# FLOWSERVE CORP (FLS) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from FLOWSERVE CORP's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/30625/000003062524000025/fls-20231231.htm
Accession: 0000030625-24-000025
Filing date: 2024-02-20
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/FLS/
All MD&A years: /company/FLS/mda/
Previous year: /company/FLS/mda/fy2022/ (FY 2022)
Next year: /company/FLS/mda/fy2024/ (FY 2024)

ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis is provided to increase the understanding of, and should be read in conjunction with, the accompanying consolidated financial statements and notes. See “Item 1A. Risk Factors” and the section titled “Forward-Looking Information is Subject to Risk and Uncertainty” included in this Annual Report on Form 10-K for the year ended December 31, 2023 ("Annual Report") for a discussion of the risks, uncertainties and assumptions associated with these statements. Unless otherwise noted, all amounts discussed herein are consolidated.

EXECUTIVE OVERVIEW

Our Company

We are a world-leading manufacturer and aftermarket service provider of comprehensive flow control systems. We develop and manufacture precision-engineered flow control equipment integral to the movement, control and protection of the flow of materials in our customers’ critical processes. Our product portfolio of pumps, valves, seals, automation and aftermarket services supports global infrastructure industries, including oil and gas, chemical, power generation and water management, as well as general industrial markets where our products and services enable customers to achieve their goals. Through our manufacturing platform and global network of QRCs, we offer a broad array of aftermarket equipment services, such as installation, advanced diagnostics and turnkey maintenance programs. As of December 31, 2023, we have approximately 16,000 employees (“associates”) globally and a footprint of manufacturing facilities and QRCs in more than 50 countries.

Our business model is significantly influenced by the capital spending of global infrastructure industries for the placement of new products into service and maintenance spending for aftermarket services for existing operations. The worldwide installed base of our products is an important source of aftermarket revenue, where products are intended to maximize operating time of many key industrial processes. We continue to invest in our aftermarket strategy to provide local support to drive customer investments in our offerings and use of our services to replace or repair installed products. The aftermarket portion of our business also helps provide business stability during various economic periods. The aftermarket business, which is primarily served by our network of 156 QRCs located around the globe, some of which are shared by our two business segments, provides a variety of service offerings for our customers including spare parts, service solutions, product life cycle solutions and other value-added services. It is generally a higher margin business compared to our original equipment business and a key component of our profitable growth strategy.

Our operations are conducted through two business segments that are referenced throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"):

•FPD designs and manufactures custom, highly-engineered pumps, pre-configured industrial pumps, pump systems, mechanical seals, auxiliary systems and replacement parts and related services; and

•FCD designs, manufactures and distributes a broad portfolio of engineered-to-order and configured-to-order isolation valves, control valves, valve automation products and related equipment.

Our business segments share a focus on industrial flow control technology and have a high number of common customers. These segments also have complementary product offerings and technologies that are often combined in applications that provide us a net competitive advantage. Our segments also benefit from our global footprint, our economies of scale in reducing administrative and overhead costs to serve customers more cost effectively and shared leadership for operational support functions, such as research and development, marketing and supply chain.

The reputation of our product portfolio is built on more than 50 well-respected brand names such as Worthington, IDP, Valtek, Limitorque, Durco, Argus, Edward, Valbart and Durametallic, which we believe to be one of the most comprehensive in the industry. Our products and services are sold either directly or through designated channels to more than 10,000 companies, including some of the world’s leading engineering, procurement and construction ("EPC") firms, original equipment manufacturers, distributors and end users.

We continue to leverage our QRC network to be positioned as near to customers as possible for service and support in order to capture valuable aftermarket business. Along with ensuring that we have the local capability to sell, install and

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service our equipment in remote regions, we continuously improve our global operations. We continue to enhance our global supply chain capability to increase our ability to meet global customer demands and improve the quality and timely delivery of our products over the long-term. Additionally, we continue to devote resources to improving the supply chain processes across our business segments to find areas of synergy and cost reduction and to improve our supply chain management capability to meet global customer demands. We also remain focused on improving on-time delivery and quality, while managing warranty costs as a percentage of sales across our global operations, through our operational excellence program. The goal of the program, which includes lean manufacturing, six sigma business management strategy and value engineering, is to maximize service fulfillment to customers through on-time delivery, reduced cycle time and quality at the highest internal productivity.

COVID-19 and Related Impacts

Throughout the pandemic, we experienced a number of supply chain and logistics constraints which impacted our ability to, and the speed at which we could manufacture and ship products to our customers. Most of these issues have stabilized as we enter 2024 and we do not expect they will have a material impact to our operations going forward.

Related to our supply chain challenges, the strong U.S. dollar has made and may continue to make our products more expensive overseas and has resulted in challenges to meet our international customers’ pricing expectations. We will continue to be proactive in our efforts to stay competitive in our prices and market share.

Throughout the pandemic we engaged in a number of cost savings measures in order to help mitigate the adverse effects of the pandemic on our financial results, including certain realignment activities. In the first quarter of 2023, we identified and initiated certain realignment activities concurrent with the consolidation of our aftermarket and pump operations into a single operating model. This consolidated operating model was designed to better align our go-to-market strategy with our product offerings, enable end-to-end lifecycle responsibility and accountability, and to facilitate more efficient operations. Collectively, the above realignment activities are referred to as the "2023 Realignment Program." The 2023 Realignment Program activities were identified and implemented in phases throughout 2023 and expected to continue into 2024.

Our Markets

Our products and services are used in several distinct industries: oil and gas, chemical, power generation, water management, and several other industries, such as mining, food and beverage, steel, and pulp and paper, that are collectively referred to as "general industries."

Oil and Gas

The oil and gas industry represented approximately 38% and 40% of our bookings in 2023 and 2022, respectively. Customer repair and maintenance spending improved during 2023 supported by strong asset utilization, while larger project activity and short cycle investments continued in order to support global demand.

The outlook for the oil and gas industry is heavily dependent on the overall macroeconomic environment, including fuel demand, demand growth from both mature markets and developing geographies as well as changes in the regulatory environment. We currently expect continued growth in our business, including increased investment related to energy security and decarbonization efforts in 2024. We further believe stable oil prices provide support for increased demand for our aftermarket products and services. We believe the medium and long-term fundamentals for this industry remain attractive and see a stabilized environment with expected increased fuel demand on expected global economic growth. In addition, we believe projected depletion rates of existing fields and forecasted long-term demand growth will require additional investments. With our long-standing reputation in providing successful solutions for upstream, mid-stream and downstream applications, along with the advancements in our portfolio of offerings, we believe that we continue to be well-positioned to assist our customers in this improving environment.

General Industries

General industries represented, in the aggregate, approximately 26% and 22% of our bookings in 2023 and 2022, respectively. General industries comprise a variety of different businesses, including mining and ore processing, pulp and paper, food and beverage and other smaller applications, none of which individually represented more than 5% of total bookings in 2023 and 2022. General industries also include sales to distributors, whose end customers operate in the industries we primarily serve. General industry activity levels increased in 2023 for the second consecutive year, primarily due to customers' improved repair and maintenance budgets.

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The outlook for this group of industries is heavily dependent upon the condition of global economies and consumer confidence levels. The long-term fundamentals of many of these industries remain sound, as many of the products produced by these industries are common staples of industrialized and urbanized economies. We believe that our specialty product offerings designed for these industries and our aftermarket service capabilities will provide continued business opportunities.

Chemical

The chemical industry represented approximately 21% and 22% of our bookings in 2023 and 2022, respectively. The chemical industry is comprised of petrochemical, specialty chemical and pharmaceutical products. Customer spending in 2023 remained resilient for the third consecutive year following the pandemic's negative impact on demand for chemical products in 2020. Customers' repair and maintenance budgets improved in 2023 and 2022 where bookings levels returned to roughly pre-pandemic levels.

The outlook for the chemical industry remains heavily dependent on global economic conditions. As global economies and unemployment conditions improve, a rise in consumer spending should follow. An increase in spending would drive greater demand for petrochemical, specialty chemical and pharmaceutical products supporting improved levels of capital investment. We believe the chemical industry will continue to invest in North America and Middle East capacity additions, maintenance and upgrades for optimization of existing assets and that developing regions will selectively invest in capital infrastructure to meet current and future indigenous demand. We believe our global presence and our localized aftermarket capabilities are well-positioned to serve the potential growth opportunities in this industry.

Power Generation

The power generation industry represented approximately 11% and 12% of our bookings in 2023 and 2022, respectively. In 2023, energy security concerns drove continued investment in the power generation industry, including nuclear new build and life extensions as well as traditional thermal power sources.

