<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-Q
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
----------------------------------
For Quarter Ended September 30, 1998 Commission File Number 1-13179
FLOWSERVE CORPORATION
(Exact name of Registrant as specified in its charter)
New York
--------
(State or other jurisdiction of incorporation or organization)
31-0267900
----------
(I.R.S. Employer Identification Number)
222 W. Las Colinas Blvd., Suite 1500, Irving, Texas 75039
- --------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (972) 443-6500
-------------
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 X NO
----- -----
Shares of Common Stock, $1.25 par value,
outstanding as of September 30, 1998 38,416,868
<PAGE> 2
PART I: Financial Information
2
<PAGE> 3
FLOWSERVE CORPORATION
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
For the quarter ended September 30
(Amounts in thousands, except per share data) 1998 1997
------------ ------------
<S> <C> <C>
Net sales $ 264,776 $ 281,805
Cost of sales 165,196 174,395
------------ ------------
Gross profit 99,580 107,410
Selling and administrative expense 63,077 71,460
Research, engineering and development expense 6,431 6,520
Merger transaction expense -- 10,200
Merger integration expense 4,154 --
------------ ------------
Operating income 25,918 19,230
Interest expense 3,141 2,697
Other income (173) (435)
------------ ------------
Earnings before income taxes 22,950 16,968
Provision for income taxes 8,033 9,918
------------ ------------
Earnings before cumulative effect of
accounting change 14,917 7,050
------------ ------------
Cumulative effect of accounting change (1,220) --
------------ ------------
Net earnings $ 16,137 $ 7,050
============ ============
Earnings per share (diluted and basic):
Before cumulative effect of accounting change $ 0.37 $ 0.17
Cumulative effect of accounting change 0.03 --
------------ ------------
Earnings per share $ 0.40 $ 0.17
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
FLOWSERVE CORPORATION
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Year to date September 30
(Amounts in thousands, except per share data) 1998 1997
------------ ------------
<S> <C> <C>
Net sales $ 803,821 $ 844,974
Cost of sales 497,051 512,205
------------ ------------
Gross profit 306,770 332,769
Selling and administrative expense 194,623 214,369
Research, engineering and development expense 18,870 19,549
Merger transaction expense -- 10,200
Merger integration expense 23,705 --
------------ ------------
Operating income 69,572 88,651
Interest expense 9,844 9,612
Other income (2,545) (4,034)
------------ ------------
Earnings before income taxes 62,273 83,073
Provision for income taxes 21,796 34,343
------------ ------------
Earnings before cumulative effect of
accounting change 40,477 48,730
Cumulative effect of accounting change (1,220) --
------------ ------------
Net earnings $ 41,697 $ 48,730
============ ============
Earnings per share (diluted and basic):
Before cumulative effect of accounting change $ 1.00 $ 1.19
Cumulative effect of accounting change 0.03 --
------------ ------------
Earnings per share $ 1.03 $ 1.19
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
FLOWSERVE CORPORATION
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, 1998 December 31
(Amounts in thousands) (Unaudited) 1997
------------ ------------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 20,809 $ 58,602
Accounts receivable, net 230,912 234,437
Inventories 204,675 184,944
Prepaids and other current assets 35,361 36,681
------------ ------------
Total current assets 491,757 514,664
Property, plant and equipment, net 205,060 209,509
Intangible assets, net 87,696 79,748
Other assets 77,715 76,104
------------ ------------
Total assets $ 862,228 $ 880,025
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
FLOWSERVE CORPORATION
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, 1998 December 31
(Amounts in thousands, except per share data) (Unaudited) 1997
---------- ----------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 66,461 $ 68,241
Notes payable 6,959 5,644
Income taxes 15,111 15,548
Accrued liabilities 108,157 128,802
Long-term debt due within one year 11,207 12,209
---------- ----------
Total current liabilities 207,895 230,444
Long-term debt due after one year 189,382 128,936
Postretirement benefits and deferred items 114,974 125,372
Shareholders' equity:
Serial preferred stock, $1.00 par value,
no shares issued -- --
Common stock, $1.25 par value, 51,856 51,856
41,484 shares issued and 38,417 shares outstanding at September 30, 1998 and
41,484 shares issued and outstanding December 31, 1997
Capital in excess of par value 70,472 70,895
Retained earnings 351,452 326,681
---------- ----------
473,780 449,432
Treasury stock at cost, 3,067 shares at September 30, 1998 and (82,910) (23,145)
881 shares at December 31, 1997, respectively
Accumulated other comprehensive income (39,980) (29,746)
Other equity adjustments (913) (1,268)
---------- ----------
Total shareholders' equity 349,977 395,273
---------- ----------
Total liabilities and shareholders' equity $ 862,228 $ 880,025
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
FLOWSERVE CORPORATION
Consolidated Statements of Shareholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Accumulated Total
Capital in other Other share-
Common excess of Retained Treasury comprehensive equity holders'
(Amounts in thousands) stock par value earnings stock income adjustments equity
--------- --------- --------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ 51,854 $ 72,628 $ 298,563 $ (27,455) $ (5,744) $ (1,222) $ 388,624
Net earnings -- -- 48,730 -- -- -- 48,730
Cash dividends ($0.14 per share) -- -- (17,765) -- -- -- (17,765)
Foreign currency translation adjustment -- -- -- -- (19,219) -- (19,219)
Stock activity under stock plans 2 (1,275) -- 3,632 -- (53) 2,306
--------- --------- --------- --------- --------- --------- ---------
Balance at September 30, 1997 $ 51,856 $ 71,353 $ 329,528 $ (23,823) $ (24,963) $ (1,275) $ 402,676
========= ========= ========= ========= ========= ========= =========
Balance at December 31, 1997 $ 51,856 $ 70,895 $ 326,681 $ (23,145) $ (29,746) $ (1,268) $ 395,273
Net earnings -- -- 41,697 -- -- -- 41,697
Cash dividends ($0.14 per share) -- -- (16,926) -- -- -- (16,926)
Foreign currency translation adjustment -- -- -- -- (10,234) -- (10,234)
Treasury stock repurchases (2,368 shares) -- -- -- (56,486) -- -- (56,486)
Stock activity under stock plans -- (423) -- 4,253 -- 355 4,185
Effect of change in accounting for Rabbi Trusts -- -- -- (7,532) -- -- (7,532)
--------- --------- --------- --------- --------- --------- ---------
Balance at September 30, 1998 $ 51,856 $ 70,472 $ 351,452 $ (82,910) $ (39,980) $ (913) $ 349,977
========= ========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE> 8
FLOWSERVE CORPORATION
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the nine months ended September 30
(Amounts in thousands) 1998 1997
------------ ------------
<S> <C> <C>
Operating activities:
