuclear orders backlog without significant disruption believe related reduction nuclear orders could continue near term though parts overall power generation business could benefit nuclear priorities reevaluated segment reorganization previously disclosed annual report form 10k year ended december 31 2010 reorganized divisional operations combining former flowserve pump division fpd former flow solutions division fsd flow solutions group fsg effective january 1 2010 fsg divided two reportable segments based type product manage business fsg engineered product division epd fsg industrial product division ipd epd includes longer leadtime custom highly engineered pump product operations former fpd substantially operations former fsd ipd consists standardized general purpose engineered pump product operations former fpd flow control division fcd affected retrospectively adjusted prior period financial information reflect current reporting structure venezuela previously disclosed annual report form 10k year ended december 31 2010 effective january 11 2010 venezuelan government devalued currency bolivar moved twotier exchange structure official exchange rate moved 215 430 bolivars us dollar nonessential items 260 bolivars us dollar essential items additionally effective january 1 2010 venezuela designated hyperinflationary result began use us dollar functional currency venezuela december 30 2010 venezuelan government announced intention eliminate favorable essential items rate effective january 1 2011 operations venezuela generally consist service center imports equipment parts certain locations resale third parties within venezuela performs service repair activities venezuelan subsidiary’s sales year ended december 31 2011 total assets december 31 2011 represented less 1 consolidated sales total assets period flowserve corporation notes consolidated financial statements continued although approvals venezuela’s commission administration foreign exchange slowed historically able remit dividends payments official rate currently anticipate future accordingly used official rate 430 bolivars us dollar remeasurement venezuelan financial statements us dollars periods presented result currency devaluation recognized net loss 76 million 2010 loss reported income expense net consolidated statement income resulted tax benefit elimination favorable essential items rate effective january 1 2011 impact consolidated financial position results operations year ended december 31 2011 included annual report form 10k year ended december 31 2011 annual report evaluated carrying value related assets concluded current impairment continuing assess monitor ongoing impact currency devaluations venezuelan operations imports market including venezuelan subsidiary’s ability remit cash dividends payments official rate well actions venezuelan government economic conditions venezuela may adversely impact future consolidated financial condition results operations principles consolidation consolidated financial statements include accounts company wholly majorityowned subsidiaries addition consolidate variable interest entities deemed primary beneficiary noncontrolling interests nonaffiliated parties recognized majorityowned consolidated subsidiaries intercompany profits transactions balances among consolidated entities eliminated consolidated financial statements investments unconsolidated affiliated companies represent noncontrolling ownership interests 20 50 accounted using equity method approximates equity interest underlying equivalent net book value accounting principles generally accepted us gaap investments interests less 20 investee accounted cost method whereby income recognized event dividend receipt investments accounted cost method tested annually impairment recorded 31 million gain 2010 sale investment joint venture accounted cost method use estimates process preparing financial statements conformity gaap requires management make estimates assumptions affect reported amounts certain assets liabilities revenues expenses management believes estimates assumptions reasonable however actual results may differ materially estimates significant estimates assumptions made management used determining • revenue recognition net liquidated damages delivery penalties • income taxes deferred taxes tax valuation allowances tax reserves • reserves contingent loss • retirement postretirement benefits • valuation goodwill indefinitelived intangible assets longlived assets revenue recognition revenues product sales recognized risks rewards ownership transferred customers typically based contractual delivery terms agreed customer fulfillment inconsequential perfunctory actions addition policy requires persuasive evidence arrangement fixed determinable sales price reasonable assurance collectability defer recognition revenue advance payments received customers performance obligations completed andor services performed freight charges billed customers included sales related shipping costs included cost sales consolidated statements income contracts typically include cancellation provisions require customers reimburse us costs incurred date cancellation well contractual cancellation penalties enter certain contracts multiple deliverables may include combination designing developing manufacturing modifying installing commissioning flow management equipment providing services related performance products delivery products services typically occurs within one twoyear period although many arrangements book ship type orders shorter timeframe delivery aggregate separate deliverables units accounting based whether deliverables standalone value customer general right return exists contract value allocated ratably units accounting arrangement based relative selling prices determined deliverables sold separately revenues longterm contracts exceed certain internal thresholds regarding size duration project flowserve corporation notes consolidated financial statements continued provide receipt progress billings customer recorded percentage completion method progress measured costtocost basis percentage completion revenue represents less 9 consolidated sales year presented revenue service repair contracts recognized services agreed customer rendered revenues generated fixed fee service repair contracts recognized ratable basis term contract contracts range duration generally extend five years fixed fee service contracts represent aproximately 1 consolidated sales year presented certain instances provide guaranteed completion dates terms contracts failure meet contractual delivery dates result late delivery penalties nonrecoverable costs instances payment costs deemed probable perform project profitability analysis accounting costs reduction realizable revenues could potentially cause estimated total project costs exceed projected total revenues realized project instances would record reserves cover excesses period determined circumstances total projected revenues still exceed total projected costs incurrence unrealized incentive fees nonrecoverable costs generally reduces profitability project time subsequent revenue recognition cash equivalents place temporary cash investments financial institutions policy invest institutions instruments minimal credit risk market risk investments original maturity three months less purchased classified cash equivalents highly liquid principal values subject significant risk change due interest rate fluctuations allowance doubtful accounts credit risk allowance doubtful accounts established based estimates amount uncollectible accounts receivable determined principally based upon aging accounts receivable also customer credit history industry market segment information economic trends conditions credit reports customer credit issues customer bankruptcies general economic conditions may also impact estimates credit risks mitigated diversity customer base across many different geographic regions industries performing creditworthiness analyses customers additionally mitigate credit risk letters credit advance payments received customers december 31 2011 2010 believe significant concentrations credit risk inventories related reserves inventories stated lowerofcost market cost determined firstin firstout method reserves excess obsolete inventories based upon assessment market conditions products determined historical usage estimated future demand due long life cycles products carry spare parts inventories historically low usage rates provide reserves inventory based demonstrated usage aging criteria income taxes deferred taxes tax valuation allowances tax reserves account income taxes asset liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases operating loss tax credit carryforwards deferred tax assets liabilities calculated using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized period includes enactment date record valuation allowances reflect estimated amount deferred tax assets may realized based upon analysis existing deferred tax assets net operating losses tax credits jurisdiction expectations ability utilize tax attributes review past current estimated future taxable income establishment tax strategies provide deferred taxes temporary differences associated investment foreign subsidiaries financial reporting basis exceeds tax basis unless assert permanent reinvestment foreign jurisdictions financial reporting basis tax basis differences investments foreign subsidiaries consist unremitted earnings losses well foreign currency translation adjustments amount income taxes pay subject ongoing audits federal state foreign tax authorities often result proposed assessments establish reserves open tax years uncertain tax positions may subject challenge various tax authorities consolidated tax provision related accruals include impact reasonably estimable losses related interest penalties deemed appropriate recognize tax benefit uncertain tax position likely tax position sustained examination taxing authorities determination based technical merits position presumes flowserve corporation notes consolidated financial statements continued uncertain tax position examined relevant taxing authority full knowledge relevant information tax benefits recognized financial statements position measured based largest benefit greater fifty percent likelihood realized upon ultimate settlement believe adequately provided reasonably foreseeable outcome related matters future results may include favorable unfavorable adjustments estimated tax liabilities extent expected tax outcome matters changes estimate impact income tax provision period determination made legal environmental accruals legal environmental reserves recorded based upon casebycase analysis relevant facts circumstances assessment potential legal obligations costs amounts relating legal environmental liabilities recorded probable loss incurred loss estimable assessments legal environmental costs based information obtained independent inhouse experts loss experience similar situations estimates updated applicable new information regarding facts circumstances matter becomes available legal fees associated legal environmental liabilities expensed incurred estimates liabilities unsettled asbestosrelated claims based known claims experience preceding two years claims filed settled dismissed adjustments events deemed unusual unlikely recur included retirement obligations liabilities consolidated balance sheets substantial majority asbestosrelated claims covered insurance indemnities estimated indemnities receivables insurance carriers unsettled claims receivables settlements legal fees paid us asbestosrelated claims estimated using historical experience insurance recovery rates estimates future recoveries include estimates coverage financial viability insurance carriers estimated receivables included assets net consolidated balance sheets one asbestos insurance related matter claim litigation relevant insurers substantially excess recorded receivable claim resolved favorably reflected receivable would benefit onetime gain amount excess currently unable estimate impact unasserted asbestosrelated claims although future claims would also subject existing indemnities insurance coverage warranty accruals warranty obligations based upon product failure rates materials usage service delivery costs analysis identified expected claims estimate cost resolve claims estimates expected claims generally factor historical claims known product issues warranty obligations based factors adjusted based historical sales trends preceding 24 months insurance accruals insurance accruals recorded wholly partially selfinsured risks medical benefits workers’ compensation based upon analysis claim loss history insurance deductibles policy limits relevant factors included accrued liabilities consolidated balance sheets estimates based upon information received actuaries insurance company adjusters independent claims administrators independent sources changes claims differences actual expected claim losses could impact future accruals receivables insurance carriers estimated using historical experience insurance recovery rates estimates future recoveries include estimates coverage financial viability insurance carriers estimated receivables included accounts receivable net assets net applicable consolidated balance sheets pension postretirement obligations determination pension postretirement benefits obligations based estimates made management consultation independent actuaries investment advisors inherent valuations assumptions including discount rates expected rates return plan assets retirement rates mortality rates compensation increase factors current market conditions including changes rates return interest rates medical inflation rates considered selecting assumptions actuarial gains losses prior service costs recognized accumulated comprehensive loss arise amortize costs net pension expense remaining expected service period valuation goodwill indefinitelived intangible assets longlived assets value goodwill indefinitelived intangible assets tested impairment december 31 year whenever events circumstances indicate assets may impaired connection segment reorganization 2010 reallocated goodwill redefined reporting units evaluated goodwill impairment identification reporting units began operating segment level epd ipd fcd considered whether components one level operating segment levels identified reporting units purpose testing goodwill impairment based certain conditions included among factors extent component represents business ii aggregation economically similar components within operating segments resulted nine reporting units factors considered determining whether aggregation components appropriate included similarity nature products services flowserve corporation notes consolidated financial statements continued nature production processes methods distribution types industries served impairment losses goodwill recognized whenever implied fair value goodwill less carrying value estimate fair value reporting units based income approach whereby calculate fair value reporting unit based present value estimated future cash flows discounted cash flow analysis requires us make various judgmental assumptions future sales operating margins growth rates discount rates based budgets business plans economic projections anticipated future cash flows market participants assumptions also made varying perpetual growth rates periods beyond longterm business plan period record impairment goodwill 2011 2010 2009 also consider market capitalization evaluation fair value goodwill although market capitalization declined compared 2010 decline level indicated potential impairment goodwill december 31 2011 impairment losses indefinitelived intangible assets recognized whenever estimated fair value less carrying value fair values calculated trademarks using relief royalty method estimates fair value trademarks determining present value royalty payments avoided result owning trademark method includes judgmental assumptions sales growth discount rates significant impact fair value substantially consistent assumptions used determine fair value reporting units discussed record material impairment trademarks 2011 2010 2009 net realizable value longlived assets including property plant equipment finitelived intangible assets reviewed periodically indicators potential impairments present based upon assessment estimated future cash flows related assets utilizing methodology similar goodwill additional considerations related longlived assets include expected maintenance improvements changes expected uses ongoing operating performance utilization property plant equipment depreciation property plant equipment stated historical cost less accumulated depreciation asset retirement obligations exist capitalized part carrying amount asset depreciated remaining useful life asset useful lives leasehold improvements lesser remaining lease term useful life improvement assets retired otherwise disposed costs related accumulated depreciation removed accounts resulting gains losses included income operations period depreciation computed straightline method based estimated useful lives depreciable assets generally estimated useful lives assets costs related routine repairs maintenance expensed incurred internally developed software capitalize certain costs associated development internaluse software generally costs related significant software development projects amortized estimated useful life typically three five years upon implementation software intangible assets intangible assets excluding trademarks considered indefinite life consist primarily engineering drawings distribution networks existing customer relationships software patents items amortized estimated useful lives generally ranging 3 40 years assets reviewed impairment whenever events circumstances indicate impairment may occurred deferred loan costs deferred loan costs consisting fees expenses associated debt financing amortized term associated debt using effective interest method additional amortization recorded periods optional prepayments debt made fair values financial instruments carrying amounts financial instruments approximated fair value december 31 2011 2010 assets liabilities recorded fair value consolidated balance sheets categorized based upon level judgment associated inputs used measure fair values hierarchical levels defined accounting standards codification flowserve corporation notes consolidated financial statements continued asc 820 fair value measurements disclosures directly related amount subjectivity associated inputs fair valuation assets liabilities asset liability’s categorization within fair value hierarchy based lowest level significant input valuation hierarchical levels follows level inputs unadjusted quoted prices active markets identical assets liabilities measurement date level ii inputs quoted prices included level either directly indirectly observable asset liability correlation market data measurement date duration instrument’s anticipated life level iii inputs reflect management’s best estimate market participants would use pricing asset liability measurement date consideration given risk inherent valuation technique risk inherent inputs model derivatives hedging activities part risk management strategy enter derivative contracts mitigate certain financial risks related foreign currencies interest rates riskmanagement derivatives policy outlining conditions enter financial derivative transactions employ foreign currency economic hedging strategy minimize potential losses earnings cash flows unfavorable foreign currency exchange rate movements strategy also minimizes potential gains favorable exchange rate movements foreign currency exposures arise transactions including firm commitments anticipated transactions denominated currency entity’s functional currency translation foreigndenominated assets liabilities us dollars primary currencies operate addition us dollar argentine peso australian dollar brazilian real british pound canadian dollar chinese yuan colombian peso euro indian rupee japanese yen mexican peso singapore dollar swedish krona venezuelan bolivar enter interest rate swap agreements purpose hedging exposure floating interest rates certain portions debt policy achieve hedge accounting treatment requires us document relationships hedging instruments hedged items risk management objective strategy entering hedges whether intend designate formal hedge accounting relationship process includes linking derivatives designated formal hedge accounting relationship fair value cash flow foreign currency hedges 1 specific assets liabilities balance sheet 2 specific firm commitments forecasted transactions cases designate hedge assess inception hedge ongoing basis whether derivatives highly effective offsetting changes fair value cash flows hedged items whether derivatives may expected remain highly effective future periods failure demonstrate effectiveness offsetting exposures retroactively prospectively would cause us deem hedge ineffective derivatives recognized balance sheet fair values derivatives qualify hedge accounting elected apply hedge accounting includes substantially forward exchange contracts changes fair values derivatives recognized income expense net consolidated statements income inception new derivative contract formal hedge accounting elected policy requires us designate derivative hedge forecasted transaction b variability cash flows received paid connection recognized asset liability cash flow hedge historically entered hedges fair values changes fair value derivative highly effective documented designated qualified cash flow hedge extent hedge effective recorded comprehensive expense income earnings affected variability cash flows hedged transaction upon settlement realized gains losses recognized income expense net consolidated statements income hedge ineffectiveness represents amount changes fair value derivative mirror change cash flow forecasted transaction recorded current period earnings discontinue hedge accounting • deem hedge ineffective determine designation derivative hedging instrument longer appropriate • derivative longer effectively offsets changes cash flows hedged item firm commitments contracts • derivative expires terminates sold flowserve corporation notes consolidated financial statements continued • occurrence contracted committed transaction longer probable occur originally expected period hedge accounting discontinued derivative remains outstanding carry derivative estimated fair value balance sheet recognizing changes fair value current period earnings cash flow hedge becomes ineffective deferred gains losses cash flow hedge remain accumulated comprehensive loss exposure relating item underlying hedge recognized becomes probable hedged forecasted transaction occur deferred gains losses hedging instrument recognized earnings immediately foreign currency translation assets liabilities foreign subsidiaries translated us dollars exchange rates prevailing balance sheet date income expenses translated average rates month translation gains losses reported component accumulated comprehensive loss transaction translation gains losses arising intercompany balances reported component accumulated comprehensive loss underlying transaction stems longterm equity investment debt designated due foreseeable future otherwise recognize transaction gains losses arising intercompany transactions component income intercompany balances longterm investment related designated due beyond foreseeable future may mitigate risk associated foreign currency fluctuations entering forward exchange contracts see note 6 discussion forward exchange contracts transactional currency gains losses arising transactions currencies sites’ functional currencies changes fair value forward exchange contracts qualify hedge accounting included consolidated results operations years ended december 31 2011 2010 2009 recognized net gains losses 37 million 265 million 78 million respectively amounts income expense net accompanying consolidated statements income stockbased compensation stockbased compensation measured grantdate fair value exercise price stock option awards value restricted share restricted share unit performancebased unit awards collectively referred restricted shares set closing price common stock new york stock exchange date grant date grants authorized board directors restricted share units performancebased units refer restricted awards voting rights accrue dividends forfeited vesting occur options expensed using graded vesting model whereby recognize compensation cost requisite service period separately vesting tranche award adjust sharebased compensation least annually changes estimate expected equity award forfeitures based actual forfeiture experience intrinsic value restricted shares typically product share price date grant number restricted shares granted amortized straightline basis compensation expense periods restrictions lapse based expected number shares vest forfeiture rate based unvested restricted shares forfeited compared original total restricted shares granted 4year period excluding significant forfeiture events expected recur earnings per share use twoclass method calculating earnings per share eps twoclass method earnings allocation formula determines earnings per share class common stock participating security earnings period distributed unvested restricted share awards earn nonforfeitable dividend rights qualify participating securities accordingly included basic computation unvested restricted shares participate equal basis common shares therefore difference undistributed earnings allocated participating security accordingly presentation prepared combined basis presented earnings per common share following reconciliation net earnings flowserve corporation weighted average shares calculating basic net earnings per common share flowserve corporation notes consolidated financial statements continued earnings per weighted average common share outstanding calculated follows diluted earnings per share based upon weighted average number shares determined basic earnings per share plus shares potentially issuable conjunction stock options restricted shares three years ended december 31 2011 2010 2009 options purchase common stock excluded computations potentially dilutive securities research development expense research development costs charged expense incurred aggregate research development costs included selling general administrative expenses sga 350 million 295 million 294 million 2011 2010 2009 respectively costs incurred research development primarily include salaries benefits consumable supplies well rent professional fees utilities depreciation property equipment used research development activities business combinations business combinations referred financial statements used purchase method accounting allocate purchase price identifiable tangible intangible assets liabilities recognizing goodwill purchase price exceeds fair value identifiable assets acquired net liabilities assumed accounting developments pronouncements implemented january 2010 financial accounting standards board fasb issued accounting standards update asu 201006 fair value measurements disclosures asc 820 improving disclosures fair value measurements requires additional disclosures transfers level ii activity level iii fair value measurements new disclosures clarifications existing disclosures effective interim annual reporting periods beginning december 15 2009 except disclosures level iii activity effective fiscal years beginning december 15 2010 interim periods within fiscal years adoption asu 201006 material impact consolidated financial condition results operations september 2009 fasb issued asu 200913 revenue recognition asc 605 multipledeliverable revenue arrangements consensus fasb emerging issues task force addresses accounting multipledeliverable arrangements enable vendors account products services separately rather combined unit requires expanded revenue recognition policy disclosures amendment addresses separate deliverables measure allocate arrangement consideration one units accounting adoption asu 200913 effective january 1 2011 impact consolidated financial condition results operations december 2010 fasb issued asu 201028 intangibles goodwill asc 350 perform step 2 goodwill impairment test reporting units zero negative carrying amounts consensus fasb flowserve corporation notes consolidated financial statements continued emerging issues task force modifies step 1 goodwill impairment test reporting units zero negative carrying amounts amendment requires entity perform step 2 goodwill impairment test likely goodwill impairment exists consider whether adverse qualitative factors indicating impairment may exist adoption asu 201028 effective january 1 2011 impact consolidated financial condition results operations december 2010 fasb issued asu 201029 business combinations asc 805 disclosure supplementary pro forma information business combinations consensus fasb emerging issues task force specifies public entity presents comparative financial statements entity disclose revenue earnings combined entity though business combination occurred current year occurred beginning comparable prior annual reporting period amendment also expands supplemental pro forma disclosures asc 805 include description nature amount material nonrecurring pro forma adjustments directly attributable business combination included reported pro forma revenue earnings adoption asu 201029 effective january 1 2011 material impact consolidated financial condition results operations pronouncements yet implemented june 2011 fasb issued asu 201105 comprehensive income asc 220 presentation comprehensive income specifies entity option present total comprehensive income components net income components comprehensive income either single continuous statement comprehensive income two separate consecutive statements amendment also requires entity present face financial statements reclassification adjustments items reclassified comprehensive income net income december 2011 fasb issued asu 201112 defer requirement present face financial statements reclassification adjustments items reclassified comprehensive income net income asu 201105 201112 effective fiscal years