Natural gas-fired combined cycle (“NGCC”) plants have increased their share of the energy mix, driven by market prices for gas remaining low and stable (partially due to the increasing global availability of LNG), low capital expenditures, and the ability of NGCC to stabilize unpredictable renewable sources. With the potential of unconventional sources of gas, the global power generation industry is forecasting an increased use of this form of fuel for power generation plants.

As countries around the world look for opportunities to gain additional energy independence, nuclear power remains an important contributor to the global energy mix and is a key factor in our Diversification strategy. We continue to support our significant installed base in the global nuclear fleet by providing aftermarket and life extension products and services. Due to our extensive history, we believe we are well positioned to take advantage of this ongoing source of aftermarket and new project opportunities.

Global efforts to limit the emissions of carbon dioxide may have some adverse effect on thermal power investment plans depending on the potential requirements imposed and the timing of compliance by country. However, many proposed methods of capturing and limiting carbon dioxide emissions offer business opportunities for our products and services. At the same time, we continue to take advantage of new investments in concentrated solar power generating capacity, where our pumps, valves, and seals are uniquely positioned for both molten salt applications as well as the traditional steam cycle.

We believe the long-term fundamentals for the power generation industry remain solid based on projected increases in demand for electricity driven by global population growth, growth of urbanization in developing markets and the increased use of electricity driven transportation. We also believe that our long-standing reputation in the power generation industry, our portfolio of offerings for the various generating methods, our advancements in serving the renewable energy market and carbon capture methodologies, as well as our global service and support structure, position us well for the future opportunities in this important industry.

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Water Management

The water management industry represented approximately 4% of our bookings in each of 2023 and 2022. Water management industry activity levels remained steady in 2023 following the decrease in 2020 primarily due to the pandemic's negative impact on government budgets across the globe. Worldwide demand for fresh water, water treatment and re-use, desalination and flood control are expected to create requirements for new facilities or for upgrades of existing systems, many of which require products that we offer, particularly pumps. We expect capital and aftermarket spending to rise in developed and emerging markets with governments and private industry providing funding for critical projects when their priorities shift away from pandemic-management.

The proportion of people living in regions that find it difficult to meet water requirements is expected to increase significantly in the coming years. We believe that the persistent demand for fresh water during all economic cycles supports continued investments, especially in North America and developing regions.

Impact of Russia-Ukraine Conflict on our Business

In response to the Russia-Ukraine conflict, several countries, including the United States, have imposed economic sanctions and export controls on certain industry sectors and parties in Russia. As a result of this conflict, including the aforementioned sanctions and overall instability in the region, in March 2022 we permanently ceased all Company operations in Russia and are currently taking the necessary steps to wind down in the country.

In the first quarter of 2022, we recorded a $20.2 million pre-tax charge ($21.0 million after-tax) to reserve the asset positions of our Russian subsidiary (excluding cash) as of March 31, 2022, to record contra-revenue for previously recognized revenue and estimated cancellation fees on open contracts that were previously accounted for under the percentage of completion ("POC") method and subsequently canceled, to establish a reserve for the estimated cost to exit the operations of our Russian subsidiary and to record a reserve for our estimated financial exposure on contracts that have been or are anticipated to be canceled.

In addition, we reevaluated our financial exposure as of December 31, 2022 and recorded an incremental $13.6 million pre-tax charge ($9.8 million after-tax) in the fourth quarter of 2022 for additional contract cancellation fees, to reserve our residual financial exposure due to increased Russia sanctions imposed during the latter part of 2022 and our decision to cancel backlog as a result of the additional sanctions.

We continue to monitor the situation involving Russia and Ukraine and its impact on the rest of our global business. This includes the macroeconomic impact, including with respect to global supply chain issues and inflationary pressures. We reevaluated our financial exposure as of December 31, 2023 and concluded that the reserve recorded as of December 31, 2022 is sufficient and no changes to material reserves were needed. To date, impacts have not been material to our business and we do not currently expect that any incremental impact in future quarters, including any financial impacts caused by our cancellation of customer contracts and ceasing of operations in Russia, will be material to the Company.

Outlook for 2024

As our operations have generally stabilized from the COVID-19 pandemic, we have seen growth from our supportive served end-markets and our focus on our 3D Strategy. Our sales volume is expected to deliver sustainable and healthy growth, while our 2023 Realignment Program and the new operating model have unlocked gains in organizational efficiency. With our strong backlog and improved market environment, we expect to continue growth in 2024.

Our bookings were $4.3 billion during 2023. Because a booking represents a contract that can be, in certain circumstances, modified or canceled, and can include varying lengths between the time of booking and the time of revenue recognition, there is no guarantee that bookings will result in comparable revenues or otherwise be indicative of future results. Assuming a positive general macroeconomic environment and continued supportive environments in our end markets, we expect full-year bookings in 2024 to be comparable to 2023 levels.

On December 31, 2023, we had $990.4 million of fixed-rate Senior Notes outstanding.  We expect our interest expense in 2024 will be relatively consistent with amounts incurred in 2023. Our results of operations may also be impacted by unfavorable foreign currency exchange rate movements. See “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” of this Annual Report.

We expect to generate sufficient cash from operations and have sufficient capacity under our Senior Credit Facility to fund any working capital, capital expenditures, dividend payments, share repurchases, debt payments and pension plan contributions in 2024. The amount of cash generated or consumed by working capital is dependent on our level of

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revenues, customer cash advances, backlog, customer-driven delays and other factors. We will seek to improve our working capital utilization, with a particular focus on improving the management of accounts receivable and inventory. In 2024, our cash flows for investing activities will be focused on strategic initiatives, information technology infrastructure, general upgrades and cost reduction opportunities and we currently estimate capital expenditures to be between $75 million and $85 million, before consideration of any acquisition activity. We currently anticipate that our contributions to our non-U.S. pension plans will be approximately $2 million in 2024, excluding direct benefits paid. We have no obligation to make contributions to our U.S. pension plans in 2024, but have authorization for contributions up to $20 million.

OUR RESULTS OF OPERATIONS

The following is the discussion and analysis of changes in the financial condition and results of operations for fiscal year December 31, 2023 compared to fiscal year 2022. The discussion and analysis of changes in the financial condition and results of operations for fiscal year 2022 compared to fiscal year 2021 that are not included in this Form 10-K may be found in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the SEC on March 7, 2023.

Throughout this discussion of our results of operations, we discuss the impact of fluctuations in foreign currency exchange rates. We have calculated currency effects on operations by translating current year results on a monthly basis at prior year exchange rates for the same periods.

In the second quarter of 2020, we identified and initiated certain realignment activities to right-size our organizational operations based on the current business environment, with the overall objective to reduce our workforce costs, including manufacturing optimization through the consolidation of certain facilities ("2020 Realignment Program"). As of December 31, 2022, the 2020 Realignment Program was substantially complete.

In the first quarter of 2023, we identified and initiated certain realignment activities concurrent with the consolidation of our aftermarket and pump operations into a single operating model. This consolidated operating model is designed to better align our go to market strategy with our product offerings, enable end-to-end lifecycle responsibility and accountability, and to facilitate more efficient operations. Additionally, we committed to an estimated $50 million in cost reduction efforts to begin in 2023. Collectively, the above realignment activities are referred to as the "2023 Realignment Program." The 2023 Realignment Program activities were identified and implemented in phases throughout 2023. We currently anticipate a total investment in realignment activities that have been evaluated and initiated of approximately $87 million of which $17 million is estimated to be non-cash. Based on 2023 Realignment Program activities initiated to date, we estimate that we recognized cost savings of approximately $27 million during the year ended December 31, 2023. Upon completion of the 2023 Realignment Program activities that have been identified and initiated to date, we expect to exceed our established target of annualized cost savings of approximately $50 million. Actual savings could vary from expected savings, which represent management's best estimate to date. There are certain remaining realignment activities that are currently being evaluated, but have not yet been approved and therefore not included in the anticipated total investment or estimated savings.

Realignment Activity

The following tables present our realignment activity by segment related to our Realignment Programs. Realignment activity for the year ended December 31, 2022 is immaterial:

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

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Restructuring charges are included within Total Realignment charges and include charges related to approved, but not yet announced, site closures.