Net earnings $ 41,697 $ 48,730
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization 26,181 27,970
Loss on the sale of fixed assets 13 30
Cumulative effect of accounting change (1,220) --
Change in assets and liabilities, net of effects of acquisitions:
Accounts receivable 5,185 (5,616)
Inventories (20,957) (28,496)
Prepaid expenses and other assets (1,439) (13,282)
Accounts payable and accrued liabilities (24,099) 19,286
Income taxes 564 (1,388)
Postretirement benefits and deferred items (11,178) 1,748
Other 624 (1,087)
------------ ------------
Net cash flows from operating activities 15,371 47,895
Investing activities:
Capital expenditures, net of disposals (23,747) (28,979)
Payment for acquisitions, net of cash acquired (12,677) (9,000)
Other 487 171
------------ ------------
Net cash flows used by investing activities (35,937) (37,808)
Financing activities:
Net borrowings under lines of credit 1,564 1,010
Payments on long-term debt (10,543) (36,476)
Proceeds from long-term debt 67,557 38,833
Treasury share purchases (56,486) --
Proceeds from stock activity (1,787) 2,306
Dividends paid (16,926) (20,435)
Other -- (170)
------------ ------------
Net cash flows used by financing activities (16,621) (14,932)
Effect of exchange rate changes (606) (1,947)
------------ ------------
Net change in cash and cash equivalents (37,793) (6,792)
Cash and cash equivalents at beginning of year 58,602 38,932
------------ ------------
Cash and cash equivalents at end of period $ 20,809 $ 32,140
============ ============
Taxes paid $ 22,232 $ 26,914
Interest paid $ 7,501 $ 8,344
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE> 9
FLOWSERVE CORPORATION
Notes to Consolidated Financial Statements
(unaudited)
1. Overview
Flowserve Corporation (the Company or Flowserve) was created on July
22, 1997, through a merger of equals between BW/IP, Inc. and Durco
International Inc. accounted for under "pooling of interests"
accounting. Accordingly, all historical information has been restated
giving effect to the transaction as if the two companies had been
combined at the beginning of all periods presented. In addition,
certain other historical information has been reclassified for
consistency with the 1998 presentation.
2. Accounting Policies - Basis of Presentation
The accompanying consolidated balance sheet as of September 30, 1998,
and the related consolidated statements of income and cash flows for
the three months and the nine months ended September 30, 1998 and 1997,
are unaudited. In management's opinion, all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation of such
financial statements have been made. The accompanying consolidated
financial statements and notes in this Form 10-Q are presented as
permitted by Regulation S-X and do not contain certain information
included in the Company's annual financial statements and notes to the
financial statements. Accordingly, the accompanying consolidated
financial information should be read in conjunction with the Company's
1997 Annual Report. Interim results are not necessarily indicative of
results to be expected for a full year.
3. Inventories
Inventories are stated at the lower of cost or market. Cost is
determined for certain inventories by the last-in, first-out (LIFO)
method and for other inventories by the first-in, first-out (FIFO)
method.
9
<PAGE> 10
The amount of inventories and the method of determining costs for the
quarter ended September 30, 1998 and the year ended December 31, 1997
were as follows:
<TABLE>
<CAPTION>
September 30 December 31
(Dollars in millions) 1998 1997
---------- ----------
<S> <C> <C>
Raw materials $ 25.8 $ 18.1
Work in process and finished goods 230.6 216.4
Less: Progress billings (11.6) (10.9)
---------- ----------
244.8 223.6
LIFO reserve 40.1 38.6
---------- ----------
Net inventory $ 204.7 $ 185.0
========== ==========
Percent of inventory accounted for by LIFO 44% 43%
Percent of inventory accounted for by FIFO 56% 57%
</TABLE>
4. Earnings per share
The Company's potentially dilutive common stock equivalents were
immaterial as of September 30, 1998 and all previous periods.
Accordingly, diluted earnings per share are equal to basic earnings per
share for all periods presented. Earnings per share for the nine months
ended September 30, 1998 and 1997 were based on average common shares
and common share equivalents outstanding of 40,497 and 40,873,
respectively.
5. Impact of Recently Issued Accounting Standards
In 1997, the Financial Accounting Standards Board issued SFAS No. 130
"Reporting Comprehensive Income", SFAS No. 131 "Disclosures About
Segments of an Enterprise and Related Information", and SFAS No.132
"Employer's Disclosure About Pensions and Other Post Retirement
Benefits". All three standards are effective for fiscal years beginning
after December 15, 1997. These standards modify or expand current
disclosure requirements and, accordingly, are not expected to impact
the Company's reported financial position, results of operations, or
cash flows.
The Company adopted SFAS No. 130 "Reporting Comprehensive Income."
Comprehensive income is defined as the change in equity of a business
during a period from transactions and other events and circumstances
from non-owner sources. Under SFAS 130, the term "comprehensive income"
is used to describe the total of net earnings plus other comprehensive
income which, for the Company, includes foreign currency translation.
SFAS 130 does not impact the calculation of net earnings or earnings
per share nor does it impact reported assets, liabilities or total
shareholders' equity. It does impact the presentation of the components
of shareholders' equity within the balance sheet and the presentation
of the components of comprehensive income. During the three months
ended
10
<PAGE> 11
September 30, 1998 and 1997, total comprehensive income (comprised of
reported net income less foreign currency translation adjustments) was
$11.9 million and $5.8 million, respectively. For the nine months ended
September 30, 1998 and 1997, total comprehensive income was $31.5
million and $29.5 million, respectively.
The Company adopted the provisions of EITF No. 97-14 "Accounting for
Deferred Compensation Arrangements Where Amounts Earned are Held in a
Rabbi Trust and Invested" at September 30, 1998. This standard
established new guidelines for deferred compensation arrangements where
amounts earned by an employee are invested in the employer's stock that
is placed in a Rabbi Trust. The EITF requires that the Company's stock
held in the trust be recorded at historical cost, the corresponding
deferred compensation liability recorded at the current fair value of
the Company's stock, and the stock held in the Rabbi Trust classified
as treasury stock. The difference between the historical cost of the
stock and the fair value of the liability at September 30, 1998 has
been recorded as a cumulative effect of a change in accounting
principle of $1.2 million, net of tax. Prior year financial statements
have not been restated to reflect the change in accounting principle.
