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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-13179
FLOWSERVE CORPORATION
(Exact name of registrant as specified in its charter)
NEW YORK 31-0267900
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
222 W. LAS COLINAS BOULEVARD
SUITE 1500
IRVING, TEXAS 75039
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(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (972) 443-6500
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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COMMON STOCK, $1.25 PAR VALUE NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the Common Stock held by non-affiliates of the
registrant as of February 23, 1999 (based on the closing sale price as reported
on the New York Stock Exchange on such date) was approximately $632,068,000.
The number of shares outstanding of the registrant's Common Stock as of February
23, 1999: 37,778,825 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for the Annual Meeting of Shareholders
to be held on or about April 22, 1999, are incorporated by reference into Part
III of this Form 10-K.
Portions of the Company's Annual Report to Shareholders for the fiscal year
ended December 31, 1998, are incorporated by reference into Parts I, II and IV
of this Form 10-K.
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PART I
ITEM 1. BUSINESS
Flowserve Corporation ("Flowserve") was incorporated under the laws of the State
of New York on May 1, 1912. On July 22, 1997, Flowserve (formerly known as Durco
International Inc. and The Duriron Company, Inc.) merged with BW/IP, Inc.
("BW/IP") in a stock-for-stock merger of equals, accounted for as a pooling of
interests, (hereafter the "Merger"). The Merger created one of the world's
leading providers of industrial flow management services. All references herein
to the "Company" or "Flowserve" refer collectively to Flowserve and its
subsidiaries unless otherwise indicated by the context.
Flowserve is principally engaged in the design, manufacture, distribution and
service of industrial flow management equipment throughout the world. The
Company provides pumps, valves and mechanical seals primarily for the refinery
and pipeline segments of the petroleum industry, the chemical processing
industry, the power generation industry and other industries requiring flow
management products and services. Flowserve manufactures certain standard
products, but specializes in the development of precision engineered equipment
for critical service applications where high reliability is required. The
Company's materials expertise, design and engineering capabilities and
applications know-how have enabled it to develop product lines that are
responsive to customers needs for manufacturing efficiency, reduced maintenance
cost, and avoidance of premature equipment failure.
An important element of Flowserve's business is its successful emphasis on
providing aftermarket products and services. These consist of supplying parts,
making repairs and providing a variety of technical services for the upgrade or
retrofit of equipment to extend its useful life or improve its operating
characteristics.
The Company operates in three business segments: Rotating Equipment, Flow
Control and Flow Solutions. Included in Note 12 to the consolidated financial
statements on pages 35 through 38 of the 1998 Annual Report to Shareholders,
provided as part of Item 8 of this Form 10-K and incorporated herein by
reference, is information concerning the Company's sales, operating income and
identifiable assets by business and geographic segment for each year in the
three-year period ended December 31, 1998. For a significant portion of its
products, the Company's domestic operations supply each other and the Company's
foreign manufacturing subsidiaries with components and subassemblies.
ROTATING EQUIPMENT
PRODUCTS
Through its Rotating Equipment Division business segment, the Company designs,
manufactures and distributes pumps and related equipment. Pump products
accounted for approximately 34.0%, 35.0% and 36.1% of the Company's sales to
external customers in 1998, 1997 and 1996, respectively. Pumps are manufactured
to industry-recognized standards, including those set by the American Petroleum
Institute (API), the American National Standards Institute (ANSI) and the
International Standards Organization (ISO).
Pump products for the petroleum industry include horizontal double case pumps
used especially for hot oils under high pressure, horizontal multi-stage pumps
used in pipelines, vertical pumps used for low specific gravity applications,
vertical circulating pumps used for cooling water, submersible pumps used for
water or brine injection in oil fields, and submersible water pumps used on
offshore platforms to supply water for fire fighting.
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Pump products for chemical processing industries include metallic and
nonmetallic pumps, varying in size, capacity, material components and sealant
specifications. These pumps are used primarily to move liquids during processing
activities, but also in auxiliary services such as waste removal, water
treatment and pollution control. The pumps are modular in design and
manufactured to withstand the abrasive and/or corrosive service fluids being
processed by customers in these industries.
Pump products for the power generating industry include a variety of pumps used
in both nuclear and fossil fuel facilities to generate steam. Products for the
fossil fuel power generation industry are horizontal double case pumps for high
pressure boiler feed applications, horizontal multi-stage pumps for low pressure
boiler feed applications, vertical double case pumps and vertical circulating
pumps.
The Company supplies pumps for other industrial uses, including without
limitation industrial production, utility services, pollution control, mining
operations and municipal water transport.
MARKETING AND DISTRIBUTION
Pumps or pump components are produced in plant facilities in the United States
(one in California, one in Oklahoma, one in Ohio, two in New Mexico), Mexico,
Argentina, Belgium and two in The Netherlands. Pump manufacturing facilities in
The Netherlands and Belgium are key sources of pumps sold in Europe, Africa and
the Middle East. The Argentine facility provides products primarily for
Argentine customers, but also serves customers in other South American
countries. The Company's Mexican operation manufactures pumps for export and for
Mexican customers. Large vertical circulating pumps manufactured in Mexico are
distributed worldwide. A majority-owned joint venture in India, which began
production in late 1997, manufactures ANSI and ISO pump components which are
assembled in Belgium.
The two specialized component manufacturing facilities in New Mexico provide a
significant portion of pump components (except for ANSI pump components). The
component facilities also supply components to other Company plants outside of
the U.S. on an economically selective basis.
The Company's pump products are primarily marketed to end-users and engineering
contractors through the Company's worldwide pump sales force, regional service
centers, independent distributors and representatives and, for modular pumps, a
national parts distribution center.
The majority of the Company's sales of pump products in the nuclear power market
are in the United States and Japan, where the Company's large installed base of
equipment provides a continuing market for products and services to ensure
safety and reliability, major customer concerns. A significant characteristic of
the nuclear market worldwide is the stringent requirements that must be met in
order to sell products to nuclear power plants. For example, the Company
maintains a Nuclear Stamp ("N Stamp") from the American Society of Mechanical
Engineers, which is required for qualification to supply certain kinds of
products to the U.S. nuclear industry.
The Company could face liability in excess of its own commercial or government
provided insurance if any of its products were found to contribute to an
accident at a nuclear power facility or at other industrial facilities. The
Company does not maintain nuclear liability insurance for the United States or
Canada, but maintains an aggregate of $15 million in nuclear liability insurance
for all other countries. The Federal Price-Anderson Act of 1954 provides U.S.
nuclear utilities with a system of no-fault insurance coverage in an amount up
to about $8.7 billion for third party losses or damages resulting from a nuclear
incident.
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BACKLOG
The Rotating Equipment Division's backlog of orders at December 31, 1998, was
$162.7 million, compared to $169.4 million at December 31, 1997. The Company
believes that a very high percentage of the current backlog will be shipped by
December 31, 1999.
FLOW CONTROL
PRODUCTS
Through its Flow Control Division business segment, the Company designs,
manufactures and distributes quarter-turn manual valves, automatic control
valves, actuators, and related components. Valve products accounted for
approximately 27.3%, 26.5% and 25.0% of the Company's sales to external
customers in 1998, 1997 and 1996, respectively. Valves are used to control the
flow of liquids and gases. Valve products for industrial processing systems
include plug and butterfly valves made of various metals, alloys and plastics
and lined ball valves. Actuators and other control accessories manufactured by
the Company are either sold independently or mounted on valves to move them from
open to closed positions and to various specified positions in between. Valve
products for the nuclear power market include a complete line of gate, globe and
check valves (including valve actuators). Automatic control valves include high
pressure valves, rotary valves, and anti-noise and anti-cavitation valves. These
valves are generally sold with an actuator. "Smart" valve technologies have been
incorporated into various control valve products to provide more efficient
process control. Through a technology alliance with Honeywell Inc., a
manufacturer of computerized control systems and software for process plants,
the Company's "smart" and control valve technologies are being incorporated in
Honeywell's distributed control systems.
MARKETING AND DISTRIBUTION
Valves are produced at facilities in the United States (two in Utah, one in
Pennsylvania, and one in Tennessee), Australia, France, Germany (one in Ahaus,
one in Essen) and Switzerland. Actuators are produced at facilities in the
United States (Utah and Ohio), Germany, France, and Italy. Two Company
majority-owned joint ventures in India (which began production in late 1997)
manufacture valves for export to U.S., Asian and European markets. In 1998 the
Company acquired Valtek Engineering Division of Rolls Royce plc, a former
licensee with territorial rights covering certain Company control valves in
parts of Europe, the Middle East and Africa.
Manual valve products and valve actuators are distributed through the Company's
sales personnel and through a network of independent stocking distributors.
Automatic control valves are marketed through specialized sales offices with
engineers and service centers or on a commission basis through independent
manufacturing representatives in principal marketing centers throughout the
United States and other countries.
BACKLOG
The Flow Control Division's backlog of orders at December 31, 1998 was $69.8
million, compared to $67.0 million at December 31, 1997. The Company believes
that virtually all of the current backlog will be shipped by December 31, 1999.
FLOW SOLUTIONS
PRODUCTS
Through its Flow Solutions Division business segment, the Company designs,
manufactures and distributes mechanical seals and sealing systems and provides
service and repair for flow control equipment used in
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process industries. Mechanical seal products and flow management services and
repairs accounted for approximately 38.7%, 36.0% and 36.9% of the Company's
sales to external customers in 1998, 1997 and 1996, respectively.
The mechanical seal is critical to the smooth operation of centrifugal pumps,
compressors and mixers because mechanical seals help prevent leakage between a
rotating shaft and a stationary casing. In doing so, mechanical seals reduce
shaft wear on pumps, compressors and mixers used in many industries. The
Company's seals are used on a variety of pumps, mixers, compressors, steam
turbines and specialty equipment, principally in the oil refining and chemical
processing industries. The Company also manufactures a dry gas seal used in gas
transmission and oil and gas production markets. In 1998, the Company acquired
its former licensee's seal manufacturing and service business in Australia and
the remaining ownership interests in its seal manufacturing joint venture in
Singapore.
The Company has established a global network of service facilities throughout
the world which have the capability to provide service, repair and diagnostics
for rotating equipment, including pumps, turbines, mixers and compressors, as
well as numerous types of valves and mechanical seals. In 1998, the Company has
expanded its service network with the acquisition of two European valve repair
companies: ARS Loheren NV in Belgium and ZAR Beheer BV in The Netherlands, plus
the acquisition of the assets of a Canadian service repair facility. The Company
sees the opportunity to expand this service repair business, as many of its
customers look for alternatives to their own in-house maintenance capabilities
or to small and independent service facilities with limited expertise.
MARKETING AND DISTRIBUTION
Mechanical seals are primarily produced in facilities in the United States (one
in California, one in Michigan), The Netherlands, Germany, Mexico, Argentina,
Brazil, Singapore, New Zealand, Australia and Japan. Seal manufacturing
facilities in The Netherlands and Germany are key sources of seals sold in
Europe, Africa and the Middle East.
The Company's mechanical seal products are primarily marketed through the
Company's worldwide seals sales force directly to end users and engineering and
construction firms. A portion of the Company's seal products is sold directly to
original equipment ("OE") manufacturers for incorporation into pumps,
compressors, mixers or other rotary equipment requiring seals. Distributors,
dealers, commissioned representatives and sales agents are also used in the
distribution and sale of mechanical seal products.
Fully equipped service centers provide equipment maintenance, including major
repairs, advanced diagnostics, installation, commissioning, re-rate and retrofit
programs and full machining capabilities. A network of quick response centers
provides local engineering, manufacturing and assembly capabilities for
mechanical seals, as well as seal inventory.
BACKLOG
The Flow Solutions Division's backlog of orders at December 31, 1998, was $56.4
million compared to $54.4 million at December 31, 1997. The Company believes
that virtually all of the current backlog will be shipped by December 31, 1999.
GENERAL BUSINESS
COMPETITION
The markets for the Company's products are highly competitive. Competition
occurs on the basis of price, technical expertise, delivery, contractual terms,
previous installation history and reputation for quality.
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Delivery speed and the proximity of service centers are important with respect
to aftermarket products. Customers are generally more likely to rely on the
Company than competitors for aftermarket products relating to its more highly
engineered and customized products than for its standard products. Price
competition tends to be more significant for OE manufacturers than aftermarket
services and has been generally increasing.
In the aftermarket portion of its service business, the Company competes against
both large and well-established national or global competitors and, in some
markets, against smaller regional and local companies, as well as the in-house
maintenance departments of the Company's end-user customers. In the sale of
aftermarket products and services, the Company benefits from the large installed
base of pumps which require maintenance, repair and replacement parts.
In the petroleum industry, the competitors for aftermarket services tend to be
the customers themselves because of their in-house capabilities. In other
industries, except the nuclear power industry, the competitors for aftermarket
services tend to be low cost replicators of spare parts and local independent
repair shops for the Company's products. The Company has certain competitive
advantages in the nuclear power industry because it maintains the N Stamp that
is required to service customers in that industry and because the Company has a
considerable base of proprietary knowledge.
Customers for the Company's products are attempting to reduce the number of
vendors from which they purchase in order to reduce the size and diversity of
their inventory. Although vendor reduction programs could adversely affect the
Company's business, the Company has been successful in entering into "alliance"
arrangements with a number of customers both in the United States and overseas
which provide competitive advantages to the Company.
RESEARCH AND DEVELOPMENT
The Company conducts research and development at its own facilities in various
locations. In 1998, 1997, and 1996, the Company spent approximately $14.7
million, $14.8 million, and $13.9 million, respectively, on Company-sponsored
research and development, primarily for new product development and extensions.
The Company's research and development group consists of engineers involved in
new product development as well as the support and improvement of existing
products. Additionally, the Company sponsors consortium programs for research
with various universities and conducts limited development work jointly with
certain of its vendors, licensees and customers. Management believes current
expenditures are adequate to sustain ongoing research and development
activities.
CUSTOMERS
The Company sells to a wide variety of customers. No individual customer
accounted for more than 10% of the Company's 1998 net sales.
RISKS OF INTERNATIONAL BUSINESS
In 1998 42% of the Company's sales were outside the United States. The Company's
activities thus are subject to the customary risks of operating in an
international environment, such as unstable political situations, local laws,
the potential imposition of trade restrictions or tariff increases and the
relationship of the U.S. dollar to other currencies. The impact of these
conditions is mitigated somewhat by the strength and diversity of the Company's
product lines and geographic coverage. To minimize the impact of foreign
exchange rate movements on its operating results, the Company enters into
forward exchange contracts to hedge specific foreign currency denominated
transactions. See Note 1 to consolidated financial statements on pages 25 and 26
of the 1998 Annual Report to Shareholders, which is incorporated by reference in
this Form 10-K. The Company conducts substantial business activities in the
Middle East.
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INTELLECTUAL PROPERTY
The Company owns a number of trademarks and patents relating to the name and
design of its products. The Company considers its trademarks Byron Jackson(R),
Durco(R), United Centrifugal(R), Durametallic(R), BW Seals(R), GASPAC(R),
Pacific Wietz(TM), Five Star Seal(R), Wilson-Snyder(R), Valtek(R), Kammer(R),
Sereg(TM) and Automax(R) to be important to its business. The patents underlying
much of the technology for the Company's products have been in the public domain
for many years. Surviving patents are not considered, either individually or in
the aggregate, to be material to the Company's business. However, the Company's
pool of proprietary information, consisting of know-how and trade secrets
relating to the design, manufacture and operation of its products and their use,
is considered particularly important and valuable. Accordingly the Company
protects such proprietary information. The Company, in general, is the owner of
the rights to the products which it manufactures and sells, and the Company is
not dependent in any material way upon any license or franchise to operate.
RAW MATERIALS
The principal raw materials used by the Company in the manufacture of its
products are normally readily available. While substantially all raw materials
are purchased from outside sources, the Company has been able to obtain an
adequate supply of raw materials, and no shortage of such materials is currently
anticipated. The Company intends to expand its use of worldwide sourcing to
capitalize on low cost sources of purchased goods.
The Company is a vertically-integrated manufacturer of certain pump and valve
products. Certain corrosion-resistant castings for Company pumps and
quarter-turn valves are manufactured at its Dayton, Ohio foundries; other metal
castings are purchased from outside sources.