Bookings and Backlog

[[GREPCENT_TABLE]]
[["","2023","","2022","","2021"],["","(Amounts in millions)"],["Bookings","$","4,271.8","","","$","4,447.5","","","$","3,774.4"],["Backlog (at period end)","2,695.1","","","2,735.3","","","2,003.6"]]
[[/GREPCENT_TABLE]]

We define a booking as the receipt of a customer order that contractually engages us to perform activities on behalf of our customer with regard to manufacturing, service or support. Bookings recorded and subsequently canceled within the year-to-date period are excluded from year-to-date bookings. Bookings cancelled from the prior fiscal periods are excluded from the reported bookings and represent less than 1% for all periods presented. Bookings of $4.3 billion in 2023 decreased by $175.8 million, or 4.0%, as compared with 2022. The decrease included currency benefits of approximately $9 million. The decrease was driven by decreased customer bookings in the oil and gas, power generation, chemical and water management industries. The decrease in customer bookings was driven substantially by original equipment bookings, including the impact of FPD original equipment orders booked in 2022 in excess of $230 million to supply pumps and related equipment to supply pumps and related equipment to support the development of an onshore unconventional gas project in the Middle East that did not recur.

Backlog represents the aggregate value of booked but uncompleted customer orders and is influenced primarily by bookings, sales, cancellations and currency effects. Backlog of $2.7 billion at December 31, 2023 decreased by $40.2 million, or 1.5%, as compared with December 31, 2022. Currency effects provided an increase of approximately $42 million (currency effects on backlog are calculated using the change in period end exchange rates). Approximately 37% of the backlog at December 31, 2023 and 34% of the backlog at December 31, 2022 was related to aftermarket orders. We expect to recognize revenue on approximately 87% of the December 31, 2023 backlog during 2024. Backlog includes our unsatisfied (or partially unsatisfied) performance obligations related to contracts having an original expected duration in excess of one year of approximately $772 million as discussed in Note 2 to our consolidated financial statements included in Item 8 of this Annual Report.

Sales

[[GREPCENT_TABLE]]
[["","2023","","2022","","2021"],["","(Amounts in millions)"],["Sales","$","4,320.6","","","$","3,615.1","","","$","3,541.1"]]
[[/GREPCENT_TABLE]]

Sales in 2023 increased by $705.5 million, or 19.5%, as compared with 2022. The increase included currency benefits of approximately $15 million. The increased sales were driven by both aftermarket and original equipment customer sales, with increased customer sales into North America, the Middle East, Asia Pacific, Europe and Latin America, partially offset by decreased customer sales into Africa. Aftermarket sales represented approximately 52% of total sales, as compared with approximately 53% of total sales for the same period in 2022.

Sales to international customers, including export sales from the U.S., were approximately 62% of total sales in both 2023 and 2022. Sales into Europe, the Middle East and Africa ("EMA") were approximately 34% of total sales in 2023 and 32% in 2022. Sales into Asia Pacific were approximately 17% of total sales in 2023 and 19% in 2022. Sales into Latin America were approximately 7% of total sales in both 2023 and 2022.

Gross Profit and Gross Profit Margin

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[[GREPCENT_TABLE]]
[["","2023","","2022","","2021"],["","(Amounts in millions, except percentages)"],["Gross profit","$","1,276.8","","","$","994.3","","","$","1,049.7"],["Gross profit margin","29.6","%","","27.5","%","","29.6","%"]]
[[/GREPCENT_TABLE]]

Gross profit in 2023 increased by $282.5 million, or 28.4%, as compared with 2022. Gross profit margin in 2023 of 29.6% increased from 27.5% in 2022. The increase was primarily due to the favorable impact of previously implemented sales price increases, lower supply chain inflationary pressure and a $8.9 million charge taken in 2022 related to our financial exposure in Russia that did not recur, partially offset by higher broad-based annual incentive compensation and increased charges of $20.7 million related to our Realignment Programs as compared to the same period in 2022.

SG&A

[[GREPCENT_TABLE]]
[["","2023","","2022","","2021"],["","(Amounts in millions, except percentages)"],["SG&A","$","961.2","","","$","815.5","","","$","797.1"],["SG&A as a percentage of sales","22.2","%","","22.6","%","","22.5","%"]]
[[/GREPCENT_TABLE]]

SG&A in 2023 increased by $145.7 million, or 17.9%, as compared with 2022. Currency effects yielded an increase of approximately $3 million. In 2023, SG&A increased due to increased charges of $45.5 million related to our Realignment Programs, higher broad-based annual incentive compensation, $8.8 million increase in research and development costs, $7.3 million of expense related to the terminated Velan acquisition, higher asbestos-related costs of $7.4 million for IBNR asbestos liability accruals based on an annual actuarial study and related legal expense, and a $2.9 million impairment of a licensing intangible, partially offset by a $15.7 million charge taken in 2022 related to our financial exposure in Russia that did not recur as compared with the same period in 2022. SG&A as a percentage of sales decreased 40 basis points primarily due to increased sales leverage that outpaced cost increases.

Net Earnings from Affiliates

[[GREPCENT_TABLE]]
[["","2023","","2022","","2021"],["","(Amounts in millions)"],["Net earnings from affiliates","$","17.9","","","$","18.5","","","$","16.3"]]
[[/GREPCENT_TABLE]]

Net earnings from affiliates represents our net income from investments in five joint ventures (one located in each of Chile, India, Saudi Arabia, South Korea and the United Arab Emirates) that are accounted for using the equity method of accounting. Net earnings from affiliates in 2023 decreased by $0.6 million, or 3.2%, as compared to the prior year, primarily as a result of decreased earnings of our FPD joint venture in South Korea.

Operating Income

[[GREPCENT_TABLE]]
[["","2023","","2022","","2021"],["","(Amounts in millions, except percentages)"],["Operating income","$","333.6","","","$","197.2","","","$","270.8"],["Operating income as a percentage of sales","7.7","%","","5.5","%","","7.6","%"]]
[[/GREPCENT_TABLE]]

Operating income in 2023 increased by $136.4 million, or 69.2%, as compared with 2022. The increase included negative currency effects of approximately $4 million. The increase was primarily a result of the $282.5 million increase in gross profit, partially offset by the $145.7 million increase in SG&A.

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Interest Expense and Interest Income

[[GREPCENT_TABLE]]
[["","2023","","2022","","2021"],["","(Amounts in millions)"],["Interest expense","$","(66.9)","","","$","(46.2)","","","$","(57.6)"],["Interest income","7.0","","","4.0","","","2.8"]]
[[/GREPCENT_TABLE]]

Interest expense in 2023 increased by $20.7 million as compared with 2022. The increase was primarily attributable to a higher effective interest rate on our outstanding debt, resulting in part from the termination of cross-currency swap agreements in 2022, and an increase in borrowings under our Revolving Credit Facility during 2023. Interest income in 2023 increased by $3.0 million as compared to 2022. The increase in interest income was primarily attributed to higher interest rates on our average cash balances compared with same period in 2022.

Loss on Extinguishment of Debt

[[GREPCENT_TABLE]]
[["","2023","","2022","","2021"],["","(Amounts in millions)"],["Loss on extinguishment of debt","$","\u2014","","","$","\u2014","","","$","(46.2)"]]
[[/GREPCENT_TABLE]]

Loss on extinguishment of debt in 2021 of $46.2 million resulted from the redemption of our 2023 Senior Notes, 2022 Senior Notes and 2022 Euro Senior Notes and the write-off of deferred financing fees due to the amendment and restatement of the previous Senior Credit facility.

Other Income (Expense), net

[[GREPCENT_TABLE]]
[["","2023","","2022","","2021"],["","(Amounts in millions)"],["Other income (expense), net","$","(49.9)","","","$","(0.6)","","","$","(36.1)"]]
[[/GREPCENT_TABLE]]

Other expense, net increased $49.3 million as compared to 2022, due primarily to a $44.0 million increase in losses from transactions in currencies other than our sites' functional currencies, a $6.7 million increase in losses arising from transactions on foreign exchange forward contracts and a $2.0 million impairment of an equity investment. The net currency related change was primarily due to the foreign currency exchange rate movements in the Euro, Argentinian peso, Hungarian forint and Mexican peso in relation to the U.S. dollar during the year ended December 31, 2023, as compared with the same period in 2022.

Income Tax and Tax Rate

[[GREPCENT_TABLE]]
[["","2023","","2022","","2021"],["","(Amounts in millions, except percentages)"],["Provision for (benefit from) income taxes","$","18.6","","","$","(43.6)","","","$","(2.6)"],["Effective tax rate","8.3","%","","(28.3)","%","","(1.9)","%"]]
[[/GREPCENT_TABLE]]

In December 2022, the European Union (“EU”) member states reached an agreement to implement the minimum tax component (“Pillar Two”) of the Organization for Economic Co-operation and Development’s tax reform initiative. Many countries continue to consider changes in their tax laws and regulations based on the Pillar Two proposals. We are continuing to evaluate the impact of these proposed and enacted legislative changes as new guidance becomes available. Some of these legislative changes could result in double taxation of our non-U.S. earnings, a reduction in the tax benefit received from our tax incentives, or other impacts to our effective tax rate and tax liabilities.