The effect of the change on 1997 year-to-date income before the
cumulative effect was a reduction of $0.5 million.
The Company is assessing the impact of SFAS No. 131 and SFAS No. 132 on
its disclosure requirements.
6. Merger Integration Program
In the fourth quarter of 1997, the Company announced its merger
integration program. This $92.4 million program includes investments of
approximately $22.2 million for capital expenditures and approximately
$70.2 million for integration expenses. Of this $70.2 million, $32.6
million was recognized as a one-time restructuring charge in the fourth
quarter of 1997. The balance is being recognized as incurred over the
three-year life of the program.
In July 1998, the Company's Board of Directors approved an $18 million
expenditure for the first phase of a global business process
improvement initiative. This initiative has costs and benefits
incremental to the on-going merger integration program. The total
incremental cost of the business process improvement initiative is
expected to approximate $120 million over a three-year period.
Approximately half of the costs associated with this initiative are
expected to be capitalized with the balance separately identified as
merger integration expense.
The Company incurred $4.2 million for merger integration expenses in
the third quarter of 1998 and the Company has incurred $30.7 million
for merger integration expense since the inception of the program.
Merger integration expense in the third quarter included costs for
closing the San Jose, California and Charleroi, Belgium pump plants,
continued consolidations in the business units, as well as
approximately $1.2 million in costs for the business process
improvement initiative. The integration program is expected to result
in a net reduction of approximately 300 employees at a cost of $22.4
million. In addition, exit costs associated
11
<PAGE> 12
with the facilities closings are estimated at $10.2 million. The
integration program is expected to be funded through operating cash
flows and available credit facilities.
In the third quarter ended September 30, 1998, severance costs of $5.0
million and exit costs of $4.0 million were paid and recorded against
the restructure accrual established in 1997. The remainder of the costs
are expected to be incurred over the life of the program.
<TABLE>
<CAPTION>
OTHER
Restructure Accrual (amounts in millions) SEVERANCE EXIT COSTS TOTAL
----------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Balance at October 27, 1997 $ 22.4 $ 10.2 $ 32.6
Cash expenditures (3.4) (.5) (3.9)
Non-cash expenditures -- (1.2) (1.2)
---------- ---------- ----------
Balance at December 31, 1997 $ 19.0 $ 8.5 $ 27.5
Cash expenditures (2.3) (0.4) (2.7)
Non-cash expenditures -- -- --
---------- ---------- ----------
Balance at March 31, 1998 $ 16.7 $ 8.1 $ 24.8
Cash expenditures (6.6) (0.8) (7.4)
Non-cash expenditures -- (0.7) (0.7)
---------- ---------- ----------
Balance at June 30, 1998 $ 10.1 $ 6.6 $ 16.7
Cash expenditures (5.0) (0.6) (5.6)
Non-cash expenditures -- (3.4) (3.4)
---------- ---------- ----------
Balance at September 30, 1998 $ 5.1 $ 2.6 $ 7.7
========== ========== ==========
</TABLE>
7. Share Repurchase Program
During the second quarter of 1998, the Company initiated a $100 million
share repurchase program and as of September 30, 1998 had spent
approximately $56.5 million to repurchase approximately 2.4 million, or
5%, of its outstanding shares. The purchases were funded through
operating cash flows and available credit facilities. The timing of
future repurchases depends on market conditions, the market price of
Flowserve's common stock, and management's assessment of the Company's
liquidity and cash flow needs.
8. Acquisitions
In July 1998, the Company completed the acquisition of certain assets
and liabilities of the Valtek Engineering Division of Allen Power
Engineering, Limited, from Rolls Royce plc. The Valtek Engineering
Division was the British licensee for many of Flowserve's control valve
products, with exclusive territorial rights for portions of Europe, the
Middle
12
<PAGE> 13
East and Africa since 1971. This business produced sales of
approximately $20 million in 1997.
In September 1998, the Company acquired the remaining 49% ownership
interest in Durametallic Asia Pte. Ltd., a fluid sealing manufacturer
located in Singapore, from its joint-venture partner, the Sanmar Group.
Flowserve, which now owns 100% of Durametallic Asia, previously had a
51% interest in this joint venture. The results of this business are
expected to have an immaterial impact on the consolidated financial
results of the Company.
9. Subsequent Events
On October 22, 1998, the Company announced that Flowserve President and
Chief Operating Officer, William M. Jordan, is leaving the Company,
effective October 31, 1998. The company expects to record a one-time
charge in the fourth quarter, relating to the employment agreement
between Mr. Jordan and the Company.
---------------------------------------------
13
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS
OVERVIEW
Flowserve Corporation (the Company or Flowserve) was created on July 22,
1997, through a merger of equals between BW/IP, Inc. and Durco
International Inc. accounted for under "pooling of interests" accounting.
Accordingly, all historical information has been restated giving effect to
the transaction as if the two companies had been combined at the beginning
of all periods presented. In addition, certain other historical information
has been reclassified for consistency with the 1998 presentation.
Flowserve produces engineered pumps for the process industries, precision
mechanical seals, manual and automated quarter-turn valves, control valves
and valve actuators, and provides a range of related flow management
services to a diverse customer base worldwide. Equipment manufactured and
serviced by the Company is used in industries that utilize difficult to
handle and often corrosive fluids in environments with extreme temperature,
pressure, horsepower and speed. Flowserve's businesses are affected by
economic conditions in the U.S. and other countries where its products are
sold and serviced, and by the relationship of the U.S. dollar to other
currencies, and demand and pricing for customers' products. The impact of
these conditions is mitigated to some degree by the strength and diversity
of Flowserve's product lines and geographic coverage.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1998
Net sales for the three months ended September 30, 1998 were $264.8
million, compared with net sales of $281.8 million for the same period in
1997. Low oil prices, a downturn in chemical markets, and the Asian
economic crisis have negatively impacted sales throughout the year. In
addition, several other negative factors impacted third quarter sales.
Sales decreased in the Fluid Sealing Division due to softening in chemical
customer demand, weaker distributor input, and lower original equipment
manufacturer (OEM) activity. Weakness in the Latin America market also
appeared for the first time in the third quarter. The remainder of the
decrease in sales was due primarily to low petroleum industry spending
caused by lower oil prices and continued effects of the Asian economic
crisis that has delayed major projects and reduced worldwide chemical
market activity. Net sales to international customers, including export
sales from the U.S., were approximately 50% for the three months ended
September 30, 1998, and approximately 53% for the three months ended
September 30, 1997.
