Realignment and Transformation Programs

In the second quarter of 2018, we launched and committed resources to our Flowserve 2.0 Transformation ("Flowserve 2.0 Transformation"), a program designed to transform our business model to drive operational excellence, reduce complexity, accelerate growth, improve organizational health and better leverage our existing global platform. We anticipate that the Flowserve 2.0 Transformation will result in restructuring charges, non-restructuring charges and other related transformation expenses (primarily professional services, project management and related travel expenses). For the three months ended March 31, 2019 and 2018, we incurred Flowserve 2.0 Transformation related expenses of $8.4 million and $0.5 million, respectively, primarily consisting of professional services and project management costs recorded in SG&A. We are currently evaluating the total investment in the various initiatives associated with this program.

In 2015, we initiated realignment programs to better align costs and improve long-term efficiency, including manufacturing optimization through the consolidation of facilities, reduction in our workforce and divestiture of certain non-strategic assets (the “Realignment Programs”). The Realignment Programs consist of both restructuring and non-restructuring charges. Restructuring charges represent costs associated with the relocation or reorganization of certain business activities and facility closures and include related severance costs. Non-restructuring charges are primarily employee severance associated with workforce reductions to reduce redundancies. Expenses are primarily reported in COS or SG&A, as applicable, in our condensed consolidated statements of income. These Realignment Programs have been substantially completed as of December 31, 2018. We estimate that the total investment in these programs will be approximately $350 million. As of March 31, 2019, we have incurred charges of $335.8 million since the inception of the programs.

Generally, the aforementioned charges will be paid in cash, except for asset write-downs, which are non-cash charges. The following is a summary of total charges, net of adjustments, related to the Realignment and Flowserve 2.0 Transformation Programs charges:



	Three Months Ended March 31, 2019
(Amounts in thousands)	FPD			FCD		Subtotal–Reportable Segments			Eliminations and All Other		Consolidated Total
Realignment Charges
Restructuring Charges
COS	$	2,622		$	456	$	3,078		$	—	$	3,078
SG&A(1)	(18,471		)	338		(18,133		)	—		(18,133		)
	$	(15,849	)	$	794	$	(15,055	)	$	—	$	(15,055	)
Non-Restructuring Charges
COS	$	2,396		$	26	$	2,422		$	—	$	2,422
SG&A	174			—		174			529		703
	$	2,570		$	26	$	2,596		$	529	$	3,125
Total Realignment Charges
COS	$	5,018		$	482	$	5,500		$	—	$	5,500
SG&A	(18,297		)	338		(17,959		)	529		$	(17,430	)
Total	$	(13,279	)	$	820	$	(12,459	)	$	529	$	(11,930	)

Transformation Charges
SG&A	$	—		$	—	$	—		$	8,413	$	8,413
	$	—		$	—	$	—		$	8,413	$	8,413

Total Realignment and Transformation Charges
COS	$	5,018		$	482	$	5,500		$	—	$	5,500
SG&A	(18,297		)	338		(17,959		)	8,942		(9,017		)
Total	$	(13,279	)	$	820	$	(12,459	)	$	8,942	$	(3,517	)

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(1) Primarily consists of gains from the sales of non-strategic manufacturing facilities that are included in our Realignment Programs.



	Three Months Ended March 31, 2018
(Amounts in thousands)	FPD			FCD		Subtotal–Reportable Segments		Eliminations and All Other		Consolidated Total
Realignment Charges
Restructuring Charges
COS	$	1,218		$	1,746	$	2,964	$	—	$	2,964
SG&A	(42		)	229		187		—		187
	$	1,176		$	1,975	$	3,151	$	—	$	3,151
Non-Restructuring Charges
COS	$	4,029		$	163	$	4,192	$	—	$	4,192
SG&A	2,902			198		3,100		1,031		4,131
	$	6,931		$	361	$	7,292	$	1,031	$	8,323
Total Realignment Charges
COS	$	5,247		$	1,909	$	7,156	$	—	$	7,156
SG&A	2,860			427		3,287		1,031		$	4,318
Total	$	8,107		$	2,336	$	10,443	$	1,031	$	11,474