The Company also produces most of its highly engineered corrosion resistant
plastic parts for certain pump and valve product lines. This includes
rotomolding as well as injection and compression molding of a variety of
fluorocarbon and other plastic materials.
Suppliers of raw materials for nuclear markets must be qualified by the American
Society of Mechanical Engineers and, accordingly, are limited in number.
However, the Company to date has experienced no significant difficulty in
obtaining such materials.
EMPLOYEES AND LABOR RELATIONS
The Company and its subsidiaries employ approximately 7,000 persons of whom
approximately 55% work in the United States. The Company's hourly employees at
its three principal U.S. pump manufacturing plants in Vernon, California,
Dayton, Ohio, and Tulsa, Oklahoma, plus those at its valve manufacturing plant
in Williamsport, Pennsylvania and at its foundries in Dayton, Ohio are
represented by unions. The Company's operations in Mexico, The Netherlands,
Germany and Belgium are unionized. The Company believes employee relations
throughout its operations are satisfactory, including those represented by
unions.
ENVIRONMENTAL REGULATIONS AND PROCEEDINGS
The Company is subject to environmental laws and regulations in all
jurisdictions in which it has operating facilities. The Company periodically
makes capital expenditures for pollution abatement and control to meet
environmental requirements. At present, the Company has no plans for any
material capital expenditures for environmental control facilities. However, the
Company has experienced and continues to experience
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operating costs relating to environmental matters, although certain costs have
been offset by the Company's successful waste minimization programs.
The Company believes that future environmental compliance expenditures will not
have a material adverse effect on its financial position and has established
allowances which it believes to be adequate to cover potential environmental
liabilities.
EXPORTS
Licenses are required from U.S. government agencies to export certain of the
Company's products from the United States. In particular, products with nuclear
applications are restricted, although limitations are placed on the export of
certain other pump, valve and mechanical seal products.
The Company's export sales from the United States to foreign unaffiliated
customers were $130,766 in 1998, $146,704 in 1997 and $140,842 in 1996.
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FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY
This 1998 Annual Report on Form 10-K, including Management's Discussion
and Analysis, contains various forward-looking statements and includes
assumptions about the Company'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 many factors that could cause actual results to
differ materially from the forward-looking statements are: further
changes in the already competitive environment for the Company's
products or competitors' responses to the Company'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; continued economic growth
within the United States; unanticipated difficulties or costs or
reduction in benefits associated with the implementation of the
Company's "Flowserver" 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 strategic and business conditions. The Company undertakes no
obligation to publicly update or revise any forward-looking statement as
a result of new information, future events or otherwise.
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ITEM 2. PROPERTIES
The Company's corporate headquarters is a leased facility in Irving, Texas
encompassing approximately 34,000 square feet.
The location, size and products manufactured at the Company's principal
manufacturing facilities are as follows:
<TABLE>
<CAPTION>
LOCATION SQUARE FOOTAGE PRODUCTS MANUFACTURED
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<S> <C> <C>
DOMESTIC:
Dayton, Ohio 600,000 Castings and pumps
Tulsa, Oklahoma 320,000 Pumps
Vernon, California 273,000 Pumps
Cookeville, Tennessee 190,000 Valves
Williamsport, Pennsylvania 141,000 Valves
Springville, Utah 140,000 Valves and actuators
Kalamazoo, Michigan 137,000 Mechanical seals
Temecula, California 64,000 Mechanical seals
Springboro, Ohio 50,000 Plastic components for pumps and valves
Albuquerque, New Mexico 50,000 Components for pumps
INTERNATIONAL:
Etten-Leur, The Netherlands 175,000 Pumps
Santa Clara, Mexico 154,000 Pumps and mechanical seals
Mendoza, Argentina 81,000 Pumps and mechanical seals
Dortmund, Germany 70,000 Mechanical seals
Ahaus, Germany 68,000 Valves
Petit Rechain, Belgium 65,000 Pumps and valves
Essen, Germany 50,000 Valves and actuators
Hengelo, The Netherlands 49,400 Pumps
Roosendaal, The Netherlands 48,400 Mechanical seals
</TABLE>
All of the Company's principal manufacturing facilities are owned with the
exception of the facilities in Springboro, Ohio; Hengelo, The Netherlands; and
Dortmund, Germany.
On the average, the Company utilizes approximately 80% to 90% of its
manufacturing capacity, although there is a variation in usage rate among the
facilities. The Company could, in general, increase its capacity through the
purchase of new or additional manufacturing equipment without obtaining
additional facilities.
The Company maintains a substantial network of domestic and foreign service
centers and sales offices most of which are leased.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in ordinary routine litigation incidental to its
business, none of which it believes to be material to its financial condition.
For further information about such litigation, see Note 9 of the Financial
Statements, provided as part of Item 8 of this Form 10-K and incorporated herein
by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of the Company (FLS) is traded on the New York Stock Exchange.
In February 1999, the Company's records showed approximately 2,300 shareholders
of record. Based on these records plus requests from brokers and nominees listed
as shareholders of record, the Company estimates there are approximately 11,200
beneficial owners of its common stock. In 1998 and 1997, the Company paid a
dividend of fourteen cents per share each calendar quarter.
PRICE RANGE OF FLOWSERVE COMMON STOCK
(INTRADAY HIGH/LOW PRICES)
<TABLE>
<CAPTION>
1998 1997
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<S> <C> <C>
First Quarter $33.75/$26.50 $27.13/$21.88
Second Quarter $32.44/$24.25 $30.00/$21.25
Third Quarter $25.50/$17.75 $36.69/$28.63
Fourth Quarter $20.38/$15.38 $30.69/$26.00
</TABLE>
During 1998, 1997 and 1996, the Company issued 10,165, 21,700 and 29,900 shares
of restricted common stock, respectively, 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 officers of the Company subject to
restrictions on transfer.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data for the five years ended December 31, 1998, which
appears on page 39 of the 1998 Annual Report to Shareholders, is incorporated
herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Management's Discussion and Analysis appears on pages 14 through 20 of the 1998
Annual Report to Shareholders and is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Disclosure about market risk appears on page 18 of the Company's 1998 Annual
Report to Shareholders under the heading "Market Risks Associated With Financial
Instruments" and is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements appearing on pages 21 through 38 of the 1998 Annual
Report to Shareholders, together with the report thereon of Ernst & Young LLP,
dated February 9, 1999, appearing on page 13 of the 1998 Annual Report to
Shareholders, and supplementary data appearing on page 38 of the 1998 Annual
Report to Shareholders are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained under the heading "Election of Directors" in the
definitive Proxy Statement for the Annual Meeting of Shareholders to be held on
or about April 22, 1999, (the "1999 Proxy Statement") is incorporated herein by
reference. The executive officers of the Company, all positions and offices
presently held by each person named, their ages as of February 15, 1999, and
their business experience during the last five years are stated below. Executive
officers serve at the discretion of the Board of Directors.
<TABLE>
<CAPTION>
Name and Position Age Principal Occupation During Past Five Years
----------------- --- -------------------------------------------
<S> <C> <C>
Bernard G. Rethore 57 Chairman of the Board of Directors and Chief Executive
Chairman of the Board of Directors, Officer since 1997 and President since 1998; Chairman
President and Chief Executive Officer of the Board of Directors of BW/IP in 1997 and President
and Chief Executive Officer and a Director of BW/IP from
1995 to 1997; Senior Vice President of Phelps Dodge
Corporation and President of Phelps Dodge Industries, its
diversified international manufacturing business, from 1989
to 1995.
Renee J. Hornbaker 46 Vice President and Chief Financial Officer since
Vice President and December 1997; Vice President, Business Development
Chief Financial Officer and Chief Information Officer in 1997; Vice President,
Finance and Chief Financial Officer of BW/IP in 1997;
Vice President, Business Development of BW/IP from 1996 to
1997; Director-Business Analysis and Planning of Phelps
Dodge Industries, the diversified international manufacturing
business of Phelps Dodge Corporation in 1996 and Director
Financial Analysis and Control from 1991 to 1996.
Rick L. Johnson 46 Vice President, Business Development since January 1998
Vice President, and Controller since November 1998; Vice President and
Business Development and Controller Controller of the Industrial Products Division from 1997
to January 1998; Industrial Products Group Vice President and
Controller from 1995 to 1997; President Durco Valtek (Singapore)
from 1993 to 1995; Corporate Controller 1991 to 1993.
Rory E. MacDowell 48 Vice President and Chief Information Officer since
Vice President and 1998; Chief Information Officer of Keystone International,
Chief Information Officer Inc., a manufacturer and distributor of flow control products
from 1993 to 1997; various information technology management
positions in the oilfield services division of Schlumberger from
1985 to 1993.
Cheryl D. McNeal 48 Vice President, Human Resources since 1996; Assistant
Vice President, Vice President, Human Resources and other Human
Human Resources Resource management positions at NCR from 1978 to 1996.
</TABLE>
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<TABLE>
<S> <C> <C>
George A. Shedlarski 54 President, Flow Solutions Division since January 1999;
President, Flow Solutions Division President, Fluid Sealing Division from 1997 to 1999;
President, ServiceRepair Division in 1997; President Rotating
Equipment Group in 1997; Group Vice President, Industrial Products
Group from 1994 to 1997; Vice President U.S. Operations from
1990 to 1994.
Ronald F. Shuff 46 Vice President since 1990 and Secretary and General
Vice President, Secretary and Counsel since 1989 .
General Counsel
Mark E. Vernon 46 President, Flow Control Division since 1997; President,
President, Flow Control Division Industrial Products Division in 1997; Group Vice President,
Flow Control Group from 1993 to 1997.
Howard D. Wynn 51 President, Rotating Equipment Division since 1997;
President, Rotating Equipment Division Vice President of BW/IP and President, Pump Division
from 1996 to 1997; Vice President of the BW/IP Pump
Division from 1993 to 1996.
Scott E. Messel 40 Treasurer since 1998; Vice President and Director, International
Treasurer Treasury from 1994 to December 1997, plus other increasingly
responsible management positions from 1983 to 1994, at Ralston
Purina Company, a manufacturer of pet foods, food-related
products and battery products.
</TABLE>
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is set forth in the 1999 Proxy
Statement and is incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is set forth in the 1999 Proxy
Statement under the heading "Security Ownership" and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is set forth to the extent applicable
in the 1999 Proxy Statement and is incorporated herein by reference.
11
<PAGE> 13
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The financial statements, appearing on pages 21 through 38 of the 1998
Annual Report to Shareholders, together with the report thereon of
Ernst & Young LLP, dated February 9, 1999, appearing on page 13 of the
1998 Annual Report to Shareholders, and the report of Price Waterhouse
LLP dated January 28, 1997, listed in the accompanying index on page
F-1, are incorporated herein by reference.
2. Financial Statement Schedules
The required financial statement schedule together with the reports
thereon of Ernst & Young LLP dated February 9, 1999, and Price
Waterhouse LLP dated January 28, 1997, listed in the accompanying index
on page F-1, is filed as part of this Form 10-K.
3. Exhibits
The exhibits listed on the accompanying index to exhibits on pages 13
through 18 are filed as part of this Form 10-K.
(b) Reports on Form 8-K
None.
(c) See Item 14(a) 3 above.
(d) See Item 14(a) 2 above.
12
<PAGE> 14
INDEX TO EXHIBITS*
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
NO.
<S> <C>
2.1 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 1 to the Joint Proxy Statement/Prospectus which is part of the
Registration Statement on Form S-4, dated June 19, 1997.
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 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
documents 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 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.
</TABLE>
13
<PAGE> 15
<TABLE>
<S> <C>
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 Company'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 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 BWIP'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.
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.**
</TABLE>
14
<PAGE> 16
<TABLE>
<S> <C>
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 was filed as Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1998.**
10.4 Amendment No. 3 to the Incentive Plan (filed herewith).**
10.5 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.**
10.6 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.**
10.7 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.**
10.8 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.**
10.9 Amendment No. 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.**
10.10 Amendment No. 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.**
10.11 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.**
10.12 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.**
10.13 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.**
10.14 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.**
10.15 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.**
</TABLE>
15
<PAGE> 17
<TABLE>
<S> <C>
10.16 Flowserve Corporation Second Amendment to the 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.**
10.17 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.**
10.18 Flowserve Corporation Retirement Compensation Plan for Directors
("Director Retirement Plan") was filed as Exhibit 10.15 to the
Company's Annual Report to Form 10-K for the year ended December 31,
1988.**
10.19 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.**
10.20 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.**
10.21 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.**
10.22 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.**
10.23 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.**
10.24 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.**
10.25 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.**
10.26 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.**
10.27 Executive Long-Term Disability Plan of The Duriron Company, Inc. was
filed as Exhibit 10.30 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.**
10.28 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.**
</TABLE>
16
<PAGE> 18
<TABLE>
<S> <C>
10.29 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.**
10.30 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. **
10.31 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.**
10.32 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.**
10.33 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. **
10.34 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. **
10.35 Amendment No. 2 to the amended and restated Director Deferral Plan was
filed as Exhibit 10.34 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998.**
10.36 Amendment No. 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.**
10.37 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.
**
10.38 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. **
10.39 Amendment No. 1 to Employment Agreement between the Company and William
M. Jordan was filed as Exhibit 10.38 to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1998.**
13.1 1998 Annual Report to Shareholders (filed herewith as part of this
report to the extent incorporated herein by reference).
18.1 Letter from Ernst & Young LLP regarding change in accounting principles
(filed herewith).
21.1 Subsidiaries of the Company (filed herewith).
</TABLE>
17
<PAGE> 19
<TABLE>
<S> <C>
23.1 Consent of Ernst & Young LLP (filed herewith).
23.2 Consent of PricewaterhouseCoopers LLP (filed herewith).
27.1 Financial Data Schedule submitted to the SEC in electronic format
(filed herewith).
27.2 Restated Financial Data Schedule submitted to the SEC in electronic
format (filed herewith).
"*" For exhibits of the Company incorporated by reference into this Annual
Report on Form 10-K from a previous filing with the Commission, the
Company's file number with the Commission since July 1997 is "1-13179"
and the previous file number was "0-325". All filings of BW/IP, Inc.
incorporated by reference in this Annual Report on Form 10-K cover the
periods prior to July 22, 1997.
"**" Management contracts and compensatory plans and arrangements required
to be filed as exhibits to this Annual Report on Form 10-K.
</TABLE>
18
<PAGE> 20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on this 19th day of
February 1999.
FLOWSERVE CORPORATION
(Registrant)
By: /s/ Bernard G. Rethore
------------------------------------------------
Bernard G. Rethore
Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ BERNARD G. RETHORE Chairman, President and February 19, 1999
- --------------------------------- Chief Executive Officer
Bernard G. Rethore (Principal Executive Officer)
/s/ RENEE J. HORNBAKER Vice President and Chief Financial Officer February 19, 1999
- --------------------------------- (Principal Financial Officer)
Renee J. Hornbaker
/s/ RICK L. JOHNSON Vice President Business Development February 19, 1999
- --------------------------------- And Controller
Rick L. Johnson (Principal Accounting Officer)
/s/ WILLIAM C. RUSNACK Director, Chairman of Audit/Finance Committee February 19, 1999
- ---------------------------------
William C. Rusnack
/s/ DIANE C. HARRIS Director, Member Audit/Finance Committee February 19, 1999
- ---------------------------------
Diane C. Harris
/s/ CHARLES M. RAMPACEK Director, Member Audit/Finance Committee February 19, 1999
- -----------------------
Charles M. Rampacek
/s/ JAMES O. ROLLANS Director, Member Audit/Finance Committee February 19, 1999
- ---------------------------------
James O. Rollans
/s/ R. ELTON WHITE Director, Member Audit/Finance Committee February 19, 1999
- ---------------------------------
R. Elton White
</TABLE>
19
<PAGE> 21
FLOWSERVE CORPORATION
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
ITEM 14(a)(1) AND (2)
<TABLE>
<CAPTION>
ANNUAL REPORT ANNUAL REPORT
TO ON
SHAREHOLDERS FORM 10-K
------------ -------------
<S> <C> <C>
Flowserve Corporation Consolidated Financial Statements
Reports of Independent Auditors 13 F-2
Consolidated Balance Sheets at 22
December 31, 1998 and 1997
For each of the three years in the period ended December 31, 1998:
Consolidated Statements of Income 21
Consolidated Statements of Comprehensive Income 21
Consolidated Statements of Shareholders' Equity 23
Consolidated Statements of Cash Flows 24
Notes to Consolidated Financial Statements 25-38
Flowserve Corporation Financial Statement Schedule for each of the three years
in the period ended December 31, 1998
Reports of Independent Auditors on
Financial Statement Schedule F-3 - F-4
Schedule II - Valuation and Qualifying Accounts F-5
</TABLE>
Financial statement schedules not included in this Annual Report on Form 10-K
have been omitted because they are not applicable or the required information is
shown in the consolidated financial statements or notes thereto.