The gross profit margin was 37.6% for the three months ended September 30,
1998, compared with 38.1% for the same period in 1997. The decrease in the
gross profit margin was due to lower sales of higher profit parts, under
absorption resulting from lower sales volume and continued pricing
pressure, principally in the valve business. Selling and administrative
expenses as a percentage of net sales were 23.8% for the three month period
ended September 30, 1998, compared with 25.4% for the corresponding 1997
period. The reduction in selling and administrative expenses percentage was
due primarily to savings generated by the merger integration program, lower
sales commissions, lower accruals for performance incentives and other cost
control initiatives.
14
<PAGE> 15
Tax savings initiatives undertaken as part of the merger integration
program reduced the effective tax rate to 35% compared with 37% in 1997.
Earnings before special items (merger related expenses and the cumulative
effect of an accounting change) for the third quarter of 1998 were $17.6
million ($0.44 per share) or 2% above the $17.3 million ($0.42 per share)
for the same period in 1997. Net earnings, after special items, were $16.1
million ($0.40 per share) for the three months ended September 30, 1998,
compared with $7.1 million ($0.17 per share) for the same period in 1997.
Net earnings for the third quarter of 1998 included a one-time cumulative
effect of an accounting change that resulted in a benefit of $1.2 million,
net of tax. This cumulative effect of an accounting change resulted from
the required adoption of EITF 97-14 "Accounting for Deferred Compensation
Arrangements Where Amounts Earned are Held in a Rabbi Trust and Invested."
Bookings of $253.8 million in the third quarter of 1998 were below the
$279.6 million recorded in the third quarter of 1997. Lower third quarter
1998 bookings were due to customers' economic uncertainty, weaker markets
for their products, project financing issues, lower activity in chemical
markets and a decrease in Fluid Sealing Business, particularly in Latin
America. Backlog at September 30, 1998 was $312.5 million, compared with
$291.6 million at December 31, 1997.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1998
Net sales for the nine months ended September 30, 1998 were $803.8 million,
compared with net sales of $845.0 million for the same period in 1997. The
sales decline was due to continued effects of the Asian economic crisis
that has delayed major projects and reduced worldwide chemical market
activity, lower petroleum industry spending related to lower oil prices, a
slowdown in the Latin America region, and unfavorable currency translation
rates. Net sales to international customers, including export sales from
the U.S., were 50% for the nine months ended September 30, 1998 and 51% for
the nine months ended September 30, 1997.
The gross profit margin was 38.2% for the nine months ended September 30,
1998, compared with 39.4% for the same period in 1997. The decrease in the
gross profit margin was due primarily to lower sales of higher profit
parts, under-absorption at certain locations and continued pricing
pressure, principally in the valve business. Selling and administrative
expenses as a percentage of net sales were 24.2% for the nine month period
ended September 30, 1998, compared with 25.4% for the corresponding period
of 1997. The reduction in the selling and administrative expenses
percentage was due primarily to savings generated by the merger integration
program, lower sales commissions and other cost control initiatives across
all divisions.
Tax savings initiatives undertaken as part of the merger integration
reduced the effective tax rate to 35% compared with 37% in 1997.
Earnings before special items were $55.9 million ($1.38 per share) for the
nine months ended September 30, 1998, compared with $58.9 million ($1.44
per share) for the same period in 1997. Net earnings, after special items
were $41.7 million ($1.03 per share) for the nine months ended
15
<PAGE> 16
September 30, 1998, compared with $48.7 million ($1.19 per share) for the
same period in 1997. Net earnings for the nine months ended September 30,
1998 included a one-time cumulative effect of an accounting change of $1.2
million net of tax, recorded in the third quarter.
Bookings of $815.5 million for the nine months ended September 30, 1998
were about 6% below the $869.6 million for 1997. The decline in bookings
was due to the Asian economic crisis that has delayed several projects and
reduced worldwide chemical market activity, a decline in oil prices that
has resulted in lower petroleum-related capital spending, and a slowdown in
the Latin America region.
MERGER INTEGRATION PROGRAM
In the fourth quarter of 1997, the Company announced its merger integration
program. This $92.4 million program includes investments of approximately
$22.2 million for capital expenditures and approximately $70.2 million for
integration expense. Of the $70.2 million, $32.6 million was recognized as
a one-time restructuring charge in the fourth quarter of 1997. The balance
is being recognized as incurred over the three-year life of the program.
In July 1998, the Company's Board of Directors approved an $18 million
expenditure for the first phase of a global business process improvement
initiative. This initiative has costs and benefits incremental to the
on-going merger integration program. This initiative includes the
standardization of the Company's processes and the implementation of a
global information system to facilitate common practices. The total
incremental cost of the business process improvement initiative is expected
to approximate $120 million over a three-year period. Approximately half of
the costs associated with this initiative are expected to be capitalized
with the balance separately identified as merger integration expense.
The Company incurred $4.2 million for merger integration expenses in the
third quarter 1998 and the Company has incurred $30.7 million for merger
integration expense since the inception of the program. Merger integration
expense in the third quarter included costs for closing the San Jose,
California and Charleroi, Belgium pump plants, continued consolidations in
the business units, as well as approximately $1.2 million in costs for the
business process improvement initiative. The integration program is
expected to result in a net reduction of approximately 300 employees at a
cost of $22.4 million. In addition, exit costs associated with the
facilities closings are estimated at $10.2 million. The integration program
is expected to be funded through operating cash flows and available credit
facilities.
In the third quarter ended September 30, 1998, severance costs of $5.0
million and exit costs of $4.0 million were paid and recorded against the
restructure accrual established in 1997. The remainder of the costs are
expected to be incurred over the life of the program.
The Company believes the merger integration program, excluding the business
process improvement initiative, will produce $45 to $55 million annually in
operating income at the end of three years. This income is expected to be
produced by eliminating cost redundancies, capturing procurement savings,
and realizing earnings increases from sales synergies. The Company realized
pre-tax
16
<PAGE> 17
integration savings of approximately $3.0 million, in the first quarter,
$3.8 million in the second quarter, and $6.0 million in the third quarter.
The Company believes the business process improvement initiative will
generate an additional $40 million in savings and reductions in working
capital of about $100 million in the first full year following completion.
(The foregoing discussion contains forward-looking information. See
cautionary statement at the end of the Management's Discussion and Analysis
section.)
