Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019
OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM           to          .
Commission File No. 1-13179
FLOWSERVE CORPORATION
(Exact name of registrant as specified in its charter)
capture.gif
New York
 
31-0267900
(State or other jurisdiction of incorporation or organization)
 
 (I.R.S. Employer Identification No.)
 
 
 
 
 
5215 N. O’Connor Blvd., Suite 2300,
Irving,
Texas
 
75039
(Address of principal executive offices)
 
 
 (Zip Code)
 
 
         
972
-
443-6500
 
(Registrant’s telephone number, including area code)
Former name, former address and former fiscal year, if changed since last report: N/A

 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of Each Exchange on Which Registered
Common Stock, $1.25 Par Value
FLS
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
 
 
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
As of July 24, 2019 there were 131,170,103 shares of the issuer’s common stock outstanding.


 
 
 








FLOWSERVE CORPORATION
FORM 10-Q
TABLE OF CONTENTS

 
Page
 
No.
 
 



 
 
 
i


Table of Contents

PART I — FINANCIAL INFORMATION
Item 1.
Financial Statements.
FLOWSERVE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Amounts in thousands, except per share data)
Three Months Ended June 30,
 
2019
 
2018
Sales
$
990,084

 
$
973,129

Cost of sales
(672,051
)
 
(687,072
)
Gross profit
318,033

 
286,057

Selling, general and administrative expense
(223,676
)
 
(240,791
)
Net earnings from affiliates
3,661

 
1,445

Operating income
98,018

 
46,711

Interest expense
(14,013
)
 
(14,939
)
Interest income
2,218

 
1,330

Other income (expense), net
(3,336
)
 
(4,770
)
Earnings before income taxes
82,887

 
28,332

Provision for income taxes
(22,413
)
 
(13,545
)
Net earnings, including noncontrolling interests
60,474

 
14,787

Less: Net earnings attributable to noncontrolling interests
(2,302
)
 
(1,567
)
Net earnings attributable to Flowserve Corporation
$
58,172

 
$
13,220

Net earnings per share attributable to Flowserve Corporation common shareholders:
 
 
 
Basic
$
0.44

 
$
0.10

Diluted
0.44

 
0.10


CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Amounts in thousands)
Three Months Ended June 30,
 
2019
 
2018
Net earnings, including noncontrolling interests
$
60,474

 
$
14,787

Other comprehensive income (loss):
 
 
 
Foreign currency translation adjustments, net of taxes of $(1,492) and $7,079, respectively
(2,848
)
 
(60,997
)
Pension and other postretirement effects, net of taxes of $(222) and $(274), respectively
2,186

 
5,817

Cash flow hedging activity
43

 
97

Other comprehensive income (loss)
(619
)
 
(55,083
)
Comprehensive income, including noncontrolling interests
59,855

 
(40,296
)
Comprehensive income attributable to noncontrolling interests
(2,290
)
 
(1,571
)
Comprehensive income attributable to Flowserve Corporation
$
57,565

 
$
(41,867
)

See accompanying notes to condensed consolidated financial statements.

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Table of Contents

FLOWSERVE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
 
 
 
(Amounts in thousands, except per share data)
Six Months Ended June 30,
 
2019
 
2018
Sales
$
1,880,135

 
$
1,893,083

Cost of sales
(1,268,026
)
 
(1,335,593
)
Gross profit
612,109

 
557,490

Selling, general and administrative expense
(428,830
)
 
(469,966
)
Net earnings from affiliates
5,970

 
4,613

Operating income
189,249

 
92,137

Interest expense
(28,044
)
 
(29,818
)
Interest income
4,241

 
2,968

Other income (expense), net
(6,476
)
 
(11,925
)
Earnings before income taxes
158,970

 
53,362

Provision for income taxes
(38,999
)
 
(22,116
)
Net earnings, including noncontrolling interests
119,971

 
31,246

Less: Net earnings attributable to noncontrolling interests
(4,538
)
 
(2,883
)
Net earnings attributable to Flowserve Corporation
$
115,433

 
$
28,363

Net earnings per share attributable to Flowserve Corporation common shareholders:
 
 
 
Basic
$
0.88

 
$
0.22

Diluted
0.88

 
0.22


CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
 
 
(Amounts in thousands)
Six Months Ended June 30,
 
2019
 
2018
Net earnings, including noncontrolling interests
$
119,971

 
$
31,246

Other comprehensive income (loss):
 
 
 
Foreign currency translation adjustments, net of taxes of $1,190 and $4,788, respectively
4,097

 
(41,548
)
Pension and other postretirement effects, net of taxes of $(429) and $(587), respectively
3,403

 
5,507

Cash flow hedging activity
105

 
125

Other comprehensive income (loss)
7,605

 
(35,916
)
Comprehensive income, including noncontrolling interests
127,576

 
(4,670
)
Comprehensive income attributable to noncontrolling interests
(5,203
)
 
(3,693
)
Comprehensive income attributable to Flowserve Corporation
$
122,373

 
$
(8,363
)

See accompanying notes to condensed consolidated financial statements.


