Business Context and Reporting Period
Company: Flowserve Corporation
Filing Type: Form 8-K (Current Report)
Date of Report: November 5, 2020
Reporting Period: Third quarter ended September 30, 2020
This filing announces the Company's third-quarter financial results and discloses revisions to previously reported financial information due to the correction of immaterial accounting errors related to asbestos claims.
Key Financial Metrics and Adjustments
The filing does not provide specific revenue, profit, or cash flow figures for the third quarter; these are contained in the attached press release (Exhibit 99.1). However, the filing details significant balance sheet adjustments resulting from the correction of accounting errors regarding unasserted asbestos claims:
- Liabilities: Increased by approximately $66 million due to the recognition of an incurred but not reported (IBNR) liability for unasserted asbestos claims.
- Total Assets: Increased by approximately $23 million, primarily related to adjustments in estimated asbestos receivables for expected insurance proceeds.
- Retained Earnings: Decreased by approximately $43 million as of June 30, 2020.
Material Changes and Accounting Corrections
The Company identified and corrected accounting errors related to the recognition of liabilities for unasserted asbestos claims and associated receivables for insurance proceeds. These errors span periods from the fiscal year ended December 31, 2014, through the second quarter of 2020.
- Historical Treatment: The Company previously recognized liabilities for known asbestos claims but did not recognize an IBNR liability for unasserted claims.
- Correction Basis: A third-party actuarial consultant reviewed the asbestos liability, leading to the recognition of the IBNR liability and adjustments to receivables and legal fees.
- Materiality Assessment: The errors are deemed immaterial to any prior annual or interim periods individually or in the aggregate. However, the aggregate amount would have been material to the current interim condensed consolidated statements of income and anticipated full-year results.
- Reporting Impact: The Company is prospectively revising previously issued financial information. The impact will be reflected in future filings, including the upcoming Form 10-Q for the third quarter.
Guidance, Outlook, and Risks
Management Commentary: The Company will hold an earnings presentation on November 6, 2020, to discuss financial and operating results. The presentation is available on the Company's website under the "Investor Relations" section.
Risks and Contingencies: The primary risk disclosed relates to the legacy asbestos liability. The Company has historically faced asbestos claims and has insurance coverage for certain product lines. The correction of the IBNR liability indicates a reassessment of the total exposure and the recoverability of insurance proceeds.
Unusual Items: The revision of financial statements due to the asbestos accounting error is the primary unusual item in this filing.
Investor Verification Checklist
- Review the attached press release (Exhibit 99.1) for specific third-quarter revenue, earnings, and cash flow figures.
- Examine the supplemental revised historical information (Exhibit 99.2) for detailed impacts on prior period financial statements.
- Monitor the upcoming Form 10-Q filing for the third quarter ended September 30, 2020, to see the finalized revised financial statements.
- Assess the Company's updated outlook for full-year results in light of the $43 million reduction in retained earnings and the prospective nature of the revisions.
- Verify the status of insurance recoveries related to the asbestos claims and the adequacy of the newly recognized IBNR liability.