F-1
<PAGE> 22
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of BW/IP, Inc.
In our opinion, the consolidated statements of income and retained earnings and
of cash flows of BW/IP, Inc. (not presented separately herein) present fairly,
in all material respects, the results of operations and cash flows of BW/IP,
Inc. and its subsidiaries for the year ended December 31, 1996, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audit. We conducted our
audit of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Los Angeles, California
January 28, 1997
F-2
<PAGE> 23
REPORT OF INDEPENDENT AUDITORS
ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors and Shareholders
Flowserve Corporation
We have audited the consolidated financial statements of Flowserve Corporation
and subsidiaries as of December 31, 1998 and 1997, and for each of the three
years in the period ending December 31, 1998, and have issued our report thereon
dated February 9, 1999 appearing on page 13 of the 1998 Annual Report (which
report and consolidated financial statements are incorporated by reference in
this Form 10-K). Our audits also included the financial statement schedule
listed in Item 14(a) of this Form 10-K. This schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion on the
schedule based on our audits. We did not audit the 1996 financial statements of
BW/IP, Inc., a wholly owned subsidiary, which statements reflect total assets
constituting 49% of the related consolidated total as of December 31, 1996, and
total revenues constituting 45% of the related totals for the year ended
December 31, 1996. We have been furnished with the report of other auditors with
respect to the financial statement schedule listed in item 14(a) of the Form
10-K of BW/IP, Inc.
In our opinion, based on our audits and the report of other auditors, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/Ernst & Young LLP
Dallas, Texas
February 9, 1999
F-3
<PAGE> 24
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of BW/IP, Inc.
Our audit of the consolidated financial statements (not presented separately
herein) referred to in our report dated January 28, 1997, of BW/IP, Inc.
appearing on page F-2 of this Annual Report on Form 10-K also included an audit
of the Financial Statement Schedules of BW/IP, Inc. for the year ended December
31, 1996 (not presented separately herein). In our opinion, these Financial
Statement Schedules present fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.
PRICE WATERHOUSE LLP
Los Angeles, California
January 28, 1997
F-4
<PAGE> 25
FLOWSERVE CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Balance at Additions Deductions Balance at
beginning Charged to from reserve end of
of year Earnings year
<S> <C> <C> <C> <C>
Description
Year ended December 31, 1998:
Allowance for doubtful accounts (a): $ 5,059 $ 333 $ 859 $ 4,533
======= ======= ======= =======
Year ended December 31, 1997:
Allowance for doubtful accounts (a): $ 4,826 $ 2,458 $ 2,225 $ 5,059
======= ======= ======= =======
Year ended December 31, 1996:
Allowance for doubtful accounts (a): $ 5,183 $ 1,786 $ 2,143 $ 4,826
======= ======= ======= =======
Year ended December 31, 1998:
Inventory reserves (b): $17,045 $ 3,388 $ 4,742 $16,051
======= ======= ======= =======
Year ended December 31, 1997:
Inventory reserves (b): $13,716 $ 4,308 $ 619 $17,405
======= ======= ======= =======
Year ended December 31, 1996:
Inventory reserves (b): $16,252 $ 860 $ 3,396 $13,716
======= ======= ======= =======
</TABLE>
(a) Deductions from reserve represent accounts written off net of recoveries.
(b) Deductions from reserve represent inventory written off.
F-5
<PAGE> 26
INDEX TO EXHIBITS*
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
NO.
<S> <C>
2.1 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 1 to the Joint Proxy Statement/Prospectus which is part of the
Registration Statement on Form S-4, dated June 19, 1997.
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 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
documents 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 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.
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 Company's Form 8-A/A dated June 11, 1998.
</TABLE>
<PAGE> 27
<TABLE>
<S> <C>
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 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 BWIP'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.
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 was filed as Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1998.**
10.4 Amendment No. 3 to the Incentive Plan (filed herewith).**
</TABLE>
<PAGE> 28
<TABLE>
<S> <C>
10.5 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.**
10.6 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.**
10.7 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.**
10.8 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.**
10.9 Amendment No. 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.**
10.10 Amendment No. 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.**
10.11 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.**
10.12 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.**
10.13 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.**
10.14 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.**
10.15 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.**
10.16 Flowserve Corporation Second Amendment to the 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.**
10.17 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.**
10.18 Flowserve Corporation Retirement Compensation Plan for Directors
("Director Retirement Plan") was filed as Exhibit 10.15 to the
Company's Annual Report to Form 10-K for the year ended December 31,
1988.**
</TABLE>
<PAGE> 29
<TABLE>
<S> <C>
10.19 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.**
10.20 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.**
10.21 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.**
10.22 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.**
10.23 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.**
10.24 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.**
10.25 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.**
10.26 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.**
10.27 Executive Long-Term Disability Plan of The Duriron Company, Inc. was
filed as Exhibit 10.30 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.**
10.28 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.**
10.29 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.**
10.30 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. **
10.31 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.**
10.32 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.**
</TABLE>
<PAGE> 30
<TABLE>
<S> <C>
10.33 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. **
10.34 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. **
10.35 Amendment No. 2 to the amended and restated Director Deferral Plan was
filed as Exhibit 10.34 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998.**
10.36 Amendment No. 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.**
10.37 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.
**
10.38 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. **
10.39 Amendment No. 1 to Employment Agreement between the Company and William
M. Jordan was filed as Exhibit 10.38 to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1998.**
13.1 1998 Annual Report to Shareholders (filed herewith as part of this
report to the extent incorporated herein by reference).
18.1 Letter from Ernst & Young LLP regarding change in accounting principles
(filed herewith).
21.1 Subsidiaries of the Company (filed herewith).
23.1 Consent of Ernst & Young LLP (filed herewith).
23.2 Consent of PricewaterhouseCoopers LLP (filed herewith).
27.1 Financial Data Schedule submitted to the SEC in electronic format
(filed herewith).
27.2 Restated Financial Data Schedule submitted to the SEC in electronic
format (filed herewith).
"*" For exhibits of the Company incorporated by reference into this Annual
Report on Form 10-K from a previous filing with the Commission, the
Company's file number with the Commission since July 1997 is "1-13179"
and the previous file number was "0-325". All filings of BW/IP, Inc.
incorporated by reference in this Annual Report on Form 10-K cover the
periods prior to July 22, 1997.
"**" Management contracts and compensatory plans and arrangements required
to be filed as exhibits to this Annual Report on Form 10-K.
</TABLE>
<PAGE> 1
Exhibit 10.4
AMENDMENT NO. 3
TO THE FLOWSERVE CORPORATION
ANNUAL INCENTIVE PLAN FOR SENIOR EXECUTIVES
(AS RESTATED JANUARY 1, 1994)
The second sentence of Section VIII (B) shall be revised and restated in its
entirety as follows:
"Effective January 1, 1998, any Award so elected by the
Participant to be paid in the form of Shares or such
deferred shares shall be increased by fifteen per cent
(15%) over an Award otherwise payable in cash."
The remainder of the Plan shall remain in full force and effect as currently
stated.
Date: February 19, 1998.
/s/ Ronald F. Shuff
-----------------------------
Ronald F. Shuff
Vice President, Secretary and
General Manager
<PAGE> 1
EXHIBIT 13
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Flowserve Corporation
We have audited the accompanying consolidated balance sheets of Flowserve
Corporation and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of income, comprehensive income, shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the 1996 financial statements
of BW/IP, Inc., a wholly owned subsidiary, which statements reflect total
revenues constituting 45% of the related totals for the year ended December 31,
1996. Those statements were audited by other auditors whose report thereon dated
January 28, 1997, has been furnished to us, and our opinion, insofar as it
relates to data included for BW/IP, Inc., is based solely on the report of the
other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Flowserve Corporation and subsidiaries at
December 31, 1998 and 1997, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles.
In 1998, as discussed in Note 5 to the consolidated financial statements,
the Company changed its method of accounting for costing its inventory, and as
discussed in Note 7, changed its method of accounting for certain defined
compensation arrangements.
/s/ ERNST & YOUNG LLP
Ernst & Young LLP
Dallas, Texas
February 9, 1999
REPORT OF MANAGEMENT
The Company's management is responsible for preparation of the accompanying
consolidated financial statements. These statements have been prepared in
conformity with generally accepted accounting principles and include amounts
that are based on management's best estimates and business judgment. Management
maintains a system of internal controls, which in management's opinion provides
reasonable assurance that assets are safeguarded and transactions properly
recorded and executed in accordance with management's authorization. The
internal control system is supported by internal audits and is tested and
evaluated by the independent accountants in connection with their annual audit.
The Board of Directors pursues its responsibility for financial information
through an Audit and Finance Committee consisting entirely of independent
directors. This committee regularly meets not only with management, but also
separately with representatives of the independent accountants.
/s/ BERNARD G. RETHORE /s/ RENEE J. HORNBAKER
Bernard G. Rethore Renee J. Hornbaker
Chairman, President and Vice President and
Chief Executive Officer Chief Financial Officer
FLOWSERVE 1998 ANNUAL REPORT
13
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OVERVIEW
The following discussion and analysis are provided to increase understanding of,
and should be read in conjunction with, the consolidated financial statements
and accompanying notes.
Flowserve Corporation was created on July 22, 1997, through a merger of
equals between BW/IP, Inc. and Durco International Inc., which was accounted for
under the "pooling of interests" method of 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.
Flowserve produces engineered pumps, precision mechanical seals, automated
and manual quarter-turn valves, control valves and valve actuators, and provides
a range of related flow management services worldwide, primarily for the process
industries. Equipment manufactured and serviced by the Company is used in
industries that deal with 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 United States
and other countries where its products are sold and serviced, by the
relationship of the U.S. dollar to other currencies and by the demand and
pricing for customers' products. The impact of these conditions is somewhat
mitigated by the strength and diversity of Flowserve's product lines and
geographic coverage.
RESULTS OF OPERATIONS
In general, 1998 results were lower than those of the two previous years due to
the downturn of economic conditions in the global markets in which the Company
participates. The economic turmoil that started in Asia in the second half of
1997 spread to other parts of the world, including Latin America. The
profitability of our chemical and petroleum customers, which collectively
represent about two-thirds of our business, was negatively impacted by the
economic weakness. This economic weakness contributed to a supply/demand
imbalance of chemicals and an oil price that averaged $11.12 per barrel in 1998,
compared with $17.78 per barrel in 1997 and $18.46 per barrel in 1996. As a
result, our customers reduced expenditures by delaying or canceling new projects
and reducing maintenance spending.
<TABLE>
<CAPTION>
BOOKINGS SALES
-------- -----
<S> <C> <C>
1998 $1,083 $1,083
1997 $1,172 $1,152
1996 $1,142 $1,098
</TABLE>
Bookings (incoming orders for which there are purchase commitments) were lower
in 1998 at $1,082.5 million, compared with $1,172.4 million in 1997 and $1,141.6
million in 1996. Sales decreased to $1,083.1 million in 1998 from $1,152.2
million in 1997 and $1,097.6 million in 1996. Bookings and sales declines in
1998 were largely a result of the economic and market factors previously
discussed.
There were several other factors that affected the comparisons. A stronger
U.S. dollar, in relation to other currencies in which the Company conducts its
business, had the effect of reducing both bookings and sales when compared with
the prior year. The negative translation effect reduced 1998 bookings and sales
by about 2% and 1997 bookings and sales by about 4%.
Comparisons are also impacted by the divestitures of several businesses in
1997 that contributed approximately $18 million to both bookings and sales in
1997 and $24 million in 1996. Several acquisitions affected the comparability as
well. Acquisitions made in 1998 added approximately $14 million to 1998 bookings
and sales, compared with 1997 and 1996. Acquisitions made in late 1996 and early
1997 added about $45 million to 1997 bookings and sales compared with 1996.
In total, sales outside the United States were 42% in 1998, compared with
48% in 1997 and 52% in 1996. These sales declined due to weaker economies in
Asia and Latin America and negative currency translation effect.
BUSINESS SEGMENTS
Flowserve manages its operations through three business segments: Rotating
Equipment Division (RED) for engineered pumps; Flow Control Division (FCD) for
automated quarter-turn valves, control valves and valve actuators; and Flow
Solutions Division (FSD) for precision mechanical seals and flow management
services.
FLOWSERVE 1998 ANNUAL REPORT
14
<PAGE> 3
Sales and operating income before special items, as defined below, for each
of the three business segments are:
<TABLE>
<CAPTION>
ROTATING EQUIPMENT DIVISION
---------------------------------
(in millions of dollars) 1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Sales $ 375.5 $ 412.8 $ 402.8
Operating income 41.1 51.0 49.0
</TABLE>
Sales of pumps and pump parts for the Rotating Equipment Division (RED)
decreased to $375.5 million from $412.8 million in 1997 and $402.8 million in
1996. The sales decline was generally due to reduced demand for chemical process
pumps as our chemical industry customers lowered their capital and maintenance
spending in response to weaker demand and pricing for their products. The
Company believes that the chemical market will continue to be weak in 1999. RED
sales were also lower due to reduced demand for nuclear parts and replacements.
RED sales increased in 1997 from 1996 due to the acquisition of the engineered
pump business of Stork Pompen, B.V. in January 1997.
Operating income before special items, as a percentage of RED sales,
declined to approximately 11% in 1998 from about 12% in the previous two years.
The decline was due to the lower volume of more profitable chemical process
pumps, nuclear products and other parts and replacement business that more than
offset the benefits of the merger integration program.
<TABLE>
<CAPTION>
FLOW CONTROL DIVISION
---------------------------------
(in millions of dollars) 1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Sales $ 303.0 $ 317.2 $ 286.4
Operating income 41.7 47.0 37.1
</TABLE>
Sales of valves and valve automation products for the Flow Control Division
(FCD) declined to $303.0 million in 1998 from $317.2 million in 1997. The
decrease was due to the weaker chemical market that reduced demand and placed
downward pressure on selling prices. The sales decrease was partly offset by the
acquisition of Valtek Engineering (United Kingdom licensee) in July 1998. FCD
sales were higher in 1997 than the $286.4 million recorded in 1996 due to
internal growth from control valves and the acquisition of Anchor/Darling Valves
in December 1996.
Operating income before special items, as a percentage of sales, was 13.8%
in 1998, compared with 14.8% in 1997 and 13.0% in 1996. The decline in 1998 was
generally due to the lower sales volume. Operating income in 1998 was also
affected by lower selling prices and a reduced volume of higher-profit spare
parts. The improvement in 1997 over 1996 was due to sales growth and higher
margins from control valves and the Anchor/Darling Valves business.
<TABLE>
<CAPTION>
FLOW SOLUTIONS DIVISION
---------------------------------
(in millions of dollars) 1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Sales $ 433.6 $ 430.1 $ 421.9
Operating income 66.1 62.7 55.5
</TABLE>
Sales of services and seal products for the Flow Solutions Division (FSD)
increased to $433.6 million in 1998, compared with $430.1 million in 1997 and
$421.9 million in 1996. Sales related to service activities increased about 11%
in 1998 and 9% in 1997, despite the challenging market environment, due to an
increased focus on this business. These increases were partly offset by reduced
demand for seals due to economic weakness in Asia and Latin America, softness in
the chemical and petroleum markets and technological improvements in the
Company's seals that have reduced their mean time between failure.
Operating income before special items, as a percentage of sales, increased
to 15.2% from 14.6% in 1997 and 13.2% in 1996. The improved margins were
generally due to the leveraging of a higher volume of sales and the benefits of
the merger integration program, partly offset by a seal product mix change to
lower margin products.