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Table of Contents

FLOWSERVE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in thousands, except par value)
June 30,
 
December 31,
 
2019
 
2018
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
596,470

 
$
619,683

Accounts receivable, net of allowance for doubtful accounts of $53,251 and $51,501, respectively
806,724

 
792,434

Contract assets, net
215,440

 
228,579

Inventories, net
680,898

 
633,871

Prepaid expenses and other
109,792

 
108,578

Total current assets
2,409,324

 
2,383,145

Property, plant and equipment, net of accumulated depreciation of $992,196 and $956,634, respectively
590,213

 
610,096

Operating lease right-of-use assets, net
189,966

 

Goodwill
1,195,116

 
1,197,640

Deferred taxes
54,576

 
44,682

Other intangible assets, net
183,113

 
190,550

Other assets, net
198,901

 
190,164

Total assets
$
4,821,209

 
$
4,616,277

 
 
 
 
LIABILITIES AND EQUITY
Current liabilities:
 
 
 
Accounts payable
$
402,118

 
$
418,893

Accrued liabilities
339,297

 
391,406

Contract liabilities
209,689

 
202,458

Debt due within one year
71,495

 
68,218

Operating lease liabilities
36,272

 

Total current liabilities
1,058,871

 
1,080,975

Long-term debt due after one year
1,386,475

 
1,414,829

Operating lease liabilities
153,401

 

Retirement obligations and other liabilities
472,674

 
459,693

Shareholders’ equity:
 
 
 
Common shares, $1.25 par value
220,991

 
220,991

Shares authorized – 305,000
 
 
 
Shares issued – 176,793
 
 
 
Capital in excess of par value
493,037

 
494,551

Retained earnings
3,607,928

 
3,543,007

Treasury shares, at cost – 45,943 and 46,237 shares, respectively
(2,036,857
)
 
(2,049,404
)
Deferred compensation obligation
8,219

 
7,117

Accumulated other comprehensive loss
(567,007
)
 
(573,947
)
Total Flowserve Corporation shareholders’ equity
1,726,311

 
1,642,315

Noncontrolling interests
23,477

 
18,465

Total equity
1,749,788

 
1,660,780

Total liabilities and equity
$
4,821,209

 
$
4,616,277


See accompanying notes to condensed consolidated financial statements.

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Table of Contents

FLOWSERVE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
 
Total Flowserve Corporation Shareholders’ Equity
 
 
 
 
 
 
 
 
 
Capital
in Excess of Par Value
 
Retained Earnings
 
 
 
 
 
Deferred Compensation Obligation
 
Accumulated
Other Comprehensive Income (Loss)
 
 
 
Total Equity
 
Common Stock
 
 
 
Treasury Stock
 
 
 
Non-
controlling Interests
 
 
Shares
 
Amount
 
 
 
Shares
 
Amount
 
 
 
 
 
(Amounts in thousands)
Balance — April 1, 2019
176.793

 
$
220,991

 
$
487,673

 
$
3,575,014

 
(45,969
)
 
$
(2,037,586
)
 
$
7,107

 
$
(566,400
)
 
$
21,187

 
$
1,707,986

Stock activity under stock plans

 

 
(2,382
)
 

 
26

 
729

 

 

 

 
(1,653
)
Stock-based compensation

 

 
7,746

 

 

 

 

 

 

 
7,746

Net earnings

 

 

 
58,172

 

 

 

 

 
2,302

 
60,474

Cash dividends declared

 

 

 
(25,258
)
 

 

 

 

 

 
(25,258
)
Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 
(607
)
 
(12
)
 
(619
)
Other, net

 

 

 

 

 

 
1,112

 

 

 
1,112

Balance — June 30, 2019
176.793

 
$
220,991

 
$
493,037

 
$
3,607,928

 
(45,943
)
 
$
(2,036,857
)
 
$
8,219

 
$
(567,007
)
 
$
23,477

 
$
1,749,788

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance — April 1, 2018
176.793

 
$
220,991

 
$
481,855

 
$
3,514,296

 
(46,273
)
 
$
(2,051,020
)
 
$
6,216

 
$
(487,111
)
 
$
18,319

 
$
1,703,546

Stock activity under stock plans

 

 
(2,812
)
 

 
32

 
1,472

 

 

 

 
(1,340
)
Stock-based compensation

 

 
4,434

 

 

 

 

 

 

 
4,434

Net earnings

 

 

 
13,220

 

 

 

 

 
1,567

 
14,787

Cash dividends declared

 

 

 
(25,136
)
 

 

 

 

 

 
(25,136
)
Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 
(55,087
)
 
4

 
(55,083
)
Other, net

 

 

 
(374
)
 

 

 
717

 

 

 
343

Balance — June 30, 2018
176.793

 
$
220,991

 
$
483,477

 
$
3,502,006

 
(46,241
)
 
$
(2,049,549
)
 
$
6,933

 
$
(542,198
)
 
$
19,891

 
$
1,641,551

See accompanying notes to condensed consolidated financial statements.


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Table of Contents

FLOWSERVE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
 
Total Flowserve Corporation Shareholders’ Equity
 
 
 
 
 
 
 
 
 
Capital
in Excess of Par Value
 
Retained Earnings
 
 
 
 
 
Deferred Compensation Obligation
 
Accumulated
Other Comprehensive Income (Loss)
 
 
 
Total Equity
 
Common Stock
 
 
 
Treasury Stock
 
 
 
Non-
controlling Interests
 
 
Shares
 
Amount
 
 
 
Shares
 
Amount
 
 
 
 
 
(Amounts in thousands)
Balance — January 1, 2019
176.793

 
$
220,991

 
$
494,551

 
$
3,543,007

 
(46,237
)
 
$
(2,049,404
)
 
$
7,117

 
$
(573,947
)
 
$
18,465

 
$
1,660,780

Stock activity under stock plans

 

 
(16,869
)
 

 
294

 
12,547

 

 

 

 
(4,322
)
Stock-based compensation

 

 
15,355

 

 

 

 

 

 

 
15,355

Net earnings

 

 

 
115,433

 