interim periods within years beginning december 15 2011 presentation disclosure requirements shall applied retrospectively periods presented adoption asu 201105 201112 impact consolidated financial condition results operations september 2011 fasb issued asu 201108 intangibles goodwill asc 350 testing goodwill impairment specifies entity option first assess qualitative factors determine whether likely fair value reporting unit less carrying amount basis determining whether necessary perform twostep goodwill impairment test entity required calculate fair value reporting unit unless entity determines likely fair value less carrying amount asu 201108 effective fiscal years interim periods within years beginning december 15 2011 expect adoption asu 201108 material impact consolidated financial condition results operations december 2011 fasb issued asu 201111 disclosures offsetting assets liabilities requires enhanced disclosures financial instruments derivative instruments either 1 offset accordance either asc 2102045 balance sheet offsetting asc 8151045 derivatives hedging overall 2 subject enforceable master netting arrangement similar agreement irrespective whether offset accordance either asc 2102045 asc 8151045 adoption asu 201111 impact consolidated financial condition results operations 2 acquisitions lawrence pumps inc effective october 28 2011 acquired inclusion epd 100 lawrence pumps inc lpi privatelyowned usbased pump manufacturer share purchase cash 896 million subject final adjustments lpi specializes design development manufacture engineered centrifugal slurry pumps critical services within petroleum refining petrochemical pulp paper energy markets terms purchase agreement deposited 15 million escrow held applied breach representations warranties indemnities 24 months additionally right make indemnification claims 15 purchase price 18 months expiration escrow period residual amounts shall released sellers satisfaction purchase price flowserve corporation notes consolidated financial statements continued purchase price allocated preliminary basis assets acquired liabilities assumed based estimates fair values date acquisition summarized excess acquisition date fair value total purchase price estimated fair value net tangible intangible assets recorded goodwill represents value expected obtained ability competitive offering complete pump product portfolio leveraging current sales distribution service network lpi products proprietary niche applications strategically complement product portfolio goodwill related acquisition recorded epd segment expected deductible tax purposes finitelived intangible assets expected weighted average useful lives ten years subsequent october 28 2011 revenues expenses lpi included consolidated statements income pro forma information provided due immateriality lpi generated approximately 44 million sales fiscal year ended december 31 2010 valbart srl effective july 16 2010 acquired inclusion fcd 100 valbart srl valbart privatelyowned italian valve manufacturer share purchase cash 1994 million included 338 million existing valbart net debt defined valbart’s third party debt less cash hand repaid closing valbart manufactures trunnionmounted ball valves used primarily upstream midstream oil gas applications enables us offer complete valve product portfolio oil gas project customers acquisition included valbart’s portion joint venture us entered december 2009 operational 2010 terms purchase agreement deposited 58 million escrow held applied breach representations warranties indemnities 30 months expiration escrow residual amounts shall released sellers satisfaction purchase price flowserve corporation notes consolidated financial statements continued purchase price allocated assets acquired liabilities assumed based estimates fair values date acquisition summarized excess acquisition date fair value total purchase price estimated fair value net tangible intangible assets recorded goodwill represents value expected obtained ability competitive offering complete valve product portfolio leveraging current sales distribution service network goodwill related acquisition recorded fcd segment expected deductible tax purposes trademarks indefinitelived intangible assets existing customer relationships noncompete agreements engineering drawings expected weighted average useful lives five years four years ten years respectively total amortizable intangible assets weighted average useful life approximately five years subsequent july 16 2010 revenues expenses valbart included consolidated statements income pro forma information provided due immateriality calder ag effective april 21 2009 acquired inclusion epd calder ag calder private swiss company supplier energy recovery technology use global desalination market 441 million net cash acquired total purchase price 284 million paid closing 24 million paid working capital valuation completed early july 2009 remaining 133 million total purchase price contingent upon calder achieving certain performance metrics twelve months following acquisition extent achieved expected paid cash within 12 months acquisition date initially recognized liability 44 million estimate acquisition date fair value contingent consideration based weighted probability achievement performance metrics specified period time date acquisition purchase price allocated assets acquired liabilities assumed based estimates fair values date acquisition excess acquisition date fair value total purchase price estimated fair value net tangible intangible assets recorded goodwill pro forma information provided due immateriality second half 2009 estimated fair value contingent consideration reduced 0 based 2009 results updated weighted probability achievement performance metrics resulting gain included sga consolidated statement income final measurement date performance metrics march 31 2010 performance metrics met resulting payment contingent consideration flowserve corporation notes consolidated financial statements continued 3 goodwill intangible assets changes carrying amount goodwill years ended december 31 2011 2010 follows 1 goodwill related acquisition valbart see note 2 additional information 2 goodwill primarily related acquisition lpi see note 2 additional information following table provides information intangible assets years ended december 31 2011 2010 1 engineering drawings represent estimated fair value associated specific acquired product component schematics 2 existing customer relationships acquired prior 2011 useful life five years 3 accumulated amortization indefinitelived intangible assets relates amounts recorded prior implementation date guidance issued asc 350 2011 2010 wrote expired fully amortized intangible assets patents total 02 million 113 million respectively flowserve corporation notes consolidated financial statements continued following schedule outlines actual amortization expense recognized 2011 estimate future amortization based upon finitelived intangible assets owned december 31 2011 4 inventories net consisted following certain reclassifications made prior period information conform current year presentation 2011 2010 2009 recognized expenses 165 million 101 million 137 million respectively excess obsolete inventory expenses included cost sales cos consolidated statements income 5 stockbased compensation plans established flowserve corporation equity incentive compensation plan 2010 plan effective january 1 2010 shareholderapproved plan authorizes issuance 2900000 shares common stock form restricted shares restricted share units performancebased units collectively referred “restricted shares” incentive stock options nonstatutory stock options stock appreciation rights bonus stock 2900000 shares common stock authorized 2010 plan 2432049 remain available issuance december 31 2011 addition 2010 plan also maintain flowserve corporation 2004 stock compensation plan “2004 plan” established april 21 2004 plan authorizes issuance 3500000 shares common stock grants restricted shares stock options equitybased awards 3500000 shares common stock authorized 2004 plan 483132 remain available issuance december 31 2011 recorded stockbased compensation follows flowserve corporation notes consolidated financial statements continued stock options granted officers employees directors allow purchase common shares market value stock date options granted although options granted market value generally options whether granted 2004 plan previously approved plans become exercisable staggered period ranging one five years typically one three years december 31 2011 outstanding options fully vested options generally expire ten years date grant within short period time following termination employment cessation services option holder options granted 2011 2010 2009 information related stock options issued officers employees directors prior 2009 plans presented following table additional information relating ranges options outstanding december 31 2011 follows december 31 2011 unrecognized compensation cost related outstanding stock option awards weighted average remaining contractual life options outstanding december 31 2011 2010 37 years 42 years respectively total intrinsic value stock options exercised years ended december 31 2011 2010 2009 15 million 86 million 49 million respectively stock options vested years ended december 31 2011 2010 compared total fair value stock options 27 million vested year ended december 31 2009 restricted shares generally restrictions restricted shares expire minimum one year maximum four years shares subject forfeiture restriction period typically restricted share grants staggered vesting periods one three years grant date intrinsic value restricted shares typically product share price date grant number restricted shares granted amortized straightline basis compensation expense periods restrictions lapse unearned compensation amortized compensation expense vesting period restricted shares december 31 2011 2010 270 million 316 million respectively unearned compensation cost related unvested restricted shares expected recognized weightedaverage period approximately 1 year amounts recognized net earnings prospective periods awards vest total market value restricted shares vested years ended december 31 2011 2010 2009 351 million 319 million 170 million respectively flowserve corporation notes consolidated financial statements continued following table summarizes information regarding restricted shares unvested restricted shares outstanding december 31 2011 includes 415000 units performancebased vesting provisions performancebased units issuable common stock vest upon achievement predefined performance targets primarily based average annual return net assets threeyear period compared measure defined peer group period units granted three annual grants since january 1 2009 vesting percentage 0 200 depending achievement specific performance targets compensation expense recognized 36month cliff vesting period based fair market value common stock date grant adjusted anticipated forfeitures performance period earned unearned compensation expense adjusted based changes expected achievement performance targets vesting provisions range 0 817000 shares based performance targets december 31 2011 estimate vesting 744000 shares based expected achievement performance targets 6 derivatives hedging activities risk management derivatives policy specifies conditions may enter derivative contracts see note 1 additional information purpose entering derivatives designated hedging instruments overall risk management strategies enter forward exchange contracts hedge risks associated transactions denominated currencies local currency operation engaging transaction december 31 2011 2010 4812 million 3585 million respectively notional amount outstanding forward exchange contracts third parties december 31 2011 length forward exchange contracts currently place ranged 3 days 19 months also part risk management program enter interest rate swap agreements hedge exposure floating interest rates certain portions debt december 31 2011 2010 3300 million 3500 million respectively notional amount outstanding interest rate swaps third parties interest rate swaps 100 effective december 31 2011 maximum remaining length interest rate contract place approximately 30 months exposed risk creditrelated losses resulting nonperformance counterparties financial instruments perform credit evaluations counterparties forward exchange contracts interest rate swap agreements expect counterparties meet obligations experienced credit losses counterparties fair value forward exchange contracts designated hedging instruments summarized flowserve corporation notes consolidated financial statements continued fair value interest rate swaps cash flow hedging relationships summarized current noncurrent derivative assets reported consolidated balance sheets prepaid expenses assets net respectively current noncurrent derivative liabilities reported consolidated balance sheets accrued liabilities retirement obligations liabilities respectively impact net changes fair values forward exchange contracts designated hedging instruments summarized impact net changes fair values interest rate swaps cash flow hedging relationships summarized gains losses recognized consolidated statements income forward exchange contracts interest rate swaps classified income expense net interest expense respectively expect recognize losses 05 million 03 million less 01 million net deferred taxes earnings 2012 2013 2014 respectively related interest rate swap agreements based fair values december 31 2011 7 realignment programs beginning 2009 initiated realignment programs reduce optimize certain nonstrategic manufacturing facilities overall cost structure improving operating efficiency reducing redundancies maximizing global consistency driving improved financial performance well expanding efforts optimize assets respond reduced orders drive enhanced customerfacing organization realignment programs substantially complete currently expect total realignment program charges approximately 93 million approved plans 912 million incurred december 31 2011 realignment programs consist restructuring nonrestructuring charges restructuring charges represent costs associated relocation certain business activities outsourcing business activities facility closures nonrestructuring charges costs incurred improve operating efficiency reduce redundancies primarily represent employee severance expenses reported cos sga applicable consolidated statements income charges net adjustments related realignment programs 48 million 183 million 681 million year ended december 31 2011 2010 2009 respectively generally aforementioned charges paid cash except asset writedowns noncash charges asset writedown charges 30 million 64 million 61 million recorded 2011 2010 2009 respectively flowserve corporation notes consolidated financial statements continued majority remaining cash payments related realignment programs incurred end 2012 restructuring reserve related realignment program 10 million 71 million december 31 2011 2010 respectively cash payments significant activity related restructuring reserve 2011 addition connection previously announced ipd recovery plan second quarter 2011 initiated new activities optimize structural parts ipds business expect charges related program nonrestructuring nature approximate 9 million 72 million incurred 2011 substantial majority recorded cos 8 fair value financial instruments financial instruments presented fair value consolidated balance sheets fair value defined price would received sell asset paid transfer liability orderly transaction market participants measurement date available fair value based observable market prices parameters derived prices parameters observable prices inputs available valuation models may applied assets liabilities recorded fair value consolidated balance sheets categorized based upon level judgment associated inputs used measure fair values hierarchical levels directly related amount subjectivity associated inputs fair valuation assets liabilities recurring fair value measurements limited investments derivative instruments equity securities fair value measurements derivative instruments determined using models maximize use observable market inputs including interest rate curves forward spot prices currencies classified level ii fair value hierarchy fair values derivatives included note 6 fair value measurements investments equity securities determined using quoted market prices fair values investments equity securities changes thereto immaterial consolidated financial position results operations 9 details certain consolidated balance sheet captions following tables present financial information certain consolidated balance sheet captions accounts receivable net accounts receivable net property plant equipment net property plant equipment net flowserve corporation notes consolidated financial statements continued accrued liabilities accrued liabilities accrued liabilities include professional fees lease obligations insurance interest freight restructuring charges accrued cash dividends payable legal environmental matters derivative liabilities items none individually exceed 5 current liabilities see note 7 additional information restructuring charges retirement obligations liabilities retirement obligations liabilities 10 equity method investments december 31 2011 investments eight joint ventures one located japan south korea saudi arabia united arab emirates two located china india accounted using equity method summarized combined financial statement information based recent financial information unaudited investments 1 provision income taxes based tax laws rates countries investees operate taxation regimes vary nominal rates also allowability deductions credits benefits flowserve corporation notes consolidated financial statements continued reconciliation net income per combined income statement information equity income investees per consolidated statements income follows investments unconsolidated affiliates 703 million 713 million december 31 2011 2010 respectively recorded assets net balance sheet 11 debt lease obligations debt including capital lease obligations consisted scheduled maturities credit facilities described well capital lease obligations borrowings flowserve corporation notes consolidated financial statements continued credit facilities december 14 2010 entered credit agreement credit agreement bank america na swingline lender letter credit issuer administrative agent lenders party thereto together lenders credit agreement provides 5000 million term loan facility maturity date december 14 2015 5000 million revolving credit facility maturity date december 14 2015 collectively referred credit facilities revolving credit facility includes 3000 million sublimit issuance letters credit subject certain conditions right increase amount revolving credit facility aggregate amount exceed 2000 million december 31 2011 98 million deferred loan costs included assets net costs amortized term credit agreement recorded interest expense december 31 2011 2010 amounts outstanding revolving credit facility respectively outstanding letters credit 1474 million 1339 million december 31 2011 2010 respectively reduced borrowing capacity 3526 million 3661 million respectively borrowings credit facilities respect swingline loans bear interest rate equal option either 1 london interbank offered rate libor plus 175 250 applicable depending consolidated leverage ratio 2 base rate based greater prime rate recently announced administrative agent credit facilities federal funds rate plus 050 3 daily rate equal one month libor plus 10 plus applicable margin 075 150 determined reference ratio total debt consolidated earnings interest taxes depreciation amortization ebitda applicable interest rate december 31 2011 258 borrowings new credit facilities connection credit facilities entered 3300 million notional amount interest rate swaps december 31 2011 hedge exposure floating interest rates pay lenders credit facilities commitment fee equal percentage ranging 030 050 determined reference ratio total debt consolidated ebitda unutilized portion revolving credit facility letter credit fees respect standby letter credit outstanding credit facilities equal percentage based applicable margin effect libor borrowings revolving credit facility fees financial performance standby letters credit 20 10 respectively obligations credit facilities unconditionally guaranteed jointly severally substantially existing subsequently acquired organized domestic subsidiaries 65 capital stock certain foreign subsidiaries subject certain controlled company materiality exceptions lenders agreed release collateral achieve investment grade rating moody’s investors service inc standard poor’s ratings services senior unsecured noncreditenhanced longterm debt case outlook stable better understanding identical collateral required pledged lenders anytime following release collateral investment grade rating maintained addition prior obtaining maintaining investment grade credit ratings guarantors’ obligations credit facilities collateralized substantially guarantors’ assets achieved ratings december 31 2011 credit agreement contains among things covenants defining subsidiaries’ ability dispose assets merge pay dividends repurchase redeem capital stock indebtedness incur indebtedness guarantees create liens enter agreements negative pledge clauses make certain investments acquisitions enter transactions affiliates engage business activity existing business credit agreement also contains covenants requiring us deliver lenders leverage interest coverage financial covenant certificates compliance maximum permitted leverage ratio 325 times debt total consolidated ebitda minimum interest coverage 325 times consolidated ebitda total interest expense compliance financial covenants credit agreement tested quarterly complied covenants december 31 2011 credit agreement includes customary events default including nonpayment principal interest violation covenants incorrectness representations warranties cross defaults cross acceleration bankruptcy material judgments employee retirement income security act 1974 amended erisa events actual asserted invalidity guarantees security documents certain changes control company occurrence event default could result acceleration guarantors’ obligations credit facilities repayment obligations made total scheduled repayments current credit agreement previous credit agreement 250 million 43 million 57 million 2011 2010 2009 respectively made mandatory repayments optional prepayments 2011 2010 2009 exception proceeds advanced term loan facility credit agreement along approximately 40 million cash hand used repay previously outstanding flowserve corporation notes consolidated financial statements continued indebtedness previous credit agreement included 6000 million term loan 4000 million revolving line credit may prepay loans credit facilities whole part without premium penalty time european letter credit facilities october 30 2009 entered new 364day unsecured european letter credit facility new european loc facility initial commitment €1250 million new european loc facility renewable annually consistent previous european letter credit facility old european loc facility used contingent obligations respect surety performance bonds bank guarantees similar obligations maturities five years renewed new european loc facility october 2011 consistent terms additional 364day period pay fees 110 135 utilized capacity 040 unutilized capacity new european loc facility outstanding letters credit drawn new european loc facility €810 million 1050 million €557 million 745 million december 31 2011 2010 respectively ability issue additional letters credit old european loc facility commitment €1100 million expired november 9 2009 paid annual fronting fees 0875 010 respectively letters credit written old european loc facility outstanding letters credit written old european loc facility €122 million 158 million €333 million 445 million december 31 2011 2010 respectively certain banks parties facilities managing exposures aggregated basis commitment new european loc facility reduced face amount existing letters credit written old european loc facility prior expiration existing letters credit remain outstanding accordingly offset €1250 million capacity new european loc facility maturity december 31 2011 approximately one year majority outstanding existing letters credit consideration outstanding commitments facilities available capacity new european loc facility €1167 million december 31 2011 €810 million utilized operating leases noncancelable operating leases certain offices service quick response centers certain manufacturing operating facilities machinery equipment automobiles rental expense relating operating leases 528 million 469 million 490 million 2011 2010 2009 respectively future minimum lease payments due noncancelable operating leases amounts thousands 12 pension postretirement benefits sponsor several noncontributory defined benefit pension plans covering substantially us employees certain nonus employees provide benefits based years service age job grade levels type compensation retirement benefits covered employees provided contributory pension plans cash balance pension plans governmentsponsored retirement programs funded defined benefit pension plans receive funding based independent actuarial valuations provide current service amount sufficient amortize unfunded prior service periods exceed 30 years funding falling within legal limits prescribed prevailing regulation also maintain unfunded defined benefit plans permitted local regulations receive funding benefits become due defined benefit plan strategy ensure current future benefit obligations adequately funded costeffective manner additionally investing objective achieve highest level investment performance compatible risk tolerance prudent investment practices longterm nature defined benefit plan liabilities funding strategy based longterm perspective formulating implementing investment policies evaluating investment performance flowserve corporation notes consolidated financial statements continued asset allocation defined benefit plans reflect decision proportion investment equity fixed income securities appropriate various subasset classes least annually complete comprehensive review asset allocation policy underlying assumptions includes longterm capital markets rate return assumptions risk tolerances relative defined benefit plan liabilities expected rates return defined benefit plan assets derived review asset allocation strategy expected longterm performance asset classes risks factors adjusted specific investment strategy rates impacted changes general market conditions longterm nature shortterm market changes significantly impact rates us defined benefit plan assets consist balanced portfolio us equity fixed income securities nonus defined benefit plan assets include significant concentration united kingdom uk equity fixed income securities monitor investment allocations manage plan assets maintain acceptable levels risk addition certain defined benefit plans hold investments european equity fixed income securities periods presented used measurement date december 31 worldwide pension postretirement medical plans us defined benefit plans maintain qualified nonqualified defined benefit pension plans us qualified plan provides coverage substantially fulltime us employees receive benefits earnings threshold specified us department labor nonqualified plans primarily cover small number employees including current former members senior management providing benefit levels equivalent participants otherwise limited us department labor rules us plans designed operate cash balance arrangements employee option take lump sum payment end service total accumulated benefit obligation equivalent total projected benefit obligation benefit obligation following assumptions related us defined benefit pension plans december 31 2011 compared december 31 2010 decreased discount rate 500 450 based analysis publiclytraded investment grade us corporate bonds lower yield due current market conditions december 31 2011 compared december 31 2010 average assumed rate compensation remained constant 425 determining 2011 expense decreased expected rate return assets 700 625 primarily based target allocations expected longterm asset returns longterm rate return assumption calculated using quantitative approach utilizes unadjusted historical returns asset allocation inputs calculation flowserve corporation notes consolidated financial statements continued net pension expense us defined benefit pension plans including qualified nonqualified plans estimated prior service benefit defined benefit pension plans amortized accumulated comprehensive loss us pension expense 2012 12 million estimated net loss defined benefit pension plans amortized accumulated comprehensive loss us pension expense 2012 123 million amortize estimated prior service benefits estimated net losses remaining expected service period following summarizes net pension liability us plans following summarizes amounts recognized balance sheet us plans following summary changes us defined benefit plans’ pension obligations flowserve corporation notes consolidated financial statements continued following table summarizes expected cash benefit payments us defined benefit pension plans future amounts millions following table shows change accumulated comprehensive loss attributable components net cost change benefit obligations us plans net tax amounts recorded accumulated comprehensive loss consist following reconciliation us defined benefit pension plans’ assets contributed 89 million 334 million us defined benefit pension plans 2011 2010 respectively payments exceeded minimum funding requirements mandated us department labor rules estimated contribution 2012 expected 20 million 25 million excluding direct benefits paid flowserve corporation notes consolidated financial statements continued us defined benefit plan assets held qualified plan asset allocation qualified plan end 2011 2010 asset category follows 1 less 1 holdings emerging markets category 2010 2 less 1 holdings category 2011 2010 none common stock directly held