EARNINGS PER SHARE
<TABLE>
<CAPTION>
AFTER SPECIAL ITEMS SPECIAL ITEMS TOTAL
------------------- ------------- -----
<S> <C> <C> <C>
1998 $1.23 $0.65 $1.88
1997 $1.26 $0.75 $2.01
1996 $1.72 $0.07 $1.79
</TABLE>
Earnings after special items were $48.9 million ($1.23 per share) in 1998,
compared with $51.6 million ($1.26 per share) in 1997 and $71.1 million ($1.72
per share) in 1996. Special items included restructuring charges, merger
integration expense, merger transaction expense, costs associated with an
obligation under an executive employment agreement, a gain on the sale of a
subsidiary and the cumulative effect of a change in accounting principle.
Earnings before special items were $74.9
FLOWSERVE 1998 ANNUAL REPORT
15
<PAGE> 4
million ($1.88 per share) in 1998, compared with $82.1 million ($2.01 per share)
in 1997 and $74.1 million ($1.79 per share) in 1996. The decline in earnings in
1998 was largely due to the decline in sales and a lower gross profit margin.
The Company's share repurchase program contributed about $0.03 per share to
earnings in 1998, compared with the two prior years.
The restructuring charges of $32.6 million in 1997 were related to the
Company's merger integration program, and the restructuring charges of $5.8
million in 1996 were related to the consolidation of certain operations in
Europe and Asia. Merger integration expense was $38.3 million in 1998 and $7.0
million in 1997. Merger integration expense was principally related to the
consolidation of the business units and headquarters, plant closings and the
formation of the Services Group of the Flow Solutions Division. Merger
transaction expense of $11.9 million in 1997 was for severance and other
expenses triggered by the merger, and investment banking, legal and other costs
required to effect the merger. In 1998, the Company recognized an obligation
under an executive employment agreement of $3.8 million recorded in selling and
administrative expense. In 1997, the Company sold its Metal Fab subsidiary and
realized a pretax gain of $11.4 million. The change in accounting principle
resulted in a one-time cumulative net-of-tax benefit of $1.2 million in 1998.
The accounting change was due to the required adoption of EITF 97-14,
"Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held
in a Rabbi Trust and Invested."
Gross profit margin, gross profit as a percentage of sales, declined to
38.3% in 1998 from 39.0% in 1997 and 39.1% in 1996. The lower margin in 1998 was
generally related to valve price discounting and a seal product mix change
toward lower margin products. These reductions were partly offset by savings
related to the Company's merger integration program that reduced cost of sales
by approximately $9 million. These factors and lower sales contributed to a
decline in gross profit dollars to $415.3 million in 1998 from $448.9 million in
1997 and $428.9 million in 1996.
Selling and administrative expense declined to $265.6 million in 1998 from
$285.9 million in 1997 and $283.4 million in 1996. Selling and administrative
expense in 1998 included $3.8 million in one-time costs associated with an
obligation under an executive employment agreement. As a percentage of sales,
selling and administrative expense was 24.5% (24.2% when adjusted for the
executive employment agreement) in 1998, compared with 24.8% in 1997 and 25.8%
in 1996. Reductions in selling and administrative expense were generally due to
savings from merger integration activities of about $12 million and lower sales.
Research, engineering and development expense was $26.4 million in 1998,
compared with $26.9 million in 1997 and $24.5 million in 1996. The slight
decline in this expense in 1998 was principally due to savings realized from
merger integration activities.
Interest expense was $13.2 million in 1998, compared with $13.3 million in
1997 and $12.1 million in 1996. Interest expense in 1998 was essentially the
same as the 1997 amount as the additional expense due to increased borrowings
throughout the year was offset by lower interest rates on the Company's variable
rate debt. The increase in 1997 over 1996 was primarily related to a full year
of expense on borrowings entered into during 1996.
The effective tax rate before special items was 34.9% in 1998, compared
with 36.9% in 1997 and 34.4% in 1996. The decrease in 1998 was due to the
geographic mix of earnings and post-merger restructuring of operations. The
effective tax rate after special items in 1998 was the same as the effective tax
rate excluding special items. In 1997, the effective tax rate after special
items was 42.6% due to the nondeductibility of certain merger transaction
expenses, partly offset by certain tax benefits realized from the sale of a
subsidiary. The rate in 1996, after special items, was 34.4% due to one-time
benefits associated with the restructuring of certain European operations and
utilization of tax loss carryforwards.
MERGER INTEGRATION PROGRAM
In 1997, the Company developed a program designed to achieve the synergies
planned for the merger of BW/IP and Durco. The program included facility
rationalizations in North America and Europe, organizational realignments at the
corporate and division levels, procurement initiatives, investments in training
and support for service operations. In the fourth quarter of 1997, the Company
recognized a one-time restructuring charge of $32.6 million in connection with
this program. Other nonrecurring expenses related to the merger were incurred in
1998 and 1997 in order to achieve the planned synergies. These expenses of $38.3
million in 1998 and $7.0 million in 1997 were principally costs for consultants,
relocations and training. In 1998, the Company also spent $11.0 million in
capital expenditures related to this program.
FLOWSERVE 1998 ANNUAL REPORT
16
<PAGE> 5
In 1998, the Company realized approximately $21 million of operating income
benefit related to the merger. In the fourth quarter of 1998, the Company
realized operating income benefits at a $28 million annualized rate. By 2001,
the Company expects to achieve the $45 million to $55 million of annual
operating income benefit planned from this program. The benefits result from
eliminating cost redundancies, capturing procurement savings and realizing
earnings increases from sales synergies.
BUSINESS PROCESS IMPROVEMENT INITIATIVE (FLOWSERVER)
In July 1998, the Company's Board of Directors approved an $18 million
expenditure for the first phase of Flowserver, a business process improvement
initiative. This program has costs and benefits incremental to the initial
merger integration program. The Flowserver initiative includes the
standardization of the Company's processes and the implementation of a global
information system to facilitate common best practices. The investment in this
business process improvement initiative is expected to approximate $120 million
over a four-year period. Approximately half of the expenditures associated with
this initiative are expected to be capitalized, with the balance expensed.
Completion of Flowserver is expected to result in more than $40 million of
annual operating income benefit in the first full year following completion of
the program and about a $100 million reduction in working capital requirements.
In 1998, the Company incurred costs associated with this project of $5.1
million recorded as merger integration expense and $1.5 million as capital
expenditures.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FROM OPERATIONS
(in millions of dollars)
<TABLE>
<CAPTION>
AFTER SPECIAL ITEMS SPECIAL ITEMS TOTAL
------------------- ------------- -----
<S> <C> <C> <C>
1998 $54.1 $ 23.7 $ 77.8
1997 $90.0 $ 25.3 $115.3
1996 $88.4 $ 3.7 $ 92.1
</TABLE>
Cash flows from operations and financing available under existing credit
agreements are the Company's primary sources of short-term liquidity. Cash flows
from operating activities in 1998 decreased to $54.1 million, compared with
$90.0 million in 1997 and $88.4 million in 1996. The decrease in cash flows in
1998 was primarily due to cash expended for restructuring and lower operating
profits. The increase in 1997 cash flows over 1996 resulted primarily from
increased earnings (before the noncash portion of the restructuring reserve).
CAPITAL EXPENDITURES
(in millions of dollars)
<TABLE>
<S> <C>
1998 $38.2
1997 $39.6
1996 $35.7
</TABLE>
Capital expenditures, net of disposals, were $38.2 million in 1998, compared
with $39.6 million in 1997 and $35.7 million in 1996. Capital expenditures were
funded by operating cash flows. For each of the three years, capital
expenditures were invested in machinery and equipment, replacements and
upgrades. Capital expenditures in 1998 included about $11.0 million related to
the merger integration projects and $1.5 million related to Flowserver. In 1997,
the amount increased over 1996 predominately due to investments in low-cost
manufacturing facilities in India.
During the second quarter of 1998, the Company initiated a $100 million
share repurchase program. In 1998, the Company spent approximately $64.5 million
to repurchase approximately 2.8 million, or 7.1%, of its outstanding shares. The
Company generally used credit facilities to fund the purchases. 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.
FLOWSERVE 1998 ANNUAL REPORT
17
<PAGE> 6
The Company has a $150 million revolving credit agreement of which $124
million was utilized at December 31, 1998. The Company also had other short-term
credit facilities under which $55.0 million was available for borrowing. At
December 31, 1998, total debt was 37.2% of the Company's capital structure,
compared with 27.1% at December 31, 1997. The ratio increased as planned due to
the share repurchase program. The interest coverage ratio of the Company's
indebtedness was 6.6 times interest at December 31, 1998, compared with 7.8
times interest at December 31, 1997.
The Company believes that internally generated funds, together with access
to external capital resources, will be sufficient to satisfy existing
commitments and plans, and to provide adequate financial flexibility to take
advantage of potential strategic business opportunities should they arise.
The return on average net assets based on results for 1998, before special
items, was 12.6%, compared with 13.7% for 1997. The decline is due to the lower
earnings discussed previously. Including the impact of special items, the return
on average net assets was 8.6% for 1998, compared with 9.0% for 1997. The return
on average shareholders' equity, before special items, was 20.0% in 1998,
compared with 20.4% in 1997. Return on shareholders' equity, including special
items, was 13.1% for 1998 and 13.0% for 1997.
Acquisitions are an important part of the Company's strategy to increase
its earnings and build shareholder value. Accordingly, in 1998 the Company
acquired 100% of its joint venture in Singapore (previously 51% owned by the
Company), acquired certain assets and liabilities related to the business of two
licensees located in the United Kingdom and Australia and acquired the
outstanding shares of a valve-repair organization with operations in Belgium and
the Netherlands. Payments for acquisitions, net of cash acquired, were $20.0
million in 1998.
Inflation during the past three years had little impact on the Company's
consolidated financial performance. Foreign currency translation had the effect
of reducing the Company's sales and earnings by 2% in 1998 and 4% in 1997.
MARKET RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS
The Company has certain market-sensitive financial instruments, including
long-term debt and investments in foreign subsidiaries. To evaluate the risks
associated with these instruments, the Company considered the impact of
unfavorable changes in the rates or values of these instruments as of December
31, 1998. The market changes, assumed to occur as of December 31, 1998, to
measure potential risk, are a 100 basis-point increase in market interest rates,
a 10% adverse change in all foreign currency exchange rates and a 10% decline in
the value of the Company's net investment in foreign subsidiaries.
The Company considered the impact of a 100 basis-point increase in interest
rates and determined such an increase would not materially affect the Company's
earnings.
The Company employs a foreign currency hedging strategy to minimize
potential losses in earnings or cash flows from unfavorable foreign currency
exchange rate movements. Foreign currency exposures arise from transactions,
including firm commitments and anticipated transactions, denominated in a
currency other than an entity's functional currency and from foreign denominated
revenues and profits translated back into U.S. dollars. The primary currencies
to which the Company has exposures are the German mark, British pound, Dutch
guilder and other European currencies; the Canadian dollar; the Mexican peso;
the Japanese yen; the Singapore dollar; and, the Australian dollar.
Exposures are hedged primarily with foreign currency forward contracts that
generally have maturity dates less than one year. Company policy allows foreign
currency coverage only for identifiable foreign currency exposures and,
therefore, the Company does not enter into foreign currency contracts for
trading purposes where the objective is to generate profits. The potential loss
in fair value at December 31, 1998, based on year-end positions of outstanding
foreign currency contracts resulting from a hypothetical 10% adverse change in
all foreign currency exchange rates would not be material. The potential loss
would exclude hedges of existing balance sheet exposures. The losses in these
contracts would be offset by exchange gains in the underlying net monetary
exposures for which the contracts are designated as hedges.
The Company generally views its investments in foreign subsidiaries from a
long-term perspective and, therefore, does not generally hedge these
investments. The Company uses capital structuring techniques to manage its
investment in foreign subsidiaries as deemed necessary. The Company's net
investment in foreign subsidiaries and affiliates, translated into U.S. dollars
using year-end exchange rates, was $106.4 million at December 31,1998. A
potential loss in value of the Company's net investment in foreign subsidiaries
resulting from a hypothetical 10% adverse change in quoted foreign exchange
rates at the end of 1998 would approximate $10.6 million.
FLOWSERVE 1998 ANNUAL REPORT
18
<PAGE> 7
EURO CONVERSION
On January 1, 1999, 11 European Union member states (Germany, France, the
Netherlands, Austria, Italy, Spain, Finland, Ireland, Belgium, Portugal and
Luxembourg) adopted the Euro as their common national currency. Until January 1,
2002, either the Euro or a participating country's national currency will be
accepted as legal tender. Beginning on January 1, 2002, Euro-denominated bills
and coins will be issued, and by July 1, 2002, only the Euro will be accepted as
legal tender. The Company does not expect future balance sheets, statements of
earnings or statements of cash flows to be materially impacted by the Euro
conversion.
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 normal business activities.
The Company has assessed how it might 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.
The Company's plan encompasses its information systems and production and
other equipment that utilize date or time-oriented software or computer chips,
products, vendors and customers. The plan is being carried out in four phases:
1) assessment and plan development; 2) remediation; 3) testing; and, 4)
implementation. The Company's plan includes the use of independent experts as
considered necessary. The Company has engaged independent experts to evaluate
its Year 2000 plan and to assist in related issue identification, assessment,
remediation and testing efforts.
With regard to information systems, production, and other equipment and
products, the Company is 100 percent complete with the assessment and plan
development phase. Planned remediation efforts are approximately 80 percent
complete. Testing is about 65 percent complete and implementation is about 50
percent complete. The Company expects that efforts in these areas will be
substantially complete by July 1999.
The Company also is working with its vendors and customers to ensure Year
2000 compliance throughout its supply chain. The Company developed a
questionnaire that is used to survey vendors regarding 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 the 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 seek 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.
The Company's preliminary estimate of the total cost for Year 2000
compliance is approximately $7.0 million, of which approximately $5.6 million
had been incurred through December 31, 1998. Virtually all of the amounts spent
to date relate to the cost to repair or replace software and associated
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 ensure compliance by the
Year 2000.
Incremental spending in addition to the $7.0 million 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.
The Company has begun, but has not yet completed, a comprehensive analysis
of the operational problems and costs (including loss of revenues) that would be
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 likely
worst-case scenario, as such a scenario has not yet been clearly identified. The
Company plans to complete such analysis and contingency planning by April 1999.
The Company believes that the Year 2000 issue will not pose significant
operational problems for the Company. However, if all Year 2000 issues are not
properly identified, or assessment, remediation and testing are not completed in
a timely manner with respect to problems that are identified, 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 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.
FLOWSERVE 1998 ANNUAL REPORT
19
<PAGE> 8
ACCOUNTING DEVELOPMENTS
In 1998, the Company adopted Statement of Financial Accounting Standards, (SFAS)
No. 130, "Reporting Comprehensive Income"; SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information"; and SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits." SFAS
No. 130 established standards for the presentation and display of comprehensive
income. SFAS No. 131 required public enterprises to disclose information about
their reporting segments consistent with the way management operates the
business. SFAS No. 132 consolidated the disclosures about pensions, settlement
and curtailment of pension plans and retirement benefits other than pensions
into a single set of requirements. In addition, the Company adopted EITF 97-14,
"Accounting for Defined Compensation Arrangements Where Amounts Earned Are Held
in a Rabbi Trust and Invested."
In 1998, the Financial Accounting Standards Board also issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This standard is
effective for fiscal periods beginning after June 15, 1999. It establishes
accounting and reporting standards for derivative instruments and hedging
activities and is not expected to materially impact Flowserve's reported
financial position, results of operations or cash flows.
FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY
This 1998 Annual Report, including Management's Discussion and Analysis and the
Letter to Shareholders, 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
many factors that could cause actual results to differ materially from the
forward-looking statements 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; continued economic growth within the
United States; unanticipated difficulties or costs or reduction in benefits
associated with the implementation of the Company's "Flowserver" 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 strategic and business conditions. The Company undertakes
no obligation to publicly update or revise any forward-looking statement as a
result of new information, future events or otherwise.