 

 

 

 
4,538

 
119,971

Cash dividends declared

 

 

 
(50,512
)
 

 

 

 

 

 
(50,512
)
Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 
6,940

 
665

 
7,605

Other, net

 

 

 

 

 

 
1,102

 

 
(191
)
 
911

Balance — June 30, 2019
176.793

 
$
220,991

 
$
493,037

 
$
3,607,928

 
(45,943
)
 
$
(2,036,857
)
 
$
8,219

 
$
(567,007
)
 
$
23,477

 
$
1,749,788

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance — January 1, 2018
176.793

 
$
220,991

 
$
488,326

 
$
3,503,947

 
(46,471
)
 
$
(2,059,558
)
 
$
6,354

 
$
(505,473
)
 
$
16,367

 
$
1,670,954

ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606)


 

 

 
19,642

 

 

 

 

 

 
19,642

Stock activity under stock plans

 

 
(13,244
)
 

 
230

 
10,009

 

 

 

 
(3,235
)
Stock-based compensation

 

 
8,395

 

 

 

 

 

 

 
8,395

Net earnings

 

 

 
28,363

 

 

 

 

 
2,883

 
31,246

Cash dividends declared

 

 

 
(49,946
)
 

 

 

 

 

 
(49,946
)
Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 
(36,725
)
 
809

 
(35,916
)
Other, net

 

 

 

 

 

 
579

 

 
(168
)
 
411

Balance — June 30, 2018
176.793

 
$
220,991

 
$
483,477

 
$
3,502,006

 
(46,241
)
 
$
(2,049,549
)
 
$
6,933

 
$
(542,198
)
 
$
19,891

 
$
1,641,551

See accompanying notes to condensed consolidated financial statements.


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Table of Contents

FLOWSERVE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
Six Months Ended June 30,
 
2019
 
2018
Cash flows – Operating activities:
 
 
 
Net earnings, including noncontrolling interests
$
119,971

 
$
31,246

Adjustments to reconcile net earnings to net cash provided (used) by operating activities:
 
 
 
Depreciation
46,666

 
49,169

Amortization of intangible and other assets
8,003

 
8,467

Stock-based compensation
15,354

 
8,395

Foreign currency and other non-cash adjustments
(20,206
)
 
35,037

Change in assets and liabilities:
 
 
 
Accounts receivable, net
(13,445
)
 
(32,235
)
Inventories, net
(47,610
)
 
(57,414
)
Contract assets, net
12,432

 
(48,907
)
Prepaid expenses and other assets, net
4,949

 
2,353

Accounts payable
(20,660
)
 
(10,550
)
Contract liabilities
6,744

 
(384
)
Accrued liabilities and income taxes payable
(56,935
)
 
(44,756
)
Retirement obligations and other
(6,824
)
 
4,478

       Net deferred taxes
911

 
(1,636
)
Net cash flows provided (used) by operating activities
49,350

 
(56,737
)
Cash flows – Investing activities:
 
 
 
Capital expenditures
(25,267
)
 
(31,747
)
Proceeds from disposal of assets and other
40,302

 
908

Net cash flows provided (used) by investing activities
15,035

 
(30,839
)
Cash flows – Financing activities:
 
 
 
Payments on long-term debt
(30,000
)
 
(30,000
)
Proceeds under other financing arrangements
1,699

 
2,253

Payments under other financing arrangements
(5,124
)
 
(6,282
)
Payments related to tax withholding for stock-based compensation
(3,441
)
 
(2,931
)
Payments of dividends
(49,772
)
 
(49,681
)
Other
(190
)
 
(607
)
Net cash flows provided (used) by financing activities
(86,828
)
 
(87,248
)
Effect of exchange rate changes on cash
(770
)
 
(11,179
)
Net change in cash and cash equivalents
(23,213
)
 
(186,003
)
Cash and cash equivalents at beginning of period
619,683

 
703,445

Cash and cash equivalents at end of period
$
596,470

 
$
517,442


See accompanying notes to condensed consolidated financial statements.