qualified plan investment strategy earn longterm rate return consistent acceptable degree risk minimize cash contributions life plan taking account liquidity needs plan preserve capital diversified investments high quality securities current allocation target invest approximately 50 plan assets equity securities 50 fixed income securities within investment category assets allocated various investment strategies professional money management firm manages assets engage consultant assist evaluating activities periodically review allocation target generally conjunction asset liability study consideration future cash flow needs regularly rebalance actual allocation target investment allocation plan assets invested commingled funds individual funds actively managed intent outperform specified benchmarks pension investment committee responsible setting investment strategy target asset allocation well selecting individual funds qualified plan approaching fully funded status working toward implementation liabilitydriven investing ldi strategy closely align duration assets duration liabilities ldi strategy result asset portfolio closely matches behavior liability thereby protecting funded status plan flowserve corporation notes consolidated financial statements continued plan’s financial instruments shown presented fair value see note 1 discussions hierarchical levels fair values plan’s investments determined fair values us defined benefit plan assets us large cap funds seek outperform russell 1000 r index investments 1000 large medium capitalization us companies represented russell 1000 r index composed largest 1000 us equities russell 3000 r index determined market capitalization russell 3000 r index composed largest us equities determined market capitalization b us small cap funds seek outperform russell 2000 r index investments medium small capitalization us companies represented russell 2000 r index composed smallest 2000 us equities russell 3000 r index determined market capitalization c international large cap funds seek outperform msci europe australia far east index investments developed nations world maintain high degree diversification among countries currencies emerging markets funds represent diversified portfolio seeks high longterm returns comparable investments emerging markets investing stocks newly developed emerging market economies e longterm governmentcredit funds seek outperform barclays capital us longterm governmentcredit index generating excess return variety diversified strategies securities longer durations sector rotation security selection tactical use highyield bonds f intermediate bonds seek outperform barclays capital us aggregate bond index generating excess return variety diversified strategies securities short intermediate durations sector rotation security selection tactical use highyield bonds g multistrategy hedge funds represents fund hedge funds invest variety private equity funds real estate level iii rollforward details provided due immateriality h details provided due immateriality nonus defined benefit plans maintain defined benefit pension plans cover employees following countries austria france germany india indonesia italy japan mexico netherlands sweden uk assets uk two plans netherlands one plan represent 98 total nonus plan assets nonus assets details countries’ assets provided due immateriality flowserve corporation notes consolidated financial statements continued following assumptions related nonus defined benefit pension plans december 31 2011 compared december 31 2010 decreased average discount rate nonus plans 513 509 based primarily lower applicable corporate aa bond yields uk partially offset higher applicable corporate aa bond yields euro zone determining 2011 expense decreased average rate return assets 621 december 31 2010 613 december 31 2011 primarily result decrease uk rate return assets resulting changes target allocations expected rate return plan assets longterm nature shortterm market changes significantly impact rates many nonus defined benefit plans unfunded permitted local regulation expected longterm rate return assets funded plans determined assessing rates return asset class calculated using quantitative approach utilizes unadjusted historical returns asset allocation inputs calculation work actuaries determine reasonableness longterm rate return assumptions looking several factors including historical returns expected future returns asset allocation risks asset class items net pension expense nonus defined benefit pension plans estimated net loss defined benefit pension plans amortized accumulated comprehensive loss nonus pension expense 2012 38 million amortize estimated net losses remaining expected service period remaining expected lifetime inactive participants plans inactive participants following summarizes net pension liability nonus plans flowserve corporation notes consolidated financial statements continued following summarizes amounts recognized balance sheet nonus plans following reconciliation nonus plans’ defined benefit pension obligations 1 actuarial losses primarily reflect impact assumption changes uk plans 2 currency translation impact 2010 reflects strengthening us dollar exchange rate significant currencies primarily british pound euro following table summarizes expected cash benefit payments nonus defined benefit plans future amounts millions flowserve corporation notes consolidated financial statements continued following table shows change accumulated comprehensive loss attributable components net cost change benefit obligations nonus plans net tax amounts recorded accumulated comprehensive loss consist following reconciliation nonus plans’ defined benefit pension assets contributions nonus defined benefit pension plans 2012 expected approximately 10 million excluding direct benefits paid flowserve corporation notes consolidated financial statements continued asset allocations nonus defined benefit pension plans end 2011 2010 follows 1 less 1 holdings emerging markets category 2010 none common stock held directly plans cases investment strategy plans earn longterm rate return consistent acceptable degree risk minimize cash contributions life plan taking account liquidity needs plan legal requirements particular country preserve capital diversified investments high quality securities asset allocation differs plan based upon plan’s benefit obligation participants well results asset liability studies conducted plan consideration future cash flow needs professional money management firms manage plan assets engage consultants uk netherlands assist evaluation activities assets uk plans overseen group trustees review investment strategy asset allocation fund selection assets passively managed invested index funds attempt match performance specified benchmark index assets netherlands plan independently managed outside service provider flowserve corporation notes consolidated financial statements continued fair values nonus assets north american companies represents us canadian large cap equity index funds passively managed track respective benchmarks ftse allworld usa index ftse allworld canada index b uk companies represents uk equity index fund passively managed tracks ftse allshare index c european companies represents european equity index fund passively managed tracks ftse allworld developed europe exuk index asian pacific companies represents japanese pacific rim equity index funds passively managed track respective benchmarks ftse allworld japan index ftse allworld developed asia pacific exjapan index e global equity represents actively managed global equity funds taking topdown strategic view different regions analyzing companies based fundamentals marketdriven thematic quantitative factors generate alpha f emerging markets represents diversified portfolio shares issued companies developing emerging country latin america asia eastern europe middle east africa using bottomup stock selection process g uk government gilt index represents uk government issued fixed income investments passively managed track respective benchmarks ftse uk gilt indexlinked 5 years index ftse uk gilt 15 years index h uk corporate bond index represents uk corporate bond investments passively managed track iboxx 15 years £ nongilt index global fixed income bond represents mostly european fixed income investment funds actively managed diversified primarily invested traditional government bonds highquality corporate bonds asset backed securities emerging market debt high yield corporates j includes assets held plans outside uk netherlands details including level iii rollforward details provided due immateriality flowserve corporation notes consolidated financial statements continued defined benefit pension plans accumulated benefit obligations excess plan assets following summarizes key pension plan information regarding us nonus plans whose accumulated benefit obligations exceed fair value respective plan assets postretirement medical plans sponsor several defined benefit postretirement medical plans covering certain current retirees limited number future retirees us plans provide medical dental benefits administered insurance companies health maintenance organizations plans include participant contributions deductibles coinsurance provisions limitations integrated medicare group plans fund plans benefits health maintenance organization premiums paid plans hold assets period presented accordingly investment strategy targeted allocations plan assets benefits postretirement medical plans available new employees existing employees following assumptions related postretirement benefits assumed ranges annual rates increase medical costs used determine net expense 85 2011 90 2010 90 2009 gradual decrease 50 2032 future years net postretirement benefit income postretirement medical plans estimated prior service benefit postretirement medical plans amortized accumulated comprehensive loss us pension expense 2012 less 01 million estimated net gain postretirement medical plans amortized accumulated comprehensive loss us expense 2012 20 million following summarizes accrued postretirement benefits liability postretirement medical plans flowserve corporation notes consolidated financial statements continued following summarizes amounts recognized balance sheet postretirement benefit obligation following reconciliation postretirement benefit obligation following presents expected benefit payments future periods amounts millions following table shows change accumulated comprehensive loss attributable components net cost change benefit obligations postretirement benefits net tax flowserve corporation notes consolidated financial statements continued amounts recorded accumulated comprehensive loss consist made contributions postretirement medical plans pay benefits 39 million 2011 38 million 2010 38 million 2009 postretirement medical plans unfunded make contributions covered individuals’ claims approved payment accordingly contributions period directly correlated benefits paid assumed health care cost trend rates effect amounts reported postretirement medical plans onepercentage point change assumed health care cost trend rates would following effect 2011 reported amounts thousands defined contribution plans sponsor several defined contribution plans covering substantially us canadian employees certain nonus employees may contribute plans contributions matched varying amounts us including opportunities discretionary matching contributions us defined contribution plan expense 178 million 2011 173 million 2010 167 million 2009 participants us defined contribution plan option invest common stock prior 2009 discretionary contributions us funded common stock therefore plan assets include holdings common stock 13 legal matters contingencies asbestosrelated claims defendant substantial number lawsuits seek recover damages personal injury allegedly caused exposure asbestoscontaining products manufactured andor distributed heritage companies past overall number asbestosrelated claims generally declined recent years assurance trend continue average cost per claim increase asbestoscontaining materials incorporated products primarily encapsulated used internal components process equipment believe significant emission asbestos fibers occurred use equipment practice vigorously contest resolve claims successful resolving majority claims little payment historically high percentage resolved claims covered applicable insurance indemnities companies believe substantial majority existing claims continue covered insurance indemnities accordingly recorded liability estimate likely settlement asserted claims related receivable insurers companies estimated recovery extent believe amounts recovery probable otherwise dispute unfavorable rulings judgments settlement terms regarding claims could material adverse impact business financial condition results operations cash flows currently believe likelihood remote one asbestos insurance related matter claim litigation relevant insurers substantially excess recorded receivable claim resolved favorably reflected receivable would benefit onetime gain amount excess currently unable estimate impact unasserted asbestosrelated claims although future claims would also subject existing indemnities insurance coverage flowserve corporation notes consolidated financial statements continued united nations oilforfood program mid2006 french authorities began investigation 170 french companies french subsidiary included concerning suspected inappropriate activities conducted connection united nations oil food program anticipated previously disclosed french investigation french subsidiary formally opened first quarter 2010 french subsidiary filed formal response french court currently expect incur additional case resolution costs material amount matter however french authorities take enforcement action french subsidiary regarding investigation may subject monetary nonmonetary penalties currently believe material adverse effect company addition governmental investigation referenced june 27 2008 republic iraq filed civil suit federal court new york 93 participants united nations oilforfood program including us two foreign subsidiaries participated program material developments case since initially filed intend vigorously contest suit believe valid defenses claims asserted cannot predict outcome suit present time currently believe resolution suit material adverse financial impact company export compliance previously reported march 2006 initiated voluntary systematic process determine compliance respect us export control economic sanctions laws regulations process included onsite review approximately 40 sites globally addressed period october 1 2002 october 1 2007 end 2008 completed comprehensive disclosures commerce departments bureau industry security bis treasury departments office foreign assets control ofac regarding results review process continued work closely authorities next several years supplement clarify specific aspects voluntary disclosures based results review process determined voluntarily selfdisclosed certain domestic foreign affiliates engaged unlicensed exports reexports pumps valves related components iran syria sudan cuba various countries previously disclosed quarterly report form 10q quarter ended september 30 2011 disclosed public releases bis ofac late september 2011 entered settlement agreements bis ofac resolved full matters contained voluntary selfdisclosures settlements agreed pay civil penalty 25 million bis settle 228 charges unlicensed exports reexports iran syria various countries 05 million ofac settle charges alleging 58 violations ofacs iranian cuban sudanese sanctioned programs part settlement bis also agreed conduct onetime postsettlement compliance audit 16 company sites located us overseas full amount civil penalties expected cost audit approximated reserve previously established matter disclosed effective january 1 2012 foreign subsidiaries substantially completed voluntary winding business countries currently involved potentially responsible party seven former public waste disposal sites various stages evaluation remediation projected cost remediation sites well alleged “fair share” allocation remain uncertain studies completed parties either negotiated amicable resolution matter judicially resolved site many parties similarly identified many parties identified financially strong solvent companies appear able pay share remediation costs based information waste disposal practices sites environmental regulatory process general believe likely ultimate remediation liability costs site apportioned among liable parties including site owners waste transporters according volumes andor toxicity wastes shown disposed sites believe exposure existing disposal sites material also defendant number lawsuits including product liability claims insured subject applicable deductibles arising ordinary course business also involved uninsured routine litigation incidental business currently believe none litigation either individually aggregate material business operations overall financial condition however litigation inherently unpredictable resolutions dispositions claims lawsuits settlement otherwise could adverse impact financial position results operations cash flows reporting period resolution disposition occurs flowserve corporation notes consolidated financial statements continued although none aforementioned potential liabilities quantified absolute certainty except otherwise indicated established reserves covering exposures relating contingencies extent believed reasonably estimable probable based past experience available facts additional exposures beyond reserves could exist currently cannot estimated continue evaluate update reserves necessary appropriate 14 warranty reserve recorded reserves product warranty claims included current noncurrent liabilities following summary activity warranty reserve 15 shareholders’ equity february 20 2012 board directors authorized increase payment quarterly dividends common stock 032 per share 036 per share payable quarterly beginning april 13 2012 february 21 2011 board directors authorized increase payment quarterly dividends common stock 029 per share 032 per share payable quarterly beginning april 14 2011 february 22 2010 board directors authorized increase payment quarterly dividends common stock 027 per share 029 per share payable quarterly beginning april 7 2010 generally dividend dateofrecord last month quarter dividend paid following month february 27 2008 board directors announced approval program repurchase 3000 million outstanding common stock concluded fourth quarter 2011 september 12 2011 board directors announced approval new program repurchase 3000 million outstanding common stock unspecified time period repurchased 73 million 1016 million common stock old new programs respectively fourth quarter 2011 december 15 2011 board directors announced approval replenishment new 3000 million share repurchase program providing full 3000 million remaining authorized repurchase capacity december 31 2011 share repurchase program expiration date reserve right limit terminate repurchase program time without notice repurchased 1482833 450000 544500 shares 1500 million 460 million 409 million 2011 2010 2009 respectively date repurchased total 4218433 shares 4019 million programs flowserve corporation notes consolidated financial statements continued 16 income taxes provision income taxes consists following expected cash payments current income tax expense 2011 2010 2009 reduced 57 million 100 million 04 million respectively result tax deductions related exercise nonqualified employee stock options vesting restricted stock income tax benefit resulting stockbased compensation plans increased capital excess par value provision income taxes differs statutory corporate rate due following net increase decrease valuation allowances rate reconciliation includes net increase reduction foreign valuation allowances 35 million 23 million 09 million 2011 2010 2009 respectively 2011 2010 2009 effective tax rates differed federal statutory rate 35 primarily due net impact foreign operations included impacts lower foreign tax rates changes reserves established uncertain tax positions assert permanent reinvestment majority invested capital unremitted foreign earnings foreign subsidiaries however assert permanent reinvestment limited number foreign subsidiaries future distributions may occur cumulative amount undistributed earnings considered permanently reinvested 13 billion permanently reinvested earnings repatriated future period form dividends otherwise provision income taxes may increase materially period three years reported period ended december 31 flowserve corporation notes consolidated financial statements continued 2011 recognized net deferred tax assets attributable excess foreign tax credits unremitted earnings foreign currency translation adjustments foreign subsidiaries excess financial reporting basis subsidiaries permanent reinvestment asserted cash deemed dividend distributions resulted recognition 95 million 82 million 24 million income tax benefit years ended december 31 2011 2010 2009 respectively recorded benefit excess foreign tax credits associated deemed repatriation unremitted earnings credits available offset liability associated dividends deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes significant components consolidated deferred tax assets liabilities 1579 million us foreign net operating loss carryforwards december 31 2011 total 371 million state net operating losses net operating losses generated us unused expire 2012 2026 majority nonus net operating losses carry forward without expiration additionally 434 million foreign tax credit carryforwards december 31 2011 expiring 2018 2020 valuation allowance reserves recorded flowserve corporation notes consolidated financial statements continued earnings income taxes comprised tabular reconciliation total gross amount unrecognized tax benefits excluding interest penalties follows millions amount gross unrecognized tax benefits december 31 2011 1188 million includes 250 million accrued interest penalties amount 752 million recognized would favorably impact effective tax rate years ended december 31 2011 2010 2009 recognized net interest penalty income expense 19 million 23 million 44 million respectively consolidated statement income limited exception longer subject us federal state local income tax audits years 2007 nonus income tax audits years 2004 currently examination various years china germany india italy singapore us venezuela reasonably possible within next 12 months effective tax rate impacted resolution matters audited various taxing authorities also reasonably possible statute limitations close various taxing jurisdictions within next 12 months estimate could record reduction tax expense 159 million 257 million within next 12 months 17 business segment information principally engaged worldwide design manufacture distribution service industrial flow management equipment provide long leadtime custom highly engineered pumps standardized general purpose pumps mechanical seals industrial valves related automation products solutions primarily oil gas chemical power generation water management general industries requiring flow management products services business segments defined share focus industrial flow control technology high number common customers segments also complementary product offerings technologies often combined applications provide us net competitive advantage segments also benefit global footprint economies scale reducing administrative overhead costs serve customers cost effectively conduct operations three business segments based type product manage business • fsg epd long leadtime custom highlyengineered pumps pump systems mechanical seals auxiliary systems replacement parts related services • fsg ipd engineered preconfigured industrial pumps pump systems related products services flowserve corporation notes consolidated financial statements continued • fcd engineered industrial valves control valves actuators controls related services 2011 president fsg reported directly chief executive officer ceo fsg vice president finance reported directly chief accounting officer cao structure fsg consists two reportable operating segments epd ipd 2011 fcd president reported directly ceo vice president finance reported directly cao decisionmaking purposes ceo members senior executive management use financial information generated reported reportable segment level corporate headquarters constitute separate division business segment january 11 2012 new unified operational leadership structure announced resulting creation chief operating officer position lieu segment president structure creation position impact defined three business segments assessment ceo chief operating decision maker evaluate segment performance allocate resources based reportable segment’s operating income amounts classified eliminations include corporate headquarters costs minor entities constitute separate segments intersegment sales transfers recorded cost plus profit margin sales related margin sales eliminated consolidation following summary financial information reportable segments years ended december 31 2011 2010 2009 reconciled amounts reported consolidated financial statements flowserve corporation notes consolidated financial statements continued 1 changes identifiable assets eliminations 2011 2010 2009 primarily result changes cash balances geographic information attribute sales different geographic areas based facilities’ locations longlived assets classified based geographic area assets located exclude deferred tax assets categorized noncurrent sales longlived assets geographic area follows 1 ema includes europe middle east africa germany accounted approximately 9 2011 9 2010 12 2009 consolidated sales italy accounted approximately 10 consolidated longlived assets 2011 2010 individual country within group represents 10 consolidated totals period presented 2 asia includes asia australia individual country within group represents 10 consolidated totals period presented 3 includes canada latin america individual country within group represents 10 consolidated totals period presented net sales international customers including export sales us represented 73 total sales 2011 2010 2009 major customer information large number customers across large number manufacturing service facilities believe sales individual customer represent 10 consolidated sales years presented flowserve corporation notes consolidated financial statements continued 18 accumulated comprehensive loss following presents components accumulated comprehensive loss net related tax effects 1 includes foreign currency translation adjustments attributable noncontrolling interests 2 foreign currency translation adjustments 2011 primarily represents strengthening us dollar exchange rate versus euro british pound december 31 2011 compared december 31 2010 foreign currency translation adjustments 2010 primarily represents strengthening us dollar exchange rate versus euro british pound december 31 2010 compared december 31 2009 19 quarterly financial data unaudited following presents summary unaudited quarterly data 2011 2010 amounts millions except per share data significant fourth quarter adjustments 2011 significant fourth quarter adjustment 2010 pretax record 81 million charges related realignment programs see note 7 additional information realignment programs item 9item 8 financial statements supplementary data report independent registered public accounting firm board directors shareholders flowserve corporation opinion consolidated financial statements listed index appearing item 15a1 present fairly material respects financial position flowserve corporation subsidiaries december 31 2013 2012 results operations cash flows three years period ended december 31 2013 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed accompanying index appearing item 15a2 presents fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintained material respects effective internal control financial reporting december 31 2013 based criteria established internal control integrated framework 1992 issued committee sponsoring organizations treadway commission coso companys management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report internal control financial reporting responsibility express opinions financial statements financial statement schedule companys internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate flowserve corporation consolidated balance sheets see accompanying notes consolidated financial statements flowserve corporation consolidated statements income see accompanying notes consolidated financial statements flowserve corporation consolidated statements comprehensive income see accompanying notes consolidated financial statements flowserve corporation consolidated statements shareholders’ equity flowserve corporation consolidated statements cash flows flowserve corporation notes consolidated financial statements december 31 2013 2012 three years ended december 31 2013 1 significant accounting policies accounting developments principally engaged worldwide design manufacture distribution service industrial flow management equipment provide long lead time custom highlyengineered pumps standardized generalpurpose pumps mechanical seals industrial valves related automation products solutions primarily oil gas chemical power generation water management general industries requiring flow management products services equipment manufactured serviced us predominantly used industries deal difficulttohandle corrosive fluids well environments extreme temperatures pressure horsepower speed business affected economic conditions united states us countries products sold serviced cyclical nature competitive environment industries served relationship us dollar currencies demand pricing customers’ end products stock split june 7 2013 recorded threeforone stock split shareholders equity share data including treasury shares stockbased compensation award shares per share data presented herein retrospectively adjusted reflect impact increase authorized shares stock split appropriate details stock split included note 15 venezuela effective february 13 2013 venezuelan