FLOWSERVE 1998 ANNUAL REPORT
20
<PAGE> 9
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------
(Amounts in thousands, except per share data) 1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Sales $ 1,083,086 $ 1,152,196 $ 1,097,645
Cost of sales 667,753 703,319 668,718
----------- ----------- -----------
Gross profit 415,333 448,877 428,927
Selling and administrative expense 265,556 285,890 283,360
Research, engineering and development expense 26,372 26,893 24,522
Restructuring and merger transaction expenses -- 44,531 5,778
Merger integration expense 38,326 6,982 --
----------- ----------- -----------
Operating income 85,079 84,581 115,267
Interest expense 13,175 13,275 12,144
Other income, net (1,253) (7,107) (5,228)
Gain on sale of subsidiary -- (11,376) --
----------- ----------- -----------
Earnings before income taxes 73,157 89,789 108,351
Provision for income taxes 25,502 38,223 37,254
----------- ----------- -----------
Earnings before cumulative effect of change in accounting principle 47,655 51,566 71,097
Cumulative effect of change in accounting principle, net (1,220) -- --
----------- ----------- -----------
Net earnings $ 48,875 $ 51,566 $ 71,097
=========== =========== ===========
Earnings per share (diluted and basic)
Before cumulative effect of change in accounting principle $ 1.20 $ 1.26 $ 1.72
Cumulative effect of change in accounting principle, net .03 -- --
----------- ----------- -----------
Net earnings per share $ 1.23 $ 1.26 $ 1.72
=========== =========== ===========
Average shares outstanding 39,898 40,896 41,363
</TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------
(Amounts in thousands) 1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Net earnings $48,875 $51,566 $71,097
Other comprehensive expense
Foreign currency translation adjustments 9,861 24,002 8,918
Nonqualified pension plan adjustment -- -- 229
------- ------- -------
Other comprehensive expense 9,861 24,002 9,147
------- ------- -------
Comprehensive income $39,014 $27,564 $61,950
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
FLOWSERVE 1998 ANNUAL REPORT
21
<PAGE> 10
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------
(Amounts in thousands, except per share data) 1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 24,928 $ 58,602
Accounts receivable, net 234,191 234,437
Inventories 199,286 184,944
Prepaids and other current assets 28,885 36,681
--------- ---------
Total current assets 487,290 514,664
Property, plant and equipment, net 209,032 209,509
Intangible assets, net 91,384 79,748
Other assets 82,491 76,104
--------- ---------
Total assets $ 870,197 $ 880,025
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 76,745 $ 68,241
Notes payable 3,488 5,644
Income taxes 17,472 15,548
Accrued liabilities 107,028 128,802
Long-term debt due within one year 14,393 12,209
--------- ---------
Total current liabilities 219,126 230,444
Long-term debt due after one year 186,292 128,936
Post-retirement benefits and deferred items 120,015 125,372
Commitments and contingencies
Shareholders' equity
Serial preferred stock, $1.00 par value, no shares issued -- --
Common shares, $1.25 par value
Shares authorized - 120,000
Shares issued and outstanding - 41,484 51,856 51,856
Capital in excess of par value 70,698 70,655
Retained earnings 353,249 326,681
--------- ---------
475,803 449,192
Treasury stock, at cost - 3,817 and 881 shares (90,404) (23,145)
Accumulated other comprehensive expense (40,635) (30,774)
--------- ---------
Total shareholders' equity 344,764 395,273
--------- ---------
Total liabilities and shareholders' equity $ 870,197 $ 880,025
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
FLOWSERVE 1998 ANNUAL REPORT
22
<PAGE> 11
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------------------------------------------------
(Amounts in thousands) Shares Amount Shares Amount Shares Amount
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Common shares
Beginning balance - January 1 41,484 $ 51,856 41,482 $ 51,854 41,320 $ 51,650
Stock activity under stock plans -- -- 2 2 162 204
--------- --------- --------- --------- --------- ---------
Ending balance - December 31 41,484 $ 51,856 41,484 $ 51,856 41,482 $ 51,854
--------- --------- --------- --------- --------- ---------
Capital in excess of par value
Beginning balance - January 1 $ 70,655 $ 72,434 $ 70,669
Stock activity under stock plans 43 (1,779) 1,765
--------- --------- --------- --------- --------- ---------
Ending balance - December 31 $ 70,698 $ 70,655 $ 72,434
--------- --------- --------- --------- --------- ---------
Retained earnings
Beginning balance - January 1 $ 326,681 $ 298,563 $ 250,762
Stock activity under stock plans -- 3 --
Net earnings 48,875 51,566 71,097
Cash dividends declared (22,307) (23,451) (23,296)
--------- --------- --------- --------- --------- ---------
Ending balance - December 31 $ 353,249 $ 326,681 $ 298,563
--------- --------- --------- --------- --------- ---------
Treasury stock
Beginning balance - January 1 (881) $ (23,145) (1,081) $ (27,455) (8) $ (210)
Stock activity under stock plans 184 4,782 200 4,310 -- --
Treasury stock repurchases (2,841) (64,508) -- -- (1,073) (27,245)
Rabbi Trust adjustment (279) (7,533) -- -- -- --
--------- --------- --------- --------- --------- ---------
Ending balance - December 31 (3,817) $ (90,404) (881) $ (23,145) (1,081) $ (27,455)
--------- --------- --------- --------- --------- ---------
Accumulated other comprehensive expense
Beginning balance - January 1 $ (30,774) $ (6,772) $ 2,375
Foreign currency translation adjustment (9,861) (24,002) (8,918)
Nonqualified pension plan adjustment -- -- (229)
--------- --------- --------- --------- --------- ---------
Ending balance - December 31 $ (40,635) $ (30,774) $ (6,772)
--------- --------- --------- --------- --------- ---------
Total Shareholders' Equity
Beginning balance - January 1 40,603 $ 395,273 40,401 $ 388,624 41,312 $ 375,246
Net changes in shareholders' equity (2,936) (50,509) 202 6,649 (911) 13,378
--------- --------- --------- --------- --------- ---------
Ending balance - December 31 37,667 $ 344,764 40,603 $ 395,273 40,401 $ 388,624
========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
FLOWSERVE 1998 ANNUAL REPORT
23
<PAGE> 12
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------
(Amounts in thousands) 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash flows - Operating activities:
Net earnings $ 48,875 $ 51,566 $ 71,097
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation 35,110 35,277 33,452
Amortization 4,189 3,656 3,213
Gain on sale of subsidiary, net of income taxes -- (7,417) --
Loss on the sale of fixed assets 57 33 551
Cumulative effect of change in accounting principle (1,220) -- --
Change in assets and liabilities, net of effects of acquisitions and dispositions:
Accounts receivable 3,015 (18,401) (8,645)
Inventories (11,507) (9,943) (1,565)
Prepaid expenses 8,718 (10,287) (1,014)
Other assets (11,066) (13,232) 103
Accounts payable 5,654 1,574 (7,239)
Accrued liabilities (25,848) 48,806 (5,677)
Income taxes 1,051 (2,005) 147
Post-retirement benefits and deferred items (3,709) 13,195 5,855
Net deferred taxes 1,033 (1,477) 1,901
Other (248) (1,342) (3,824)
-------- -------- --------
Net cash provided by operating activities 54,104 90,003 88,355
-------- -------- --------
Cash flows - Investing activities:
Capital expenditures, net of disposals (38,249) (39,560) (35,691)
Payments for acquisitions, net of cash acquired (19,951) (10,461) (13,240)
Proceeds from sale of subsidiary -- 18,793 --
Other (427) 1,777 (258)
-------- -------- --------
Net cash flows used by investing activities (58,627) (29,451) (49,189)
-------- -------- --------
Cash flows - Financing activities:
Net repayments under lines of credit (2,314) 576 (12,720)
Payments on long-term debt (20,212) (15,760) (71)
Proceeds from long-term debt 76,950 929 36,296
Repurchase of common stock (64,508) -- (27,838)
Proceeds from issuance of common stock 4,764 2,584 2,467
Dividends paid (22,307) (26,121) (23,296)
-------- -------- --------
Net cash flows used by financing activities (27,627) (37,792) (25,162)
-------- -------- --------
Effect of exchange rate changes (1,524) (3,091) (3,667)
-------- -------- --------
Net change in cash and cash equivalents (33,674) 19,669 10,337
Cash and cash equivalents at beginning of year 58,602 38,933 28,596
-------- -------- --------
Cash and cash equivalents at end of year $ 24,928 $ 58,602 $ 38,933
======== ======== ========
Taxes paid $ 23,579 $ 27,636 $ 31,493
Interest paid $ 11,190 $ 13,420 $ 12,269
</TABLE>
See accompanying notes to consolidated financial statements.
FLOWSERVE 1998 ANNUAL REPORT
24
<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly and majority-owned subsidiaries. Intercompany profits, transactions
and balances have been eliminated. Investments in unconsolidated affiliated
companies, which represent all nonmajority ownership interests, are carried on
the equity basis, which approximates the Company's equity interest in their
underlying net book value.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
BASIS OF COMPARISON
Certain amounts in 1997 and 1996 have been reclassified to conform with the 1998
presentation.
BUSINESS COMBINATIONS
Business combinations accounted for under the pooling of interests method of
accounting combine the assets, liabilities and shareholders' equity of the
acquired entity with the Company's respective accounts at recorded values.
Prior-period financial statements have been restated to give effect to the
transactions as if they had occurred at the beginning of all periods presented.
Business combinations accounted for under the purchase method of accounting
include the results of operations of the acquired business from the date of
acquisition. Net assets of the companies acquired are recorded at their fair
value to the Company at the date of acquisition and any excess of purchase price
over fair value is recorded as goodwill.
REVENUE RECOGNITION
Revenues and costs are generally recognized as units are shipped. Revenue for
certain longer-term contracts is recognized based on the percentage of
completion. Progress billings are generally shown as a reduction of inventory
unless such billings are in excess of accumulated costs, in which case such
balances are included in accrued liabilities.
SHORT-TERM INVESTMENTS AND CREDIT RISK
The Company places its temporary cash investments with financial institutions
and, by policy, limits the amount of credit exposure to any one financial
institution. These investments, with an original maturity of three months or
less when purchased, are classified as cash equivalents. They are highly liquid
with principal values not subject to significant risk of change due to interest
rate fluctuations. Credit risk related to accounts receivable is also limited
due to the large number of customers in the Company's customer base, the
Company's diverse product line and the dispersion of the Company's customers
across many geographic regions. As of December 31, 1998, the Company does not
believe that it had significant concentrations of credit risk.
ACCOUNTS RECEIVABLE
Accounts receivable are stated net of the allowance for doubtful accounts of
$4,533 and $5,059 at December 31, 1998 and 1997, respectively.
INVENTORIES
Inventories are stated at 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.
PROPERTY, PLANT AND EQUIPMENT, AND DEPRECIATION
Property, plant and equipment are stated on the basis of cost. Depreciation is
computed by the straight-line method based on the estimated useful lives of the
depreciable assets for financial statement purposes and by accelerated methods
for income tax purposes. The estimated useful lives of the assets are:
<TABLE>
<S> <C>
Buildings, improvements, furniture and fixtures 5 to 35 years
Machinery and equipment 3 to 12 years
Capital leases 5 to 25 years
</TABLE>
INTANGIBLES
The excess cost over the fair value of net assets acquired (goodwill) is
amortized on a straight-line basis over 15 to 40 years. The carrying value of
goodwill is reviewed as the facts and circumstances suggest that it may be
impaired. If this review indicates that goodwill will not be recoverable, as
determined based on the undiscounted cash flows of the entity acquired over the
remaining amortization period, the Company's carrying value of the goodwill will
be adjusted accordingly. Intangibles are stated net of accumulated amortization
of $6,426 and $5,266 as of December 31, 1998 and 1997, respectively.
FLOWSERVE 1998 ANNUAL REPORT
25
<PAGE> 14
HEDGING/FORWARD CONTRACTS
The Company is party to forward contracts for purposes of hedging certain
transactions denominated in foreign currencies. The Company has a
risk-management and derivatives policy statement outlining the conditions in
which the Company can enter into hedging or forward transactions. Gains and
losses on forward contracts qualifying as hedges are deferred and included in
the measurement of the related foreign currency transaction. Gains and losses on
hedges of existing assets or liabilities are included in the carrying amounts of
those assets or liabilities and are ultimately recognized in income as part of
those carrying amounts. Gains and losses related to hedges of anticipated
transactions are recognized in income as the transactions occur. The Company is
exposed to credit-related losses in the event of nonperformance by
counterparties to financial instruments, but it expects all counterparties to
meet their obligations given their high credit ratings. As of December 31, 1998,
the Company had no significant outstanding hedges or forward contracts with
third parties. The carrying amounts of the financial instruments (primarily
accounts receivable and long-term debt), approximate fair value as defined under
Statement of Financial Accounting Standards (SFAS) No. 107, "Disclosures about
Fair Value of Financial Instruments." Fair value is estimated by reference to
quoted prices by financial institutions.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the Company's foreign affiliates, other than those
located in highly inflationary countries, are translated at current exchange
rates, while income and expenses are translated at average rates for the period.
For entities in highly inflationary countries, a combination of current and
historical rates is used to determine currency gains and losses resulting from
financial-statement translation and those resulting from transactions.
Translation gains and losses are reported as a component of shareholders'
equity, except for those associated with highly inflationary countries, which
are reported directly in the consolidated statements of income.
ACCOUNTING DEVELOPMENTS
In 1998, the Company adopted Statement of Financial Accounting Standards, (SFAS)
No. 130, "Reporting Comprehensive Income"; SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information"; and SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits." SFAS
No. 130 established standards for the presentation and display of comprehensive
income. SFAS No. 131 required public enterprises to disclose information about
their reporting segments consistent with the way management operates the
business. SFAS No. 132 consolidated the disclosures about pensions, settlement
and curtailment of pension plans and retirement benefits other than pensions
into a single set of requirements. In addition, the Company adopted EITF 97-14,
"Accounting for Defined Compensation Arrangements Where Amounts Earned Are Held
in a Rabbi Trust and Invested."
In 1998, the Financial Accounting Standards Board also issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This standard is
effective for fiscal periods beginning after June 15, 1999. It establishes
accounting and reporting standards for derivative instruments and hedging
activities and is not expected to materially impact Flowserve's reported
financial position, results of operations or cash flows.
EARNINGS PER SHARE
In 1997, the Company adopted SFAS No. 128, "Earnings Per Share," that
established standards for computing and presenting earnings per share. SFAS 128
requires dual presentation of basic and diluted earnings per share on the face
of the income statement and requires a reconciliation of the numerator and
denominator of the basic earnings per share computation to the numerator and
denominator of the diluted earnings per share computation. The Company's
potentially dilutive common stock equivalents have been immaterial for all
periods presented. Accordingly, basic earnings per share is equal to diluted
earnings per share and is presented on the same line for income statement
presentation.
INCOME TAXES
The Company accounts for income taxes under the asset and liability method in
accordance with SFAS No. 109, "Accounting for Income Taxes." This approach
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of temporary differences between the carrying amounts
and the tax basis of assets and liabilities.
STOCK-BASED COMPENSATION
The Company follows Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB No. 25), and related interpretations in
accounting for its employee stock options. Under APB No. 25, no compensation
expense is recorded if the exercise price of the Company's stock options equals
the market price of the underlying stock on the date of grant. Accordingly, the
Company has no compensation expense recorded.
FLOWSERVE 1998 ANNUAL REPORT
26
<PAGE> 15
NOTE 2: MERGER
On July 22, 1997, shareholders of Durco International Inc. (Durco) and BW/IP,
Inc. (BW/IP) voted to approve a merger of the companies in a stock-for-stock
merger of equals that was accounted for as a pooling of interests transaction
(the merger). As part of the merger agreement, the Company changed its name from
Durco to Flowserve Corporation. The Company issued approximately 16,914,000
shares of common stock in connection with the merger. BW/IP shareholders
received 0.6968 shares of the Company's common stock for each previously owned
share of BW/IP stock.
The consolidated financial statements, including the accompanying notes
thereto, have been restated for all periods prior to the merger to include the
financial position, results of operations, and cash flows of BW/IP and Durco as
if the merger had occurred at the beginning of all periods presented.
In connection with the merger, the Company recorded a one-time charge of
$11,900 for merger-related expenses in 1997. These expenses included severance
and other expenses triggered by the merger and investment banking fees, legal
fees and other costs related to the merger, which were primarily nondeductible
for tax purposes.