6


Table of Contents

FLOWSERVE CORPORATION
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.
Basis of Presentation and Accounting Policies
Basis of Presentation
The accompanying condensed consolidated balance sheet as of June 30, 2019, the related condensed consolidated statements of income and comprehensive income for the three and six months ended June 30, 2019 and 2018, the condensed consolidated statements of stockholders' equity for the three and six months ended June 30, 2019 and 2018 and the condensed consolidated statements of cash flows for the six months ended June 30, 2019 and 2018 of Flowserve Corporation are unaudited. In management’s opinion, all adjustments comprising normal recurring adjustments necessary for fair statement of such condensed consolidated financial statements have been made. Where applicable, prior period information has been updated to conform to current year presentation.
The accompanying condensed consolidated financial statements and notes in this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2019 ("Quarterly Report") are presented as permitted by Regulation S-X and do not contain certain information included in our annual financial statements and notes thereto. Accordingly, the accompanying condensed consolidated financial information should be read in conjunction with the audited consolidated financial statements presented in our Annual Report on Form 10-K for the year ended December 31, 2018 ("2018 Annual Report").
Resegmentation - We have determined that there are meaningful operational synergies and benefits to combining our previously reported Engineered Product Division ("EPD") and Industrial Product Division ("IPD") segments into one reportable segment, Flowserve Pump Division ("FPD"). During the first quarter of 2019, we implemented a reorganization of our operating segments and as a result we report our financial information reflecting two operating segments, FPD and Flow Control Division ("FCD"). The reorganization of the segments reflects how our chief operating decision maker (Chief Executive Officer) regularly reviews financial information to allocate resources and assess performance.
Accounting Developments
Pronouncements Implemented
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No.2016-02, “Leases (Topic 842),” ("New Lease Standard"). The New Lease Standard increases transparency and comparability by requiring lessees to recognize right-of-use (“ROU”) assets and lease liabilities for operating leases on their consolidated balance sheets. Additionally, expanded disclosures are required to enable users of financial statements to understand the amount, timing and uncertainty of cash flows arising from leases.
We adopted the New Lease Standard effective January 1, 2019, utilizing the modified retrospective approach and elected an initial application date of January 1, 2019. The adoption resulted in an increase to total assets and liabilities due to the recording of lease ROU assets and lease liabilities of approximately $210 million as of January 1, 2019. The adoption did not materially impact our condensed consolidated results of operations or cash flows. Refer to Note 4 for further discussion of our adoption of the New Lease Standard.
On July 13, 2017, the FASB issued ASU No. 2017-11, “Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatory Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatory Redeemable Noncontrolling Interests with a Scope Exception.” The ASU amends guidance in FASB Accounting Standards Codification ("ASC") 260, Earnings Per Share, FASB ASC 480, Distinguishing Liabilities from Equity, and FASB ASC 815, Derivatives and Hedging. The amendments in Part I of this ASU change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. The amendments in this ASU must be applied to annual reporting periods beginning after December 15, 2018. Our adoption of ASU No. 2017-11 effective January 1, 2019 did not have an impact on our condensed consolidated financial condition and results of operations.
On August 28, 2017, the FASB issued ASU No. 2017-12, "Derivatives and Hedging (Topic 815): Targeted improvements of Accounting for Hedging Activities." The purpose of this ASU is to better align a company’s risk management activities and financial reporting for hedging relationships. Additionally, the ASU simplifies the hedge accounting requirements and improve the disclosures of hedging arrangements. The amendments in this ASU must be applied to annual reporting periods beginning after December 15, 2019. Early adoption is permitted. Our adoption of ASU No. 2017-12 effective January 1, 2019 did not have an impact on our condensed consolidated financial condition and results of operations.
In February 2018, the FASB issued ASU No. 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Comprehensive Income (“AOCI”)." The ASU and its amendments were issued as a result of the enactment of the U.S. Tax Cuts and Jobs Act of 2017. The amendments of this ASU address the

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available options to reclassify stranded tax effects within AOCI to retained earnings in each period in which the effect of the change (or portion thereof) is recorded. Additionally, the ASU outlines the disclosure requirements for releasing income tax effects from AOCI. The ASU is effective for fiscal years beginning after December 15, 2018. The ASU should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. We elected not to reclassify the income tax effects of the Tax Cuts and Jobs Act from accumulated comprehensive income to retained earnings.
In July 2018, the FASB issued ASU No. 2018-07, "Compensation - Stock Compensation (Topic 718) - Improvements to Non-employee Share-based Payment Accounting." The amendments of this ASU apply to all share-based payment transactions to non-employees, in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations, accounted under ASC 505-50, Equity-Based Payments to Non-Employees. Under the amendments of ASU 2018-07, most of the guidance on compensation to non-employees would be aligned with the requirements for shared based payments granted to employees, Topic 718. The ASU is effective for fiscal years beginning after December 15, 2018. Our adoption of ASU No. 2018-07-12 effective January 1, 2019 did not have an impact on our condensed consolidated financial condition and results of operations.

Pronouncements Not Yet Implemented
In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments." The ASU requires, among other things, the use of a new current expected credit loss ("CECL") model in order to determine allowances for doubtful accounts with respect to accounts receivable and contract assets. The CECL model requires that companies estimate the lifetime of an expected credit loss with respect to receivables and contract assets and record allowances that, when deducted from the balance of the receivables, represent the net amounts expected to be collected. Companies will also be required to disclose information about how the allowances were developed, including changes in the factors that influenced our estimate of expected credit losses and the reasons for those changes. The amendments of the ASU are effective for fiscal years beginning after December 15, 2019. We are currently evaluating the impact of ASU No. 2016-13 and other related ASUs on our consolidated financial condition and results of operations.
In January 2017, the FASB issued ASU No. 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment." The amendments in this ASU allow companies to apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The amendments of the ASU are effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are currently evaluating the impact of ASU No. 2017-04 on our consolidated financial condition and results of operations.
In August 2018, the FASB issued ASU No. 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement." The amendments of the ASU modify the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosure information requirements for assets and liabilities measured at fair value in the statement of financial position or disclosed in the notes to financial statements. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted for the removed disclosures and delayed adoption until fiscal year 2020 permitted for the new disclosures. The removed and modified disclosures will be adopted on a retrospective basis and the new disclosures will be adopted on a prospective basis. We are currently evaluating the impact of ASU No. 2018-13 on our consolidated financial condition and results of operations.
In August 2018, the FASB issued ASU No. 2018-14, "Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans." The ASU amends the disclosure requirements by adding, clarifying, or removing certain disclosures for sponsor defined benefit pension or other postretirement plans. The amendments are effective for fiscal years ending after December 15, 2020 and the amendments should be applied retrospectively to all periods presented. We are currently evaluating the impact of ASU No. 2018-14 on our consolidated financial condition and results of operations.
In August 2018, the FASB issued ASU No. 2018-15, "Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract." The ASU addresses how entities should account for costs associated with implementing a cloud computing arrangement that is considered a service contract. Per the amendments of the ASU, implementation costs incurred in a cloud computing arrangement that is a service contract should be accounted for in the same manner as implementation costs incurred to develop or obtain software for internal use as prescribed by guidance in ASC 350-40. The ASU requires that implementation costs incurred in a cloud computing arrangement be capitalized rather than expensed. Further, the ASU specifies the method for the amortization of costs incurred during implementation, and the manner in which the unamortized portion of these capitalized implementation costs should be evaluated for impairment. The ASU also provides guidance on how to present such implementation costs in the financial statements and also creates additional disclosure requirements. The amendments are effective for fiscal years beginning after