government devalued currency bolivar 43 63 bolivars us dollar operations venezuela generally consist service center performs service repair activities addition certain operations countries sell equipment parts typically denominated us dollars directly venezuelan customers venezuelan subsidiarys sales year ending december 31 2013 total assets december 31 2013 represented less 1 consolidated sales total assets periods result devaluation recognized loss 40 million first quarter 2013 loss reported expense income net consolidated statements income resulted tax benefit evaluated carrying value related assets concluded current impairment continuing monitor actions venezuelan government local economic conditions may adversely impact future consolidated financial condition results operations including impacts venezuelan operations imports market venezuelan subsidiarys ability remit cash dividends payments official rate principles consolidation consolidated financial statements include accounts company wholly majorityowned subsidiaries addition would consolidate variable interest entities deemed primary beneficiary noncontrolling interests nonaffiliated parties recognized majorityowned consolidated subsidiaries intercompany profitslosses transactions balances among consolidated entities eliminated consolidated financial statements investments unconsolidated affiliated companies represent noncontrolling ownership interests 20 50 accounted using equity method approximates equity interest underlying equivalent net book value accounting principles generally accepted us gaap investments interests less 20 investee accounted cost method whereby income recognized event dividend receipt investments accounted cost method tested impairment indicator present use estimates process preparing financial statements conformity us gaap requires us make estimates assumptions affect reported amounts certain assets liabilities revenues expenses believe estimates assumptions reasonable however actual results may differ materially estimates significant estimates assumptions used determining • revenue recognition net liquidated damages delivery penalties • income taxes deferred taxes tax valuation allowances tax reserves • reserves contingent loss • retirement postretirement benefits • valuation goodwill indefinitelived intangible assets longlived assets revenue recognition revenues product sales recognized risks rewards ownership transferred customers typically based contractual delivery terms agreed customer fulfillment inconsequential perfunctory actions addition policy requires persuasive evidence arrangement fixed determinable sales price reasonable assurance collectability defer recognition revenue advance payments received customers performance obligations completed andor services performed freight charges billed customers included sales related shipping costs included cost sales consolidated statements income contracts typically include cancellation provisions require customers reimburse us costs incurred date cancellation well contractual cancellation penalties enter certain agreements multiple deliverables may include combination designing developing manufacturing modifying installing commissioning flow management equipment providing services related performance products delivery products services typically occurs within one twoyear period although many arrangements shortcycle type orders shorter timeframe delivery separate deliverables units accounting based whether deliverables standalone value customer impact general rights return immaterial contract value allocated ratably units accounting arrangement based relative selling prices determined deliverables sold separately revenues longterm contracts exceed certain internal thresholds regarding size duration project provide receipt progress billings customer recorded percentage completion method progress measured costtocost basis percentage completion revenue represents less 7 consolidated sales year presented revenue service repair contracts recognized services agreed customer rendered revenues generated fixed fee service repair contracts recognized ratable basis term contract contracts range duration generally extend five years fixed fee service contracts represent approximately 1 consolidated sales year presented certain instances provide guaranteed completion dates terms contracts failure meet contractual delivery dates result late delivery penalties nonrecoverable costs instances payment costs deemed probable perform project profitability analysis accounting costs reduction realizable revenues could potentially cause estimated total project costs exceed projected total revenues realized project instances would record reserves cover excesses period determined circumstances total projected revenues still exceed total projected costs incurrence penalties nonrecoverable costs generally reduces profitability project time subsequent revenue recognition cash equivalents place temporary cash investments financial institutions policy invest institutions instruments minimal credit risk market risk investments original maturity three months less purchased classified cash equivalents highly liquid principal values subject significant risk change due interest rate fluctuations allowance doubtful accounts credit risk allowance doubtful accounts established based estimates amount uncollectible accounts receivable determined principally based upon aging accounts receivable also customer credit history industry market segment information economic trends conditions credit reports customer credit issues customer bankruptcies general economic conditions may also impact estimates credit risks mitigated diversity customer base across many different geographic regions industries performing creditworthiness analyses customers additionally mitigate credit risk letters credit advance payments received customers december 31 2013 2012 although experienced increased aging slower collection certain receivables latin america 2013 believe significant concentrations credit risk inventories related reserves inventories stated lower cost market cost determined firstin firstout method reserves excess obsolete inventories based upon assessment market conditions products determined historical usage estimated future demand due long life cycles products carry spare parts inventories historically low usage rates provide reserves inventory based demonstrated usage aging criteria income taxes deferred taxes tax valuation allowances tax reserves account income taxes asset liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases operating loss tax credit carryforwards deferred tax assets liabilities calculated using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized period includes enactment date record valuation allowances reflect estimated amount deferred tax assets may realized based upon analysis existing deferred tax assets net operating losses tax credits jurisdiction expectations ability utilize tax attributes review past current estimated future taxable income establishment tax strategies provide deferred taxes temporary differences associated investment foreign subsidiaries financial reporting basis exceeds tax basis unless assert permanent reinvestment foreign jurisdictions financial reporting basis tax basis differences investments foreign subsidiaries consist unremitted earnings losses well foreign currency translation adjustments amount income taxes pay subject ongoing audits federal state foreign tax authorities often result proposed assessments establish reserves open tax years uncertain tax positions may subject challenge various tax authorities consolidated tax provision related accruals include impact reasonably estimable losses related interest penalties deemed appropriate recognize tax benefit uncertain tax position likely tax position sustained examination taxing authorities determination based technical merits position presumes uncertain tax position examined relevant taxing authority full knowledge relevant information tax benefits recognized financial statements position measured based largest benefit greater fifty percent likelihood realized upon ultimate settlement legal environmental contingencies legal environmental reserves recorded based upon casebycase analysis relevant facts circumstances assessment potential legal obligations costs amounts relating legal environmental liabilities recorded probable loss incurred loss estimable assessments legal environmental costs based information obtained independent inhouse experts loss experience similar situations estimates updated applicable new information regarding facts circumstances matter becomes available legal fees associated legal environmental liabilities expensed incurred estimates liabilities unsettled asbestosrelated claims based known claims experience preceding two years claims filed settled dismissed adjustments events deemed unusual unlikely recur included retirement obligations liabilities consolidated balance sheets substantial majority asbestosrelated claims covered insurance indemnities estimated indemnities receivables insurance carriers unsettled claims receivables settlements legal fees paid us asbestosrelated claims estimated using historical experience insurance recovery rates estimates future recoveries include estimates coverage financial viability insurance carriers estimated receivables included assets net consolidated balance sheets claims pending certain insurers resolved favorably estimated future recoveries would result discrete gains applicable quarter currently unable estimate impact unasserted asbestosrelated claims although future claims would also subject existing indemnities insurance coverage warranty accruals warranty obligations based upon product failure rates materials usage service delivery costs analysis identified expected claims estimate cost resolve claims estimates expected claims generally factor historical claims known product issues warranty obligations based factors adjusted based historical sales trends preceding 24 months insurance accruals insurance accruals recorded wholly partially selfinsured risks medical benefits workers’ compensation based upon analysis claim loss history insurance deductibles policy limits relevant factors updated annually included accrued liabilities consolidated balance sheets estimates based upon information received actuaries insurance company adjusters independent claims administrators independent sources receivables insurance carriers estimated using historical experience insurance recovery rates estimates future recoveries include estimates coverage financial viability insurance carriers estimated receivables included accounts receivable net assets net applicable consolidated balance sheets pension postretirement obligations determination pension postretirement benefits obligations based estimates made management consultation independent actuaries investment advisors inherent valuations assumptions including discount rates expected rates return plan assets retirement rates mortality rates compensation increase factors reviewed annually updated necessary current market conditions including changes rates return interest rates medical inflation rates considered selecting assumptions actuarial gains losses prior service costs recognized accumulated comprehensive loss arise amortize costs net pension expense remaining expected service period property plant equipment depreciation property plant equipment stated historical cost less accumulated depreciation asset retirement obligations exist capitalized part carrying amount asset depreciated remaining useful life asset useful lives leasehold improvements lesser remaining lease term useful life improvement assets retired otherwise disposed costs related accumulated depreciation removed accounts resulting gains losses included income operations period depreciation computed straightline method based estimated useful lives depreciable assets case assets capital leases related lease turn generally estimated useful lives assets costs related routine repairs maintenance expensed incurred internally developed software capitalize certain costs associated development internaluse software generally costs related significant software development projects amortized estimated useful life typically three five years upon implementation software intangible assets intangible assets excluding trademarks considered indefinite life consist primarily engineering drawings patents existing customer relationships software distribution networks items amortized estimated useful lives generally ranging three 40 years assets reviewed impairment whenever events circumstances indicate impairment may occurred valuation goodwill indefinitelived intangible assets longlived assets value goodwill indefinitelived intangible assets tested impairment december 31 year whenever events circumstances indicate assets may impaired identification reporting units began operating segment level considered whether components one level operating segment levels identified reporting units purpose testing goodwill impairment based certain conditions included among factors extent component represents business ii aggregation economically similar components within operating segments resulted eight reporting units factors considered determining whether aggregation components appropriate included similarity nature products services nature production processes methods distribution types industries served impairment loss goodwill recognized implied fair value goodwill less carrying value estimate fair value reporting units based income approach whereby calculate fair value reporting unit based present value estimated future cash flows discounted cash flow analysis requires us make various judgmental assumptions future sales operating margins growth rates discount rates based budgets business plans economic projections anticipated future cash flows market participants assumptions also made varying perpetual growth rates periods beyond longterm business plan period record impairment goodwill 2013 2012 2011 also consider market capitalization evaluation fair value goodwill market capitalization increased compared 2012 indicate potential impairment goodwill december 31 2013 impairment losses indefinitelived intangible assets recognized whenever estimated fair value less carrying value fair values calculated trademarks using relief royalty method estimates fair value trademark determining present value estimated royalty payments avoided result owning trademark method includes judgmental assumptions sales growth discount rates significant impact fair value substantially consistent assumptions used determine fair value reporting units discussed record material impairment trademarks 2013 2012 2011 recoverable value longlived assets including property plant equipment finitelived intangible assets reviewed indicators potential impairments present recoverable value based upon assessment estimated future cash flows related assets utilizing assumptions similar goodwill additional considerations related longlived assets include expected maintenance improvements changes expected uses ongoing operating performance utilization deferred loan costs deferred loan costs consisting fees expenses associated debt financing amortized term associated debt using effective interest method additional amortization recorded periods optional prepayments debt made fair values financial instruments financial instruments presented fair value consolidated balance sheets exception longterm debt fair value defined price would received sell asset paid transfer liability orderly transaction market participants measurement date available fair value based observable market prices parameters derived prices parameters observable prices inputs available valuation models may applied assets liabilities recorded fair value consolidated balance sheets categorized based upon level judgment associated inputs used measure fair values hierarchical levels defined accounting standards codification asc 820 fair value measurements disclosures directly related amount subjectivity associated inputs fair valuation assets liabilities asset liability’s categorization within fair value hierarchy based lowest level significant input valuation hierarchical levels follows level inputs unadjusted quoted prices active markets identical assets liabilities measurement date level ii inputs quoted prices included level either directly indirectly observable asset liability correlation market data measurement date duration instrument’s anticipated life level iii inputs reflect management’s best estimate market participants would use pricing asset liability measurement date consideration given risk inherent valuation technique risk inherent inputs model recurring fair value measurements limited investments derivative instruments certain equity securities fair value measurements derivative instruments determined using models maximize use observable market inputs including interest rate curves forward spot prices currencies classified level ii fair value hierarchy fair values derivative instruments included note 6 fair value measurements investments equity securities determined using quoted market prices classified level fair values investments equity securities changes thereto immaterial consolidated financial position results operations derivatives hedging activities foreign currency derivatives hedging policy outlining conditions enter financial derivative transactions use derivative instruments trading speculative purposes derivative instruments recognized balance sheet fair values accounting gains losses resulting changes fair value depends whether derivative designated qualifies hedge accounting forward exchange contracts employ foreign currency economic hedging strategy mitigate certain financial risks resulting foreign currency exchange rate movements impact foreign currency denominated receivables payables firm committed transactions forecasted sales purchases fourth quarter 2013 began designate certain forward exchange contracts hedging instruments apply hedge accounting instruments designated forward exchange contracts changes fair value recorded comprehensive loss underlying hedged item affects earnings time change fair value recognized sales consolidated statements income nondesignated forward exchange contracts changes fair values recognized immediately expense income net consolidated statements income see note 6 discussion forward exchange contracts interest rate swaps enter interest rate swap agreements purpose hedging cash flow exposure floating interest rates certain portions debt changes fair value designated interest rate swap recorded comprehensive loss earnings affected underlying hedged item ineffective portion gain loss immediately recognized earnings upon settlement realized gains losses recognized interest expense consolidated statements income see note 6 discussion interest rate swaps discontinue hedge accounting 1 deem hedge ineffective determine designation derivative hedging instrument longer appropriate 2 derivative matures terminates sold 3 occurrence contracted committed transaction longer probable occur originally expected period hedge accounting discontinued derivative remains outstanding carry derivative estimated fair value balance sheet recognizing changes fair value current period earnings cash flow hedge becomes ineffective deferred gains losses remain accumulated comprehensive loss underlying hedged item recognized becomes probable hedged forecasted transaction occur deferred gains losses hedging instrument recognized earnings immediately exposed risk creditrelated losses resulting nonperformance counterparties financial instruments perform credit evaluations counterparties forward exchange contracts interest rate swap agreements expect counterparties meet obligations necessary would adjust values derivative contracts counterparties’ credit risks foreign currency translation assets liabilities foreign subsidiaries translated us dollars exchange rates prevailing balance sheet date income expenses translated average rates month translation gains losses reported component accumulated comprehensive loss transactional currency gains losses arising transactions currencies sites’ functional currencies included consolidated results operations transaction translation gains losses arising intercompany balances reported component accumulated comprehensive loss underlying transaction stems longterm equity investment debt designated due foreseeable future otherwise recognize transaction gains losses arising intercompany transactions component income intercompany balances longterm investment related designated due beyond foreseeable future may mitigate risk associated foreign currency fluctuations entering forward exchange contracts stockbased compensation stockbased compensation measured grantdate fair value exercise price stock option awards value restricted share restricted share unit performancebased unit awards collectively referred restricted shares set closing price common stock new york stock exchange date grant date grants authorized board directors restricted share units performancebased units refer restricted awards voting rights accrue dividends forfeited vesting occur intrinsic value restricted shares typically product share price date grant number restricted shares granted amortized straightline basis compensation expense periods restrictions lapse based expected number shares vest forfeiture rate based unvested restricted shares forfeited compared original total restricted shares granted 4year period excluding significant forfeiture events expected recur earnings per share use twoclass method calculating earnings per share eps determines earnings per share class common stock participating security earnings period distributed unvested restricted share awards earn nonforfeitable dividend rights qualify participating securities accordingly included basic computation unvested restricted shares participate equal basis common shares therefore difference undistributed earnings allocated participating security accordingly presentation prepared combined basis presented earnings per common share following reconciliation net earnings flowserve corporation weighted average shares calculating basic net earnings per common share earnings per weighted average common share outstanding calculated follows diluted earnings per share based upon weighted average number shares determined basic earnings per share plus shares potentially issuable conjunction stock options restricted share units performance share units three years ended december 31 2013 2012 2011 options purchase common stock excluded computations potentially dilutive securities none considered antidilutive research development expense research development costs charged expense incurred aggregate research development costs included selling general administrative expenses sga 378 million 389 million 350 million 2013 2012 2011 respectively costs incurred research development primarily include salaries benefits consumable supplies well rent professional fees utilities depreciation property equipment used research development activities accounting developments pronouncements implemented december 2011 financial accounting standards board fasb issued accounting standards update asu 201111 balance sheet topic 210 disclosures offsetting assets liabilities requires enhanced disclosures financial instruments derivative instruments either 1 offset accordance either accounting standards codification asc 2102045 balance sheet offsetting asc 8151045 derivatives hedging overall 2 subject enforceable master netting arrangement similar agreement irrespective whether offset accordance either asc 2102045 asc 8151045 disclosure requirements shall applied retrospectively periods presented adoption asu 201111 effective january 1 2013 impact consolidated financial condition results operations january 2013 fasb issued asu 201301 balance sheet topic 210 clarifying scope disclosures offsetting assets liabilities limits scope asu 201111 derivatives repurchase agreements securities lending transactions extent 1 offset financial statements 2 subject enforceable master netting arrangement similar agreement disclosure requirements shall applied retrospectively periods presented adoption asu 201301 effective january 1 2013 impact consolidated financial condition results operations july 2012 fasb issued asu 201202 intangiblesgoodwill topic 350 testing indefinitelived intangible assets impairment specifies entity option first assess qualitative factors determine whether likely asset impaired unless entity determines likely fair value asset less carrying amount would need calculate fair value asset year adoption asu 201202 effective january 1 2013 impact consolidated financial condition results operations february 2013 fasb issued asu 201302 comprehensive income topic 220 reporting amounts reclassified accumulated comprehensive income requires entity provide information amounts reclassified accumulated comprehensive income addition entity required present either face statement net income presented notes significant amounts reclassified accumulated comprehensive income respective line items net income amount reclassified required us gaap reclassified net income entirety reporting period amounts required us gaap reclassified entirety net income entity required crossreference disclosures required us gaap provide additional detail amounts adoption asu 201302 effective january 1 2013 impact consolidated financial condition results operations march 2013 fasb issued asu 201305 foreign currency matters topic 830 parents accounting cumulative translation adjustment upon derecognition certain subsidiaries groups assets within foreign entity investment foreign entity specifies cumulative translation adjustment released earning entity ceases controlling financial interest subsidiary group assets within consolidated foreign entity sale transfer results complete substantially complete liquidation foreign entity asu 201305 effective fiscal years interim periods within years beginning december 15 2013 early adopted asu effective january 1 2013 material impact consolidated financial condition results operations july 2013 fasb issued asu 201310 derivatives hedging topic 815 inclusion fed funds effective swap rate overnight index swap rate benchmark interest rate hedge accounting purposes allows use fed funds effective swap rate us benchmark interest rate fair value cash flow hedges topic 815 addition interest rates direct treasury obligations us government london interbank offered rate swap rate asu also removes restriction using different benchmark rates similar hedges asu 201310 effective prospectively qualifying new redesignated hedging relationships entered july 17 2013 adoption asu 201310 material impact consolidated financial condition results operations pronouncements yet implemented february 2013 fasb issued asu 201304 liabilities topic 405 obligations resulting joint several liability arrangements total amount obligation fixed reporting date requires reporting entity jointly severally liable measure obligation sum amount entity agreed coobligors pay additional amount expects pay behalf one coobligors scope asu excludes obligations addressed existing guidance asu 201304 effective fiscal years interim periods within years beginning december 15 2013 asu shall applied retrospectively arrangements existing beginning year adoption asu 201304 impact consolidated financial condition results operations april 2013 fasb issued asu 201307 presentation financial statements topic 205 liquidation basis accounting requires entity prepare financial statements using liquidation basis accounting liquidation imminent liquidation imminent likelihood remote entity return liquidation either plan liquidation approved person persons authority make plan effective likelihood remote execution plan blocked parties b plan liquidation imposed forces example involuntary bankruptcy asu 201307 effective entities determine liquidation imminent annual reporting periods beginning december 15 2013 interim reporting periods therein asu shall applied prospectively day liquidation becomes imminent adoption asu 201307 impact consolidated financial condition results operations july 2013 fasb issued asu 201311 income taxes topic 740 presentation unrecognized tax benefit net operating loss carryforward similar tax loss tax credit carryforward exists provides guidance presentation unrecognized tax benefit net operating loss carryforward similar tax loss tax credit carryforward exists asu 201311 effective fiscal years interim periods within years beginning december 15 2013 asu shall applied prospectively unrecognized tax benefits exist effective date adoption asu 201311 material impact consolidated financial condition results operations 2 acquisitions exit joint venture innovative magdrive llc december 10 2013 acquired inclusion industrial product division ipd 100 innovative magdrive llc innomag privatelyowned usbased company specializing advanced sealless magnetic drive centrifugal pumps chemical general industries asset purchase 787 million cash subject final adjustments total purchase price 667 million paid closing 08 million represents preliminary working capital adjustment remaining 112 million total purchase price contingent upon innomag achieving certain performance metrics two fiveyear periods following acquisition extent achieved expected paid cash within four months performance measurement dates initially recorded liability 75 million estimate acquisition date fair value contingent consideration based weighted probability achievement performance metrics date acquisition innomag generated approximately 17 million sales unaudited fiscal year ended december 31 2012 preliminary purchase price allocated assets acquired liabilities assumed based estimates fair values date acquisition summarized excess acquisition date fair value total purchase price estimated fair value net tangible intangible assets recorded goodwill represents value expected obtained ability competitive offering complete pump product portfolio leveraging current sales distribution service network goodwill related acquisition recorded ipd segment upon acquisition knowhow existing customer relationships represented approximately 7 million intangible assets acquired