In 1997, the Company developed a merger integration program that includes
facility rationalizations in North America and Europe, organizational
realignments at the corporate and division levels, procurement initiatives,
investments in training and support for the service operations. In the fourth
quarter of 1997, the Company recognized a one-time restructuring charge of
$32,600 related to this program. Other nonrecurring expenses related to the
merger (merger integration expense) were incurred in 1998 and 1997 in order to
achieve the planned synergies. These expenses of $38,300 in 1998 and $7,000 in
1997 were principally for costs for consultants, relocation and training. In
1998, the Company also spent $11,000 in capital expenditures related to this
program.
Merger-related transactions were:
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997
------- -------
<S> <C> <C>
Integration expense $38,300 $ 7,000
Restructuring expense -- 32,600
Transaction expense -- 11,900
Capital expenditures 11,000 --
</TABLE>
Through December 31, 1998, the Company paid severance relating to
approximately 275 employees.
Expenditures charged to the restructuring reserve were:
<TABLE>
<CAPTION>
Other Exit
Severance Costs Total
----------- ----------- -----------
<S> <C> <C> <C>
Balance at October 27, 1997 $ 22,400 $ 10,200 $ 32,600
Cash expenditures (3,400) (500) (3,900)
Noncash expenditures -- (1,200) (1,200)
----------- ----------- -----------
Balance at December 31, 1997 19,000 8,500 27,500
Cash expenditures (16,300) (3,100) (19,400)
Noncash expenditures -- (5,400) (5,400)
----------- ----------- -----------
Balance at December 31, 1998 $ 2,700 $ -- $ 2,700
=========== =========== ===========
</TABLE>
In July 1998, the Company's Board of Directors approved an $18 million
expenditure for the first phase of "Flowserver." This business process
improvement program has costs and benefits incremental to the initial merger
integration program. Flowserver includes the standardization of the Company's
processes and the implementation of a global information system to facilitate
common best practices. The investment in this business process improvement
initiative is expected to approximate $120 million over a four-year period.
Approximately half of the costs associated with this program are expected to be
capitalized, with the balance expensed.
In 1998, the Company incurred costs associated with this project of $5.1
million recorded as merger integration expense and $1.5 million as capital
expenditures.
NOTE 3: ACQUISITIONS AND DISPOSITIONS
In July 1998, the Company purchased 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 East and Africa since 1971.
In September 1998, the Company acquired the remaining 49% ownership
interest in Durametallic Asia Pte. Ltd., a fluid sealing manufacturer in
Singapore, from its joint-venture partner. Also in 1998, the Company acquired
the outstanding shares of ARS Lokeren NV, a Belgian company, and ZAR Beheer BV,
a Dutch company, which specialize in the service and repair of industrial
valves, with service and repair facilities near Rotterdam, the Netherlands, and
Ghent and Antwerp, Belgium.
FLOWSERVE 1998 ANNUAL REPORT
27
<PAGE> 16
In 1997, the Company purchased the 49% remaining shares of its joint
venture in Argentina, Byron Jackson Argentina I.C.S.A., and purchased the
engineered pump business of Stork Pompen, B.V. In 1996, the Company acquired
certain assets and liabilities of Anchor/Darling Valves.
The Company sold its wholly owned subsidiary, Metal Fab Machine
Corporation, for $18,793 in December 1997, and realized a pretax gain of
$11,376. In addition, in 1997, the Company sold its Filtration Systems Division.
NOTE 4: STOCK PLANS
The Company maintains a shareholder-approved stock option plan, which provides
for the grant of 1,500,000 options to purchase shares of the Company's common
stock. At December 31, 1998, approximately 439,000 options were available for
grant. Options have been granted to officers and employees to purchase shares of
common stock at a price equal to fair market value at the date of grant.
Generally, these options, whether granted from the current or prior plans,
become exercisable over staggered periods, but may not be exercised after 10
years from the date of the grant. The aggregate number of shares exercisable was
1,703,171 at December 31, 1998; 1,707,677 at December 31, 1997; and 915,509 at
December 31, 1996.
Stock options issued to officers and other employees were:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------------------------------------------------------------
WEIGHTED Weighted Weighted
AVERAGE Average Average
EXERCISE Exercise Exercise
SHARES PRICE Shares Price Shares Price
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Number of shares under option:
Outstanding at beginning of year 2,246,557 $ 25.05 1,842,239 $ 22.83 1,558,119 $ 20.98
Granted 794,240 18.50 690,270 26.53 433,591 24.85
Exercised (167,867) 20.32 (285,952) 14.30 (149,471) 9.37
Cancelled (41,316) 25.80 -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Outstanding at end of year 2,831,614 $ 23.49 2,246,557 $ 25.05 1,842,239 $ 22.83
========== ========== ========== ========== ========== ==========
</TABLE>
The weighted average contractual life of options outstanding is 8.6 years.
Additional information relating to the range of options outstanding at December
31, 1998, is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Remaining Average Number Average
Range of Exercise Prices Contractual Number Exercise Price Exercisable at Exercise Price
Per Share Life Outstanding Per Share December 31, 1998 Per Share
- ------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
$ 5.95 - $11.76 2.4 49,205 $ 8.57 49,205 $ 8.57
$11.76 - $27.44 7.3 2,001,860 $20.76 1,103,757 $21.99
$27.44 - $39.20 6.5 780,549 $31.43 550,209 $32.05
--------- ---------
2,831,614 1,703,171
========= =========
</TABLE>
FLOWSERVE 1998 ANNUAL REPORT
28
<PAGE> 17
Pro forma information regarding net earnings and earnings per share is
required by SFAS No. 123, which also requires that the information be determined
as if the Company had accounted for its stock options granted subsequent to
December 31, 1994, under the fair value method of that Statement. The "fair
value" for these options at the date of grant was estimated using a binomial
option pricing model (a modified Black-Scholes model). The assumptions used in
this valuation are as follows:
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Risk-free interest rate 5.6% 5.5% 6.2%
Dividend yield 3.3% 2.0% 2.1%
Stock volatility 34.1% 35.5% 36.6%
Average expected life (years) 8.6 8.1 6.7
</TABLE>
The options granted had a weighted average "fair value" per share on date
of grant of $6.14 in 1998, $10.69 in 1997 and $10.42 in 1996. For purposes of
pro forma disclosure, the estimated fair value of the options is amortized to
expense over the options vesting periods. The Company's pro forma information is
as follows:
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net earnings
As reported $ 48,875 $ 51,566 $ 71,097
Pro forma 47,030 48,224 69,156
Earnings per share
(diluted and basic)
As reported $ 1.23 $ 1.26 $ 1.72
Pro forma 1.18 1.18 1.67
</TABLE>
Because the determination of the fair value of all options granted includes
an expected volatility factor and because additional option grants are expected
to be made each year, the above pro forma disclosures are not representative of
pro forma effects for future years.
The restricted stock plan approved by shareholders in 1998 authorized the
grant of up to 800,000 shares of the Company's common stock. The 1989 restricted
stock plan, which expired following the 1998 annual meeting of shareholders,
authorized the grant of up to 337,500 shares of the Company's common stock. In
general, the shares cannot be transferred for a period of at least one but not
more than 10 years and are subject to forfeiture during the restriction period.
The fair value of the shares is amortized to compensation expense over the
periods in which the restrictions lapse. Restricted stock grants were 10,165
shares in 1998, 21,700 shares in 1997 and 29,900 shares in 1996. The weighted
average fair value of the restricted stock grants at date of grant was $24.07 in
1998, $27.73 in 1997 and $25.84 in 1996. Total compensation expense recognized
in the income statement for all stock-based awards was $485 in 1998, $510 in
1997 and $584 in 1996.
NOTE 5: DETAILS OF CERTAIN CONSOLIDATED BALANCE SHEET CAPTIONS
INVENTORIES
Inventories and the method of determining cost were:
<TABLE>
<CAPTION>
December 31, 1998 1997
--------- ---------
<S> <C> <C>
Raw materials $ 26,088 $ 18,082
Work in process and finished goods 226,843 216,377
Less: Progress billings (15,024) (10,903)
--------- ---------
237,907 223,556
LIFO reserve (38,621) (38,612)
--------- ---------
Net inventory $ 199,286 $ 184,944
========= =========
Percent of inventory accounted
for by LIFO 61% 43%
Percent of inventory accounted
for by FIFO 39% 57%
</TABLE>
The percentage of inventory accounted for by the last-in first-out (LIFO)
method increased in 1998 as the U.S. operations of the former BW/IP changed its
method of accounting for inventories to LIFO during the year. Because the
December 31, 1997, BW/IP inventory valued at FIFO is the opening LIFO inventory,
there is neither a cumulative effect to January 1, 1998, nor pro forma amounts
of retroactively applying the change to LIFO. The effect of the change in 1998
was not significant.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment were:
<TABLE>
<CAPTION>
December 31, 1998 1997
--------- ---------
<S> <C> <C>
Land $ 17,856 $ 18,703
Buildings, improvements,
furniture and fixtures 179,588 151,004
Machinery, equipment,
capital leases and construction
in progress 290,730 291,559
--------- ---------
488,174 461,266
Less: Accumulated depreciation (279,142) (251,757)
--------- ---------
Net property, plant and equipment $ 209,032 $ 209,509
========= =========
</TABLE>
FLOWSERVE 1998 ANNUAL REPORT
29
<PAGE> 18
OTHER ASSETS
Other assets were:
<TABLE>
<CAPTION>
December 31, 1998 1997
-------- --------
<S> <C> <C>
Pension assets $ 11,461 $ 8,695
Deferred tax assets 22,098 25,903
Deferred compensation funding 10,408 9,299
Investments in unconsolidated affiliates 5,331 3,844
Patents and other intangibles 8,491 4,431
Long-term notes receivable 2,914 3,363
Other 21,788 20,569
-------- --------
Total $ 82,491 $ 76,104
======== ========
</TABLE>
ACCRUED LIABILITIES
Accrued liabilities were:
<TABLE>
<CAPTION>
December 31, 1998 1997
-------- --------
<S> <C> <C>
Wages and other compensation $ 62,249 $ 66,208
Accrued restructuring, current portion 2,730 18,048
Accrued commissions and royalties 7,494 3,386
Other 34,555 41,160
-------- --------
Total $107,028 $128,802
======== ========
</TABLE>
POST-RETIREMENT BENEFITS AND DEFERRED ITEMS
Post-retirement benefits and deferred items were:
<TABLE>
<CAPTION>
December 31, 1998 1997
-------- --------
<S> <C> <C>
Post-retirement benefits $ 64,311 $ 65,028
Deferred compensation 13,231 8,246
Deferred taxes 16,977 15,946
Other 25,496 36,152
-------- --------
Total $120,015 $125,372
======== ========
</TABLE>
NOTE 6: DEBT AND LEASE OBLIGATIONS
Long-term debt, including capital lease obligations, consisted of:
<TABLE>
<CAPTION>
December 31, 1998 1997
-------- --------
<S> <C> <C>
Senior Notes, interest of
7.14% to 7.92% $ 58,333 $ 66,667
Revolving credit agreement,
interest at 5.5% in 1998 and
7.04% in 1997 124,000 50,000
Loan, due annually through 2002,
interest at 8.94% 12,321 14,438
Floating rate revolving notes -- 5,952
Credit agreements, average interest
rate 6.2% in 1998 and
6.0% in 1997 2,935 678
Capital lease obligations and other 3,096 3,410
-------- --------
200,685 141,145
Less amounts due within one year 14,393 12,209
-------- --------
Total long-term debt $186,292 $128,936
======== ========
</TABLE>
Maturities of long-term debt, including capital lease obligations, for the
next five years are:
<TABLE>
<S> <C>
1999 $ 14,393
2000 3,125
2001 3,125
2002 8,946
2003 10,000
Thereafter 161,096
--------
Total $200,685
========
</TABLE>
In 1997, the Company entered into a $150,000 revolving credit agreement
with the option to increase borrowings up to $200,000. As of December 31, 1998,
$124,000 was outstanding. The Company has an interest-rate swap that fixes
$50,000 usage of the revolving credit facility at 6.74%.
In connection with a German acquisition, the Company converted a
deutsche-mark obligation through a currency swap agreement against its U.S.
dollar private placement to fund the acquisition. The effective rate on the loan
swap was 8.94%. The maturity and repayment terms of the swap match precisely the
maturity and repayment term of the underlying debt.
FLOWSERVE 1998 ANNUAL REPORT
30
<PAGE> 19
In 1992, the Company issued $50,000 Senior Notes requiring annual payments
of $8,333 through 1999, bearing interest at 7.92%, of which $8,333 was
outstanding at December 31, 1998. In 1996, the Company issued $30,000 Senior
Notes requiring annual principal payments of $6,000 commencing in 2002, bearing
interest of 7.14%. In 1997, the Company issued $20,000 in Senior Notes, bearing
interest of 7.17% with principal payments of $4,000 due annually, commencing in
2003.
The provisions of the credit agreements require the Company to meet or
exceed specified financial covenants that are defined in the agreements. The
agreements also contain limitations or restrictions relating to new indebtedness
and liens, disposition of assets and payment of dividends or other
distributions. All such covenants were met in each of the years presented. The
most restrictive of these include a debt-to-capital ratio and a minimum tangible
net worth requirement.
As of December 31, 1998, the Company had $9,897 of contingent obligations
relating to bank guarantees and performance bonds outstanding.
At December 31, 1998 and 1997, the Company had short-term credit facilities
available from banks under which it could borrow at local market rates up to
$58,500 and $61,521, respectively. These facilities are presented as notes
payable on the Company's consolidated balance sheets. Under these facilities,
the Company had borrowings outstanding of $3,488 at December 31, 1998, and
$5,644 at December 31, 1997. The weighted average interest rate on these
borrowings was 6.0% at December 31, 1998, and was 4.8% at December 31, 1997.
Borrowings against these facilities were primarily to support the operations of
foreign subsidiaries.
The Company has noncancelable operating leases for certain offices, service
and quick response centers, certain manufacturing and operations facilities, and
machinery, equipment and automobiles. Rental expense relating to operating
leases was $11,798 in 1998, $15,000 in 1997 and $15,100 in 1996.
The future minimum lease payments under noncancelable operating leases are:
<TABLE>
<S> <C>
1999 $10,345
2000 7,520
2001 5,480
2002 2,524
2003 1,940
Thereafter 3,778
-------
Total $31,587
=======
</TABLE>
NOTE 7: DEFERRED COMPENSATION - RABBI TRUST
In September 1998, 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." 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 $1,220,
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 income
before the cumulative effect would have been a reduction of $490. The effect of
the change on 1996 income would not have been material.
NOTE 8: RETIREMENT BENEFITS
The Company sponsors several noncontributory defined benefit pension plans,
covering approximately 60% of U.S. employees, which provide benefits based on
years of service and compensation. Retirement benefits for all other employees
are provided through defined contribution pension plans and government-sponsored
retirement programs. All defined benefit pension plans are funded based on
independent actuarial valuations to provide for current service and an amount
sufficient to amortize unfunded prior service over periods not to exceed 30
years.