Transformation Charges
SG&A	$	—		$	—	$	—	$	500	$	500
	$	—		$	—	$	—	$	500	$	500

Total Realignment and Transformation Charges
COS	$	5,247		$	1,909	$	7,156	$	—	$	7,156
SG&A	2,860			$	427	$	3,287	$	1,531	$	4,818
Total	$	8,107		$	2,336	$	10,443	$	1,531	$	11,974

The following is a summary of total inception to date charges, net of adjustments, related to the Realignment Programs:



	Inception to Date
(Amounts in thousands)	FPD		FCD		Subtotal–Reportable Segments		Eliminations and All Other		Consolidated Total
Realignment Charges
Restructuring Charges
COS	$	111,664	$	27,481	$	139,145	$	—	$	139,145
SG&A	18,439		9,793		28,232		317		28,549
Income tax expense(1)	18,700		1,800		20,500		—		20,500
	$	148,803	$	39,074	$	187,877	$	317	$	188,194
Non-Restructuring Charges
COS	$	70,880	$	13,744	$	84,624	$	8	$	84,632
SG&A	39,478		7,512		46,990		16,031		63,021
	$	110,358	$	21,256	$	131,614	$	16,039	$	147,653
Total Realignment Charges
COS	$	182,544	$	41,225	$	223,769	$	8	$	223,777
SG&A	57,917		17,305		75,222		16,348		91,570
Income tax expense(1)	18,700		1,800		20,500		—		20,500
Total	$	259,161	$	60,330	$	319,491	$	16,356	$	335,847

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(1) Income tax expense includes exit taxes as well as non-deductible costs.

Restructuring charges represent costs associated with the relocation or reorganization of certain business activities and facility closures and include costs related to employee severance at closed facilities, contract termination costs, asset write-downs and other costs. Severance costs primarily include costs associated with involuntary termination benefits. Contract termination costs include costs related to termination of operating leases or other contract termination costs. Asset write-downs include accelerated depreciation of fixed assets, accelerated amortization of intangible assets, divestiture of certain non-strategic assets and inventory write-downs. Other costs generally include costs related to employee relocation, asset relocation, vacant facility costs (i.e., taxes and insurance) and other charges.

The following is a summary of restructuring charges, net of adjustments, for the Realignment Programs:



	Three Months Ended March 31, 2019
(Amounts in thousands)	Severance		Contract Termination		Asset Write-Downs (Gains)			Other		Total
COS	$	1,679	$	39	$	233		$	1,127	$	3,078
SG&A(1)	316		—		(18,502		)	53		(18,133		)
Total	$	1,995	$	39	$	(18,269	)	$	1,180	$	(15,055	)

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(1) Primarily consists of gains from the sales of non-strategic manufacturing facilities that are included in our Realignment Programs.



	Three Months Ended March 31, 2018
(Amounts in thousands)	Severance			Contract Termination		Asset Write-Downs (Gains)		Other		Total
COS	$	1,107		$	—	$	481	$	1,376	$	2,964
SG&A	(191		)	—		—		378		187
Total	$	916		$	—	$	481	$	1,754	$	3,151

The following is a summary of total inception to date restructuring charges, net of adjustments, related to the Realignment Programs:



	Inception to Date
(Amounts in thousands)	Severance		Contract Termination		Asset Write-Downs (Gains)			Other		Total
COS	$	86,839	$	946	$	24,568		$	26,792	$	139,145
SG&A	32,061		43		(16,813		)	13,258		28,549
Income tax expense(1)	—		—		—			20,500		20,500
Total	$	118,900	$	989	$	7,755		$	60,550	$	188,194

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(1) Income tax expense includes exit taxes as well as non-deductible costs.

The following represents the activity, primarily severance, related to the restructuring reserve for the Realignment Programs for the three months ended March 31, 2019 and 2018:



(Amounts in thousands)	2019			2018
Balance at December 31	$	11,927		$	39,230
Charges, net of adjustments	3,213			2,670
Cash expenditures	(3,221		)	(5,471		)
Other non-cash adjustments, including currency	(314		)	(663		)
Balance at March 31	$	11,605		$	35,766