knowhow exisiting customer relationships expected weighted average useful life ten years total amortizable intangible assets expected weighted average useful life ten years subsequent december 10 2013 revenues expenses innomag included consolidated statements income pro forma information provided due immateriality audco india limited effective march 28 2013 joint venture partner agreed exit joint venture audco india limited “ail” manufactures integrated industrial valves india effect exit two separate transactions flow control division fcd acquired 100 ownership ails plug valve manufacturing business asset purchase cash 101 million sold 50 equity interest ail joint venture partner 462 million cash remeasured fair value previously held equity interest purchased net assets plug valve manufacturing business resulting net assets acquired approximately 25 million pretax gain 153 million sale equity interest ail resulted pretax gain 130 million gains recorded net earnings affiliates consolidated statements income pro forma information provided due immateriality prior transactions 50 interest ail recorded using equity method accounting lawrence pumps inc effective october 28 2011 acquired inclusion engineered product division epd 100 lawrence pumps inc lpi privatelyowned usbased pump manufacturer final purchase price 882 million reflects immaterial adjustments goodwill current liabilities 2012 lpi specializes design development manufacture engineered centrifugal slurry pumps critical services within petroleum refining petrochemical pulp paper energy markets purchase price allocated assets acquired liabilities assumed based estimates fair values date acquisition summarized excess acquisition date fair value total purchase price estimated fair value net tangible intangible assets recorded goodwill represents value expected obtained ability competitive offering complete pump product portfolio leveraging current sales distribution service network lpi products proprietary niche applications strategically complement product portfolio goodwill related acquisition recorded epd segment upon acquisition existing customer relationships represent approximately 16 million intangible assets acquired expected weighted average useful life ten years total amortizable intangible assets expected weighted average useful life ten years subsequent october 28 2011 revenues expenses lpi included consolidated statements income pro forma information provided due immateriality 3 goodwill intangible assets changes carrying amount goodwill years ended december 31 2013 2012 follows 1 goodwill primarily related purchase price adjustments acquisition lpi 2012 innomag acquisition 2013 see note 2 additional information following table provides information intangible assets years ended december 31 2013 2012 1 engineering drawings represent estimated fair value associated specific acquired product component schematics 2 existing customer relationships acquired prior 2011 useful life five years 3 accumulated amortization indefinitelived intangible assets relates amounts recorded prior implementation date guidance issued asc 350 following schedule outlines actual amortization expense recognized 2013 estimate future amortization based upon finitelived intangible assets owned december 31 2013 amortization expense finitelived intangible assets 160 million 2012 142 million 2011 4 inventories net consisted following 2013 2012 2011 recognized expenses 244 million 182 million 165 million respectively excess obsolete inventory expenses included cost sales cos consolidated statements income 5 stockbased compensation plans maintain flowserve corporation equity incentive compensation plan 2010 plan shareholderapproved plan authorizing issuance 8700000 shares common stock form incentive stock options nonstatutory stock options restricted shares restricted share units performancebased units collectively referred restricted shares stock appreciation rights bonus stock 8700000 shares common stock authorized 2010 plan 5676596 available issuance december 31 2013 addition 2010 plan also maintain flowserve corporation 2004 stock compensation plan 2004 plan 2004 plan authorizes issuance 10500000 shares common stock grants restricted shares stock options equitybased awards 10500000 shares common stock authorized 2004 plan 827835 available issuance december 31 2013 stock options granted since 2006 stock options granted officers employees directors allow purchase common shares market value stock date options granted options generally become exercisable staggered period ranging one five years typically one three years december 31 2013 outstanding options fully vested options generally expire 10 years date grant within short period time following termination employment cessation services option holder options granted 2013 2012 2011 information related stock options issued officers employees directors prior 2010 plans presented following table additional information relating ranges options outstanding december 31 2013 follows december 31 2013 unrecognized compensation cost related outstanding stock option awards weighted average remaining contractual life options outstanding december 31 2013 2012 28 years 33 years respectively total intrinsic value stock options exercised years ended december 31 2013 2012 2011 08 million 07 million 15 million respectively stock options vested years ended december 31 2013 2012 2011 restricted shares generally restrictions restricted shares expire minimum one year maximum three years shares subject forfeiture restriction period typically restricted share grants staggered vesting periods one three years grant date intrinsic value restricted shares typically product share price date grant number restricted shares granted amortized straightline basis compensation expense periods restrictions lapse unearned compensation amortized compensation expense vesting period restricted shares december 31 2013 2012 315 million 304 million respectively unearned compensation cost related unvested restricted shares expected recognized weightedaverage period approximately one year amounts recognized net earnings prospective periods awards vest total fair value restricted shares vested years ended december 31 2013 2012 2011 349 million 364 million 351 million respectively recorded stockbased compensation restricted shares follows following table summarizes information regarding restricted shares unvested restricted shares outstanding december 31 2013 includes approximately 897000 units performancebased vesting provisions performancebased units issuable common stock vest upon achievement predefined performance targets primarily based average annual return net assets threeyear period compared measure defined peer group period units granted three annual grants since january 1 2011 vesting percentage 0 200 depending achievement specific performance targets compensation expense recognized ratably cliffvesting period 36 months based fair market value common stock date grant adjusted anticipated forfeitures performance period earned unearned compensation expense adjusted based changes expected achievement performance targets vesting provisions range 0 approximately 1793000 shares based performance targets december 31 2013 estimate vesting approximately 1280000 shares based expected achievement performance targets 6 derivatives hedging activities risk management foreign currency derivatives hedging policy specifies conditions may enter derivative contracts see note 1 additional information purpose entering derivatives overall risk management strategies designated hedging instruments highly effective beginning fourth quarter 2013 elected designate apply hedge accounting certain forward exchange contracts forward exchange contracts designated hedging instruments notional value 62 million december 31 2013 fair values assets liabilities changes fair values related designated forward exchange contracts immaterial periods presented forward exchange contracts designated hedging instruments notional values 6107 million 6089 million december 31 2013 2012 respectively december 31 2013 length forward exchange contracts currently place ranged 2 days 27 months december 31 2013 2012 1400 million 2750 million respectively notional amount outstanding designated interest rate swaps third parties december 31 2013 maximum remaining length interest rate contract place approximately 18 months exposed risk creditrelated losses resulting nonperformance counterparties financial instruments perform credit evaluations counterparties forward exchange contracts interest rate swap agreements expect counterparties meet obligations experienced credit losses counterparties fair value forward exchange derivative contracts designated hedging instruments summarized fair value interest rate swaps forward exchange derivative contracts designated hedging instruments summarized impact net changes fair values forward exchange contracts summarized 7 fair value financial instruments fair value debt excluding senior notes estimated using interest rates similar debt recently issued companies credit metrics similar classified level ii fair value hierarchy carrying value debt included note 10 except senior notes approximates fair value estimated fair value senior notes based level quoted market rates estimated fair value senior notes december 31 2013 7631 million compared carrying value 7969 million carrying amounts financial instruments ie cash equivalents accounts receivable net accounts payable approximated fair value due shortterm nature december 31 2013 december 31 2012 8 details certain consolidated balance sheet captions following tables present financial information certain consolidated balance sheet captions accounts receivable net accounts receivable net property plant equipment net property plant equipment net accrued liabilities accrued liabilities accrued liabilities include professional fees lease obligations insurance interest freight restructuring charges accrued cash dividends payable legal environmental matters derivative liabilities items none individually exceed 5 current liabilities retirement obligations liabilities retirement obligations liabilities 9 equity method investments occasionally enter joint venture arrangements local country partners preferred means entry countries barriers entry may exist similar consolidated subsidiaries unconsolidated joint ventures generally operate within primary businesses designing manufacturing assembling distributing fluid motion control products services agreements certain joint ventures restrict us otherwise entering respective market certain joint ventures produce andor sell products part broader product offering net earnings investments unconsolidated joint ventures reported net earnings affiliates consolidated statements income given integrated role unconsolidated joint ventures business net earnings affiliates presented component operating income discussed note 2 effective march 28 2013 joint venture partner agreed exit ail joint venture manufacturer integrated industrial valves india prior transactions 50 interest recorded using equity method accounting december 31 2013 investments seven joint ventures one located india japan saudi arabia south korea united arab emirates two located china accounted using equity method immaterial disclosure purposes 10 debt lease obligations debt including capital lease obligations consisted scheduled maturities senior credit facility described well senior notes debt senior notes november 1 2013 completed public offering 3000 million aggregate principal amount senior notes due november 15 2023 senior notes 2023 senior notes bear interest rate 400 per year payable may 15 november 15 year commencing may 15 2014 2023 senior notes priced 99532 par value reflecting discount aggregate principal amount used portion net proceeds 2023 senior notes offering repay amounts outstanding revolving credit facility described used remaining portion net proceeds general corporate purposes including acquisition innomag described note 2 september 11 2012 completed public offering 5000 million aggregate principal amount senior notes due september 15 2022 senior notes 2022 senior notes bear interest rate 350 per year payable march 15 september 15 year 2022 senior notes priced 99615 par value reflecting discount aggregate principal amount used portion net proceeds 2022 senior notes offering repay 2500 million outstanding principal balance bridge loan described used remaining portion net proceeds general corporate purposes including repayment outstanding balance revolving credit facility repurchase shares common stock discussed note 15 right redeem 2022 senior notes 2023 senior notes time prior june 15 2022 august 15 2023 respectively whole part option redemption price equal greater 1 100 principal amount senior notes redeemed 2 sum present values remaining scheduled payments principal interest respect senior notes redeemed discounted redemption date semiannual basis applicable treasury rate plus 30 basis points 2022 senior notes plus 25 basis points 2023 senior notes addition time june 15 2022 senior notes august 15 2023 senior notes may redeem senior notes redemption price equal 100 principal amount senior notes redeemed case also pay accrued unpaid interest principal amount redeemed redemption date 2022 senior notes 2023 senior notes unsecured jointly severally fully unconditionally guaranteed certain 100 owned domestic subsidiaries guarantors senior credit facility described guarantees automatically unconditionally released discharged guarantor subsidiary sold sells assets requirement legal covenant defeasance discharge obligations satisfied upon delivery officers certificate trustee guarantor subsidiary guarantee obligations senior credit facility 2022 senior notes 2023 senior notes rank equally right payment senior unsecured indebtedness senior credit facility october 4 2013 amended existing credit agreement provided initial 4000 million term loan “term loan facility” revolving credit facility “revolving credit facility” together term loan facility “senior credit facility” significant amendments extended maturity senior credit facility one year october 4 2018 increased revolving credit facility 8500 million 10 billion removed 3000 million sublimit issuance performance letters credit revolving credit facility retains 300 million sublimit swing line loans significant existing terms credit agreement remained unchanged december 31 2013 december 31 2012 amounts outstanding revolving credit facility outstanding letters credit 1061 million 1522 million december 31 2013 december 31 2012 respectively reduced borrowing capacity 8939 million 6978 million respectively senior credit facility subject certain conditions right increase amount term loan facility revolving credit facility aggregate amount exceed 4000 million obligations senior credit facility guaranteed certain 100 owned domestic subsidiaries guarantees released achieve certain credit ratings achieved ratings december 31 2013 future borrowings revolving credit facility subject various conditions including absence default senior credit facility senior credit facility contains among things covenants defining subsidiaries ability dispose assets merge pay dividends repurchase redeem capital stock indebtedness incur indebtedness guarantees create liens enter agreements negative pledge clauses make certain investments acquisitions enter transactions affiliates engage business activity existing business senior credit facility requires us maximum permitted leverage ratio 325 times debt total consolidated ebitda defined senior credit facility minimum interest coverage 325 times consolidated ebitda total interest expense compliance financial covenants senior credit facility tested quarterly compliance covenants december 31 2013 repayment obligations may prepay loans senior credit facility whole part without premium penalty time commitment fee payable quarterly daily unused portions senior credit facility 0175 per annum december 31 2013 made scheduled principal repayments term loan facility 250 million 50 million 2013 2012 respectively made scheduled principal payments 125 million 250 million prior credit agreement 2012 2011 respectively scheduled principal repayments 100 million due next four quarters 2014 term loan facility senior credit facility bears floating rate interest entered 1400 million notional amount interest rate swaps december 31 2013 hedge exposure floating interest rates bridge loan june 15 2012 entered loan agreement jpmorgan chase bank na administrative agent lenders party thereto providing term loan aggregate commitment 2500 million term 364 days “bridge loan” proceeds bridge loan used fund share repurchase program described note 15 consolidated financial statements included annual report bridge loan repaid entirety third quarter 2012 using portion net proceeds 2022 senior notes offering european letter credit facility due increased capacity removal performance letters credit sublimit amended revolving credit facility elected renew 364day unsecured committed €1250 million european letter credit facility european loc facility expired october 2013 however existing letters credit remain outstanding still bound facilitys covenants european loc facilitys covenants restrict ability certain foreign subsidiaries issue debt incur liens sell assets merge consolidate make certain investments pay dividends enter agreements negative pledge clauses engage business activity existing business european loc facility also incorporates reference covenants contained senior credit facility compliance covenants european loc facility december 31 2013 remaining outstanding letters credit mature next five years outstanding letters credit drawn european loc facility €696 million 954 million €631 million 833 million december 31 2013 2012 respectively operating leases noncancelable operating leases certain offices service quick response centers certain manufacturing operating facilities machinery equipment automobiles rental expense relating operating leases 623 million 636 million 528 million 2013 2012 2011 respectively future minimum lease payments due noncancelable operating leases amounts thousands 11 supplemental guarantor financial information september 11 2012 november 1 2013 completed public offerings senior notes fully unconditionally jointly severally guaranteed certain 100owned domestic subsidiaries following condensed consolidating financial statements present financial position results operations cash flows flowserve corporation referred “parent” purpose note parent−only issuer basis combined guarantor subsidiaries guarantor−only basis combined nonguarantor subsidiaries nonguarantoronly basis elimination adjustments necessary arrive information parent guarantor subsidiaries nonguarantor subsidiaries condensed consolidated basis investments subsidiaries accounted using equity method presentation condensed consolidating balance sheets condensed consolidating statements income comprehensive income condensed consolidating statements cash flows 12 pension postretirement benefits sponsor several noncontributory defined benefit pension plans covering substantially us employees certain nonus employees provide benefits based years service age job grade levels type compensation retirement benefits covered employees provided contributory pension plans cash balance pension plans governmentsponsored retirement programs funded defined benefit pension plans receive funding based independent actuarial valuations provide current service amount sufficient amortize unfunded prior service periods exceed 30 years funding falling within legal limits prescribed prevailing regulation also maintain unfunded defined benefit plans permitted local regulations receive funding benefits become due defined benefit plan strategy ensure current future benefit obligations adequately funded costeffective manner additionally investing objective achieve highest level investment performance compatible risk tolerance prudent investment practices longterm nature defined benefit plan liabilities funding strategy based longterm perspective formulating implementing investment policies evaluating investment performance asset allocation defined benefit plans reflect decision proportion investment equity fixed income securities appropriate various subasset classes least annually complete comprehensive review asset allocation policy underlying assumptions includes longterm capital markets rate return assumptions risk tolerances relative defined benefit plan liabilities expected rates return defined benefit plan assets derived review asset allocation strategy expected longterm performance asset classes risks factors adjusted specific investment strategy rates impacted changes general market conditions longterm nature shortterm market changes significantly impact rates us defined benefit plan assets consist balanced portfolio primarily us equity fixed income securities nonus defined benefit plan assets include significant concentration united kingdom uk equity fixed income securities monitor investment allocations manage plan assets maintain acceptable levels risk addition certain defined benefit plans hold investments european equity fixed income securities periods presented used measurement date december 31 us nonus pension postretirement medical plans us defined benefit plans maintain qualified nonqualified defined benefit pension plans us qualified plan provides coverage substantially fulltime us employees receive benefits earnings threshold specified us department labor nonqualified plans primarily cover small number employees including current former members senior management providing benefit levels equivalent participants otherwise limited us department labor rules us plans designed operate cash balance arrangements employee option take lump sum payment end service total accumulated benefit obligation equivalent total projected benefit obligation benefit obligation following assumptions related us defined benefit pension plans december 31 2013 compared december 31 2012 increased discount rate 375 450 based analysis publiclytraded investment grade us corporate bonds higher yield due current market conditions december 31 2013 compared december 31 2012 average assumed rate compensation increase remained constant 425 determining 2013 expense expected rate return us plan assets slightly lower 2012 600 primarily based target allocations expected longterm asset returns longterm rate return assumption calculated using quantitative approach utilizes unadjusted historical returns asset allocation inputs calculation net pension expense us defined benefit pension plans including qualified nonqualified plans estimated prior service benefit estimated net loss us defined benefit pension plans amortized accumulated comprehensive loss pension expense 2014 03 million 83 million respectively amortize estimated prior service benefits estimated net losses remaining expected service period following summarizes net pension asset liability us plans following summarizes amounts recognized balance sheet us plans following summary changes us defined benefit plans’ pension obligations following table summarizes expected cash benefit payments us defined benefit pension plans future amounts millions following table shows change accumulated comprehensive loss attributable components net cost change benefit obligations us plans net tax amounts recorded accumulated comprehensive loss consist following reconciliation us defined benefit pension plans’ assets contributed 242 million 79 million us defined benefit pension plans 2013 2012 respectively payments exceeded minimum funding requirements mandated us department labor rules estimated contribution 2014 expected approximately 20 million excluding direct benefits paid us defined benefit plan assets held qualified plan asset allocations qualified plan end 2013 2012 asset category follows 1 less 1 holdings category 2013 none common stock directly held qualified plan investment strategy earn longterm rate return consistent acceptable degree risk minimize cash contributions life plan taking account liquidity needs plan preserve capital diversified investments high quality securities current allocation target invest approximately 50 plan assets equity securities 50 fixed income securities within investment category assets allocated various investment strategies professional money management firm manages assets engage consultant assist evaluating activities periodically review allocation target generally conjunction asset liability study consideration future cash flow needs regularly rebalance actual allocation target investment allocation plan assets invested commingled funds individual funds actively managed intent outperform specified benchmarks pension investment committee responsible setting investment strategy target asset allocation well selecting individual funds qualified plan approached fully funded status implemented liabilitydriven investing ldi strategy closely aligns duration assets duration liabilities ldi strategy result asset portfolio closely matches behavior liability thereby protecting funded status plan’s financial instruments shown presented fair value see note 1 discussion hierarchical levels fair values plan’s investments determined fair values us defined benefit plan assets us large cap funds seek outperform russell 1000 r index investments large medium capitalization us companies represented russell 1000 r index composed largest 1000 us equities determined market capitalization b us small cap funds seek outperform russell 2000 r index investments medium small capitalization us companies represented russell 2000 r index composed smallest 2000 us equities determined market capitalization c international large cap funds seek outperform msci europe australia far east index investments developed nations world maintain high degree diversification among countries currencies emerging markets funds represent diversified portfolio seeks high longterm returns comparable investments emerging markets investing stocks newly developed emerging market economies e world equity funds seek outperform russell developed large cap index net full market cycle funds goal provide favorable total return relative benchmark primarily longterm capital appreciation f ldi funds seek outperform barclaysrussell ldi index investing high quality mostly corporate bonds fixed income securities closely match found discount curves used value plans liabilities g longterm governmentcredit funds seek outperform barclays capital us longterm governmentcredit index generating excess return variety diversified strategies securities longer durations sector rotation security selection tactical use highyield bonds h intermediate bonds seek outperform barclays capital us aggregate bond index generating excess return variety diversified strategies securities short intermediate durations sector rotation security selection tactical use highyield bonds details provided due immateriality nonus defined benefit plans maintain defined benefit pension plans cover employees following countries austria france germany india indonesia italy japan mexico netherlands sweden uk assets uk two plans netherlands one plan represent 97 total nonus plan assets nonus assets details countries’ plan assets provided due immateriality following assumptions related nonus defined benefit pension plans december 31 2013 compared december 31 2012 increased average discount rate nonus plans 416 422 based primarily rates remaining steady eurozone uk venezuela nonus countries discount rates increased determine 2013 pension expense decreased average expected rate return plan assets 578 december 31 2012 549 december 31 2013 primarily result target asset allocations expected longterm asset returns expected rate return plan assets longterm nature shortterm market changes significantly impact rate many nonus defined benefit plans unfunded permitted local regulation expected longterm rate return assets funded plans determined assessing rates return asset class calculated using quantitative approach utilizes unadjusted historical returns asset allocation inputs calculation work actuaries determine reasonableness longterm rate return assumptions looking several factors including historical returns expected future returns asset allocation risks asset class items net pension expense nonus defined benefit pension plans estimated net loss defined benefit pension plans amortized accumulated comprehensive loss nonus pension expense 2014 69 million amortize estimated net losses remaining expected service period remaining expected lifetime inactive participants plans inactive participants following summarizes net pension liability nonus plans following summarizes amounts recognized balance sheet nonus plans following reconciliation nonus plans’ defined benefit pension obligations 1 2012 actuarial losses primarily reflect impact assumption changes euro zone uk plans 2012 2 currency translation impact reflects weakening us dollar exchange rate significant currencies primarily british pound euro following table summarizes expected cash benefit payments nonus defined benefit plans future amounts millions following table shows change accumulated comprehensive loss attributable components net cost change benefit obligations nonus plans net tax amounts recorded accumulated comprehensive loss consist following reconciliation nonus plans’ defined benefit pension assets contributions nonus defined benefit pension plans 2014 expected approximately 13 million excluding direct benefits paid asset allocations nonus defined benefit pension plans end 2013 2012 follows none common stock held directly plans cases investment strategy plans earn longterm rate return consistent acceptable degree risk minimize cash contributions life plan taking account liquidity needs plan legal requirements particular country preserve capital diversified investments high quality securities asset allocation differs plan based upon plan’s benefit obligation participants well results asset liability studies conducted plan consideration future cash flow needs professional money management firms manage plan assets engage consultants uk netherlands assist evaluation activities assets uk plans overseen group trustees review investment strategy asset allocation fund selection assets passively managed invested index funds