CAPITAL RESOURCES AND LIQUIDITY
During the third quarter, the Company was able to finance short and
long-range business objectives through operating cash flows and its credit
facilities. At September 30, 1998, total debt was 37.2% of the Company's
capital structure, compared with 27.1% at December 31, 1997. Based on
annualized 1998 results, the interest coverage ratio of the Company's
indebtedness was 7.5 times interest at September 30, 1998, compared with
7.8 times interest for the twelve months ended December 31, 1997.
Operating cash flows for the first nine months of 1998 were below those in
the comparable 1997 period principally due to the merger integration
program as well as lower operating profits.
The return on average net assets based on annualized results for September
30, 1998, before special items, was 12.7%, compared with 13.7% for December
31, 1997. Including the impact of special items, the annualized return on
average net assets was 9.6% for September 30, 1998, compared with 9.0% for
December 31, 1997. The annualized return on average shareholders' equity,
before special items, was 19.6% at September 30, 1998, compared with 20.4%
for December 31, 1997. Annualized return on average shareholders' equity,
including special items, was 14.6% for September 30, 1998 versus 13.0% for
December 31, 1997.
During the second quarter of 1998, the Company initiated a $100 million
share repurchase program and as of September 30, 1998 had spent
approximately $56.5 million to repurchase approximately 2.4 million, or 5%,
of its outstanding shares. Operating cash flows and available credit
facilities were utilized to fund the repurchases. The timing of future
repurchases depends on market conditions, the market price of Flowserve's
common stock, and management's assessment of the Company's liquidity and
cash flow needs.
YEAR 2000 COSTS
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the
Company's computer systems that have time-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This could
result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business
activities.
The Company has assessed how it may be impacted by the Year 2000 issue and
has formulated and commenced implementation of a comprehensive plan to
address all known aspects of the issue.
17
<PAGE> 18
The Plan
The Company's plan encompasses its information systems, production and
facilities equipment that utilize date/time oriented software or computer
chips, products, vendors and customers. The plan will be carried out in
four phases: 1) assessment and development of a plan; 2) remediation; 3)
testing; and 4) implementation.
The Company's plan includes use of internal staff resources as well as
external consultants. The Company has also engaged independent experts to
evaluate its Year 2000 plan, including its identification, assessment,
remediation and testing efforts.
With regard to information systems, production and facilities equipment and
products, the Company is 99% complete with the assessment and plan
development phase and is approximately 70%, 50% and 30% complete,
respectively with its total planned efforts including remediation, testing
and implementation. The Company expects that its remediation efforts in
these areas will be substantially completed by July 1999.
The Company also is working with its vendors and customers to ensure Year
2000 compliance throughout the supply chain. The Company has prepared a
questionnaire that is used to survey and follow-up with its vendors about
compliance. In addition, the Company has prepared a standard letter
outlining the importance of and commitment to resolving the Year 2000 issue
in a timely manner and this letter is used to respond to inquiries from
customers. Although this review is continuing, the Company is not currently
aware of any vendor or customer circumstances that may have a material
adverse impact on the Company. The Company will be looking for alternative
suppliers where circumstances warrant. The Company can provide no assurance
that Year 2000 compliance plans will be successfully completed by suppliers
and customers in a timely manner.
Cost
The Company's estimate of the total cost for Year 2000 compliance is
approximately $7.5 million, of which approximately $1.0 million has been
incurred through September 30, 1998. Virtually all of the funds spent to
date related to the cost to repair or replace software and related
hardware. The Company's cost estimates include the amount specifically
related to remedying Year 2000 issues, as well as costs for improved
systems that are Year 2000 compliant and would have been acquired in the
ordinary course of business but whose acquisition has been accelerated to
facilitate compliance by the Year 2000.
Incremental spending has not been, and is not expected to be, material
because most Year 2000 compliance costs include items that are part of the
standard procurement and maintenance of the Company's information systems
and production and facilities equipment. Other non-Year 2000 efforts have
not been materially delayed or impacted by the Company's Year 2000
initiatives.
18
<PAGE> 19
Risks
The Company believes its expectation that the Year 2000 issue will not pose
significant operational problems for the Company is reasonable. However, if
all Year 2000 issues are not properly identified, or assessment,
remediation and testing of identified problems are not implemented in a
timely manner, there can be no assurance that the Year 2000 issue will not
have a material adverse impact on the Company's results of operations or
adversely affect the Company's relationships with customers, vendors, or
others. Additionally, there can be no assurance that the Year 2000 issues
of other entities will not have a material adverse impact on the Company's
systems or results of operations.
Contingency Plan
The Company has begun, but not yet completed, a comprehensive analysis of
the operational problems and costs (including loss of revenues) that would
be reasonably likely to result from the failure by the Company and certain
third parties to complete efforts necessary to achieve Year 2000 compliance
on a timely basis. A contingency plan has not been developed for dealing
with the most reasonably likely worst case scenario as such scenario has
not yet been clearly identified. The Company plans to complete such
analysis and contingency planning by April 1999.
(The foregoing discussion contains forward-looking information. See
cautionary statement at the end of the Management's Discussion and Analysis
section.)
SAFE HARBOR STATEMENT
This document contains various forward-looking statements and includes
assumptions about Flowserve's future market conditions, operations, and
results. These statements are based on current expectations and are subject
to significant risks and uncertainties. They are made pursuant to safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Among the principal important risk factors that could cause actual results
to differ materially from the forward-looking statements made in this
document are: further changes in the already competitive environment for
the Company's products or competitors' responses to Flowserve's strategies;
political risks or trade embargoes affecting important country markets; the
health of the petroleum, chemical and power industries; economic turmoil in
areas outside the United States, including the Asia Pacific region and
Latin America; continued economic growth within the United States;
unanticipated difficulties or costs or reduction in benefits associated
with the implementation of the Company's global business process
improvement initiative including software; the impact of the "Year 2000"
computer issue; and the recognition of significant expenses associated with
adjustments to realign the combined Company's facilities and other
capabilities with its strategies and business conditions.
Readers should not place undue reliance on forward-looking statements,
which speak only as of the date of this report. The Company undertakes no
obligation to revise any forward-looking statements in order to reflect
events or circumstances that my subsequently arise. Readers should also
carefully
19
<PAGE> 20
review the risk factors described in other documents the Company files from
time to time with the Securities and Exchange Commission.
Net earnings for future periods are uncertain and dependent on general
worldwide economic conditions in the Company's major markets and their
strong impact on the level of incoming business activity.
20
<PAGE> 21
PART II. OTHER INFORMATION
Item 2.
During 1998 the Company issued 6,150 shares of restricted common stock,
pursuant to an exemption from registration under Section 4(2) of the
Securities Act of 1933. Shares were issued for the benefit of directors
and employees of the Company subject to restrictions on transfer and
vesting.