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Our effective tax rate of 8.3% for the year ended December 31, 2023 increased from (28.3)% in 2022 and differed from the federal statutory tax rate of 21% primarily due to the benefits of a tax planning strategy and the release of valuation allowances on the net deferred tax assets in Brazil and France, partially offset by the net impact of foreign operations.

The 2022 effective tax rate differed from the federal statutory rate of 21% primarily due to the release of the valuation allowance against our deferred tax assets in Germany and Mexico partially offset by a valuation allowance establishment in Argentina, and the release of the valuation allowance on our U.S. foreign tax credit carryforwards on general category income.

Our effective tax rate is based upon current earnings and estimates of future taxable earnings for each domestic and international location. The assumptions about future taxable income require the use of significant judgment and are consistent with the plans and estimates used in the underlying business. Changes in any of these and other factors, including our ability to utilize foreign tax credits and net operating losses or results from tax audits, could impact the tax rate in future periods. As of December 31, 2023, we had U.S. foreign tax credit carryforwards of $63.5 million, expiring in 2028-2033 tax years, against which we recorded a valuation allowance of $49.1 million related to the U.S. foreign tax credit carryforwards on foreign branch category income. Additionally, we have recorded other net deferred tax assets of $202.6 million, which relate to net operating losses, tax credits and other deductible temporary differences that are available to reduce taxable income in future periods, most of which do not have a definite expiration. Should we not be able to utilize all or a portion of these credits and losses, our effective tax rate would increase.

Net Earnings and Earnings Per Share

[[GREPCENT_TABLE]]
[["","2023","","2022","","2021"],["","(Amounts in millions, except per share amounts)"],["Net earnings attributable to Flowserve Corporation","$","186.7","","","$","188.7","","","$","125.9"],["Net earnings per share \u2014 diluted","$","1.42","","","$","1.44","","","$","0.96"],["Average diluted shares","131.9","","","131.3","","","130.9"]]
[[/GREPCENT_TABLE]]

Net earnings in 2023 decreased by $2.0 million to $186.7 million, or to $1.42 per diluted share, as compared with 2022. The decrease was primarily attributable to a $62.2 million increase in tax expense, a $49.3 million increase in other expense, net, a $20.7 million increase in interest expense and a $9.2 million increase in net earnings attributable to noncontrolling interests, partially offset by an increase in operating income of $136.4 million.

Other Comprehensive Income (Loss)

[[GREPCENT_TABLE]]
[["","2023","","2022","","2021"],["","(Amounts in millions)"],["Other comprehensive income (loss)","$","(4.6)","","","$","(82.9)","","","$","44.7"]]
[[/GREPCENT_TABLE]]

Other comprehensive income (loss) in 2023 decreased by $78.3 million from a loss of $82.9 million in 2022. The net loss in 2023 was primarily due to foreign currency translation adjustments resulting primarily from exchange rate movements of the Euro, British pound, Colombian peso and Mexican peso versus the U.S. dollar at December 31, 2023 as compared with 2022, partially offset by pension and other postretirement activity.

Business Segments

We conduct our operations through two business segments based on type of product and how we manage the business. We evaluate segment performance and allocate resources based on each segment’s operating income. See Note 19 to our consolidated financial statements included in Item 8 of this Annual Report for further discussion of our segments. The key operating results for our two business segments, FPD and FCD, are discussed below.

Flowserve Pumps Division Segment Results

36

Our largest business segment is FPD, through which we design, manufacture, distribute and service highly custom engineered pumps, pre-configured industrial pumps, pump systems, mechanical seals and auxiliary systems (collectively referred to as "original equipment") and related services. FPD includes longer lead time, highly-engineered pump products and mechanical seals that are generally manufactured within shorter lead times. FPD also manufactures replacement parts and related equipment and provides aftermarket services. FPD primarily operates in the oil and gas, chemical, power generation, water management and general industries. FPD operates in 49 countries with 35 manufacturing facilities worldwide, 10 of which are located in Europe, 11 in North America, eight in Asia Pacific and six in Latin America, and we have 131 QRCs, including those co-located in manufacturing facilities and/or shared with FCD.

[[GREPCENT_TABLE]]
[["","FPD"],["","2023","","2022","","2021"],["","(Amounts in millions, except percentages)"],["Bookings","$","2,941.2","","","$","3,214.7","","","$","2,675.7"],["Sales","3,064.5","","","2,522.5","","","2,470.8"],["Gross profit","906.8","","","728.1","","","760.4"],["Gross profit margin","29.6","%","","28.9","%","","30.8","%"],["SG&A","575.8","","","538.5","","","535.6"],["Gain on sale of business","\u2014","","","\u2014","","","1.8"],["Segment operating income","348.9","","","208.0","","","243.2"],["Segment operating income as a percentage of sales","11.4","%","","8.2","%","","9.8","%"],["Backlog (at period end)","1,891.7","","","2,008.9","","","1,368.9"]]
[[/GREPCENT_TABLE]]

Bookings in 2023 decreased by $273.5 million, or 8.5%, as compared with 2022. The decrease included currency benefits of approximately $15 million. The decrease in customer bookings was driven by decreased orders in the oil and gas, power generation, chemical, general and water industries. Decreased customer orders of $250.3 million into the Middle East, $20.6 million into Europe, and $44.3 million into Asia Pacific, were partially offset by increased customer orders of $18.0 million into Africa, $25.3 million into Latin America and $1.3 million into North America. The decrease in customer bookings was substantially driven by original equipment bookings, including the impact of original equipment orders booked in 2022 in excess of $230 million to supply pumps and related equipment to support the development of an onshore unconventional gas project in the Middle East, that did not recur. Of the $2.9 billion of bookings in 2023, approximately 40% were from oil and gas, 27% from general industries, 18% from chemical, 10% from power generation and 5% from water management.

Sales in 2023 increased $542.0 million, or 21.5%, as compared with 2022. The increase included currency benefits of approximately $18 million. The increase was driven by both original equipment and aftermarket customer sales, resulting from increased customer sales of $204.8 million into North America, $193.4 million into the Middle East, $50.4 million into Latin America, $47.5 million into Asia Pacific and $75.3 million into Europe, partially offset by decreased customer sales of $27.0 million into Africa.

Gross profit in 2023 increased by $178.7 million, or 24.5%, as compared with 2022. Gross profit margin in 2023 of 29.6% increased from 28.9% in 2022. The increase in gross profit margin was primarily due to the favorable impact of previously implemented sales price increases, lower supply chain inflationary pressure, a $7.4 million charge taken in 2022 related to our financial exposure in Russia that did not recur and the under absorption of $5.1 million of fixed manufacturing costs primarily due to operational interruptions related to the implementation of a new enterprise resource planning system at certain of our North America quick response centers in 2022 that did not recur, partially offset by higher broad-based annual incentive compensation, increased charges of $10.6 million related to our Realignment Programs, a mix shift away from higher margin aftermarket sales and a $4.5 million reversal of previously reserved inventory due to settlement with a customer in 2022 that did not recur as compared to the same period in 2022.

SG&A in 2023 increased by $37.3 million, or 6.9%, as compared with 2022. Currency effects provided an increase of approximately $3 million. The increase in SG&A was primarily due to higher broad-based annual incentive compensation, increased charges of $14.4 million related to our Realignment Programs, a $2.9 million impairment of a licensing intangible, the reversal of $5.1 million of previously reserved accounts receivable due to collection from a customer in 2022 that did not recur and a $4.2 million gain resulting from the sale of a small QRC facility in 2022 that did not recur, partially offset by a $14 million charge taken in 2022 related to our financial exposure in Russia that did not recur and a $2.5 million decrease in research and development costs as compared to the same period in 2022.

37

Operating income in 2023 increased by $140.9 million, or 67.7%, as compared with 2022. The increase included negative currency effects of approximately $2 million. The increase was primarily due to the $178.7 million increase in gross profit partially offset by the $37.3 million increase in SG&A.

Backlog of $1.9 billion at December 31, 2023 decreased by $117.2 million, or 5.8%, as compared with December 31, 2022. Currency effects provided an increase of approximately $34 million.