attempt match performance specified benchmark index assets netherlands plan independently managed outside service provider fair values nonus assets north american companies represents us canadian large cap equity index funds passively managed track respective benchmarks ftse allworld usa index ftse allworld canada index b uk companies represents uk equity index fund passively managed tracks ftse allshare index c european companies represents european equity index fund passively managed tracks ftse allworld developed europe exuk index asian pacific companies represents japanese pacific rim equity index funds passively managed track respective benchmarks ftse allworld japan index ftse allworld developed asia pacific exjapan index e global equity represents actively managed global equity funds taking topdown strategic view different regions analyzing companies based fundamentals marketdriven thematic quantitative factors generate alpha f uk government gilt index represents uk government issued fixed income investments passively managed track respective benchmarks ftse uk gilt indexlinked 5 years index ftse uk gilt 15 years index ftse uk gilt indexlinked 25 years index g uk corporate bond index represents uk corporate bond investments passively managed track iboxx 15 years £ nongilt index h global fixed income bond represents mostly european fixed income investment funds actively managed diversified primarily invested traditional government bonds highquality corporate bonds asset backed securities emerging market debt high yield corporates includes assets held plans outside uk netherlands details including level iii rollforward details provided due immateriality defined benefit pension plans accumulated benefit obligations excess plan assets following summarizes key pension plan information regarding us nonus plans whose accumulated benefit obligations exceed fair value respective plan assets decrease 2013 primarily due exclusion us qualified plan net asset position december 31 2013 postretirement medical plans sponsor several defined benefit postretirement medical plans covering certain current retirees limited number future retirees us plans provide medical dental benefits administered insurance companies health maintenance organizations plans include participant contributions deductibles coinsurance provisions limitations integrated medicare group plans fund plans benefits health maintenance organization premiums paid plans hold assets period presented accordingly investment strategy targeted allocations plan assets benefits postretirement medical plans available new employees existing employees following assumptions related postretirement benefits assumed ranges annual rates increase medical costs used determine net expense 75 2013 80 2012 85 2011 gradual decrease 50 2032 future years net postretirement benefit income postretirement medical plans estimated prior service benefit cost expected amortized accumulated comprehensive loss us pension expense 2014 estimated net gain postretirement medical plans amortized accumulated comprehensive loss us expense 2014 14 million following summarizes accrued postretirement benefits liability postretirement medical plans following summarizes amounts recognized balance sheet postretirement benefit obligation following reconciliation postretirement benefit obligation following presents expected benefit payments future periods amounts millions following table shows change accumulated comprehensive loss attributable components net cost change benefit obligations postretirement benefits net tax amounts recorded accumulated comprehensive loss consist made contributions postretirement medical plans pay benefits 37 million 2013 38 million 2012 39 million 2011 postretirement medical plans unfunded make contributions covered individuals’ claims approved payment accordingly contributions period directly correlated benefits paid assumed health care cost trend rates effect amounts reported postretirement medical plans onepercentage point change assumed health care cost trend rates would following effect 2013 reported amounts thousands defined contribution plans sponsor several defined contribution plans covering substantially us canadian employees certain nonus employees may contribute plans contributions matched varying amounts us including opportunities discretionary matching contributions us defined contribution plan expense 200 million 2013 193 million 2012 178 million 2011 effective january 1 2013 common stock longer investment option prior 2013 participants us defined contribution plan option invest common stock therefore plan assets prior 2013 include holdings common stock participants existing holdings stock effective date able maintain holdings time reallocated within plan participant taken distribution participant 13 legal matters contingencies asbestosrelated claims defendant substantial number lawsuits seek recover damages personal injury allegedly caused exposure asbestoscontaining products manufactured andor distributed heritage companies past overall number asbestosrelated claims generally declined recent years assurance trend continue average cost per claim increase asbestoscontaining materials incorporated products primarily encapsulated used internal components process equipment believe significant emission asbestos fibers occurred use equipment practice vigorously contest resolve claims successful resolving majority claims little payment historically high percentage resolved claims covered applicable insurance indemnities companies believe substantial majority existing claims continue covered insurance indemnities accordingly recorded liability estimate likely settlement asserted claims related receivable insurers companies estimated recovery extent believe amounts recovery probable otherwise dispute although infrequent time tried cases one resulted unfavorable ruling third quarter 2013 impact verdict material intend vigorously contest ruling established loss reserve related insurance receivable based reasonably estimable probable outcome case unfavorable rulings judgments settlement terms regarding claims could material adverse impact business financial condition results operations cash flows currently believe likelihood remote additionally claims pending certain insurers resolved favorably reflected recorded receivables would result discrete gains applicable quarter currently unable estimate impact unasserted asbestosrelated claims although future claims would also subject existing indemnities insurance coverage united nations oilforfood program mid2006 french authorities began investigation 170 french companies one french subsidiaries included concerning suspected inappropriate activities conducted connection united nations oil food program previously disclosed french investigation french subsidiary formally opened first quarter 2010 french subsidiary filed formal response french court july 2012 french court ruled procedural motions challenge constitutionality charges quash indictment french court ruling currently proceeding formal review process currently expect incur additional case resolution costs material amount matter however french authorities take enforcement action french subsidiary regarding investigation may subject monetary nonmonetary penalties currently believe material adverse financial impact company addition governmental investigation referenced june 27 2008 republic iraq filed civil suit federal court new york 93 participants united nations oilforfood program including us two foreign subsidiaries participated program material developments case since initially filed intend vigorously contest suit believe valid defenses claims asserted cannot predict outcome suit present time currently believe resolution suit material adverse financial impact company currently involved potentially responsible party five former public waste disposal sites various stages evaluation remediation projected cost remediation sites well alleged fair share allocation remain uncertain studies completed parties either negotiated amicable resolution matter judicially resolved site many parties similarly identified many parties identified financially strong solvent companies appear able pay share remediation costs based information waste disposal practices sites environmental regulatory process general believe likely ultimate remediation liability costs site apportioned among liable parties including site owners waste transporters according volumes andor toxicity wastes shown disposed sites believe financial exposure existing disposal sites materially excess accrued reserves also defendant number lawsuits including product liability claims insured subject applicable deductibles arising ordinary course business also involved uninsured routine litigation incidental business currently believe none litigation either individually aggregate material business operations overall financial condition however litigation inherently unpredictable resolutions dispositions claims lawsuits settlement otherwise could adverse impact financial position results operations cash flows reporting period resolution disposition occurs although none aforementioned potential liabilities quantified absolute certainty except otherwise indicated established reserves covering exposures relating contingencies extent believed reasonably estimable probable based past experience available facts additional exposures beyond reserves could exist currently cannot estimated continue evaluate update reserves necessary appropriate 14 warranty reserve recorded reserves product warranty claims included current liabilities following summary activity warranty reserve 15 shareholders’ equity stock split may 23 2013 certificate incorporation amended increase number authorized shares common stock 1200 million 3050 million enable threeforone stock split approved board directors february 7 2013 form 200 common stock dividend record date stock split june 7 2013 additional shares distributed june 21 2013 result threeforone stock split 117861772 shares common stock issued par value common stock remained unchanged 125 per share required 1473 million retrospectively reclassified capital excess par value common shares within shareholders equity section consolidated balance sheets shareholders equity share data including treasury shares stockbased compensation award shares per share data presented herein retrospectively adjusted reflect impact increase authorized shares stock split appropriate dividends february 17 2014 board directors authorized increase payment quarterly dividends common stock 014 per share 016 per share payable beginning april 11 2014 february 19 2013 board directors authorized increase payment quarterly dividends common stock 012 per share 014 per share payable beginning april 12 2013 february 20 2012 board directors authorized increase payment dividends common stock 011 per share 012 per share payable quarterly beginning april 13 2012 generally dividend dateofrecord last month quarter dividend paid following month subsequent dividends reviewed board directors declared discretion dependent assessment financial situation business outlook applicable time share repurchase program may 31 2012 announced board directors endorsed capital structure strategy expanded share repurchase program 10 billion february 19 2013 board directors approved 750 million share repurchase authorization included approximately 193 million remaining capacity 10 billion share repurchase authorization share repurchase program expiration date reserve right limit terminate repurchase program anytime without notice part 10 billion share repurchase program june 14 2012 entered accelerated share repurchase program “asr program” jp morgan securities llc agent jpmorgan chase bank na london branch agreed repurchase aggregate 3000 million common stock total 7243191 shares repurchased asr program based volumeweighted average price 4231 average common stock price repurchase period less agreed upon discount postsplit basis repurchased 8142723 18638340 4448499 shares 4583 million 7719 million 1500 million 2013 2012 2011 respectively december 31 2013 3844 million remaining capacity current share repurchase program 16 income taxes provision income taxes consists following expected cash payments current income tax expense 2013 2012 2011 reduced 101 million 110 million 57 million respectively result tax deductions related exercise nonqualified employee stock options vesting restricted stock income tax benefit resulting stockbased compensation plans increased capital excess par value provision income taxes differs statutory corporate rate due following 2013 2012 2011 effective tax rates differed federal statutory rate 35 primarily due net impact foreign operations included impacts lower foreign tax rates changes reserves established uncertain tax positions assert permanent reinvestment majority invested capital unremitted foreign earnings foreign subsidiaries however assert permanent reinvestment limited number foreign subsidiaries future distributions may occur cumulative amount undistributed earnings considered permanently reinvested 17 billion permanently reinvested earnings repatriated future period form dividends otherwise provision income taxes may increase materially period quantification deferred tax liability associated indefinitely reinvested differences practicable three years reported period ended december 31 2013 recognized net deferred tax assets attributable excess foreign tax credits unremitted earnings foreign currency translation adjustments foreign subsidiaries excess financial reporting basis subsidiaries permanent reinvestment asserted cash deemed dividend distributions resulted recognition 50 million income tax expense year ended december 31 2013 23 million 95 million income tax benefit years ended december 31 2012 2011 respectively recorded benefit excess foreign tax credits associated deemed repatriation unremitted earnings credits available offset liability associated dividends deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes significant components consolidated deferred tax assets liabilities 1474 million us foreign net operating loss carryforwards december 31 2013 total 397 million state net operating losses net operating losses generated us unused expire 2014 2027 majority nonus net operating losses carry forward without expiration additionally 279 million foreign tax credit carryforwards december 31 2013 expiring 2020 2023 valuation allowance 08 million recorded earnings income taxes comprised tabular reconciliation total gross amount unrecognized tax benefits excluding interest penalties follows millions amount gross unrecognized tax benefits december 31 2013 755 million includes 162 million accrued interest penalties amount 572 million recognized would favorably impact effective tax rate years ended december 31 2013 2012 2011 recognized net interest penalty income 24 million 29 million 19 million respectively consolidated statements income limited exception longer subject us federal income tax audits years 2011 state local income tax audits years 2009 nonus income tax audits years 2007 currently examination various years austria canada france germany india italy singapore us venezuela reasonably possible within next 12 months effective tax rate impacted resolution matters audited various taxing authorities also reasonably possible statute limitations close various taxing jurisdictions within next 12 months estimate could record reduction tax expense approximately 14 million within next 12 months 17 business segment information business segments defined share focus industrial flow control technology high number common customers segments also complementary product offerings technologies often combined applications provide us net competitive advantage segments also benefit global footprint economies scale reducing administrative overhead costs serve customers cost effectively conduct operations three business segments based type product manage business • epd long lead time custom highlyengineered pumps pump systems mechanical seals auxiliary systems replacement parts related services • ipd engineered preconfigured industrial pumps pump systems related products services • fcd engineered industrial valves control valves actuators controls related services decisionmaking purposes chief executive officer ceo members senior executive management use financial information generated reported reportable segment level corporate headquarters constitute separate division business segment january 11 2012 new unified operational leadership structure announced resulting creation chief operating officer position creation position impact defined three business segments assessment ceo chief operating decision maker evaluate segment performance allocate resources based reportable segment’s operating income amounts classified eliminations include corporate headquarters costs minor entities constitute separate segments intersegment sales transfers recorded cost plus profit margin sales related margin sales eliminated consolidation following summary financial information reportable segments years ended december 31 2013 2012 2011 reconciled amounts reported consolidated financial statements 1 changes identifiable assets eliminations 2013 2012 2011 primarily result changes cash balances geographic information attribute sales different geographic areas based facilities’ locations longlived assets classified based geographic area assets located exclude deferred taxes goodwill intangible assets prior period information updated conform current year presentation sales longlived assets geographic area follows 1 ema includes europe middle east africa individual country within group represents 10 consolidated totals period presented 2 asia includes asia australia individual country within group represents 10 consolidated totals period presented 3 includes canada latin america individual country within group represents 10 consolidated totals period presented net sales international customers including export sales us represented approximately 71 total sales 2013 71 2012 73 2011 major customer information large number customers across large number manufacturing service facilities believe sales individual customer represent 10 consolidated sales years presented 18 accumulated comprehensive loss following presents components accumulated comprehensive loss net related tax effects 1 includes foreign currency translation adjustments attributable noncontrolling interests 12 million december 31 2013 2012 13 million 2011 2 foreign currency translation adjustments 2013 primarily represents weakening argentinian peso mexican peso indian rupee canadian dollar australian dollar exchange rates versus us dollar december 31 2013 compared december 31 2012 3 comprehensive loss reclassifications net taxes 04 million amounts reclassified accumulated comprehensive loss net taxes 09 million twelve months ended december 31 2012 cash flow hedging activity following table presents reclassifications accumulated comprehensive loss year ended december 31 2013 1 amounts parentheses indicate decreases income none reclass amounts noncontrolling interest component 2 accumulated comprehensive loss components included computation net periodic pension cost see note 12 additional details december 31 2013 expect recognize losses 09 million net deferred taxes earnings next twelve months related interest rate swap agreements based fair values december 31 2013 19 quarterly financial data unaudited following presents summary unaudited quarterly data 2013 2012 amounts millions except per share data 1 earnings per share computed independently quarters presented sum quarters may equal total year amount due impact changes weighted average quarterly shares outstanding significant pretax fourth quarter adjustment 2013 record 107 million charges related realignment program see note 20 additional information realignment program 20 realignment program fourth quarter 2013 initiated realignment program reduce optimize certain nonstrategic qrc manufacturing facilities overall cost structure 2013 realignment program expect total 2013 realignment program charges 158 million approved plans 107 million incurred december 31 2013 previously separate realignment programs began 2009 substantially complete 2011 realignment program consists restructuring nonrestructuring charges restructuring charges represent costs associated relocation reorganization certain business activities facility closures primarily represent employee severance nonrestructuring charges costs incurred improve operating efficiency reduce redundancies primarily represent employee severance expenses reported cos sga applicable consolidated statements income realignment charges net adjustments 107 million 07 million 119 million years ended december 31 2013 2012 2011 respectively 2013 charges 39 million recorded epd 38 million fcd 25 million ipd majority charges restructuring nature generally aforementioned charges paid cash except asset writedowns noncash charges majority remaining cash payments related 2013 realignment program incurred end 2014 restructuring reserve related 2013 realignment program 63 million december 31 2013 item 9 nannannannannannanitem 15 exhibits financial statement schedules reports form 8k a1 financial statements financial statements listed accompanying index financial statements financial statement schedule page hereof incorporated reference companys 2002 annual report shareholders part form 10k 2 financial statement schedule required financial statement schedule together report thereon pricewaterhousecoopers llp dated february 3 2003 listed accompanying index financial statements financial statement schedule page hereof filed part form 10k 3 exhibits listed accompanying index exhibits pages 15 20 either incorporated reference attached hereto part form 10k breports form 8k november 21 2002 company filed form 8k reaffirming 2002 full year estimated earnings per share company also filed form 8k december 23 2002 announcing increased number directors would serve board directors nine 9 ten 10 board directors elected christopher bartlett serve new director next annual shareholders meeting csee item 15a 3 dsee item 15a 2 index exhibits exhibit description 21 purchase agreement among flowserve corporation flowserve red corporation idp acquisition llc ingersollrand company dated february 9 2000 filed exhibit 21 companys quarterly report form 10q quarter ended march 31 2000 22 amendment 1 dated july 14 2000 purchase agreement dated february 9 2000 among flowserve corporation flowserve red corporation idp acquisition llc ingersollrand company filed exhibit 21 companys report form 8k dated july 19 2000 23 agreement plan merger among flowserve corporation forest acquisition sub inc innovative valve technologies inc dated november 18 1999 filed exhibit 99c1 schedule 14 d1 tender offer statement schedule 13d dated november 22 1999 31 1988 restated certificate incorporation duriron company inc filed exhibit 31 companys annual report form 10k year ended december 31 1988 32 1989 amendment certificate incorporation filed exhibit 32 companys annual report form 10k year ended december 31 1989 33 bylaws duriron company inc restated filed exhibit 32 companys annual report form 10k year ended december 31 1987 34 1996 certificate amendment certificate incorporation filed exhibit 34 companys annual report form 10k year ended december 31 1995 35 amendment 1 restated bylaws filed exhibit 35 companys annual report form 10k year ended december 31 1995 36 april 1997 certificate amendment certificate incorporation filed part annex vi joint proxy statementprospectus part registration statement form s4 dated june 19 1997 37 july 1997 certificate amendment certificate incorporation filed exhibit 36 companys quarterly report form 10q quarter ended june 30 1997 41 lease agreement indenture dated january 1 1995 bond purchase agreement dated january 27 1995 connection 8 taxable industrial development revenue bond city albuquerque new mexico relates class indebtedness exceed 10 total assets company furnish copy documents commission upon request 42 rights agreement dated august 1 1986 company bankone na rights agent includes exhibit b thereto form rights certificate filed exhibit 1 companys registration statement form 8a august 13 1986 43 amendment dated august 1 1996 rights agreement filed exhibit 45 companys quarterly report form 10q quarter ended june 30 1996 44 amendment 2 dated june 1 1998 rights agreement dated august 13 1986 amended august 1 1996 filed exhibit 1 companys form 8aa dated june 11 1998 45 rate swap agreement amount 25000000 company national city bank dated november 14 1996 filed exhibit 49 companys annual report form 10k year ended december 31 1996 46 rate swap agreement amount 25000000 company key bank national association dated october 28 1996 filed exhibit 410 companys annual report form 10k year ended december 31 1996 47 indenture dated august 8 2000 company guarantors identified therein bank new york trustee 290000000 aggregate principal amount 1225 senior subordinated notes due august 15 2010 filed exhibit 47 form s4 registration statement dated september 27 2000 48 indenture dated august 8 2000 flowserve finance bv guarantors identified therein bank new york trustee 100000000 aggregate principal amount 1225 senior subordinated notes due august 15 2010 filed exhibit 48 form s4 registration statement dated september 27 2000 49 dollar notes registration rights agreement dated august 3 2000 among company dollar notes guarantors credit suisse first boston bank america securities inc abn amro incorporated banc one capital markets inc filed exhibit 410 form s4 registration statement dated september 27 2000 410 euro notes registration rights agreement dated august 3 2000 among ffbv euro notes guarantors credit suisse first boston europe limited bank america international limited abn amro international limited first chicago limited filed exhibit 411 form s4 registration statement dated september 27 2000 101 flowserve corporation incentive compensation plan senior executives amended restated effective october 1 2000 filed exhibit 101 companys annual report form 10k year ended december 31 2000 102 supplemental pension plan salaried employees filed exhibit 104 companys annual report form 10k year ended december 31 1987 103 flowserve corporation director deferral plan amended restated effective october 1 2000 filed exhibit 103 companys annual report form 10k year ended december 31 2000 104 first master benefit trust agreement dated october 1 1987 filed exhibit 1024 companys annual report form 10k year ended december 31 1987 105 amendment 1 first master benefit trust agreement dated october 1 1987 filed exhibit 1024 companys annual report form 10k year ended december 31 1993 106 amendment 2 first master benefit trust agreement filed exhibit 1025 companys annual report form 10k year ended december 31 1993 107 second master benefit trust agreement dated october 1 1987 filed exhibit 1012 companys annual report form 10k year ended december 31 1987 108 first amendment second master benefit trust agreement filed exhibit 1026 companys annual report form 10k year ended december 31 1993 109 longterm incentive plan amended restated effective october 1 2000 filed exhibit 1010 companys annual report form 10k year ended december 31 2000 1010 flowserve corporation 1989 stock option plan amended restated effective january 1 1997 filed exhibit 1014 companys annual report form 10k year ended december 31 1996 1011 flowserve corporation second amendment 1989 stock option plan previously amended restated filed exhibit 1014 companys quarterly report form 10q quarter ended june 30 1998 1012 amendment 3 flowserve corporation 1989 stock option plan filed exhibit 1013 companys annual report form 10k year ended december 31 2000 1013 flowserve corporation 1989 restricted stock plan 1989 restricted stock plan amended restated effective january 1 1997 filed exhibit 1015 companys annual report form 10k year ended december 31 1996 1014 amendment 1 1989 restricted stock plan amended restated filed exhibit 1033 companys annual report form 10k year ended december 31 1997 1015 amendment 2 flowserve corporation 1989 restricted stock plan filed exhibit 1016 companys annual report form 10k year ended december 31 2000 1016 flowserve corporation 1989 restricted stock dividend plan effective october 1 2000 filed exhibit 1017 companys annual report form 10k year ended december 31 2000 1017 flowserve corporation retirement compensation plan directors director retirement plan filed exhibit 1015 companys annual report form 10k year ended december 31 1988 1018 amendment 1 director retirement plan filed exhibit 1021 companys annual report form 10k year ended december 31 1995 1019 companys benefit equalization pension plan equalization plan filed exhibit 1016 companys annual report form 10k year ended december 31 1989 1020 amendment 1 dated december 15 1992 equalization plan filed exhibit 1018 companys annual report form 10k year ended december 31 1992 1021 flowserve corporation executive equity incentive plan amended restated effective july 21 1999 filed exhibit 102 companys quarterly report form 10q quarter ended september 30 1999 1022 flowserve corporation deferred compensation plan filed exhibit 1023 companys annual report form 10k year ended december 31 2000 1023 executive life insurance plan flowserve corporation filed exhibit 1029 companys annual report form 10k year ended december 31 1995 1024 executive longterm disability plan duriron company inc filed exhibit 1030 companys annual report form 10k year ended december 31 1995 1025 flowserve corporation 1997 stock option plan included exhibit companys 1997 proxy statement filed march 17 1997 1026 first amendment flowserve corporation 1997 stock option plan filed exhibit 1028 companys quarterly report form 10q quarter ended june 30 1998 1027 amendment 2 flowserve corporation 1997 stock option plan filed exhibit 1029 companys annual report form 10k year ended december 31 1999 1028 amendment 3 flowserve corporation 1997 stock option plan filed exhibit 1029 companys annual report form 10k year ended december 31 2000 1029 flowserve corporation 1999 stock option plan included exhibit companys 1999 proxy statement filed march 15 1999 1030 amendment 1 flowserve corporation 1999 stock option plan filed exhibit 1031 companys annual