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December 15, 2019. Early adoption of the ASU requirements is permitted, including adoption in any interim period. The amendments in this ASU should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We are currently evaluating the impact of ASU No. 2018-15 on our consolidated financial condition and results of operations.
In October 2018, the FASB issued ASU No. 2018-17, "Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities ("VIEs")." The standard reduces the cost and complexity of financial reporting associated with VIEs. The new standard amends the guidance for determining whether a decision-making fee is a VIE.  The amendments require organizations to consider indirect interests held through related parties under common control on a proportional basis rather than as the equivalent of a direct interest in its entirety as currently required in GAAP. The amendments of this ASU are effective for fiscal years beginning after December 15, 2019. We are currently evaluating the impact of ASU No. 2018-17 on our consolidated financial condition and results of operations.
In November 2018, the FASB issued ASU No. 2018-18, "Collaborative Arrangements (Topic 808): Clarifying the Interaction Between Topic 808 and Topic 606." The ASU clarifies the interaction between the guidance for certain collaborative arrangements and the New Revenue Standard. The amendments of the ASU provide guidance on how to assess whether certain transactions between collaborative arrangement participants should be accounted for within the New Revenue Standard. The ASU also provides more comparability in the presentation of revenue for certain transactions between collaborative arrangement participants. Parts of the collaborative arrangement that are not in the purview of the revenue recognition standard should be presented separately. The amendments are effective for fiscal years beginning after December 15, 2019. Early adoption is permitted. We are currently evaluating the impact of ASU No. 2018-18 on our consolidated financial condition and results of operations.

2.
Revenue Recognition
We enter into contracts with customers typically having multiple commitments of goods and services including any combination of designing, developing, manufacturing, modifying, installing and commissioning of flow management equipment and providing services and parts related to the performance of such products. Control transfers over time when the customer is able to direct the use of and obtain substantially all of the benefits of our work as we perform.
Our primary method for recognizing revenue over time is the percentage of completion ("POC") method. Revenue from products and services transferred to customers over time accounted for approximately 19% and 23% of total revenue for the three month periods ended June 30, 2019 and 2018, respectively, and 18% and 23% for the six month periods ended June 30, 2019 and 2018, respectively. If control does not transfer over time, then control transfers at a point in time. We recognize revenue at a point in time at the level of each performance obligation based on the evaluation of certain indicators of control transfer, such as title transfer, risk of loss transfer, customer acceptance and physical possession. Revenue from products and services transferred to customers at a point in time accounted for approximately 81% and 77% of total revenue for the three month periods ended June 30, 2019 and 2018, respectively, and 82% and 77% for the six month periods ended June 30, 2019 and 2018, respectively. Refer to Note 2 to our consolidated financial statements included in our 2018 Annual Report for a more comprehensive discussion of our policies and accounting practices of revenue recognition.
Disaggregated Revenue
We conduct our operations through two business segments based on the type of product and how we manage the business:
FPD for custom, highly-engineered pumps, pre-configured industrial pumps, pump systems, mechanical seals, auxiliary systems and replacement parts and related services; and
FCD for engineered and industrial valves, control valves, actuators and controls and related services.
Our revenue sources are derived from our original equipment manufacturing and our aftermarket sales and services. Our original equipment revenues are generally related to originally designed, manufactured, distributed and installed equipment that can range from pre-configured, short-cycle products to more customized, highly-engineered equipment ("Original Equipment"). Our aftermarket sales and services are derived from sales of replacement equipment, as well as maintenance, advanced diagnostic, repair and retrofitting services ("Aftermarket"). Each of our two business segments generate Original Equipment and Aftermarket revenues.

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The following table presents our customer revenues disaggregated by revenue source:
 
Three Months Ended June 30, 2019
(Amounts in thousands)
FPD
 
FCD
 
Total
Original Equipment
$
243,625

 
$
248,927

 
$
492,552

Aftermarket
430,341

 
67,191

 
497,532

 
$
673,966

 
$
316,118

 
$
990,084

 
 
 
 
 
 
 
Three Months Ended June 30, 2018
 
FPD
 
FCD
 
Total
Original Equipment
$
246,470

 
$
238,977

 
$
485,447

Aftermarket
420,999

 
66,683

 
487,682

 
$
667,469

 
$
305,660

 
$
973,129



 
Six Months Ended June 30, 2019
(Amounts in thousands)
FPD
 
FCD
 
Total
Original Equipment
$
449,429

 
$
462,973

 
$
912,402

Aftermarket
833,296

 
134,437

 
967,733

 
$
1,282,725

 
$
597,410

 
$
1,880,135

 
 
 
 
 
 
 
Six Months Ended June 30, 2018
 
FPD
 
FCD
 
Total
Original Equipment
$
500,536

 
$
449,467

 
$
950,003

Aftermarket
810,973

 
132,107

 
943,080

 
$
1,311,509

 
$
581,574

 
$
1,893,083


Our customer sales are diversified geographically. The following table presents our revenues disaggregated by geography, based on the shipping addresses of our customers:
:
 