Flow Control Division Segment Results

FCD designs, manufactures and distributes a broad portfolio of engineered-to-order and configured-to-order isolation valves, control valves, valve automation products and related equipment. FCD leverages its experience and application know-how by offering a complete menu of engineered services to complement its expansive product portfolio. FCD has a total of 44 manufacturing facilities and QRCs in 22 countries around the world, with five of its 19 manufacturing operations located in the U.S., eight located in Europe, five located in Asia Pacific and one located in Latin America. Based on independent industry sources, we believe that FCD is the second largest industrial valve supplier on a global basis.

[[GREPCENT_TABLE]]
[["","FCD"],["","2023","","2022","","2021"],["","(Amounts in millions, except percentages)"],["Bookings","$","1,345.9","","","$","1,247.2","","","$","1,112.8"],["Sales","1,266.0","","","1,100.6","","","1,075.9"],["Gross profit","372.8","","","305.5","","","316.7"],["Gross profit margin","29.4","%","","27.8","%","","29.4","%"],["SG&A","224.8","","","192.1","","","197.4"],["Segment operating income","148.0","","","113.4","","","119.7"],["Segment operating income as a percentage of sales","11.7","%","","10.3","%","","11.1","%"],["Backlog (at period end)","826.8","","","745.5","","","639.8"]]
[[/GREPCENT_TABLE]]

Bookings in 2023 increased $98.7 million, or 7.9%, as compared with 2022. The increase included negative currency effects of approximately $5 million. The increase in customer bookings was driven by increased orders in the oil and gas, power generation, chemical, general and water management industries. There were increased customer orders of $0.6 million into North America, $35.0 million into Europe, $70.9 million into the Middle East and $1.0 million into Africa, partially offset by decreased bookings of $9.7 million into Asia Pacific and $0.1 million into Latin America. The increase in customer bookings was driven by both original equipment and aftermarket bookings. Of the $1.3 billion of bookings in 2023, approximately 30% were from chemical, 33% were from oil and gas, 23% from general, 13% from power generation and 1% from water management industries.

Sales in 2023 increased by $165.4 million, or 15.0%, as compared with 2022. The increase included negative currency effects of approximately $3 million. The increase was driven by both increased customer original equipment and aftermarket sales, resulting from increased customer sales of $82.7 million into North America, $6.6 million into Africa, $28.7 million into Europe, $38.7 million into the Middle East and $6.5 million into Latin America, partially offset by decreased customer sales of $3.2 million into Asia Pacific.

Gross profit in 2023 increased by $67.3 million, or 22.0%, as compared with 2022. Gross profit margin in 2023 of 29.4% increased from 27.8% in 2022. The increase in gross profit margin was primarily due to the favorable impact of previously implemented sales price increases, favorable original equipment mix, lower supply chain inflationary pressure and a $1.4 million charge taken in 2022 related to our financial exposure in Russia that did not recur, partially offset by higher broad-based annual incentive compensation and increased charges of $10.4 million related to our Realignment Programs as compared to the same period in 2022.

SG&A in 2023 increased by $32.7 million, or 17.0% as compared with 2022. Currency effects provided a decrease of less than a million. The increase in SG&A was primarily due to increased charges of $11.8 million related to our Realignment Programs, higher broad-based annual incentive compensation and $7.3 million of expense related to the terminated Velan acquisition, partially offset by a $1.7 million charge taken in 2022 related to our financial exposure in

38

Russia that did not recur and a discrete asset write-down of $3.0 million in 2022 that did not recur as compared to the same period in 2022.

Operating income in 2023 increased by $34.6 million, or 30.5%, as compared with 2022. The increase included negative currency effects of approximately $2 million. The increase was primarily due to the $67.3 million increase in gross profit partially offset by the increase in SG&A of $32.7 million.

Backlog of $826.8 million at December 31, 2023 increased by $81.3 million, or 10.9%, as compared with December 31, 2022. Currency effects provided an increase of approximately $8 million.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flow Analysis

[[GREPCENT_TABLE]]
[["","2023","","2022","","2021"],["","(Amounts in millions)"],["Net cash flows provided (used) by operating activities","$","325.8","","","$","(40.0)","","","$","250.1"],["Net cash flows provided (used) by investing activities","(68.6)","","","(6.1)","","","(59.5)"],["Net cash flows provided (used) by financing activities","(153.0)","","","(150.0)","","","(599.7)"]]
[[/GREPCENT_TABLE]]

The following is a discussion and analysis of the Company’s liquidity and capital resources for the years ended December 31, 2023 and 2022. A discussion of changes in the Company’s liquidity and capital resources for the year ended December 31, 2022 and 2021 can be found in Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the SEC on March 7, 2023.

Existing cash, cash generated by operations and borrowings available under our senior credit facility are our primary sources of short-term liquidity. We monitor the depository institutions that hold our cash and cash equivalents on a regular basis, and we believe that we have placed our deposits with creditworthy financial institutions. Our sources of operating cash generally include the sale of our products and services and the conversion of our working capital, particularly accounts receivable and inventories. Our total cash balance at December 31, 2023 was $545.7 million, compared with $435.0 million at December 31, 2022.

At December 31, 2023 our cash provided by operating activities was $325.8 million, as compared to cash used of $40.0 million in 2022. Cash flow used by working capital decreased in 2023, due primarily to decreased cash flows used by or increased cash flows provided by accounts receivable, inventories, contract assets, accrued liabilities and income taxes payable and retirement obligations and other liabilities, partially offset by decreased cash flows provided by or increased cash flows used by contract liabilities, prepaid expenses and other and accounts payable as compared to the same period in 2022.

Increases in accounts receivable provided $4.7 million of cash flow in 2023, compared to cash used of $152.0 million in 2022. For the fourth quarter of 2023 our days' sales outstanding ("DSO") was 68 days as compared to 75 days in 2022. We have not experienced a significant increase in customer payment defaults in 2023.

Increases in inventory used $59.8 million of cash flow in 2023, compared with cash used of $147.5 million in 2022. Inventory turns were 3.6 times at both December 31, 2023 and 2022. Our calculation of inventory turns does not reflect the impact of advanced cash received from our customers.

Increases in contract assets used $41.1 million of cash flow and increases in contact liabilities provided $26.8 million of cash flow in 2023.

Increases in accounts payable provided $53.1 million of cash flow in 2023 compared with cash provided of $79.0 million in 2022. Increases in accrued liabilities and income taxes payable provided $59.2 million of cash flow in 2023 compared to cash used of $5.2 million in 2022.

Cash used by investing activities were $68.6 million in 2023, as compared to $6.1 million in 2022. The increase of cash used in 2023 was primarily due to the termination of cross-currency swaps resulting in cash proceeds received of $66.0 million in 2022 that did not recur, lower cash proceeds provided from the disposal of assets during the year of $2.4 million and higher net affiliate investment activity of $3.1 million. Capital expenditures were $67.4 million in 2023, as

39

compared to $76.3 million in 2022. In 2024, we currently estimate capital expenditures to be between $75 million and $85 million, before consideration of any acquisition activity.

Cash used by financing activities were $153.0 million in 2023 compared to cash used of $150.0 million in 2022. Cash outflows during 2023 resulted primarily from the $40.0 million in payments on our Term Loan and $105.0 million of dividend payments.

In 2023 we repurchased no shares of our outstanding common stock during the year. As of December 31, 2023, we had $96.1 million of remaining capacity under our share repurchase plan previously approved by the Board of Directors. Effective February 19, 2024, the Board of Directors authorized an increase in our total remaining capacity in the share repurchase program to $300.0 million.

Our material cash requirements for the next 12 months, include our estimated 2024 capital expenditures described above and our contractual obligations summarized below under the subheading "--Contractual Obligations". In the aggregate, our cash needs in 2024 are expected to be lower than those of 2023 due to anticipated benefits from working capital reductions. We believe cash flows from operating activities, combined with availability under our senior credit facility and our existing cash balances, will be sufficient to enable us to meet our cash flow needs for the next 12 months. However, cash flows from operations could be adversely affected by a decrease in the rate of general global economic growth and an extended decrease in capital spending of our customers, as well as economic, political and other risks associated with sales of our products, operational factors, competition, regulatory actions, fluctuations in foreign currency exchange rates and fluctuations in interest rates, among other factors. We believe that cash flows from operating activities and our expectation of continuing availability to draw upon our credit agreements are also sufficient to meet our cash flow needs for periods beyond the next 12 months.