Item 6. Exhibits and Reports on Form 8-K
(a) The following Exhibits are attached hereto
10.3 Amendment No. 2 to the Flowserve Corporation
Incentive Compensation Plan
10.34 Amendment No. 2 to the amended and restated Director
Deferral Plan
10.38 Amendment #1 to Employment Agreement between the
Company and William M. Jordan
27.1 Financial Data Schedule
All other Exhibits are incorporated by reference.
(b) None
21
<PAGE> 22
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
FLOWSERVE CORPORATION
(Registrant)
/s/Renee Hornbaker
----------------------------
Renee Hornbaker
Vice President and
Chief Financial Officer
Date: November 14, 1998
- -----------------------
22
<PAGE> 23
INDEX TO EXHIBITS*
EXHIBIT DESCRIPTION
NO.
3.1 1988 Restated Certificate of Incorporation of The Duriron Company, Inc.
was filed as Exhibit 3.1 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1988.
3.2 1989 Amendment to Certificate of Incorporation was filed as Exhibit 3.2
to the Company's Annual Report on Form 10-K for the year ended December
31, 1989.
3.3 By-Laws of The Duriron Company, Inc. (as restated) were filed with the
Commission as Exhibit 3.2 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1987.
3.4 1996 Certificate of Amendment of Certificate of Incorporation was filed
as Exhibit 3.4 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995.
3.5 Amendment No. 1 to Restated Bylaws was filed as Exhibit 3.5 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1995.
3.6 April 1997 Certificate of Amendment of Certificate of Incorporation was
filed as part of Annex VI to the Joint Proxy Statement/Prospectus which
is part of the Registration Statement on Form S-4, dated June 19, 1997.
3.7 July 1997 Certificate of Amendment of Certificate of Incorporation was
filed as Exhibit 3.6 to the Company's Quarterly Report on Form 10-Q,
for the Quarter ended June 30, 1997.
4.1 Lease agreement and indenture, dated as of January 1, 1995 and bond
purchase agreement dated January 27, 1995, in connection with an 8%
Taxable Industrial Development Revenue Bond, City of Albuquerque, New
Mexico (relates to a class of indebtedness that does not exceed 10% of
the total assets of the Company. The Company will furnish a copy of the
document to the Commission upon request.)
4.2 Rights Agreement dated as of August 1, 1986, between the Company and
BankOne, N.A., as Rights Agent, which includes as Exhibit B thereto the
Form of Rights Certificate which was filed as Exhibit 1 to the
Company's Registration Statement on Form 8-A on August 13, 1986.
4.3 Amendment dated as of August 1, 1996, to Rights Agreement was filed as
Exhibit 4.5 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996.
<PAGE> 24
4.4 Amendment No. 2 dated as of June 1, 1998, to the Rights Agreement dated
as of August 13, 1986, and amended as of August 1, 1996, was filed as
Exhibit 1 to the Registrant's Form 8-A/A dated June 11, 1998.
4.5 Interest Rate and Currency Exchange Agreement between the Company and
Barclays Bank PLC dated November 17, 1992 in the amount of $25,000,000
was filed as Exhibit 4.9 to the Company's Annual Report on Form 10-K
for year ended December 31, 1992.
4.6 Credit Agreement dated as of November 26, 1997, among Flowserve
Corporation, Bank of America National Trust and Savings Association as
Agent and Letter of Credit Issuing Bank and the other Financial
Institutions Party thereto was filed as Exhibit 4.9 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997.
4.7 Material Subsidiary Guarantee, dated as of November 26, 1997, by BW/IP
International, Inc. in favor of and for the benefit of Bank of America
National Trust and Savings Association, as Agent was filed as Exhibit
4.10 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
4.8 Rate Swap Agreement in the amount of $25,000,000 between the Company
and National City Bank dated November 14, 1996 was filed as Exhibit 4.9
to the Company's Annual Report on Form 10-K for the year ended December
31, 1996.
4.9 Rate Swap Agreement in the amount of $25,000,000 between the Company
and Key Bank National Association dated October 28, 1996 was filed as
Exhibit 4.10 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996.
4.10 Guaranty, dated August 1, 1997 between Flowserve Corporation and
ABN-AMRO Bank N.V. was filed as Exhibit 4.12 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1997.
4.11 Credit Agreement, dated as of September 10, 1993, between BW/IP
International B.V. and ABN/AMRO was filed as Exhibit 10.dd to BW/IP,
Inc.'s Annual Report on Form 10-K for the year ended December 31, 1993.
4.12 Note Agreement, dated as of November 15, 1996, between BW/IP
International, Inc. and the Note Purchasers named therein, with respect
to $30,000,000 principal amount of 7.14% Senior Notes, Series A, due
November 15, 2006, and $20,000,000 principal amount of 7.17% Senior
Notes, Series B, due March 31, 2007, was filed as Exhibit 4.1 to
BW/IP's Registration Statement on Form S-8 (Registration No. 333-21637)
as filed February 12, 1997.
4.13 Note Agreement, dated as of April 15, 1992, between BW/IP
International, Inc. and the Note Purchasers named therein, with respect
to $50,000,000 principal amount of 7.92% Senior Notes due May 15, 1999,
filed as Exhibit 4.a to BW/IP's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1992.