Three Months Ended June 30, 2019
(Amounts in thousands)
FPD
 
FCD
 
Total
North America(1)
$
269,737

 
$
134,715

 
$
404,452

Latin America(1)
45,771

 
10,093

 
55,864

Middle East and Africa
87,344

 
22,875

 
110,219

Asia Pacific
124,206

 
83,189

 
207,395

Europe
146,908

 
65,246

 
212,154

 
$
673,966

 
$
316,118

 
$
990,084

 
 
 
 
 
 
 
Three Months Ended June 30, 2018
 
FPD
 
FCD
 
Total
North America(1)
$
264,250

 
$
133,564

 
$
397,814

Latin America(1)
43,674

 
5,319

 
48,993

Middle East and Africa
83,813

 
32,986

 
116,799

Asia Pacific
138,580

 
76,390

 
214,970

Europe
137,152

 
57,401

 
194,553

 
$
667,469

 
$
305,660

 
$
973,129


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Six Months Ended June 30, 2019
(Amounts in thousands)
FPD
 
FCD
 
Total
North America (1)
$
517,506

 
$
269,874

 
$
787,380

Latin America(1)
83,373

 
15,893

 
99,266

Middle East and Africa
161,710

 
45,763

 
207,473

Asia Pacific
238,154

 
140,401

 
378,555

Europe
281,982

 
125,479

 
407,461

 
$
1,282,725

 
$
597,410

 
$
1,880,135

 
 
 
 
 
 
 
Six Months Ended June 30, 2018
 
FPD
 
FCD
 
Total
North America (1)
$
523,429

 
$
258,279

 
$
781,708

Latin America(1)
85,137

 
10,991

 
96,128

Middle East and Africa
169,836

 
66,045

 
235,881

Asia Pacific
266,695

 
132,573

 
399,268

Europe
266,412

 
113,686

 
380,098

 
$
1,311,509

 
$
581,574

 
$
1,893,083

_____________________________________
(1) North America represents United States and Canada; Latin America includes Mexico.
On June 30, 2019, the aggregate transaction price allocated to unsatisfied (or partially unsatisfied) performance obligations was approximately $487 million. We estimate recognition of approximately $275 million of this amount as revenue in the remainder of 2019 and an additional $212 million in 2020 and thereafter.
Revenue recognized for performance obligations satisfied (or partially satisfied) in prior periods for the six months ended June 30, 2019 and 2018 was not material.
Contract Balances
We receive payment from customers based on a contractual billing schedule and specific performance requirements as established in our contracts. We record billings as accounts receivable when an unconditional right to consideration exists. A contract asset represents revenue recognized in advance of our right to receive payment under the terms of a contract. A contract liability represents our right to receive payment in advance of revenue recognized for a contract.
The following table presents beginning and ending balances of contract assets and contract liabilities, current and long-term, for the six months ended June 30, 2019:
(Amounts in thousands)
Contract Assets, net (Current)
 
Long-term Contract Assets, net(1)
 
Contract Liabilities (Current)
 
Long-term Contract Liabilities(2)
Beginning balance, January 1, 2019
$
228,579

 
10,967

 
$
202,458

 
$
1,370

Revenue recognized that was included in contract liabilities at the beginning of the period

 

 
(108,769
)
 

Increase due to revenue recognized in the period in excess of billings
361,384

 

 

 

Increase due to billings arising during the period in excess of revenue recognized

 

 
119,726

 

Amounts transferred from contract assets to receivables
(372,398
)
 
(2,444
)
 

 

Currency effects and other, net
(2,125
)
 
45

 
(3,726
)
 
(360
)
Ending balance, June 30, 2019
$
215,440

 
$
8,568

 
$
209,689

 
$
1,010

_____________________________________
(1) Included in other assets, net.
(2) Included in retirement obligations and other liabilities.


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3.
Dispositions
FPD Business Divestiture
On June 29, 2018, pursuant to a plan of sale approved by management, we executed an agreement to divest two FPD locations and associated product lines, including the related assets and liabilities.  This transaction did not meet the criteria for classification of assets held for sale as of June 30, 2018 due to a contingency that could have potentially impacted the final terms and/or timing of the divestiture. The sale transaction was completed on August 9, 2018. During the twelve months ended December 31, 2018, we recorded a pre-tax charge of $25.1 million, including a pre-tax charge of $17.4 million in the second quarter of 2018 and a loss on sale of the business of $7.7 million in the third quarter of 2018. The second quarter of 2018 pre-tax charge related to write-downs of inventory and long-lived assets to their estimated fair value, of which $7.7 million was recorded in cost of sales ("COS") and $9.7 million was recorded in selling, general and administrative ("SG&A").  The third quarter of 2018 pre-tax charge primarily related to working capital changes since the second quarter of 2018 and net cash transferred at the closing date of $3.7 million. The sale included a manufacturing facility in Germany and a related assembly facility in France. In 2017, net sales related to the business totaled approximately $42 million, although the business produced an operating loss in each of the previous two fiscal years.