Financing

On September 13, 2021, we amended and restated our credit agreement (the "Amended and Restated Credit Agreement") under our Senior Credit Facility ("Credit Facility") with Bank of America, N.A. and the other lenders to provide greater flexibility in maintaining adequate liquidity and access to available borrowings. The Amended and Restated Credit Agreement, (i) retained, from the previous credit agreement, the $800.0 million unsecured Revolving Credit Facility (the "Revolving Credit Facility"), which includes a $750.0 million sublimit for the issuance of letters of credit and a $30.0 million sublimit for swing line loans ii) provides for an up to $300 million unsecured Term Loan Facility (the "Term Loan"), (iii) extends the maturity date of the agreement to September 13, 2026, (iv) reduces commitment fees, (v) extends net leverage ratio covenant definition through the maturity of the agreement, and (vi) provides the ability to make certain adjustments to the otherwise applicable commitment fee, interest rate and letter of credit fees based on the Company’s performance against to-be-established key performance indicators with respect to certain of the Company’s environmental, social and governance targets. Subsequently, on February 3, 2023, we entered into an amendment to the Credit Facility (the “Amendment”) which (i) replaced LIBOR with Secured Overnight Financing Rate (“SOFR”) as the benchmark reference rate, (ii) lowered the Material Acquisition (as defined in the Credit Facility) threshold from $250 million to $200 million and (iii) extended compliance dates for certain financial covenants. We believe this Amendment will provide greater flexibility and additional liquidity under our Credit Facility as we continue to pursue our business goals and strategy. Most other terms and conditions under the previous Credit Facility remained unchanged.

The interest rates per annum applicable to the Revolving Credit Facility, other than with respect to swing line loans, are adjusted Term Secured Overnight Financing Rate ("Adjusted Term SOFR") plus between 1.000% to 1.750%, depending on our debt rating by either Moody’s Investors Service, Inc. ("Moody's") or Standard & Poor’s Financial Services LLC ("S&P"), or, at our option, the Base Rate (as defined in the Senior Credit Agreement) plus between 0.000% to 0.750% depending on our debt rating by either Moody’s or S&P. An additional credit spread adjustment of 0.100% is included within Adjusted Term SOFR to account for the transition from LIBOR to SOFR. At December 31, 2023, the interest rate on the Revolving Credit Facility was the Adjusted Term Secured Overnight Financing Rate ("SOFR") plus 1.375% in the case of Adjusted Term SOFR loans and the Base Rate plus 0.375% in the case of Base Rate loans. In addition, a commitment fee is payable quarterly in arrears on the daily unused portions of the Revolving Credit Facility. The commitment fee will be between 0.080% and 0.250% of unused amounts under the Revolving Credit Facility depending on our debt rating by either Moody’s or S&P. The commitment fee was 0.175% (per annum) during the period ended December 31, 2023.

Under the terms and conditions of the Senior Credit Agreement, interest rates per annum applicable to the Term Loan Facility are stated as Adjusted Term SOFR plus between 0.875% to 1.625%, depending on the Company’s debt rating by either Moody’s or S&P, or, at the option of the Company, the Base Rate plus between 0.000% to 0.625% depending on the Company’s debt rating by either Moody’s or S&P. At December 31, 2023, the interest rate on the Term Loan Facility

40

was Adjusted Term SOFR plus 1.250% in the case of Adjusted Term SOFR loans and the Base Rate plus 0.250% in the case of Base Rate loans.

A discussion of our debt and related covenants is included in Note 12 to our consolidated financial statements included in Item 8 of this Annual Report. We were in compliance with the covenants as of December 31, 2023.

Liquidity Analysis

Our cash balance increased by $110.7 million to $545.7 million as of December 31, 2023 as compared with December 31, 2022. The cash increase included $325.8 million in operating cash inflows, partially offset by $40.0 million in payments on long-term debt and $105.0 million in dividend payments.

During 2023, we made $2.0 million cash contributions to our U.S. pension plan, compared to no cash contributions in 2022. At December 31, 2023 and 2022, as a result of the values of the plan’s assets and our contributions to the plan, our U.S. pension plan was fully-funded as defined by applicable law. As of December 31, 2023 direct benefits paid by the U.S. pension plan were $2.8 million. We continue to maintain an asset allocation consistent with our strategy to maximize total return, while reducing portfolio risks through asset class diversification.

As of December 31, 2023, we had approximately $1,219 million of liquidity, consisting of cash and cash equivalents of $546 million and $673 million of borrowings available under our Senior Credit Facility. In light of the liquidity currently available to us, and the costs savings measures planned and already in place, we expect to be able to maintain adequate liquidity over the next 12 months. We do not currently anticipate, nor are we aware of, any significant market conditions or commitments that would change any of our conclusions of the liquidity currently available to us. We will continue to actively monitor the credit markets in order to maintain sufficient liquidity and access to capital throughout 2024.

Contractual Obligations

The following table presents a summary of our contractual obligations at December 31, 2023:

[[GREPCENT_TABLE]]
[["","Payments Due By Period"],["(Amounts in millions)","Within 1 Year","","1-3 Years","","3-5 Years","","Beyond 5 Years","","Total"],["Senior Notes and Term Loan Facility","$","59.9","","","$","159.9","","","$","\u2014","","","$","990.4","","","$","1,210.2"],["Fixed interest payments(1)","31.5","","","63.0","","","63.0","","","73.3","","","230.8"],["Other debt","6.2","","","17.2","","","\u2014","","","\u2014","","","23.4"],["Leases:"],["Operating","37.9","","","55.0","","","40.4","","","66.1","","","199.4"],["Finance","6.5","","","8.8","","","2.2","","","4.3","","","21.8"],["Purchase obligations:(2)"],["Inventory","741.7","","","38.2","","","16.7","","","20.8","","","817.4"],["Non-inventory","59.8","","","2.3","","","0.1","","","0.1","","","62.3"],["Pension and postretirement benefits(3)","63.0","","","120.3","","","114.3","","","260.0","","","557.6"],["Total","$","1,006.5","","","$","464.7","","","$","236.7","","","$","1,415.0","","","$","3,122.9"]]
[[/GREPCENT_TABLE]]

_______________________________________

(1)Fixed interest payments represent interest payments on the Senior Notes as defined in Note 12 to our consolidated financial statements included in Item 8 of this Annual Report.

(2)Purchase obligations are presented at the face value of the purchase order, excluding the effects of early termination provisions. Actual payments could be less than amounts presented herein.

(3)Retirement and postretirement benefits represent estimated benefit payments for our U.S. and non-U.S. defined benefit plans and our postretirement medical plans, as more fully described below and in Note 13 to our consolidated financial statements included in Item 8 of this Annual Report.

41

The following table presents a summary of our commercial commitments at December 31, 2023:

[[GREPCENT_TABLE]]
[["","Commitment Expiration By Period"],["","Within 1 Year","","1-3 Years","","3-5 Years","","Beyond 5 Years","","Total"],["","(Amounts in millions)"],["Letters of credit","$","487.8","","","$","173.4","","","$","15.0","","","$","10.2","","","$","686.4"],["Surety bonds","51.9","","","8.9","","","\u2014","","","\u2014","","","60.8"],["Total","$","539.7","","","$","182.3","","","$","15.0","","","$","10.2","","","$","747.2"]]
[[/GREPCENT_TABLE]]

We expect to satisfy these commitments through performance under our contracts.

PENSION AND POSTRETIREMENT BENEFITS OBLIGATIONS

Plan Descriptions

We and certain of our subsidiaries have defined benefit pension plans and defined contribution plans for full-time and part-time employees. Approximately 67% of total defined benefit pension plan assets and approximately 58% of defined benefit pension obligations are related to the U.S. qualified plan as of December 31, 2023. Unless specified otherwise, the references in this section are to all of our U.S. and non-U.S. plans. None of our common stock is directly held by these plans.

In August 2023, we amended the U.S. qualified plan for non-union employees to discontinue future benefit accruals under the qualified plan and freeze existing accrued benefits effective January 1, 2025. Benefits earned by participants under the qualified plan prior to January 1, 2025 are not affected. We also amended the U.S. non-qualified defined benefit pension plan that provides enhanced retirement benefits to select members of management. The qualified plan and the non-qualified plan are closed to new entrants effective January 1, 2024, and September 1, 2023, respectively. The amendments resulted in a curtailment of both plans during the year ended December 31, 2023. The curtailment loss incurred and the change in projected benefit obligation is immaterial.