report form 10k year ended december 31 1999 1031 amendment 2 flowserve corporation 1999 stock option plan filed exhibit 1032 companys annual report form 10k year ended december 31 2000 1032 bwip international inc supplemental executive retirement plan amended restated filed exhibit 1027 companys quarterly report form 10q quarter entered march 31 1998 1033 flowserve corporation 1998 restricted stock plan included exhibit companys 1999 proxy statement filed april 9 1998 1034 amendment 1 flowserve corporation 1998 restricted stock plan filed exhibit 10 companys quarterly report form 10q quarter ended march 31 1999 1035 amendment 2 flowserve corporation 1998 restricted stock plan filed exhibit 101 companys quarterly report form 10q quarter ended june 30 1999 1036 amendment 3 flowserve corporation 1998 restricted stock plan filed exhibit 1037 companys annual report form 10k year ended december 31 2000 1037 amendment 4 flowserve corporation 1998 restricted stock plan filed exhibit 101 companys quarterly report form 10q quarter ended june 30 2001 1038 flowserve corporation 1998 restricted stock dividend plan effective october 1 2000 filed exhibit 1038 companys annual report form 10k year ended december 31 2000 1039 employment agreement effective july 1 1999 company c scott greer filed exhibit 102 companys quarterly report form 10q quarter ended june 30 1999 1040 loan agreement company c scott greer filed exhibit 101 companys quarterly report form 10q quarter ended september 30 1999 1041 credit agreement among registrant certain subsidiaries referred therein lenders referred therein credit suisse first boston new york branch syndication agent bank america na administrative agent collateral agent swingline lender abn amro bank nv bank one na salomon smith barney inc codocumentation agents dated august 8 2000 credit agreement filed exhibit 1045 form s4 registration statement dated september 27 2000 1042 security agreement among registrant certain subsidiaries referred therein bank america na dated august 8 2000 filed exhibit 1046 form s8 registration statement dated september 27 2000 1043 first amendment 2000 credit agreement dated november 9 2001 filed exhibit 1043 companys annual report form 10k year ended december 31 2001 1044 amendment master benefit trust agreement filed exhibit 1045 companys annual report form 10k year ended december 31 2000 1045 executive severance arrangement filed exhibit 1045 companys annual report form 10k year ended december 31 2001 1046 flowserve corporation executive officers change control severance plan effective january 1 2002 filed herewith 1047 flowserve corporation officers change control severance plan effective january 1 2002 filed herewith 1048 flowserve corporation key management change control severance plan effective january 1 2002 filed herewith 1049 amendment 1 flowserve corporation flex health welfare plan amended restated effective december 1 2002 filed herewith 1050 amendment 1 flowserve corporation deferred compensation plan amended restated effective june 1 2000 filed herewith 1051 2002 restricted stock unit plan effective december 1 2002 filed herewith 1052 flowserve corporation senior management retirement plan effective july 1 1999 filed herewith 1053 flowserve corporation supplemental executive retirement plan effective july 1 1999 filed herewith 1054 flowserve corporation performance unit plan effective january 1 2001 filed herewith 131 2002 annual report shareholders filed herewith part form 10k report extent incorporated herein reference 141 flowserve financial management code ethics adopted companys principal executive officer ceo principal financial officer cfo principal accounting officer controller senior financial managers filed herewith part report incorporated herein reference 211 subsidiaries company filed herewith 221 2003 proxy statement filed herewith part form 10k report extent incorporated herein reference 231 consent pricewaterhousecoopers llp filed herewith 991 certification pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 filed herewith 992 certification pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 filed herewith exhibits company incorporated reference annual report form 10k previous filing commission companys file number commission since july 1997 113179 previous file number 0325 management contracts compensatory plans arrangements required filed exhibits annual report form 10k forwardlooking information subject risk uncertainty annual report form 10k written reports oral statements made timetotime company contain various forwardlooking statements include assumptions companys future financial market conditions operations results statements based current expectations subject significant risks uncertainties made pursuant safe harbor provisions private securities litigation reform act 1995 among many factors could cause actual results differ materially forwardlooking statements changes financial markets availability capital changes already competitive environment companys products competitors responses companys strategies companys ability integrate past future acquisitions management operations political risks military actions trade embargoes affecting customer markets including possibility war iraq potential impact middle eastern markets global petroleum producers health petroleum chemical power water industries economic conditions extent economic growth areas inside outside united states unanticipated difficulties costs associated implementation systems including software companys relative geographical profitability impact companys utilization foreign tax credits recognition expenses associated adjustments realign combined company acquisition facilities capabilities strategic business conditions including without limitation expenses incurred restructuring companys operations incorporate acquisition facilities companys ability meet financial covenants requirements financing agreements repercussions terrorist attacks september 11 2001 threat future attacks response united states attacks technological developments companys products compared competitors changes prevailing interest rates effective interest costs company bears adverse changes regulatory climate legal obligations imposed company undertakes obligation publicly update revise forwardlooking statement result new information future events otherwise signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 21st day february 2003 flowserve corporation registrant c scott greer c scott greer chairman president chief executive officer pursuant requirements securities exchange act 1934 report signed following persons capacities dates indicated signature title date c scott greer c scott greer chairman president chief executive officer principal executive officer february 21 2003 renée j hornbaker renée j hornbaker vice president chief financial officer principal financial officer february 21 2003 kathleen giddings kathleen giddings vice president controller principal accounting officer february 21 2003 diane c harris diane c harris director chairman auditfinance committee february 21 2003 william c rusnack william c rusnack director member auditfinance committee february 21 2003 charles rampacek charles rampacek director member auditfinance committee february 21 2003 james rollans james rollans director member auditfinance committee february 21 2003 kevin e sheehan kevin e sheehan director february 21 2003 certification pursuant section 302 sarbanesoxley act 2002 c scott greer chief executive officer flowserve corporation certify 1 reviewed annual report form 10k flowserve corporation 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4 registrants certifying officers responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrants disclosure controls procedures date within 90 days prior filing date annual report evaluation date c presented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5 registrants certifying officers disclosed based recent evaluation registrants auditors audit committee registrants board directors significant deficiencies design operation internal controls could adversely affect registrants ability record process summarize report financial data identified registrants auditors material weaknesses internal controls b fraud whether material involves management employees significant role registrants internal controls 6 registrants certifying officers indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses date february 21 2003 c scott greer c scott greer chief executive officer certification pursuant section 302 sarbanesoxley act 2002 renée j hornbaker chief financial officer flowserve corporation certify 1 reviewed annual report form 10k flowserve corporation 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4 registrants certifying officers responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrants disclosure controls procedures date within 90 days prior filing date annual report evaluation date c presented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5 registrants certifying officers disclosed based recent evaluation registrants auditors audit committeee registrants board directors significant deficiencies design operation internal controls could adversely affect registrants ability record process summarize report financial data identified registrants auditors material weaknesses internal controls b fraud whether material involves management employees significant role registrants internal controls 6 registrants certifying officers indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses date february 21 2003 renée j hornbaker renée j hornbaker vice president chief financial officer flowserve corporation index financial statements financial statement schedule item 15a1 2 financial statement schedules included annual report form 10k omitted applicable required information shown consolidated financial statements notes thereto report independent accountants financial statement schedule board directors flowserve corporation audits consolidated financial statements referred report dated february 3 2003 appearing 2002 annual report shareholders flowserve corporation report consolidated financial statements incorporated reference annual report form 10k also included audit financial statement schedule listed item 15a2 form 10k opinion financial statement schedule presents fairly material respects information set forth therein read conjunction related consolidated financial statements spricewaterhousecoopers llp pricewaterhousecoopers llp dallas texas february 3 flowserve corporation schedule ii valuation qualifying accounts dollars thousands adeductions reserve represent accounts written net recoveries bdeductions reserve represent inventory disposed written documents incorporated reference part item 1 business item 2 properties item 3 legal proceedings item 4 submission matters vote security holders part ii item 5 market registrants common equity related stockholder matters item 6 selected financial data item 7 managements discussion analysis financial condition results operation item 7a quantitative qualitative disclosures market risk item 8 financial statements supplementary data item 9 changes disagreements accountants accounting financial disclosure part iii item 10 directors executive officers certain corporate officers registrant item 11 executive compensation item 12 security ownership certain beneficial owners management related shareholder matters item 13 certain relationships related transactions item 14 controls procedures part iv item 15 exhibits financial statement schedules reports form 8k index exhibits forwardlooking information subject risk uncertainty certification pursuant section 302 sarbanesoxley act 2002 certification pursuant section 302 sarbanesoxley act 2002 flowserve corporation index financial statements financial statement schedule item 15a1 2 report independent accountants financial statement scheduleitem 15 exhibits financial statement schedules reports form 8k a1 financial statements following index lists consolidated financial statements notes thereto filed part annual report form 10k 2financial statement schedule required financial statement schedule together report thereon pricewaterhousecoopers llp dated april 26 2004 indicated index page 3exhibits exhibits listed accompanying index exhibits pages 94 99 either incorporated reference attached hereto part form 10k breports form 8k december 22 2003 filed form 8k announcing press release issued day reduced earnings outlook 2003 reconfirmed still expected meet current year debt reduction target 50 million cash flow target signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 26th day april 2004 flowserve corporation registrant c scott greer c scott greer chairman president chief executive officer pursuant requirements securities exchange act 1934 report signed following persons capacities dates indicated signature title date c scott greer c scott greer chairman president chief executive officer principal executive officer april 26 2004 renée j hornbaker renée j hornbaker vice president chief financial officer principal financial accounting officer april 26 2004 diane c harris diane c harris director chairman auditfinance committee april 26 2004 william c rusnack william c rusnack director member auditfinance committee april 26 2004 charles rampacek charles rampacek director member auditfinance committee april 26 2004 james rollans james rollans director member auditfinance committee april 26 2004 george haymaker jr george haymaker jr director april 26 2004 index exhibits 42 rights agreement dated august 1 1986 company bank one na rights agent includes exhibit b thereto form rights certificate filed exhibit 1 companys registration statement form 8a august 13 1986 43 amendment dated august 1 1996 rights agreement filed exhibit 45 companys quarterly report form 10q quarter ended june 30 1996 44 amendment 2 dated june 1 1998 rights agreement dated august 13 1986 amended august 1 1996 filed exhibit 103 companys form 8aa dated june 11 1998 45 rate swap agreement amount 25000000 company national city bank dated november 14 1996 filed exhibit 49 companys annual report form 10k year ended december 31 1996 46 rate swap agreement amount 25000000 company key bank national association dated october 28 1996 filed exhibit 410 companys annual report form 10k year ended december 31 1996 47 indenture dated august 8 2000 company guarantors identified therein bank new york trustee 290000000 aggregate principal amount 1225 senior subordinated notes due august 15 2010 filed exhibit 47 form s4 registration statement dated september 27 2000 48 indenture dated august 8 2000 flowserve finance bv guarantors identified therein bank new york trustee 100000000 aggregate principal amount 1225 senior subordinated notes due august 15 2010 filed exhibit 48 form s4 registration statement dated september 27 2000 49 dollar notes registration rights agreement dated august 3 2000 among company dollar notes guarantors credit suisse first boston bank america securities inc abn amro incorporated banc one capital markets inc filed exhibit 410 form s4 registration statement dated september 27 2000 410 euro notes registration rights agreement dated august 3 2000 among ffbv euro notes guarantors credit suisse first boston europe limited bank america international limited abn amro international limited first chicago limited filed exhibit 411 form s4 registration statement dated september 27 2000 101 flowserve corporation incentive compensation plan senior executives amended restated effective october 1 2000 filed exhibit 101 companys annual report form 10k year ended december 31 2000 102 supplemental pension plan salaried employees filed exhibit 104 companys annual report form 10k year ended december 31 1987 103 flowserve corporation director deferral plan amended restated effective october 1 2000 filed exhibit 103 companys annual report form 10k year ended december 31 2000 104 first master benefit trust agreement dated october 1 1987 filed exhibit 1024 companys annual report form 10k year ended december 31 1987 105 amendment 1 first master benefit trust agreement dated october 1 1987 filed exhibit 1024 companys annual report form 10k year ended december 31 1993 106 amendment 2 first master benefit trust agreement filed exhibit 1025 companys annual report form 10k year ended december 31 1993 107 second master benefit trust agreement dated october 1 1987 filed exhibit 1012 companys annual report form 10k year ended december 31 1987 108 first amendment second master benefit trust agreement filed exhibit 1026 companys annual report form 10k year ended december 31 1993 109 longterm incentive plan amended restated effective october 1 2000 filed exhibit 1010 companys annual report form 10k year ended december 31 2000 1010 flowserve corporation 1989 stock option plan amended restated effective january 1 1997 filed exhibit 1014 companys annual report form 10k year ended december 31 1996 1011 flowserve corporation second amendment 1989 stock option plan previously amended restated filed exhibit 1014 companys quarterly report form 10q quarter ended june 30 1998 1012 amendment 3 flowserve corporation 1989 stock option plan filed exhibit 1013 companys annual report form 10k year ended december 31 2000 1013 flowserve corporation 1989 restricted stock plan 1989 restricted stock plan amended restated effective january 1 1997 filed exhibit 1015 companys annual report form 10k year ended december 31 1996 1014 amendment 1 1989 restricted stock plan amended restated filed exhibit 1033 companys annual report form 10k year ended december 31 1997 1015 amendment 2 flowserve corporation 1989 restricted stock plan filed exhibit 1016 companys annual report form 10k year ended december 31 2000 1016 flowserve corporation 1989 restricted stock dividend plan effective october 1 2000 filed exhibit 1017 companys annual report form 10k year ended december 31 2000 1017 flowserve corporation retirement compensation plan directors director retirement plan filed exhibit 1015 companys annual report form 10k year ended december 31 1988 1018 amendment 1 director retirement plan filed exhibit 1021 companys annual report form 10k year ended december 31 1995 1019 companys benefit equalization pension plan equalization plan filed exhibit 1016 companys annual report form 10k year ended december 31 1989 1020 amendment 1 dated december 15 1992 equalization plan filed exhibit 1018 companys annual report form 10k year ended december 31 1992 1021 flowserve corporation executive equity incentive plan amended restated effective july 21 1999 filed exhibit 102 companys quarterly report form 10q quarter ended september 30 1999 1022 flowserve corporation deferred compensation plan filed exhibit 1023 companys annual report form 10k year ended december 31 2000 1023 executive life insurance plan duriron company inc filed exhibit 1029 companys annual report form 10k year ended december 31 1995 1024 executive longterm disability plan duriron company inc filed exhibit 1030 companys annual report form 10k year ended december 31 1995 1025 duriron company inc 1997 stock option plan included exhibit companys 1997 proxy statement filed march 17 1997 1026 first amendment flowserve corporation 1997 stock option plan filed exhibit 1028 companys quarterly report form 10q quarter ended june 30 1998 1027 amendment 2 flowserve corporation 1997 stock option plan filed exhibit 1029 companys annual report form 10k year ended december 31 1999 1028 amendment 3 flowserve corporation 1997 stock option plan filed exhibit 1029 companys annual report form 10k year ended december 31 2000 1029 flowserve corporation 1999 stock option plan included exhibit companys 1999 proxy statement filed march 15 1999 1030 amendment 1 flowserve corporation 1999 stock option plan filed exhibit 1031 companys annual report form 10k year ended december 31 1999 1031 amendment 2 flowserve corporation 1999 stock option plan filed exhibit 1032 companys annual report form 10k year ended december 31 2000 1032 bwip international inc supplemental executive retirement plan amended restated filed exhibit 1027 companys quarterly report form 10q quarter entered march 31 1998 1033 flowserve corporation 1998 restricted stock plan included appendix companys 1999 proxy statement filed april 9 1998 1034 amendment 1 flowserve corporation 1998 restricted stock plan filed exhibit 10 companys quarterly report form 10q quarter ended march 31 1999 1035 amendment 2 flowserve corporation 1998 restricted stock plan filed exhibit 101 companys quarterly report form 10q quarter ended june 30 1999 1036 amendment 3 flowserve corporation 1998 restricted stock plan filed exhibit 1037 companys annual report form 10k year ended december 31 2000 1037 amendment 4 flowserve corporation 1998 restricted stock plan filed exhibit 101 companys quarterly report form 10q quarter ended june 30 2001 1038 flowserve corporation 1998 restricted stock dividend plan effective october 1 2000 filed exhibit 1038 companys annual report form 10k year ended december 31 2000 1039 employment agreement effective july 1 1999 company c scott greer filed exhibit 102 companys quarterly report form 10q quarter ended june 30 1999 1040 loan agreement company c scott greer filed exhibit 101 companys quarterly report form 10q quarter ended september 30 1999 1041 credit agreement among registrant certain subsidiaries referred therein lenders referred therein credit suisse first boston new york branch syndication agent bank america na administrative agent collateral agent swingline lender abn amro bank nv bank one na salomon smith barney inc codocumentation agents dated august 8 2000 credit agreement filed exhibit 1045 form s4 registration statement dated september 27 2000 1042 security agreement among registrant certain subsidiaries referred therein bank america na dated august 8 2000 filed exhibit 1046 form s4 registration statement dated september 27 2000 1043 first amendment 2000 credit agreement dated november 9 2001 filed exhibit 1043 companys annual report form 10k year ended december 31 2001 1044 amendment master benefit trust agreement filed exhibit 1045 companys annual report form 10k year ended december 31 2000 1045 executive severance arrangement filed exhibit 1045 companys annual report form 10k year ended december 31 2001 1046 flowserve corporation executive officers change control severance plan effective january 1 2002 filed exhibit 1046 companys annual report form 10k year ended december 31 2002 1047 flowserve corporation officer change control severance plan effective january 1 2002 filed exhibit 1047 companys annual report form 10k year ended december 31 2002 1048 flowserve corporation key management change control severance plan effective january 1 2002 filed exhibit 1048 companys annual report form 10k year ended december 31 2002 1049 amendment 1 flowserve corporation flex health welfare plan amended restated effective december 1 2002 filed exhibit 1049 companys annual report form 10k year ended december 31 2002 1050 amendment 1 flowserve corporation deferred compensation plan amended restated effective june 1 2000 filed exhibit 1050 companys annual report form 10k year ended december 31 2002 1051 2002 restricted stock unit plan effective december 1 2002 filed exhibit 1051 companys annual report form 10k year ended december 31 2002 1052 flowserve corporation senior management retirement plan effective july 1 1999 filed exhibit 1052 companys annual report form 10k year ended december 31 2002 1053 flowserve corporation supplemental executive retirement plan effective july 1 1999 filed exhibit 1053 companys annual report form 10k year ended december 31 2002 1054 flowserve corporation performance unit plan effective january 1 2001 filed exhibit 1054 companys annual report form 10k year ended december 31 2002 1055 first amendment first amended restated credit agreement effective june 30 2003 filed exhibit 1055 companys quarterly report form 10q quarter ended june 30 2003 141 flowserve financial management code ethics adopted companys principal executive officer ceo principal financial officer cfo principal accounting officer controller senior financial managers filed exhibit 141 companys annual report form 10k year ended december 31 2002 211 subsidiaries company filed herewith 231 consent pricewaterhousecoopers llp filed herewith 311 certification pursuant section 302 sarbanesoxley act 2002 filed herewith 312 certification pursuant section 302 sarbanesoxley act 2002 filed herewith 321 certification pursuant section 906 sarbanesoxley act 2002 filed herewith 322 certification pursuant section 906 sarbanesoxley act 2002 filed herewith exhibits company incorporated reference annual report form 10k previous filing commission companys file number commission since july 1997 113179 previous file number 0325 management contracts compensatory plans arrangements required filed exhibits annual report form 10k flowserve corporation index financial statements financial statement schedule item 15a1 2 flowserve corporation financial statement schedule three years period ended december 31 2003 report independent auditors financial statement schedule iivaluation qualifying accounts financial statement schedules included annual report form 10k omitted applicable required information shown consolidated financial statements notes thereto report independent auditors financial statement schedule board directors shareholders flowserve corporation audits consolidated financial statements referred report dated april 26 2004 also included audit financial statement schedule listed item 15a2 form 10k opinion financial statement schedule presents fairly material respects information set forth therein read conjunction related consolidated financial statements pricewaterhousecoopers llp pricewaterhousecoopers llp dallas texas april 26 2004 flowserve corporation schedule iivaluation qualifying accounts dollars thousands adeductions reserve represent accounts written net recoveries reductions due improved aging receivables bdeductions reserve represent inventory disposed written cdeductions reserve result expiration utilization foreign tax credits previously reserved forwardlooking information subject risk uncertainty annual report form 10k reports oral statements made timetotime company contain various forwardlooking statements include assumptions companys future market conditions operations results statements based current expectations subject significant risks uncertainties made pursuant safe harbor provisions private securities litigation reform act 1995 among many factors could cause actual results differ materially forwardlooking statements •material adverse events national financial markets •changes already competitive environment companys products competitors responses companys strategies •the companys ability integrate past future acquisitions management operations •political risks military actions trade embargoes affecting customer markets including continuing conflict iraq potential impact middle eastern markets global oil producers •the health companys various customer industries including petroleum chemical power water industries •economic turmoil areas outside united states •global economic growth •unanticipated difficulties costs associated new systems including software •the companys relative geographical profitability impact companys utilization foreign tax credits •the recognition significant expenses associated adjustments realign companys facilities capabilities strategies business conditions including without limitation expenses incurred restructuring companys operations cost financing including increases interest costs •litigation developments company undertakes obligation update revise forwardlooking statements contained herein result new information future events otherwise occurring date forwardlooking statements made new factors emerge timetotime possible company predict factors part item 1 business item 2 properties item 3 legal proceedings item 4 submission matters vote security holders item 4a executive officers company part ii item 5 market registrants common equity related stockholder matters issuer purchases equity securities item 6 selected financial data item 7 managements discussion analysis financial condition results operations item 7a quantitative qualitative disclosures market risk item 8 financial statements supplementary data item 9 changes disagreements accountants accounting financial disclosure item 9a controls procedures part iii item 10 directors executive officers certain corporate officers registrant item 11 executive compensation item 12 security ownership certain beneficial owners management related stockholder matters item 13 certain relationships related transactions item 14 principal accounting fees services part iv index exhibits flowserve corporation index financial statements financial statement schedule item 15a1 2 report independent auditors financial statement schedule flowserve corporation schedule iivaluation qualifying accounts dollars thousandsitem 15 exhibits financial statement schedules documents filed part annual report 1 consolidated financial statements following consolidated financial statements notes thereto filed part annual report form 10k 2 consolidated financial statement schedules following consolidated financial statement schedule filed part annual report financial statement schedules included annual report omitted applicable required information shown consolidated financial statements notes thereto 3 exhibits following exhibits either filed herewith incorporated reference designated document previously filed sec management contracts compensatory plans arrangements required filed exhibits annual report form 10k forwardlooking information subject risk uncertainty annual report includes forwardlooking statements forward looking statements historical facts include without limitation statements relating business strategy statements expectations beliefs future plans strategies anticipated developments concerning industry business operations financial performance condition words “believe” “seek” “anticipate” “plan” “estimate” “expect” “intend” “project” “forecast” “predict” “potential” “continue” “will” “may” “could” “should” words similar meaning intended identify forwardlooking statements forwardlooking statements made annual report made pursuant safe harbor provisions private securities litigation reform