FLOWSERVE 1998 ANNUAL REPORT
31
<PAGE> 20
Net defined benefit pension expense (including both qualified and
nonqualified plans) was:
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Service cost-benefits earned
during the period $ 6,411 $ 5,627 $ 5,481
Interest cost on projected
benefit obligations 14,704 13,931 13,179
Expected gain on
plan assets (18,086) (16,284) (21,908)
Unrecognized prior
service cost 537 (427) 7,001
Unrecognized net (asset)
obligation (499) 576 (541)
-------- -------- --------
Net defined benefit
pension expense $ 3,067 $ 3,423 $ 3,212
======== ======== ========
</TABLE>
The following table reconciles the plans' funded status to amounts
recognized in the Company's consolidated balance sheets:
<TABLE>
<CAPTION>
December 31, 1998 1997
--------- ---------
<S> <C> <C>
Projected benefit obligations $ 226,463 $ 210,878
Plan assets, at fair value 225,260 219,860
--------- ---------
Plan assets (less than) in excess
of projected benefit obligations (1,203) 8,982
Unrecognized net transition asset (942) (1,735)
Unrecognized net gain (622) (10,047)
Unrecognized prior service benefit 2,612 2,932
--------- ---------
Net pension (liability) asset $ (155) $ 132
========= =========
Discount rate 6.75% 7.25%
Rate of increase in
compensation levels 4.0%-8.0% 4.0%-8.0%
Long-term rate of return
on assets 9.5% 8.0%-10.0%
</TABLE>
Following is a reconciliation of the defined benefit pension obligations:
<TABLE>
<CAPTION>
December 31, 1998 1997
--------- ---------
<S> <C> <C>
Beginning benefit obligation $ 210,878 $ 183,220
Service cost 6,410 6,156
Interest cost 14,704 13,766
Plan amendments -- 607
Actuarial loss 7,726 19,784
Benefits paid (13,154) (12,383)
Curtailments (101) (272)
--------- ---------
Ending benefit obligation $ 226,463 $ 210,878
========= =========
</TABLE>
Following is a reconciliation of the defined benefit pension assets:
<TABLE>
<CAPTION>
December 31, 1998 1997
--------- ---------
<S> <C> <C>
Beginning plan assets $ 219,860 $ 197,523
Return on plan assets 18,093 34,282
Company contributions 462 438
Benefits paid (13,155) (12,383)
--------- ---------
Ending plan assets $ 225,260 $ 219,860
========= =========
</TABLE>
The Company sponsors several defined contribution pension plans covering
substantially all U.S. and Canadian employees and certain other foreign
employees. Employees may contribute to these plans, and these contributions are
matched in varying amounts by the Company. The Company may also make additional
contributions for eligible employees. Defined contribution pension expense for
the Company was $7,309 in 1998, $7,733 in 1997 and $6,903 in 1996.
The Company also sponsors several defined benefit post-retirement health
care plans covering approximately 77% of future retirees and most current
retirees in the United States. These plans are for medical and dental benefits
and are provided through insurance companies and health maintenance
organizations. The plans include participant contributions, deductibles,
co-insurance provisions and other limitations, and are integrated with Medicare
and other group plans. The plans are funded as insured benefits and health
maintenance organization premiums are incurred.
FLOWSERVE 1998 ANNUAL REPORT
32
<PAGE> 21
Net post-retirement benefit expense comprised:
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Service cost - benefits earned
during the period $ 882 $ 916 $ 843
Interest cost on accumulated
post-retirement benefit
obligations 3,749 3,652 3,556
Amortization of unrecognized
prior service cost (1,497) (2,012) (1,613)
------- ------- -------
Net post-retirement
benefit expense $ 3,134 $ 2,556 $ 2,786
======= ======= =======
</TABLE>
Following is a reconciliation of the accumulated post-retirement benefits
obligations:
<TABLE>
<CAPTION>
December 31, 1998 1997
-------- --------
<S> <C> <C>
Beginning accumulated post-retirement
benefit obligation $ 53,072 $ 49,703
Service cost 882 916
Interest cost 3,749 3,652
Actuarial loss 3,460 1,977
Benefits paid (3,850) (3,176)
Ending accumulated post-retirement
-------- --------
benefit obligation $ 57,313 $ 53,072
======== ========
</TABLE>
The following table presents the components of post-retirement benefit
amounts recognized in the Company's consolidated balance sheet:
<TABLE>
<CAPTION>
December 31, 1998 1997
-------- --------
<S> <C> <C>
Actuarial present value of accumulated
post-retirement benefit obligations: $ 57,313 $ 53,072
Unrecognized prior service benefit 7,369 8,866
Unrecognized net (loss) gain (371) 3,090
-------- --------
Accrued post-retirement benefits $ 64,311 $ 65,028
======== ========
Discount rate 6.75% 7.25%
</TABLE>
The assumed annual rates of increase in per capita costs for periods prior
to Medicare were 8.0% for 1998 with a gradual decrease to 6.0% for 2002 and
future years, and for periods after Medicare, 6.0% for 1998 with a gradual
decrease to 5.0% for 2000 and future years.
Increasing the assumed rate of increase in post-retirement benefit costs by
1.0% in each year would increase net post-retirement benefit expense by
approximately $297 and accumulated post-retirement benefit obligations by
$3,689. Reducing the assumed rate of decrease in post-retirement benefit costs
by 1.0% in each year would reduce net post-retirement benefit expense by
approximately $273 and accumulated benefit obligations by $3,553. The Company
made contributions to the defined benefit post-retirement plan of $3,849 in 1998
and $3,176 in 1997.
NOTE 9: CONTINGENCIES
As of December 31, 1998, the Company was involved as a "potentially responsible
party" (PRP) at six former public waste disposal sites that may be subject to
remediation under pending government procedures. The sites are in various stages
of evaluation by federal and state environmental authorities. The projected cost
of remediating these sites, as well as the Company's alleged "fair share"
allocation, is uncertain and speculative until all studies have been completed
and the parties have either negotiated an amicable resolution or the matter has
been judicially resolved. At each site, there are many other parties who have
been similarly identified, and the identification and location of additional
parties is continuing under applicable federal or state law. Many of the other
parties identified are financially strong and solvent companies that appear able
to pay their share of the remediation costs. Based on the Company's preliminary
information about the waste disposal practices at these sites and the
environmental regulatory process in general, the Company believes that it is
likely that ultimate remediation liability costs for each site will be
apportioned among all liable parties, including site owners and waste
transporters, according to the volumes and/or toxicity of the wastes shown to
have been disposed of at the sites.
The Company is a defendant in numerous pending lawsuits (which include, in
many cases, multiple claimants) that seek to recover damages for personal injury
allegedly resulting from exposure to asbestos-containing products formerly
manufactured and distributed by the Company. All such products were used within
self-contained process equipment, and management does not believe that there was
any emission of ambient asbestos fiber during the use of this equipment.
FLOWSERVE 1998 ANNUAL REPORT
33
<PAGE> 22
The Company is also a defendant in several other products liability
lawsuits that are insured, subject to the applicable deductibles, and certain
other noninsured lawsuits received in the ordinary course of business.
Management believes that the Company has adequately accrued estimated losses for
such lawsuits. No insurance recovery has been projected for any of the insured
claims, because management currently believes that all will be resolved within
applicable deductibles. The Company is also a party to other noninsured
litigation that is incidental to its business, and, in management's opinion,
will be resolved without a material impact on the Company's financial
statements.
Although none of the aforementioned gives rise to any additional liability
that can now be reasonably estimated, the Company believes such costs will be
immaterial. The Company will continue to evaluate these contingent loss
exposures and, if they develop, recognize expense as soon as such losses can be
reasonably estimated.
NOTE 10: SHAREHOLDERS' EQUITY
In 1997, the Company increased its authorized $1.25 par value common stock from
60,000,000 to 120,000,000 shares. The authorized shares were increased in
connection with the merger of Durco and BW/IP resulting in the formation of
Flowserve Corporation. At both December 31, 1998 and 1997, the Company had
authorized 1,000,000 shares of $1.00 par value preferred stock.
Each share of the Company's common stock contains a preferred stock
purchase right. These rights are not currently exercisable and trade in tandem
with the common stock. The rights become exercisable and trade separately in the
event of certain significant changes in common stock ownership or on the
commencement of certain tender offers that, in either case, may lead to a change
of control of the Company. Upon becoming exercisable, the rights provide
shareholders the opportunity to acquire a new series of Company preferred stock
to be then automatically issued at a pre-established price. In the event of
certain forms of acquisition of the Company, the rights also provide Company
shareholders the opportunity to purchase shares of the acquiring company's
common stock from the acquirer at a 50% discount from the current market value.
The rights are redeemable for $0.022 per right by the Company at any time prior
to becoming exercisable and will expire in August 2006.
At December 31, 1998, approximately 3,511,000 shares of common stock were
reserved for exercise of stock options and for grants of restricted stock.
NOTE 11: INCOME TAXES
The provision for taxes on income consisted of the following:
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Current:
U.S. federal $ 1,226 $ 30,461 $ 15,009
Non-U.S. 13,798 17,752 15,643
State and local 438 5,485 4,127
-------- -------- --------
Total current 15,462 53,698 34,779
-------- -------- --------
Deferred:
U.S. federal 7,915 (15,585) 3,446
Non-U.S. 1,409 1,012 (895)
State and local 716 (902) (76)
-------- -------- --------
Total deferred 10,040 (15,475) 2,475
-------- -------- --------
Total provision $ 25,502 $ 38,223 $ 37,254
======== ======== ========
</TABLE>
The provision for taxes on income differed from the U.S. federal statutory
tax rate due to the following:
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
U.S. federal income tax rate 35.0% 35.0% 35.0%
Non-U.S. tax rate differential
and utilization of operating
loss carryforwards 2.6 2.2 (0.5)
Merger transaction expenses -- 3.7 --
State and local income taxes, net 1.4 3.2 2.4
Utilization of tax credits (1.5) (2.7) (1.4)
Foreign sales corporation (2.6) (1.8) (1.0)
Other net -- 3.0 (0.1)
-------- -------- --------
Effective tax rate 34.9% 42.6% 34.4%
======== ======== ========
</TABLE>
FLOWSERVE 1998 ANNUAL REPORT
34
<PAGE> 23
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's consolidated deferred tax assets and liabilities were:
<TABLE>
<CAPTION>
December 31, 1998 1997
-------- --------
<S> <C> <C>
Deferred tax assets related to:
Post-retirement benefits $ 17,556 $ 24,824
Net operating loss carryforwards 11,553 7,370
Compensation accruals 8,131 9,849
Inventories 7,892 1,278
Credit carryforwards 3,679 614
Loss on dispositions 2,462 2,437
Warranty and accrued liabilities 1,258 4,666
Restructuring charge 988 9,413
Other 9,914 6,135
-------- --------
Total deferred tax assets 63,433 66,586
Less valuation allowances 8,655 9,007
-------- --------
Net deferred tax assets 54,778 57,579
-------- --------
Deferred tax liabilities related to:
Property, plant and equipment 13,563 13,511
Goodwill 12,225 5,071
Pension benefits -- 2,444
Other 5,376 3,692
-------- --------
Total deferred tax liabilities 31,164 24,718
-------- --------
Deferred tax assets, net $ 23,614 $ 32,861
======== ========
</TABLE>
The Company has recorded valuation allowances to reflect the estimated
amount of deferred tax assets that may not be realized due to the expiration of
net operating loss and foreign tax credit carryforwards. The net changes in the
valuation allowances were attributable to utilization and expiration of net
operating loss carryforwards partially offset by an increase in expected
nonutilization of net operating loss and credit carryforwards. The Company had
approximately $26,400 of net operating loss carryforwards at December 31, 1998,
the majority of which were generated in non-U.S. jurisdictions in which net
operating losses do not expire.
Earnings before income taxes comprised:
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
U.S. $ 27,326 $ 48,897 $ 63,238
Non-U.S. 45,831 40,892 45,113
-------- -------- --------
$ 73,157 $ 89,789 $108,351
======== ======== ========
</TABLE>
Undistributed earnings of the Company's non-U.S. subsidiaries amounted to
approximately $187,000 at December 31, 1998. These earnings are considered to be
indefinitely reinvested and, accordingly, no additional U.S. income taxes or
non-U.S. withholding taxes have been provided. Determination of the amount of
additional taxes that would be payable if such earnings were not considered
indefinitely reinvested is not practical.
NOTE 12: SEGMENT INFORMATION
Flowserve is principally engaged in the worldwide design, manufacture,
distribution and service of industrial flow management equipment. The Company
provides pumps, valves, mechanical seals and service primarily for the refinery
and pipeline segments of the petroleum industry, the chemical-processing
industry, the power-generation industry and other industries requiring flow
management products.
The Company has three divisions, each of which constitutes a business
segment. Each division manufactures different products and is defined by the
type of products and services provided. Each division has a president, who
reports directly to the Chief Executive Officer of the Company, and a division
controller. For decision-making purposes, the Chief Executive Officer, Chief
Financial Officer and other members of upper management use financial
information generated and reported at the division level.
The Rotating Equipment Division designs, manufactures and distributes pumps
and related equipment. The Flow Control Division designs, manufactures and
distributes automated and manual quarter-turn valves, control valves and valve
actuators, and related components. The Flow Solutions Division designs,
manufactures and distributes mechanical seals and sealing systems and provides
service and repair for flow control equipment used in process industries. The
Company also has a corporate headquarters that does not constitute a separate
division or business segment. Amounts classified as All Other include minor
entities that are not considered separate segments and businesses subsequently
divested. See Note 3: Acquisitions and Dispositions.
FLOWSERVE 1998 ANNUAL REPORT
35
<PAGE> 24
The Company evaluates segment performance and allocates resources based on
operating income or loss before special items and taxes. The accounting policies
of the reportable segments are the same as described in Note 1: Significant
Accounting Policies. Intersegment sales and transfers are recorded at cost plus
a profit margin. This intersegment profit is eliminated in consolidation.
<TABLE>
<CAPTION>
ROTATING FLOW FLOW CONSOLIDATED
YEAR ENDED DECEMBER 31, 1998 EQUIPMENT CONTROL SOLUTIONS ALL OTHER TOTAL
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Sales to external customers $ 368,451 $ 295,371 $ 418,953 $ 311 $1,083,086
Intersegment sales 7,000 7,626 14,671 (29,297) --
Segment operating income (before special items) 41,058 41,732 66,124 (25,509) 123,405
Depreciation and amortization 11,535 11,290 13,186 3,288 39,299
Identifiable assets $ 285,990 $ 234,551 $ 266,485 $ 83,171 $ 870,197
Capital expenditures 13,416 9,284 15,049 500 38,249
</TABLE>
<TABLE>
<CAPTION>
Rotating Flow Flow Consolidated
Year ended December 31, 1997 Equipment Control Solutions All Other Total
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Sales to external customers $ 403,801 $ 305,150 $ 415,321 $ 27,924 $1,152,196
Intersegment sales 9,000 12,001 14,780 (35,781) --
Segment operating income (before special items) 50,969 46,981 62,728 (24,584) 136,094
Depreciation and amortization 9,767 9,160 13,286 6,720 38,933
Identifiable assets $ 301,176 $ 219,074 $ 257,531 $ 102,244 $ 880,025
Capital expenditures 14,623 8,140 11,733 5,064 39,560
</TABLE>
<TABLE>
<CAPTION>
Rotating Flow Flow Consolidated
Year ended December 31, 1996 Equipment Control Solutions All Other Total
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Sales to external customers $ 395,824 $ 274,641 $ 405,303 $ 21,877 $1,097,645
Intersegment sales 7,000 11,798 16,634 (35,432) --
Segment operating income (before special items) 48,973 37,103 55,500 (20,531) 121,045
Depreciation and amortization 9,933 8,841 14,064 3,827 36,665
Identifiable assets $ 284,840 $ 201,373 $ 263,314 $ 80,249 $ 829,776
Capital expenditures 17,117 3,758 12,433 2,383 35,691
</TABLE>
FLOWSERVE 1998 ANNUAL REPORT
36
<PAGE> 25
RECONCILIATION OF SEGMENT INFORMATION TO CONSOLIDATED AMOUNTS
Significant items from the Company's reportable segments can be reconciled to
the consolidated amounts as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
Sales 1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Total sales for reportable segments $1,082,775 $ 1,124,272 $ 1,075,768
Total intersegment sales for reportable segments 29,297 35,781 35,432
Other sales 311 27,924 21,877
Elimination of intersegment sales (29,297) (35,781) (35,432)
----------- ----------- -----------
Total sales $ 1,083,086 $ 1,152,196 $ 1,097,645
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
Profit or Loss 1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Total segment operating income (before special items) $ 148,914 $ 160,678 $ 141,576
Corporate expenses and other 25,509 24,584 20,531
Merger restructuring and transaction expenses -- 44,531 5,778
Merger integration expense 38,326 6,982 --
Interest expense 13,175 13,275 12,144
Other income (1,253) (7,107) (5,228)
Gain on sale of subsidiary -- (11,376) --
----------- ----------- -----------
Earnings before income taxes $ 73,157 $ 89,789 $ 108,351
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
Assets 1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Total assets for reportable segments $ 787,026 $ 777,781 $ 749,527
Other assets 104,749 125,826 99,737
Elimination of intercompany receivables (21,578) (23,582) (19,488)
----------- ----------- -----------
Total assets $ 870,197 $ 880,025 $ 829,776
=========== =========== ===========
</TABLE>
FLOWSERVE 1998 ANNUAL REPORT
37
<PAGE> 26
Geographic Information
The Company attributes sales to different geographic areas based on the point of
sale. Long-lived assets are classified based on the geographic area in which the
assets are located. Sales related to and investment in long-lived assets by
geographic area are as follows:
<TABLE>
<CAPTION>
LONG-LIVED
YEAR ENDED DECEMBER 31, 1998 SALES ASSETS
---------- ----------
<S> <C> <C>
United States $ 629,117 $ 250,999
Europe 279,117 81,058
Other(1) 174,852 28,751
---------- ----------
Consolidated total $1,083,086 $ 360,808
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Long-lived
Year ended December 31, 1997 Sales Assets
---------- ----------
<S> <C> <C>
United States $ 691,337 $ 228,056
Europe 261,289 78,400
Other(1) 199,570 32,991
---------- ----------
Consolidated total $1,152,196 $ 339,447
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Long-lived
Year ended December 31, 1996 Sales Assets
---------- ----------
<S> <C> <C>
United States $ 654,581 $ 226,672
Europe 257,889 92,694
Other(1) 185,175 24,932
---------- ----------
Consolidated total $1,097,645 $ 344,298
========== ==========
</TABLE>
(1) Includes Canada, Latin America and Asia/Pacific. No individual geographic
segment within this group represents 10% or more of consolidated totals.