Our U.S. defined benefit plan assets consist of a balanced portfolio of equity and fixed income securities. Our non-U.S. defined benefit plan assets include a significant concentration of United Kingdom ("U.K.") fixed income securities, as discussed in Note 13 to our consolidated financial statements included in Item 8 of this Annual Report. We monitor investment allocations and manage plan assets to maintain an acceptable level of risk. At December 31, 2023, the estimated fair market value of U.S. and non-U.S. plan assets for our defined benefit pension plans increased to $540.6 million from $537.3 million at December 31, 2022. Assets were allocated as follows:

[[GREPCENT_TABLE]]
[["","","U.S. Plan"],["Asset category","","2023","","2022"],["Cash and Cash Equivalents","","2","%","","1","%"],["Global Equity","","21","%","","21","%"],["Global Real Assets","","15","%","","13","%"],["Equity securities","","36","%","","34","%"],["Diversified Credit","","15","%","","18","%"],["Liability-Driven Investment","","47","%","","47","%"],["Fixed income","","62","%","","65","%"]]
[[/GREPCENT_TABLE]]

42

[[GREPCENT_TABLE]]
[["","","Non-U.S. Plans"],["Asset category","","2023","","2022"],["Cash and Cash Equivalents","","0","%","","1","%"],["U.K. Government Gilt Index","","39","%","","38","%"],["Liability-Driven Investment","","12","%","","12","%"],["Fixed income","","51","%","","50","%"],["Multi-asset","","19","%","","20","%"],["Buy-in Contract","","18","%","","19","%"],["Other","","12","%","","10","%"],["Other types","","49","%","","49","%"]]
[[/GREPCENT_TABLE]]

The projected benefit obligation ("Benefit Obligation") for our defined benefit pension plans was $715.2 million and $651.3 million as of December 31, 2023 and 2022, respectively. Benefits under our defined benefit pension plans are based primarily on participants’ compensation and years of credited service.

We sponsor defined benefit postretirement medical plans covering certain current retirees and a limited number of future retirees in the U.S. These plans provide for medical and dental benefits and are administered through insurance companies. We fund the plans as benefits are paid, such that the plans hold no assets in any period presented. Accordingly, we have no investment strategy or targeted allocations for plan assets. The benefits under the plans are not available to new employees or most existing employees.

The Benefit Obligation for our defined benefit postretirement medical plans was $12.4 million and $13.4 million as of December 31, 2023 and 2022, respectively.

Accrual Accounting and Significant Assumptions

We account for pension benefits using the accrual method, recognizing pension expense before the payment of benefits to retirees. The accrual method of accounting for pension benefits requires actuarial assumptions concerning future events that will determine the amount and timing of the benefit payments.

Our key assumptions used in calculating our cost of pension benefits are the discount rate, the rate of compensation increase and the expected long-term rate of return on plan assets. We, in consultation with our actuaries, evaluate the key actuarial assumptions and other assumptions used in calculating the cost of pension and postretirement benefits, such as discount rates, expected return on plan assets for funded plans, mortality rates, retirement rates and assumed rate of compensation increases, and determine such assumptions as of December 31 of each year to calculate liability information as of that date and pension and postretirement expense for the following year. See discussion of our accounting for and assumptions related to pension and postretirement benefits in the “Our Critical Accounting Estimates” section of this MD&A.

In 2023, the service cost component of the pension expense for our defined benefit pension plans included in operating income was $26.0 million compared to $30.7 million in 2022. The non-service cost portion of net pension expense (e.g., interest cost, actuarial gains and losses and expected return on plan assets) for our defined benefit pension plans included in other income (expense), net was $4.5 million in 2023, compared to $(4.2) million in 2022.

The following are assumptions related to our defined benefit pension plans as of December 31, 2023:

[[GREPCENT_TABLE]]
[["","U.S. Plan","","Non-U.S. Plans"],["Weighted average assumptions used to determine Benefit Obligation:"],["Discount rate","5.41","%","","4.22","%"],["Rate of increase in compensation levels","4.00","","","3.24"],["Weighted average assumptions used to determine 2023 net pension expense:"],["Long-term rate of return on assets","6.00","%","","3.97","%"],["Discount rate","5.73","","","4.46"],["Rate of increase in compensation levels","3.50","","","3.62"],["Weighted-average interest crediting rates","4.00","%","","2.29","%"]]
[[/GREPCENT_TABLE]]

43

The following provides a sensitivity analysis of alternative assumptions on the U.S. qualified, aggregate non-U.S. pension plans and U.S. postretirement plans.

Effect of Discount Rate Changes and Constancy of Other Assumptions:

[[GREPCENT_TABLE]]
[["","0.5% Increase","","0.5% Decrease"],["","(Amounts in millions)"],["U.S. defined benefit pension plan:"],["Effect on net pension expense","$","0.2","","","$","(0.2)"],["Effect on Benefit Obligation","(14.5)","","","15.6"],["Non-U.S. defined benefit pension plans:"],["Effect on net pension expense","(0.4)","","","0.4"],["Effect on Benefit Obligation","(17.0)","","","18.6"],["U.S. Postretirement medical plans:"],["Effect on Benefit Obligation","(0.3)","","","0.3"]]
[[/GREPCENT_TABLE]]

Effect of Changes in the Expected Return on Assets and Constancy of Other Assumptions:

[[GREPCENT_TABLE]]
[["","0.5% Increase","","0.5% Decrease"],["","(Amounts in millions)"],["U.S. defined benefit pension plan:"],["Effect on net pension expense","$","(2.0)","","","$","2.0"],["Non-U.S. defined benefit pension plans:"],["Effect on net pension expense","(0.8)","","","0.8"]]
[[/GREPCENT_TABLE]]

As discussed below, accounting principles generally accepted in the U.S. (“U.S. GAAP”) provide that differences between expected and actual returns are recognized over the average future service of employees or over the remaining expected lifetime for plans with only inactive participants.

At December 31, 2023, as compared with December 31, 2022, we decreased our discount rate for the U.S. plan from 5.73% to 5.41% based on an analysis of publicly-traded investment grade U.S. corporate bonds, which had lower yields due to current market conditions. The average discount rate for the non-U.S. plans decreased from 4.46% to 4.22% based on analysis of bonds and other publicly-traded instruments, by country, which had lower yields due to market conditions. The average assumed rate of compensation increased from 3.50% to 4.00% for the U.S. plan and decreased to 3.24% from 3.61% for our non-U.S. plans. To determine the 2023 pension expense, the expected rate of return on U.S. plan and non-US plan assets increased to 6.00% from 5.75% and increased to 3.97% from 2.43%, respectively, based on our target allocations and expected long-term asset returns. As the expected rate of return on plan assets is long-term in nature, short-term market fluctuations do not significantly impact the rate. For all U.S. plans, we adopted the Pri-2012 mortality tables and the MP-2021 improvement scale published in October 2021. We applied the Pri-2012 tables based on the constituency of our plan population for union and non-union participants. We adjusted the improvement scale to utilize the Proxy SSA Long Term Improvement Rates, consistent with assumptions adopted by the Social Security Administration trustees, based on long-term historical experience. Currently, we believe this approach provides the best estimate of our future obligation. Most plan participants elect to receive plan benefits as a lump sum at the end of service, rather than an annuity. As such, the updated mortality tables had an immaterial effect on our pension obligation.

We expect that the net pension expense for our defined benefit pension plans included in earnings before income taxes will be approximately $3.4 million higher in 2024 than the $30.4 million in 2023, primarily due to an increase in the service cost and amortization of the net loss. We have used discount rates of 5.41%, 4.22% and 5.57% at December 31, 2023, in calculating our estimated 2024 net pension expense for the U.S. pension plans, non-U.S. pension plans and postretirement medical plans, respectively.

The assumed ranges for the annual rates of increase in health care costs were 7.00% for 2023, 7.25% for 2022 and 7.50% for 2021, with a gradual decrease to 5.00% for 2032 and future years. If actual costs are higher than those assumed, this will likely put modest upward pressure on our expense for retiree health care.

Plan Funding

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Our funding policy for defined benefit plans is to contribute at least the amounts required under applicable laws and local customs. In 2023, we contributed $15.0 million, to our defined benefit plans, compared to $18.7 million in 2022. We have no obligation to make contributions to our U.S. pension plans in 2024, but have authorization for contributions up to $20 million. We expect to contribute approximately $2 million to our non-U.S. pension plans in 2024, excluding direct benefits paid.

For further discussion of our pension and postretirement benefits, see Note 13 to our consolidated financial statements included in Item 8 of this Annual Report.

OUR CRITICAL ACCOUNTING ESTIMATES

The process of preparing financial statements in conformity with U.S. GAAP requires the use of estimates and assumptions to determine reported amounts of certain assets, liabilities, revenues and expenses and the disclosure of related contingent assets and liabilities. These estimates and assumptions are based upon information available at the time of the estimates or assumptions, including our historical experience, where relevant. The most significant estimates made by management include: timing and amount of revenue recognition; deferred taxes, tax valuation allowances and tax reserves; reserves for contingent loss; pension and postretirement benefits; and valuation of goodwill, indefinite-lived intangible assets and other long-lived assets. The significant estimates are reviewed at least annually if not quarterly by management. Because of the uncertainty of factors surrounding the estimates, assumptions and judgments used in the preparation of our financial statements, actual results may differ from the estimates, and the difference may be material.