<PAGE> 25
10.1 Flowserve Corporation Incentive Compensation Plan (the "Incentive
Plan") for Senior Executives, as amended and restated effective January
1, 1994, was filed as Exhibit 10.1 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1993. **
10.2 Amendment No. 1 to the Incentive Plan was filed as Exhibit 10.2 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1995. **
10.3 Amendment No. 2 to the Incentive Plan (filed herewith). **
10.4 The Duriron Company, Inc. Supplemental Pension Plan for Salaried
Employees was filed with the Commission as Exhibit 10.4 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1987. **
10.5 Flowserve Corporation amended and restated Director Deferral Plan was
filed as Attachment A to the Company's definitive 1996 Proxy Statement
filed with the Commission on March 10, 1996. **
10.6 Form of Change in Control Agreement between all executive officers and
the Company was filed as Exhibit 10.6 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1996. **
10.7 The Duriron Company, Inc. First Master Benefit Trust Agreement dated
October 1, 1987 was filed as Exhibit 10.24 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1987.**
10.8 Amendment #1 to the First Master Benefit Trust Agreement dated October
1, 1987 was filed as Exhibit 10.24 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1993.**
10.9 Amendment #2 to First Master Benefit Trust Agreement was filed as
Exhibit 10.25 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1993.**
10.10 The Duriron Company, Inc. Second Master Benefit Trust Agreement dated
October 1, 1987 was filed as Exhibit 10.12 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1987.**
10.11 First Amendment to Second Master Benefit Trust Agreement was filed as
Exhibit 10.26 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1993.**
10.12 The Duriron Company, Inc. Long-Term Incentive Plan (the "Long-Term
Plan"), as amended and restated effective November 1, 1993 was filed as
Exhibit 10.8 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1993.**
10.13 Amendment No. 1 to the Long-Term Plan was filed as Exhibit 10.13 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1995.**
<PAGE> 26
10.14 Flowserve Corporation 1989 Stock Option Plan as amended and restated
effective January 1, 1997 was filed as Exhibit 10.14 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996.**
10.15 Flowserve Corporation Second Amendment to 1989 Stock Option Plan, as
previously amended and restated was filed as Exhibit 10.14 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1998.**
10.16 Flowserve Corporation 1989 Restricted Stock Plan (the "1989 Restricted
Stock Plan") as amended and restated effective January 1, 1997 was
filed as Exhibit 10.15 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996.**
10.17 The Duriron Company, Inc. Retirement Compensation Plan for Directors
("Director Retirement Plan") was filed as Exhibit 10.15 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1988.**
10.18 Amendment No. 1 to Director Retirement Plan was filed as Exhibit 10.21
to the Company's Annual Report on Form 10-K for the year ended December
31, 1995.**
10.19 The Company's Benefit Equalization Pension Plan (the "Equalization
Plan") was filed as Exhibit 10.16 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1989.**
10.20 Amendment #1 dated December 15, 1992 to the Equalization Plan was filed
as Exhibit 10.18 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1992.**
10.21 The Company's Equity Incentive Plan as amended and restated effective
July 21, 1995 was filed as Exhibit 10.25 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995.**
10.22 Supplemental Pension Agreement between the Company and William M.
Jordan dated January 18, 1993 was filed as Exhibit 10.15 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1992.**
10.23 1979 Stock Option Plan, as amended and restated April 23, 1991, and
Amendment #1 thereto dated December 15, 1992, was filed as Exhibit
10.17 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1992.**
10.24 Flowserve Corporation Deferred Compensation Plan for Executives was
filed as Exhibit 10.19 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1992.**
10.25 Executive Life Insurance Plan of Flowserve Corporation was filed as
Exhibit 10.29 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995.**
<PAGE> 27
10.26 Executive Long-Term Disability Plan of Flowserve Corporation was filed
as Exhibit 10.30 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995.**
10.27 Employee Protection Plan, as revised effective March 1, 1997 (which
provides certain severance benefits to employees upon a change of
control of the Company) was filed as Exhibit 10.32 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996.**
10.28 Flowserve Corporation 1997 Stock Option Plan was included as Exhibit A
to the Company's 1997 Proxy Statement which was filed with the
Commission on March 17, 1997.**
10.29 Flowserve Corporation First Amendment to 1997 Stock Option Plan was
filed as Exhibit 10.28 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998.**
10.30 BW/IP International, Inc. Supplemental Executive Retirement Plan as
amended and restated was filed as Exhibit 10.27 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1998**
10.31 Flowserve Corporation 1998 Restricted Stock Plan was included as
Exhibit A to the Company's 1998 Proxy Statement which was filed with
the Commission on April 9, 1998.**
10.32 Form of Employment Agreement between the Company and certain executive
officers was filed as Exhibit 10.31 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997. **
10.33 Amendment No. 1 to the amended and restated Director Deferral Plan was
filed as Exhibit 10.32 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.**
10.34 Amendment No. 2 to the amended and restated Director Deferral Plan
(filed herewith). **
10.35 Amendment # 1 to the 1989 Restricted Stock Plan as amended and restated
was filed as Exhibit 10.33 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997. **
10.36 Employment Agreement, effective July 22, 1997, between the Company and
Bernard G. Rethore was filed as Exhibit 10.53 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1997.**
10.37 Employment Agreement, effective July 22, 1997, between the Company and
William M. Jordan was filed as Exhibit 10.54 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1997.**
10.38 Amendment No. 1 to Employment Agreement between the Company and William
M. Jordan (filed herewith). **
<PAGE> 28
10.39 Agreement and Plan of Merger dated as of May 6, 1997, among the
Company, Bruin Acquisition Corp. and BW/IP, Inc. ("BW/IP") was filed as
Annex I to the Joint Proxy Statement/Prospectus which is part of the
Registration Statement on Form S-4, dated June 19, 1997.
27.1 Financial Data Schedule submitted to the SEC in electronic format
(filed herewith).
"*" For exhibits of the Company incorporated by reference into this
Quarterly Report on Form 10-Q from a previous filing with the
Commission, the Company's file number with the Commission since July
22, 1997 is "1-13179" and the previous file number was "0-325". All
filings of BW/IP, Inc. ("BWIP") incorporated by reference in this
Quarterly Report on Form 10-Q cover the periods prior to July 22, 1997.
"**" Management contracts and compensatory plans and arrangements required
to be filed as exhibits to this Form 10-Q.
<PAGE> 1
Exhibit 10.3
AMENDMENT NO. 2
TO THE DURIRON COMPANY, INC.
ANNUAL INCENTIVE COMPENSATION PLAN
FOR SENIOR EXECUTIVES
AS RESTATED JANUARY 1, 1994
I.
SECTION II(C) IS HEREBY AMENDED AND RESTATED IN ITS ENTIRETY TO READ AS FOLLOWS:
C. "COMPANY" - Flowserve Corporation, a New York corporation and its
successors in interest.
II.
SECTION II(K) IS HEREBY AMENDED AND RESTATED IN ITS ENTIRETY TO READ AS FOLLOWS:
K. "SUBSIDIARY" - Any entity of which more than 50 per cent of the voting
control is owned, directly or indirectly, by the Company.
III.
The term "The Duriron Company, Inc." is changed to "Flowserve Corporation" each
place it appears in the document and the term "Duriron" is changed to
"Flowserve" each place that it appears in the document.
The remainder of the Plan shall remain in full force and effect as currently
stated.
IN WITNESS WHEREOF, Flowserve Corporation has caused this instrument to be
executed by its duly authorized officers on this 31st day of December 1997.