4.
Leases
We adopted the New Lease Standard effective January 1, 2019 utilizing the modified retrospective approach and have elected an initial application date of January 1, 2019. Adoption of the New Lease Standard resulted in an increase to total assets and liabilities due to the recording of lease ROU assets and lease liabilities of approximately $210 million as of January 1, 2019. Our adoption of the New Lease Standard included modification of certain accounting policies and practices, business processes, systems and controls in order to support compliance with the requirements.
We elected the package of three practical expedients for transition, which include the carry forward of our leases without reassessing whether any contracts are leases or contain leases, lease classification and initial direct costs. We elected the transition practical expedient to apply hindsight when determining the lease term and when assessing impairment of ROU assets at the adoption date, which allows us to update our assessments according to new information and changes in facts and circumstances that have occurred since lease inception. We have certain land easements that have historically been accounted for as finite-lived intangible assets.  We elected the practical expedient related to land easements, allowing us to carry forward our accounting treatment for land easements on existing agreements as intangible assets.  Any new or modified land easements will be accounted for as leases under the New Lease Standard.
Presentation of Leases
We have operating and finance leases for certain manufacturing facilities, offices, service and quick response centers, machinery, equipment and automobiles. Our leases have remaining lease terms of up to 34 years. The terms and conditions of our leases may include options to extend or terminate the lease which are considered and included in the lease term when these options are reasonably certain of exercise.
We determine if a contract is (or contains) a lease at inception by evaluating whether the contract conveys the right to control the use of an identified asset. For all classes of leased assets, we have elected the practical expedient to account for any non-lease components in the contract together with the related lease component in the same unit of account. For lease contracts containing more than one lease component, we allocate the contract consideration to each of the lease components on the basis of relative standalone prices in order to identify the lease payments for each lease component.
ROU assets and lease liabilities are recognized in our condensed consolidated balance sheets at the commencement date based on the present value of remaining lease payments over the lease term. Additionally, ROU assets include any lease payments made at or before the commencement date, as well as any initial direct costs incurred, and are reduced by any lease incentives received. As most of our operating leases do not provide an implicit rate, we apply our incremental borrowing rate to determine the present value of remaining lease payments. Our incremental borrowing rate is determined based on information available at the commencement date of the lease.
Operating leases are included in operating lease right-of-use assets, net and operating lease liabilities in our condensed consolidated balance sheets. Finance leases are included in property plant and equipment, debt due within one year and long-term debt due after one year in our condensed consolidated balance sheets.
For all classes of leased assets, we have applied an accounting policy election to exclude short-term leases from recognition in our condensed consolidated balance sheets. A short-term lease has a lease term of 12 months or less at the commencement date and does not include a purchase option that is reasonably certain of exercise. We recognize short-term lease expense in our condensed consolidated income statements on a straight-line basis over the lease term. Our short-term lease expense and short-term lease commitments as of June 30, 2019 are immaterial.

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We have certain lease contracts with terms and conditions that provide for variability in the payment amount based on changes in facts or circumstances occurring after the commencement date. These variable lease payments are recognized in our condensed consolidated income statements as the obligation is incurred.
We have certain lease contracts where we provide a guarantee to the lessor that the value of an underlying asset will be at least a specified amount at the end of the lease. Estimated amounts expected to be paid for residual value guarantees are included in lease liabilities and ROU assets.
As of June 30, 2019, we had $37.7 million of legally binding minimum lease payments for operating leases signed but not yet commenced. We did not have material subleases, leases that imposed significant restrictions or covenants, material related party leases or sale-leaseback arrangements.

Other information related to our leases is as follows:
 
 
 
June 30,
(Amounts in thousands)
 
 
2019
Operating Leases:
 
 
 
ROU assets recorded under operating leases
 
 
$
208,534

Accumulated amortization associated with operating leases
 
 
(18,568
)
Total operating leases ROU assets, net
 
 
$
189,966

 
 
 
 
Liabilities recorded under operating leases (current)
 
 
$
36,272

Liabilities recorded under operating leases (non-current)
 
 
153,401

Total operating leases liabilities
 
 
$
189,673

 
 
 
 
Finance Leases: 
 
 
 
ROU assets recorded under finance leases
 
 
$
18,017

Accumulated depreciation associated with finance leases
 
 
(8,469
)
Total finance leases ROU assets, net(1)
 
 
$
9,548

 
 
 
 
Total finance leases liabilities(2)
 
 
$
9,671

 
 
 
 
        The costs components of operating and finance leases are as follows:
(Amounts in thousands)
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2019
Operating Lease Costs:
 
 
 
Fixed lease expense(3)
$
14,797

 
$
30,006

Variable lease expense(3)
1,306

 
2,880

Total operating lease expense
$
16,103

 
$
32,886

 
 
 
 
Finance Lease Costs:
 
 
 
Depreciation of finance lease ROU assets(3)
$
1,130

 
$
2,287

Interest on lease liabilities(4)
73

 
151

Total finance lease expense
$
1,203

 
$
2,438

_____________________
(1) Included in property plant and equipment, net
(2) Included in debt due within one year and long-term debt due after one year, accordingly
(3) Included in cost of sales and selling, general and administrative expense, accordingly
(4) Included in interest expense






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Supplemental cash flows information as of and for the six months ended June 30, 2019:
(Amounts in thousands, except lease term and discount rate)
 
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash flows from operating leases(1)
$
26,448

Financing cash flows from finance leases(2)
2,297

ROU assets obtained in exchange for lease obligations:
 
Operating leases
$
11,983

Finance leases
6,006

Weighted average remaining lease term (in years)
 
Operating leases
9 years

Finance leases
3 years

Weighted average discount rate (percent)
 
Operating leases
4.5
%
Finance leases
3.8
%
_____________________
(1) Included in our condensed consolidated statement of cash flows, operating activities, prepaid expenses and other assets, net and retirement obligations and other
(2) Included in our condensed consolidated statement of cash flows, financing activities, payments under other financing arrangements
 

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Future undiscounted lease payments under operating and finance leases as of June 30, 2019 were as follows (amounts in thousands):
Year ending December 31,
Operating
Leases
 