Our critical accounting policies are those policies that are both most important to our financial condition and results of operations and require the most difficult, subjective or complex judgments on the part of management in their application, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We believe that the following represent our critical accounting policies. For a summary of all of our significant accounting policies, see Note 1 to our consolidated financial statements included in Item 8 of this Annual Report. Management and our external auditors have discussed our critical accounting estimates and policies with the Audit Committee of our Board of Directors.

Revenue Recognition

We recognize revenue when (or as) we satisfy a performance obligation by transferring control to a customer. Transfer of control is evaluated based on the customer’s ability to direct the use of and obtain substantially all of the benefits of a performance obligation. Revenue is recognized either over time or at a point in time, depending on the specific facts and circumstances for each contract, including the terms and conditions of the contract as agreed with the customer and the nature of the products or services to be provided. Service-related revenues do not typically represent a significant portion of the contracts with our customers and do not meet the thresholds requiring separate disclosure.

Our primary method for recognizing revenue over time is the POC method, whereby progress towards completion is measured by applying an input measure based on costs incurred to date relative to total estimated costs at completion. If control of the products and/or services does not transfer over time, then control transfers at a point in time. We determine the point in time that control transfers to a customer based on the evaluation of specific indicators, such as title transfer, risk of loss transfer, customer acceptance and physical possession. For a discussion related to revenue recognition refer to Note 2 included in Item 8 of this Annual Report.

Deferred Taxes, Tax Valuation Allowances and Tax Reserves

We recognize valuation allowances to reduce the carrying value of deferred tax assets to amounts that we expect are more likely than not to be realized. Our valuation allowances primarily relate to the deferred tax assets established for certain tax credit carryforwards, capital loss carryforwards, and net operating loss carryforwards for non-U.S. subsidiaries, and we evaluate the realizability of our deferred tax assets and adjust the amount of the valuation allowances, if necessary. We assess such factors as our forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets in determining the sufficiency of our valuation allowances. Failure to achieve forecasted taxable income in the applicable tax jurisdictions could affect the ultimate realization of deferred tax assets and could result in an increase in our effective tax rate on future earnings. Implementation of different tax structures in certain jurisdictions could, if successful, result in future reductions of certain valuation allowances.

The amount of income taxes we pay is subject to ongoing audits by federal, state and foreign tax authorities, which often result in proposed assessments. Significant judgment is required in determining income tax provisions and evaluating tax positions. We establish reserves for open tax years for uncertain tax positions that may be subject to challenge by

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various tax authorities. The consolidated tax provision and related accruals include the impact of such reasonably estimable losses and related interest and penalties as deemed appropriate. Tax benefits recognized in the financial statements from uncertain tax positions are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.

While we believe we have adequately provided for any reasonably foreseeable outcomes related to these matters, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities. To the extent that the expected tax outcome of these matters changes, such changes in estimate will impact the income tax provision in the period in which such determination is made. For a discussion related to deferred taxes, tax valuation allowances and tax reserves refer to Note 18 included in Item 8 of this Annual Report.

Reserves for Contingent Loss

We are a defendant in a number of lawsuits that seek to recover damages for personal injury allegedly resulting from exposure to asbestos-containing products formerly manufactured and/or distributed by heritage companies of the Company. We have estimated that the liability for pending and future claims not yet asserted, and which are probable and estimable, could be experienced through 2053, which represents the expected end of our asbestos liability exposure with no further ongoing claims expected beyond that date. In light of the uncertainties and variables inherent in the long-term projection of the total asbestos liability, as part of our ongoing review of asbestos claims, each year we will reassess the projected liability of unasserted asbestos claims to be filed through 2053, and we will continually reassess the time horizon over which a reasonable estimate of unasserted claims can be projected.

In connection with our ongoing review of asbestos-related claims, we have also reviewed the amount of potential insurance coverage for such claims, taking into account the remaining limits of such coverage, the number and amount of claims on our insurance from co-insured parties, ongoing litigation against the Company’s insurers, potential remaining recoveries from insolvent insurers, the impact of previous insurance settlements and coverage available from solvent insurers not party to the coverage litigation. Continuously, we review ongoing insurance coverage available for a significant amount of the potential future asbestos-related claims and in the future could secure additional insurance coverage as deemed necessary. For a discussion pertaining to asbestos claims refer to Note 15 included in Item 8 of this Annual Report.

Liabilities are recorded for various non-asbestos contingencies arising in the normal course of business when it is both probable that a loss has been incurred and such loss is reasonably estimable. Assessments of reserves are based on information obtained from our independent and in-house experts, including recent legal decisions and loss experience in similar situations. The recorded legal reserves are susceptible to changes due to new developments regarding the facts and circumstances of each matter, changes in political environments, legal venue and other factors. Recorded environmental reserves could change based on further analysis of our properties, technological innovation and regulatory environment changes.

Pension and Postretirement Benefits

We provide pension and postretirement benefits to certain of our employees, including former employees, and their beneficiaries. The assets, liabilities and expenses we recognize and disclosures we make about plan actuarial and financial information are dependent on the assumptions and estimates used in calculating such amounts. The assumptions include factors such as discount rates, health care cost trend rates, inflation, expected rates of return on plan assets, retirement rates, mortality rates, turnover, rates of compensation increases and other factors.

The assumptions utilized to compute expense and benefit obligations are shown in Note 13 to our consolidated financial statements included in Item 8 of this Annual Report. These assumptions are assessed annually in consultation with independent actuaries and investment advisors as of December 31 and adjustments are made as needed. We evaluate prevailing market conditions and local laws and requirements in countries where plans are maintained, including appropriate rates of return, interest rates and medical inflation (health care cost trend) rates. We ensure that our significant assumptions are within the reasonable range relative to market data. The methodology to set our significant assumptions includes:

•Discount rates are estimated using high quality debt securities based on corporate or government bond yields with a duration matching the expected benefit payments. For the U.S. the discount rate is obtained from an analysis of publicly-traded investment-grade corporate bonds to establish a weighted average discount rate. For plans in the U.K. and the Eurozone we use the discount rate obtained from an analysis of AA-graded corporate bonds used to generate a yield curve. For other countries or regions without a corporate AA bond market, government bond

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rates are used. Our discount rate assumptions are impacted by changes in general economic and market conditions that affect interest rates on long-term high-quality debt securities, as well as the duration of our plans’ liabilities.

•The expected rates of return on plan assets are derived from reviews of asset allocation strategies, expected long-term performance of asset classes, risks and other factors adjusted for our specific investment strategy. These rates are impacted by changes in general market conditions, but because they are long-term in nature, short-term market changes do not significantly impact the rates. Changes to our target asset allocation also impact these rates.

•The expected rates of compensation increase reflect estimates of the change in future compensation levels due to general price levels, seniority, age and other factors.

Depending on the assumptions used, the pension and postretirement expense could vary within a range of outcomes and have a material effect on reported earnings. In addition, the assumptions can materially affect benefit obligations and future cash funding. Actual results in any given year may differ from those estimated because of economic and other factors.

We evaluate the funded status of each retirement plan using current assumptions and determine the appropriate funding level considering applicable regulatory requirements, tax deductibility, reporting considerations, cash flow requirements and other factors. We discuss our funding assumptions with the Finance and Risk Committee of our Board of Directors.

Valuation of Goodwill, Indefinite-Lived Intangible Assets and Other Long-Lived Assets

The initial recording of goodwill and intangible assets requires subjective judgments concerning estimates of the fair value of the acquired assets. We test the value of goodwill, indefinite-lived intangible assets and long-lived assets for impairment as of December 31 each year or whenever events or circumstances indicate such assets may be impaired. The test for goodwill impairment involves significant judgment in estimating projections of fair value generated through future performance of each of the reporting units. We did not record a material impairment for goodwill, indefinite-lived intangible assets or long-lived assets in 2023, 2022 or 2021.

Due to uncertain market conditions and potential changes in strategy and product portfolio, it is possible that forecasts used to support asset carrying values may change in the future, which could result in non-cash charges that would adversely affect our financial condition and results of operations. For a discussion pertaining to goodwill, indefinite-lived intangible assets and long-lived assets refer to Note 1 included in Item 8 of this Annual Report.

ACCOUNTING DEVELOPMENTS

We have presented the information about accounting pronouncements not yet implemented in Note 1 to our consolidated financial statements included in Item 8 of this Annual Report.

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