FLOWSERVE CORPORATION
Date Signed: December 31, 1997. By:/s/ Ronald F. Shuff
-------------------------------
Name: Ronald F. Shuff
Title: Vice Present, Secretary and
General Counsel
<PAGE> 1
EXHIBIT 10.34
AMENDMENT NO. 2
TO THE FLOWSERVE CORPORATION
DIRECTOR DEFERRAL PLAN
(AS AMENDED AND RESTATED)
Section 5(e) is newly added to the Plan, effective January 1, 1999, as stated
hereafter:
"5(e) If a Director elects to defer his or her Compensation in the form
of Deferred Shares instead of cash, the cash equivalent value of such
Deferred Share election shall be increased by 15% over the available
cash deferral election."
The remainder of the Plan shall remain unchanged and in full force and effect.
/s/ Ronald F. Shuff
-----------------------
August 10, 1998
<PAGE> 1
EXHIBIT 10.38
AMENDMENT #1 TO
EMPLOYMENT AGREEMENT (THE "AGREEMENT")
DATED AUGUST 1, 1997
BETWEEN
WILLIAM M. JORDAN ("EXECUTIVE")
AND
FLOWSERVE CORPORATION (THE "COMPANY")
Effective October 20, 1998, the Company and the Executive agree to the following
amendment to the Agreement by adding the following paragraphs.
18. Non Competition and Cooperation
Except as otherwise approved by the Company, which shall not be
unreasonably withheld or delayed, during the term of the Agreement, the
Executive shall not compete in any way with the Company nor any of its
beneficially owned or controlled subsidiaries. As clarification, but
not limitation of this obligation, the Executive shall not be employed
by, retained as a consultant by (except by any subsidiary or division
of a company which subsidiary or division is not in competition with
the Company), invest in (except for a passive investment totaling less
than 10% of the outstanding common stock of a company), direct nor
otherwise assist, in any commercial manner, any company, organization,
person or group of persons which offer any products or services which
compete with those offered by the Company. The obligation shall apply
on a global basis. For purposes of this Agreement, competition shall
mean manufacturing, designing or distributing products for use in the
chemical process industries similar to products of the Company.
Additionally, the Executive will reasonably cooperate with the Company
in announcing his resignation as President and COO of the Company.
Executive will also then refrain from taking any intentional action
designed to be detrimental to the best interests of the Company before
the investment community and the Company's customers, suppliers and
employees during the balance of the term of the Agreement. The Company
will refrain from taking any intentional action detrimental to the best
interests of Executive.
19. Employment Duties
The Executive shall continue to be an employee of the Company; however,
Executive (i) shall not be required to devote any of his time and
attention to the business and affairs of the Company; (ii) may serve as
a director of other entities for which he currently serves as a
director, notwithstanding paragraph 18 of this Agreement; (iii) shall
have only such duties, if any, as shall be mutually agreeable to the
Executive and the Board; (iv) subject to paragraph 18 of this
Agreement, may perform services and/or serve as an employee, officer or
director or engage in any other activity for remuneration or otherwise
without the approval of the Company and without any diminution of
amounts payable under this Agreement, as amended.
<PAGE> 2
20. Dispute Resolution
Any dispute or controversy arising out of the Agreement, as amended,
shall be settled by arbitration in Dallas, Texas, in accordance with
the rules of the American Arbitration Association, and judgment may be
entered in thereon in any court having jurisdiction in Dallas, Texas.
21. Company Default
This Agreement, as amended, shall not be terminated by the Company. Any
wrongful termination of this Agreement by the Company, or any default
by the Company under this Agreement, as amended, shall entitle
Executive to obtain appropriate damages.
22. Change of Control
In the event of a "change of control" of the Company, as such term is
defined in the separate contract (the "CIC Agreement") between the
Company and the Executive noted in paragraph 9 of the Agreement, then
the following shall occur:
(a) The future base salary due the Executive under this Agreement
shall be computed and promptly paid in a lump sum, assuming
that such amount would have increased by 3.5% on each
following March 1 of the then remaining term of the Agreement;
(b) The future annual incentive payments and long-term incentive
payments, due Executive during the balance of the Agreement
term, shall also be computed and promptly paid in a lump sum,
assuming both that (i) such incentives would have been payable
at 100% of target amount and (ii) Executive's salary reference
rate would have increased by 3.5% on each following March 1 of
the then remaining term of the Agreement;
(c) All other rights and benefits of Executive under this
Agreement shall survive such change of control and be binding
obligations upon the Company; and
(d) The provisions of Section 9 of the CIC Agreement, which is
entitled "GROSS UP OF PAYMENTS DEEMED TO BE EXCESS PARACHUTE
PAYMENTS", shall apply to all payments and benefits received
by Executive hereunder after such change of control, as if
such provisions were specifically stated herein.
<PAGE> 3
In addition, the Company and the Executive agree that the Agreement shall be,
and hereby is, further amended by deleting paragraphs 2(d), 2(e), 3, 4, 6(a),
6(b), 6(c), 6(d), 6(e), 6(f), 7(a), 7(b), 7(c), the first clause beginning with
"If" and ending with "Reason" of 7(d), and 9 of the Agreement, in the mutual
understanding that the Executive's rights to compensation under the Agreement
shall survive his death or disability, if applicable and to the extent possible.
The Company and the Executive also agree that the CIC Agreement be immediately
terminated by mutual consent.
The remainder of the Agreement shall remain unchanged and in full force and
effect.
ACKNOWLEDGED AND AGREED:
FLOWSERVE CORPORATION EXECUTIVE
/S/ Kevin E. Sheehan, Chairman /S/ William M. Jordan
- ------------------------------ ---------------------
Compensation Committee
Board of Directors
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 20,809
<SECURITIES> 0
<RECEIVABLES> 230,912
<ALLOWANCES> 3,661
<INVENTORY> 204,675
<CURRENT-ASSETS> 491,757
<PP&E> 478,537
<DEPRECIATION> 273,477
<TOTAL-ASSETS> 862,228
<CURRENT-LIABILITIES> 207,895
<BONDS> 189,382
0
0
<COMMON> 51,856
<OTHER-SE> 298,121
<TOTAL-LIABILITY-AND-EQUITY> 862,228
<SALES> 803,821
<TOTAL-REVENUES> 803,821
<CGS> 497,051
<TOTAL-COSTS> 710,544
<OTHER-EXPENSES> 21,160
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,844
<INCOME-PRETAX> 62,273
<INCOME-TAX> 21,796
<INCOME-CONTINUING> 40,477
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 1,220
<NET-INCOME> 41,697
<EPS-PRIMARY> 1.03
<EPS-DILUTED> 1.03
</TABLE>