Finance Leases
2019 (excluding the six months ended June 30, 2019)
$
21,528

 
$
2,461

2020
38,288

 
4,201

2021
29,341

 
2,689

2022
24,355

 
1,243

2023
20,827

 
295

Thereafter
108,196

 
23

Total future minimum lease payments
$
242,535

 
$
10,912

Less: Imputed interest
(52,862
)
 
(1,241
)
Total
$
189,673

 
$
9,671

 
 
 
 
Other current liabilities
$
36,272

 
$

Operating lease liabilities
153,401

 

Debt due within one year

 
4,425

Long-term debt due after one year

 
5,246

Total
$
189,673

 
$
9,671

 
 
 
 
The future minimum lease payments as of December 31, 2018 were as follows (amounts in thousands):
Year ending December 31,
 
 
 
2019
 
 
$
68,443

2020
 
 
49,874

2021
 
 
38,446

2022
 
 
28,496

2023
 
 
21,473

Thereafter
 
 
66,518

Total future minimum lease payments
 
 
$
273,250



5.
Stock-Based Compensation Plans
We maintain the Flowserve Corporation Equity and Incentive Compensation Plan (the "2010 Plan"), which is a shareholder-approved plan authorizing the issuance of up to 8,700,000 shares of our common stock in the form of restricted shares, restricted share units and performance-based units (collectively referred to as "Restricted Shares"), incentive stock options, non-statutory stock options, stock appreciation rights and bonus stock. Of the 8,700,000 shares of common stock authorized under the 2010 Plan, 1,526,953 were available for issuance as of June 30, 2019. In 2016, the long-term incentive program was amended to allow Restricted Shares granted after January 1, 2016 to employees who retire and have achieved at least 55 years of age and 10 years of service to continue to vest over the original vesting period ("55/10 Provision"). As of June 30, 2019, 114,943 stock options were outstanding, with a grant date fair value of $2.0 million, which is expected to be recognized over a weighted-average period of approximately one year. No stock options were granted during the six months ended June 30, 2019 and 2018. No stock options vested during the six months ended June 30, 2019 and 2018.
 Restricted Shares – Awards of Restricted Shares are valued at the closing market price of our common stock on the date of grant. The unearned compensation is amortized to compensation expense over the vesting period of the restricted shares, except for awards related to the 55/10 Provision which are expensed in the period granted. We had unearned compensation of $38.9 million and $24.3 million at June 30, 2019 and December 31, 2018, respectively, which is expected to be recognized over a weighted-average period of approximately one year. These amounts will be recognized into net earnings in prospective periods as the awards vest. The total fair value of Restricted Shares vested during the three months ended June 30, 2019 and 2018 was $2.4 million and $3.2 million, respectively. The total fair value of Restricted Shares vested during the six months ended June 30, 2019 and 2018 was $16.3 million and $13.9 million, respectively.


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We recorded stock-based compensation expense of $5.9 million ($7.7 million pre-tax) and $3.4 million ($4.4 million pre-tax) for the three months ended June 30, 2019 and 2018, respectively. We recorded stock-based compensation expense of $11.9 million ($15.3 million pre-tax) and $6.5 million ($8.4 million pre-tax) for the six months ended June 30, 2019 and 2018, respectively. Performance-based shares granted in 2016 did not fully vest due to the unachievement of certain performance targets, resulting in 115,302 forfeited shares and a $4.5 million reduction of stock-based compensation expense for the six months ended June 30, 2019. Performance-based shares granted in 2015 did not vest due to performance targets not being achieved, resulting in 100,033 forfeited shares and a $5.4 million reduction of stock-based compensation expense for the six months ended June 30, 2018.
The following table summarizes information regarding Restricted Shares:
 
Six Months Ended June 30, 2019
 
Shares
 
Weighted Average
Grant-Date Fair
Value
Number of unvested shares:
 
 
 
Outstanding - January 1, 2019
1,530,214

 
$
45.06

Granted
763,062

 
47.03

Vested
(380,435
)
 
42.73

Forfeited
(153,710
)
 
40.84

Outstanding as of June 30, 2019
1,759,131

 
$
46.79



Unvested Restricted Shares outstanding as of June 30, 2019 included approximately 678,000 units with performance-based vesting provisions. Performance-based units are issuable in common stock and vest upon the achievement of pre-defined performance targets. Performance-based units have performance targets based on our average return on invested capital and our total shareholder return ("TSR") over a three-year period. Most unvested units were granted in three annual grants since January 1, 2017 and have a vesting percentage between 0% and 200% depending on the achievement of the specific performance targets. Except for shares granted under the 55/10 Provision, compensation expense is recognized ratably over a cliff-vesting period of 36 months, based on the fair value of our common stock on the date of grant, as adjusted for actual forfeitures. During the performance period, earned and unearned compensation expense is adjusted based on changes in the expected achievement of the performance targets for all performance-based units granted except for the TSR-based units. Vesting provisions range from 0 to approximately 1,356,000 shares based on performance targets. As of June 30, 2019, we estimate vesting of approximately 678,000 shares based on expected achievement of performance targets.

6.
Derivative Instruments and Hedges
Our risk management and foreign currency derivatives and hedging policy specifies the conditions under which we may enter into derivative contracts. See Notes 1 and 7 to our consolidated financial statements included in our 2018 Annual Report and Note 8 of this Quarterly Report for additional information on our derivatives. We enter into foreign exchange forward contracts to hedge our cash flow risks associated with transactions denominated in currencies other than the local currency of the operation engaging in the transaction.
Foreign exchange contracts with third parties had a notional value of $