act 1995 forwardlooking statements involve known unknown risks uncertainties factors cases beyond control risks uncertainties factors may cause actual results performance achievements industry results market trends materially different future results performance achievements trends expressed implied forwardlooking statements important risks uncertainties factors could cause actual results differ forwardlooking statements include limited risks uncertainties discussed “item 1 business risk factors” following • delays future reports company’s management outside auditors company’s internal control financial reporting related certification • continuing delays company’s filing periodic public reports sec nyse debt rating agencies’ actions resulting therefrom • possibility adverse consequences pending securities litigation sec investigations • possibility adverse consequences governmental tax audits company’s tax returns including irs audit company’s us tax returns years 2002 2004 • company’s ability convert bookings subject computed accordance generally accepted accounting principles revenues acceptable profit margins since profit margins cannot assured necessarily assumed follow historical trends • changes financial markets availability capital • changes already competitive environment company’s products competitors’ responses company’s strategies • company’s ability integrate acquisitions management operations • political risks military actions trade embargoes affecting customer markets including continuing conflict iraq potential impact middle eastern markets global petroleum producers • company’s ability comply laws regulations affecting international operations including us export laws effect noncompliance • health petroleum chemical power water industries • economic conditions extent economic growth us countries regions • unanticipated difficulties costs associated implementation systems including software • company’s relative geographical profitability impact company’s utilization foreign tax credits • recognition significant expenses associated realigning operations acquired companies flowserve • company’s ability meet financial covenants requirements debt agreements • terrorist attacks response us attacks threat attacks • technological developments company’s products compared competitors • changes prevailing interest rates company’s effective interest costs • adverse changes regulatory climate legal obligations imposed company possible foresee identify factors may affect future performance forwardlooking information new risk factors emerge time given risks uncertainties place undue reliance forwardlooking statements prediction actual results forwardlooking statement included annual report based information available us date annual report undertake obligation revise update forwardlooking statement disclose facts events circumstances occur date hereof may affect accuracy forwardlooking statement signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 13th day february 2006 flowserve corporation registrant lewis kling lewis kling president chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated signature title date kevin e sheehan kevin e sheehan chairman board director member finance committee february 13 2006 christopher bartlett christopher bartlett director member organization compensation committee february 13 2006 george haymaker jr george haymaker jr director chairman organization compensation committee member corporate governance nominating committee february 13 2006 flowserve corporation schedule iivaluation qualifying accounts deductions reserve represent accounts written net recoveries reductions due improved aging receivables b deductions reserve represent inventory disposed written c deductions reserve result expiration utilization foreign tax credits previously reserved index exhibits management contracts compensatory plans arrangements required filed exhibits annual report form 10kitem 15 exhibits financial statement schedules documents filed part annual report form 10k 1 consolidated financial statements following consolidated financial statements notes thereto filed part annual report form 10k report independent registered public accounting firm flowserve corporation consolidated financial statements consolidated balance sheets december 31 2005 2006 three years period ended december 31 2006 consolidated statements income consolidated statements comprehensive income loss consolidated statements shareholders’ equity consolidated statements cash flows notes consolidated financial statements 2 consolidated financial statement schedules following consolidated financial statement schedule filed part annual report financial statement schedules included annual report omitted applicable required information shown consolidated financial statements notes thereto 3 exhibits following exhibits either filed herewith incorporated reference designated document previously filed sec management contracts compensatory plans arrangements required filed exhibits annual report form 10k signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 1st day march 2007 flowserve corporation registrant lewis kling lewis kling president chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated flowserve corporation schedule ii valuation qualifying accounts deductions reserve represent accounts written net recoveries reductions due improved aging receivables b deductions reserve result expiration utilization foreign tax credits previously reserved index exhibits management contracts compensatory plans arrangements required filed exhibits annual report form 10kitem 15 exhibits financial statement schedules documents filed part annual report form 10k 1 consolidated financial statements following consolidated financial statements notes thereto filed part annual report form 10k report independent registered public accounting firm flowserve corporation consolidated financial statements consolidated balance sheets december 31 2006 2007 three years period ended december 31 2007 consolidated statements income consolidated statements comprehensive income loss consolidated statements shareholders’ equity consolidated statements cash flows notes consolidated financial statements 2 consolidated financial statement schedules following consolidated financial statement schedule filed part annual report financial statement schedules included annual report omitted applicable required information shown consolidated financial statements notes thereto 3 exhibits following exhibits either filed herewith incorporated reference designated document previously filed sec company furnish copies exhibits reasonable fee covering expense furnishing copies upon request stockholders may request exhibits copies contacting flowserve corporation attn investor relations 5215 n o’connor boulevard suite 2300 irving texas 75039 972 4436500 management contracts compensatory plans arrangements required filed exhibits annual report form 10k signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 27th day february 2008 flowserve corporation registrant lewis kling lewis kling president chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated flowserve corporation schedule ii valuation qualifying accounts deductions reserve represent accounts written net recoveries reductions due improved aging receivables b deductions reserve result expiration utilization net operating losses foreign tax credits previously reserved index exhibits management contracts compensatory plans arrangements required filed exhibits annual report form 10kitem 15 exhibits financial statement schedules documents filed part annual report 1 consolidated financial statements following consolidated financial statements notes thereto filed part annual report form 10k report independent registered public accounting firm flowserve corporation consolidated financial statements consolidated balance sheets december 31 2007 2008 three years period ended december 31 2008 consolidated statements income consolidated statements comprehensive income loss consolidated statements shareholders’ equity consolidated statements cash flows notes consolidated financial statements 2 consolidated financial statement schedules following consolidated financial statement schedule filed part annual report financial statement schedules included annual report omitted applicable required information shown consolidated financial statements notes thereto 3 exhibits see index exhibits annual report signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized flowserve corporation lewis kling lewis kling president chief executive officer date february 25 2009 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated flowserve corporation schedule ii valuation qualifying accounts deductions reserve represent accounts written net recoveries reductions due improved aging receivables b deductions reserve result expiration utilization net operating losses foreign tax credits previously reserved index exhibits management contracts compensatory plans arrangements required filed exhibits annual report form 10k filed herewithitem 15 exhibits financial statement schedules documents filed part annual report 1 consolidated financial statements following consolidated financial statements notes thereto filed part annual report form 10k report independent registered public accounting firm flowserve corporation consolidated financial statements consolidated balance sheets december 31 2009 2008 three years period ended december 31 2009 consolidated statements income consolidated statements comprehensive income consolidated statements shareholders’ equity consolidated statements cash flows notes consolidated financial statements 2 consolidated financial statement schedules following consolidated financial statement schedule filed part annual report financial statement schedules included annual report omitted applicable required information shown consolidated financial statements notes thereto 3 exhibits see index exhibits annual report signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized flowserve corporation mark blinn mark blinn president chief executive officer date february 24 2010 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated schedule valuation qualifying accounts disclosure flowserve corporation schedule ii valuation qualifying accounts deductions reserve represent accounts written net recoveries reductions due improved aging receivables b deductions reserve result expiration utilization net operating losses foreign tax credits previously reserved index exhibits management contracts compensatory plans arrangements required filed exhibits annual report form 10k filed herewith furnished herewithitem 15 exhibits financial statement schedules documents filed part annual report 1 consolidated financial statements following consolidated financial statements notes thereto filed part annual report form 10k report independent registered public accounting firm flowserve corporation consolidated financial statements consolidated balance sheets december 31 2010 2009 three years period ended december 31 2010 consolidated statements income consolidated statements comprehensive income consolidated statements shareholders’ equity consolidated statements cash flows notes consolidated financial statements 2 consolidated financial statement schedules following consolidated financial statement schedule filed part annual report financial statement schedules included annual report omitted applicable required information shown consolidated financial statements notes thereto 3 exhibits see index exhibits annual report signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized flowserve corporation mark blinn mark blinn president chief executive officer date february 23 2011 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated schedule valuation qualifying accounts flowserve corporation schedule ii valuation qualifying accounts deductions reserve represent accounts written net recoveries reductions due improved aging receivables b deductions reserve result expiration utilization net operating losses foreign tax credits previously reserved index exhibits management contracts compensatory plans arrangements required filed exhibits annual report form 10k filed herewith furnished herewithitem 15 exhibits financial statement schedules documents filed part annual report 1 consolidated financial statements following consolidated financial statements notes thereto filed part annual report independent registered public accounting firm flowserve corporation consolidated financial statements consolidated balance sheets december 31 2012 2011 three years period ended december 31 2012 consolidated statements income consolidated statements comprehensive income consolidated statements shareholders’ equity consolidated statements cash flows notes consolidated financial statements 2 consolidated financial statement schedules following consolidated financial statement schedule filed part annual report schedule ii valuation qualifying accounts financial statement schedules included annual report omitted applicable required information shown consolidated financial statements notes thereto 3 exhibits see index exhibits annual report signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized flowserve corporation mark blinn mark blinn president chief executive officer date february 21 2013 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated flowserve corporation schedule ii valuation qualifying accounts deductions reserve represent accounts written recoveries b deductions reserve result expiration utilization net operating losses foreign tax credits previously reserved index exhibits management contracts compensatory plans arrangements required filed exhibits annual report form 10k filed herewith furnished herewithitem 15 exhibits financial statement schedules documents filed part annual report 1 consolidated financial statements following consolidated financial statements notes thereto filed part annual report independent registered public accounting firm flowserve corporation consolidated financial statements consolidated balance sheets december 31 2014 2013 three years period ended december 31 2014 consolidated statements income consolidated statements comprehensive income consolidated statements shareholders’ equity consolidated statements cash flows notes consolidated financial statements 2 consolidated financial statement schedules following consolidated financial statement schedule filed part annual report financial statement schedules included annual report omitted applicable required information shown consolidated financial statements notes thereto 3 exhibits see index exhibits annual report signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized flowserve corporation mark blinn mark blinn president chief executive officer date february 17 2015 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated flowserve corporation schedule ii valuation qualifying accounts deductions reserve represent accounts written recoveries b deductions reserve result expiration utilization net operating losses foreign tax credits previously reserved index exhibits management contracts compensatory plans arrangements required filed exhibits annual report form 10k filed herewith furnished herewithitem 15 exhibits financial statement schedules documents filed part annual report 1 consolidated financial statements following consolidated financial statements notes thereto filed part annual report independent registered public accounting firm flowserve corporation consolidated financial statements consolidated balance sheets december 31 2015 2014 three years period ended december 31 2015 consolidated statements income consolidated statements comprehensive income consolidated statements shareholders’ equity consolidated statements cash flows notes consolidated financial statements 2 consolidated financial statement schedules following consolidated financial statement schedule filed part annual report financial statement schedules included annual report omitted applicable required information shown consolidated financial statements notes thereto 3 exhibits see index exhibits annual report signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized flowserve corporation mark blinn mark blinn president chief executive officer date february 18 2016 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated flowserve corporation schedule ii valuation qualifying accounts deductions reserve represent accounts written recoveries b deductions reserve result expiration utilization net operating losses foreign tax credits previously reserved index exhibits management contracts compensatory plans arrangements required filed exhibits annual report form 10k filed herewith furnished herewithitem 15 exhibits financial statement schedules documents filed part annual report 1 consolidated financial statements following consolidated financial statements notes thereto filed part annual report independent registered public accounting firm flowserve corporation consolidated financial statements consolidated balance sheets december 31 2016 2015 three years period ended december 31 2016 consolidated statements income consolidated statements comprehensive income consolidated statements shareholders’ equity consolidated statements cash flows notes consolidated financial statements 2 consolidated financial statement schedules following consolidated financial statement schedule filed part annual report schedule ii valuation qualifying accounts financial statement schedules included annual report omitted applicable required information shown consolidated financial statements notes thereto 3 exhibits see index exhibits annual report item 16 form 10k summary none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized flowserve corporation mark blinn mark blinn president chief executive officer date february 16 2017 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated flowserve corporation schedule ii valuation qualifying accounts deductions reserve represent accounts written recoveries b deductions reserve result expiration utilization net operating losses foreign tax credits previously reserved c excludes 632 million charge fully reserve accounts receivables primary venezuelan customer classified longterm within assets net consolidated balance sheet disclosed note 1 annual report form 10k year ended december 31 2016 index exhibits management contracts compensatory plans arrangements required filed exhibits annual report form 10k filed herewith furnished herewithitem 15 exhibits financial statement schedules documents filed part annual report 1 consolidated financial statements following consolidated financial statements notes thereto filed part annual report independent registered public accounting firm flowserve corporation consolidated financial statements consolidated balance sheets december 31 2017 2016 three years period ended december 31 2017 consolidated statements income consolidated statements comprehensive income consolidated statements shareholders’ equity consolidated statements cash flows notes consolidated financial statements 2 consolidated financial statement schedules following consolidated financial statement schedule filed part annual report schedule ii valuation qualifying accounts financial statement schedules included annual report omitted applicable required information shown consolidated financial statements notes thereto 3 exhibits management contracts compensatory plans arrangements required filed exhibits annual report form 10k filed herewith furnished herewith item 16 form 10k summary applicable signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized flowserve corporation r scott rowe r scott rowe president chief executive officer date february 28 2018 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated flowserve corporation schedule ii valuation qualifying accounts years ended december 31 2017 2016 2015 deductions reserve represent accounts written recoveries b deductions reserve result expiration utilization net operating losses foreign tax credits previously reserved c excludes 735 million charge fully reserve accounts receivables primary venezuelan customer classified longterm within assets net consolidated balance sheet disclosed note 1 annual report form 10k year ended december 31 2017item 15 exhibits financial statement schedules documents filed part annual report 1 consolidated financial statements following consolidated financial statements notes thereto filed part annual report independent registered public accounting firm flowserve corporation consolidated financial statements consolidated balance sheets december 31 2018 2017 three years period ended december 31 2018 consolidated statements income consolidated statements comprehensive income consolidated statements shareholders’ equity consolidated statements cash flows notes consolidated financial statements 2 consolidated financial statement schedules following consolidated financial statement schedule filed part annual report schedule ii valuation qualifying accounts financial statement schedules included annual report omitted applicable required information shown consolidated financial statements notes thereto 3 exhibits exhibit description 101lab xbrl taxonomy extension label linkbase document 101pre xbrl taxonomy extension presentation linkbase document 101def xbrl taxonomy extension definition linkbase document management contracts compensatory plans arrangements required filed exhibits annual report form 10k filed herewith furnished herewith item 16 form 10k summary applicable signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized flowserve corporation r scott rowe r scott rowe president chief executive officer date february 20 2019 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated flowserve corporation schedule ii valuation qualifying accounts years ended december 31 2018 2017 2016 deductions reserve represent accounts written recoveries b deductions reserve result expiration utilization net operating losses foreign tax credits previously reserveditem 15 exhibits financial statement schedules documents filed part annual report 1 consolidated financial statements following consolidated financial statements notes thereto filed part annual report independent registered public accounting firm flowserve corporation consolidated financial statements consolidated balance sheets december 31 2019 2018 three years period ended december 31 2019 consolidated statements income consolidated statements comprehensive income consolidated statements shareholders’ equity consolidated statements cash flows notes consolidated financial statements 2 consolidated financial statement schedules following consolidated financial statement schedule filed part annual report schedule ii valuation qualifying accounts financial statement schedules included annual report omitted applicable required information shown consolidated financial statements notes thereto 3 exhibits management contracts compensatory plans arrangements required filed exhibits annual report form 10k filed herewith furnished herewith item 16 form 10k summary none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized flowserve corporation r scott rowe r scott rowe president chief executive officer date february 17 2020 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated flowserve corporation schedule ii valuation qualifying accounts years ended december 31 2019 2018 2017 deductions reserve represent accounts written recoveries b deductions reserve result expiration utilization net operating losses foreign tax credits previously reserved additions 2019 includes capital loss carryforward refer note 17 consolidated financial statements included item 8 annual reportitem 15exhibits financial statement schedules documents filed part annual report 1 consolidated financial statements following consolidated financial statements notes thereto filed part annual report independent registered public accounting firm flowserve corporation consolidated financial statements consolidated balance sheets december 31 2020 2019 three years period ended december 31 2020 consolidated statements income consolidated statements comprehensive income consolidated statements shareholders’ equity consolidated statements cash flows notes consolidated financial statements 2 consolidated financial statement schedules following consolidated financial statement schedule filed part annual report schedule ii valuation qualifying accounts three years period ended december 31 2020 financial statement schedules included annual report omitted applicable required information shown consolidated financial statements notes thereto 3 exhibits management contracts compensatory plans arrangements required filed exhibits annual report form 10k filed herewith furnished herewith item 16form 10k summary none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized flowserve corporation r scott rowe r scott rowe president chief executive officer date february 23 2021 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated flowserve corporation schedule ii valuation qualifying accounts years ended december 31 2020 2019 2018 adeductions reserve represent accounts written recoveries related trade accounts receivables bdeductions reserve result expiration utilization net operating losses foreign tax credits previously reserved additions 2020 includes capital loss carryforward refer note 19 consolidated financial statements included item 8 annual reportnannanitem 15 exhibits financial statement schedules documents filed part annual report 1 consolidated financial statements following consolidated financial statements notes thereto filed part annual report form 10k report independent registered public accounting firm flowserve corporation consolidated financial statements consolidated balance sheets december 31 2004 2005 three years period ended december 31 2005 consolidated statements operations consolidated statements comprehensive income loss consolidated statements shareholders’ equity consolidated statements cash flows notes consolidated financial statements 2 consolidated financial statement schedules following consolidated financial statement schedule filed part annual report financial statement schedules included annual report omitted applicable required information shown consolidated financial statements notes thereto 3 exhibits following exhibits either filed herewith incorporated reference designated document previously filed sec management contracts compensatory plans arrangements required filed exhibits annual report form 10k signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 30th day june 2006 flowserve corporation registrant lewis kling lewis kling president chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated flowserve corporation schedule ii valuation qualifying accounts deductions reserve represent accounts written net recoveries reductions due improved aging receivables b deductions reserve represent inventory disposed written c deductions reserve result expiration utilization foreign tax credits previously reserved index exhibits management contracts compensatory plans arrangements required filed exhibits annual report form 10kitem 15 exhibits financial statement schedules documents filed part annual report 1 consolidated financial statements following consolidated financial statements notes thereto filed part annual report independent registered public accounting firm flowserve corporation consolidated financial statements consolidated balance sheets december 31 2011 2010 three years period ended december 31 2011 consolidated statements income consolidated statements comprehensive income consolidated statements shareholders’ equity consolidated statements cash flows notes consolidated financial statements 2 consolidated financial statement schedules following consolidated financial statement schedule filed part annual report schedule ii valuation qualifying accounts financial statement schedules included annual report omitted applicable required information shown consolidated financial statements notes thereto 3 exhibits see index exhibits annual report signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized flowserve corporation mark blinn mark blinn president chief executive officer date february 22 2012 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated flowserve corporation schedule ii valuation qualifying accounts deductions reserve represent accounts written net recoveries reductions due improved aging receivables b deductions reserve result expiration utilization net operating losses foreign tax credits previously reserved index exhibits management contracts compensatory plans arrangements required filed exhibits annual report form 10k filed herewith furnished herewithitem 15 exhibits financial statement schedules documents filed part annual report 1 consolidated financial statements following consolidated financial statements notes thereto filed part annual report independent registered public accounting firm flowserve corporation consolidated financial statements consolidated balance sheets december 31 2013 2012 three years period ended december 31 2013 consolidated statements income consolidated statements comprehensive income consolidated statements shareholders’ equity consolidated statements cash flows notes consolidated financial statements 2 consolidated financial statement schedules following consolidated financial statement schedule filed part annual report schedule ii valuation qualifying accounts financial statement schedules included annual report omitted applicable required information shown consolidated financial statements notes thereto 3 exhibits see index exhibits annual report signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized flowserve corporation mark blinn mark blinn president chief executive officer date february 18 2014 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated flowserve corporation schedule ii valuation qualifying accounts deductions reserve represent accounts written recoveries b deductions reserve result expiration utilization net operating losses foreign tax credits previously reserved index exhibits management contracts compensatory plans arrangements required filed exhibits annual report form 10k filed herewith furnished herewith