MAJOR CUSTOMER INFORMATION
The Company has not received revenues from any customer that represent 10% or
more of consolidated revenues for any of the years presented.
NOTE 13: UNAUDITED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
(Amounts in millions, except per share data) 1998(a) 1997(b)
-------------------------------------------------------------------------------------------
Quarter 4th 3rd 2nd 1st 4th 3rd 2nd 1st
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 279.3 $ 264.8 $ 280.7 $ 258.3 $ 307.2 $ 282.0 $ 300.5 $ 262.5
Gross profit 108.5 99.6 106.0 101.2 116.2 107.4 121.2 104.1
Net earnings before special items 19.0 17.6 20.2 18.1 23.2 17.3 24.8 16.8
Net earnings 7.2 16.1 12.5 13.1 2.9 7.1 24.8 16.8
Earnings per share before special
items (diluted and basic) $ 0.50 $ 0.44 $ 0.50 $ 0.44 $ 0.57 $ 0.42 $ 0.61 $ 0.41
Earnings per share (diluted and basic) 0.20 0.40 0.31 0.32 0.07 0.17 0.61 0.41
</TABLE>
(a) Net earnings in 1998 included the following special items: merger expenses
of $38.3 million before tax and an obligation under an executive employment
agreement of $3.8 million (included in selling and administrative expense),
before tax; and the benefit of the cumulative effect of an accounting change of
$1.2 million, net of tax. These special items resulted in a reduction in net
earnings of $26.0 million, or $0.65 per share after tax.
(b) Net earnings in the third quarter of 1997 included restructuring and merger
expenses of $10.2 million before tax, or $0.25 per share after tax. Net earnings
in the fourth quarter of 1997 included merger-related expenses and a gain on the
sale of a subsidiary that totaled $30.0 million before tax, or $0.50 per share
after tax. Excluding special items, net earnings for the year ended December 31,
1997, were $82.1 million, or $2.01 per share.
FLOWSERVE 1998 ANNUAL REPORT
38
<PAGE> 27
FIVE-YEAR SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
December 31,
(Amounts in thousands, except ---------------------------------------------------------------------------
per share data and ratios) 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Results of Operations
Sales $ 1,083,086 $ 1,152,196 $ 1,097,645 $ 983,917 $ 909,226
Cost of sales 667,753 703,319 668,718 591,550 554,707
----------- ----------- ----------- ----------- -----------
Gross profit 415,333 448,877 428,927 392,367 354,519
Selling and administrative expense 265,556 285,890 283,360 264,426 241,131
Research, engineering and development expense 26,372 26,893 24,522 24,649 24,528
Merger transaction and restructuring expenses -- 44,531 5,778 5,042 --
Merger integration expense 38,326 6,982 -- -- --
----------- ----------- ----------- ----------- -----------
Operating income 85,079 84,581 115,267 98,250 88,860
Interest expense 13,175 13,275 12,144 12,293 12,214
Other income (1,253) (7,107) (5,228) (2,455) (4,187)
Gain on sale of subsidiary -- (11,376) -- -- --
----------- ----------- ----------- ----------- -----------
Earnings before income taxes 73,157 89,789 108,351 88,412 80,833
Provision for income taxes 25,502 38,223 37,254 34,391 29,601
----------- ----------- ----------- ----------- -----------
Earnings from continuing operations 47,655 51,566 71,097 54,021 51,232
Cumulative effect of change in accounting principle (1,220) -- -- -- --
----------- ----------- ----------- ----------- -----------
Net earnings $ 48,875 $ 51,566 $ 71,097 $ 54,021 $ 51,232
=========== =========== =========== =========== ===========
Average shares outstanding 39,898 40,896 41,363 41,652 41,626
Net earnings per share (diluted and basic) $ 1.23 $ 1.26 $ 1.72 $ 1.30 $ 1.23
Dividends paid per share 0.56 0.65 0.57 0.51 0.45
Bookings 1,082,484 1,172,431 1,141,614 1,013,861 930,863
Ending backlog 291,082 291,568 287,076 249,562 237,598
Performance Ratios (as a percent of sales)
Gross profit margin 38.3% 39.0% 39.1% 39.9% 39.0%
Selling and administrative expense 24.5% 24.8% 25.8% 26.9% 26.5%
Research, engineering and development expense 2.4% 2.3% 2.2% 2.5% 2.7%
Operating income 7.9% 7.3% 10.5% 10.0% 9.8%
Net earnings 4.5% 4.5% 6.5% 5.5% 5.6%
Financial Condition
Cash and cash equivalents $ 24,928 $ 58,602 $ 38,933 $ 28,596 $ 28,777
Working capital 268,164 284,220 279,972 251,774 222,798
Net property, plant and equipment 209,032 209,509 211,738 209,974 197,844
Intangibles and other assets 173,875 155,852 149,003 139,204 113,824
Total assets 870,197 880,025 829,776 801,120 712,160
Capital expenditures 38,249 39,560 35,691 39,928 26,506
Depreciation and amortization 39,299 38,933 36,665 34,451 34,054
Long-term debt 186,292 128,936 143,962 125,931 95,971
Post-retirement benefits and deferred items 120,015 125,372 108,127 99,775 98,228
Shareholders' equity 344,764 395,273 388,624 375,246 340,267
Financial Ratios
Return on average shareholders' equity 13.1% 13.0% 18.6% 15.1% 15.8%
Return on average net assets 8.6% 9.0% 12.5% 10.4% 11.2%
Debt to capital ratio 37.2% 27.1% 30.0% 27.9% 25.9%
Cash dividends paid as a percent of ending
shareholders' equity 6.5% 6.6% 6.0% 5.6% 5.5%
Current ratio 2.2 2.2 2.5 2.3 2.3
Interest coverage ratio 6.6 7.8 9.9 8.2 7.6
</TABLE>
FLOWSERVE 1998 ANNUAL REPORT
39
<PAGE> 28
BOARD OF DIRECTORS
Left to right:
[PICTURE OF DIANE C. HARRIS((2)), President, Hypotenuse Enterprises,
BOARD OF Inc.; HUGH K. COBLE(1),(3), Vice Chairman Emeritus, Fluor
DIRECTORS] Corporation; BERNARD G. RETHORE(3), Chairman, President and
Chief Executive Officer, Flowserve Corporation; GEORGE T.
HAYMAKER, JR.(1), Chairman and Chief Executive Officer,
Kaiser Aluminum Corporation; CHARLES M. RAMPACEK(2),
President and Chief Executive Officer, Lyondell-Citgo
Refining LP; WILLIAM C. RUSNACK(2),(3), President and Chief
Executive Officer, Clark Refining & Marketing, Inc.; R.
ELTON WHITE(2), Former President, NCR Corporation; KEVIN E.
SHEEHAN(1),(3), General Partner, CID Equity Partners; JAMES
O. ROLLANS(2), Senior Vice President and Chief Financial
Officer, Fluor Corporation; and MICHAEL F. JOHNSTON(1),
President, Americas Automotive Group, Johnson Controls, Inc.
(1) Compensation Committee
(2) Audit and Finance Committee
(3) Executive Committee
OFFICERS
Left to right:
[PICTURE OF MICHAEL S. DUNN, Assistant Vice President and Director of
OFFICERS] Taxes; RICK L. JOHNSON, Vice President, Business Development
and Corporate Controller; CHERYL D. MCNEAL, Vice President,
Human Resources; HOWARD D. WYNN, Vice President, Division
President, Rotating Equipment Division; RORY E. MACDOWELL,
Vice President and Chief Information Officer; SCOTT E.
MESSEL, Corporate Treasurer; RENEE J. HORNBAKER, Vice
President and Chief Financial Officer; BERNARD G. RETHORE,
Chairman, President and Chief Executive Officer; RONALD F.
SHUFF, Vice President, Secretary and General Counsel; MARK
E. VERNON, Vice President, Division President, Flow Control
Division; and GEORGE A. SHEDLARSKI, Vice President, Division
President, Flow Solutions Division.
40
<PAGE> 1
Exhibit 18.1
February 9, 1999
Board of Directors and Shareholders
The Flowserve Corporation
222 West Las Colinas Blvd.
Irving, Texas 75039
Dear Sirs:
Note 5 of Notes to the Consolidated Financial Statements of the Flowserve
Corporation and Subsidiaries (the "Company" or "Flowserve") incorporated by
reference in its Annual Report on Form 10-K for the year ended December 31, 1998
describes a change in the method of accounting for inventories at certain of the
Company's domestic locations. The Company has changed from the first-in,
first-out to the last-in first-out ("LIFO") method of accounting for these
inventories representing twenty-three percent of the Company's inventories on a
FIFO basis at December 31, 1998. You have advised us that you believe that the
change is to a preferable method in your circumstances because:
1) The LIFO method will provide for a better matching of current
production costs with current revenues as the most recently
incurred costs will be expensed as inventory is sold.
2) Adoption of LIFO at the former BW/IP, Inc. locations will improve
consistency among the domestic operations of Flowserve, as all
U.S. operations will then be using the LIFO method.
There are no authoritative criteria for determining a preferable inventory
cost-flow method based on the particular circumstances; however, we conclude
that the change in the method of accounting for inventories at the former BW/IP,
Inc. locations is an acceptable alternative method which, based on your business
judgment to make this change for the reasons cited above, is preferable in your
circumstances.
Very truly yours,
/s/ Ernst & Young LLP
<PAGE> 1
Exhibit 21.1
FLOWSERVE CORPORATION
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
JURISDICTION PERCENTAGE
NAME OF SUBSIDIARY OF INCORPORATION OWNED
- ------------------ ---------------- -----
<S> <C> <C>
Byron Jackson Argentina I.C.S.A. Argentina 100%
Durametallic Argentina S.A. Argentina 100%
Flowserve FSD Pty. Ltd. Australia 100%
Flowserve Australia Pty. Ltd. Australia 100%
Flowserve Pty. Ltd. Australia 100%
Flowserve Dichtungstechnik Gesellschaft m.b.H Austria 100%
Flowserve (Barbados), Ltd. Foreign Sales Corporation Barbados 100%
Flowserve SRD S.A. Belgium 100%
Flowserve FSD N.V. Belgium 100%
Durco Europe S.A. Coordination Center Belgium 100%
Flowserve RED S.A. Belgium 100%
Flowserve Ltda Brazil 100%
Flowserve Inc. Canada 100%
Flowserve S.A.S France 100%
Flowserve Essen GmbH Germany 100%
Flowserve Dortmund Verwaltungs GmbH Germany 100%
Flowserve Dortmund GmbH & Co. KG Germany 100%
Flowserve Ahaus GmbH Germany 100%
Flowserve Microfinish Pumps Pvt. Ltd. India 76%
Flowserve India Controls Pvt. Ltd. India 95%
Flowserve Microfinish Valves Pvt. Ltd. India 76%
PT Flowserve Indonesia 75%
Flowserve Ireland Limited Ireland 100%
Flowserve Spa Italy 100%
Byron Jackson K.K. Japan 100%
Flowserve Japan K.K. Japan 100%
Ebara-ByronJackson K.K. Japan 50%
Flowserve Sdn. Bhd. Malaysia 70%
Flowserve (Mauritius) Corporation Mauritius 100%
Flowserve S.A. de C.V. Mexico 100%
Flowserve B.V. Netherlands 100%
</TABLE>
1
<PAGE> 2
<TABLE>
<CAPTION>
JURISDICTION PERCENTAGE
NAME OF SUBSIDIARY OF INCORPORATION OWNED
- ------------------ ---------------- -----
<S> <C> <C>
Flowserve Services B.V. Netherlands 100%
Flowserve International B.V. Netherlands 100%
Flowserve New Zealand Limited New Zealand 100%
Flowserve Abahsain Co.Ltd. Saudi Arabia 60%
Flowserve Pte. Ltd. Singapore 100%
Valtek South Africa (Proprietary) Limited South Africa 100%
Flowserve, S.A. Spain 100%
Flowserve S.A. Switzerland 100%
Flowserve Siam Co., Ltd. Thailand 60%
Flowserve International Limited United Kingdom 100%
Flowserve Limited. United Kingdom 100%
Flowserve International, Inc. U.S. - Delaware 100%
Flowserve FSD Corporation U.S. - Delaware 100%
Flowserve FCD Corporation U.S. - Delaware 100%
Flowserve RED Corporation U.S.- Delaware 100%
Flowserve Holdings, Inc. U. S. - Delaware 100%
Flowserve Management Company (Business Trust) U. S. - Delaware 100%
Durametallic Australia Holding Company U.S. - Michigan 100%
Flowserve New Mexico, Inc. U.S. - New Mexico 100%
Durametallic Uruguary Uruguay 100%
Flowserve Venezuela S.A. Venezuela 100%
</TABLE>
2
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Flowserve Corporation of our report dated February 9, 1999, included in the
1998 Annual Report to Shareholders of Flowserve Corporation.
We also consent to the incorporation by reference in the Registration
Statements (Form S-8 No. 33-28497) pertaining to the 1989 Stock Option Plan,
(Form S-8 No. 33-28497) pertaining to the Duriron Company, Inc. Savings and
Thrift Plan, (Form S-8 No. 33-72372) pertaining to the Valtek Incorporated
Retirement Plan and Trust, (Form S-8 No. 333-50667) pertaining to the BW/IP,
Inc. 1996 Long-Term Incentive Plan, the BW/IP, Inc. 1996 Directors' Stock and
Deferred Compensation Plan, the BW/IP International, Inc. 1992 Long-Term
Incentive Plan, the BW/IP Holding, Inc. Non-Employee Directors' Stock Option
Plan, and the BW/IP International, Inc. Capital Accumulation Plan, and (Form
S-8 No. 333-57773) pertaining to The Duriron Company, Inc. Pump and Foundry
Divisions Hourly Employees Savings and Thrift Plan of our reports dated
February 9, 1999, with respect to the consolidated financial statements and
schedule of Flowserve Corporation included or incorporated by reference in this
Annual Report (Form 10-K) for the year ended December 31, 1998.
/s/Ernst & Young LLP
Dallas, Texas
March 12, 1999
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-28497, 33-72372, 333-50667 and 333-57773) of
Flowserve Corporation of our report (relating to BW/IP, Inc. and its
subsidiaries) dated January 28, 1997 appearing on page F-2 in this Annual Report
on Form 10-K. We also consent to the incorporation by reference of our report
(relating to BW/IP, Inc. and its subsidiaries) on the Financial Statement
Schedules, which appears on page F-4 of this Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Los Angeles, California
March 12, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 24,928
<SECURITIES> 0
<RECEIVABLES> 234,191
<ALLOWANCES> 4,533
<INVENTORY> 199,286
<CURRENT-ASSETS> 487,290
<PP&E> 488,174
<DEPRECIATION> 279,142
<TOTAL-ASSETS> 870,197
<CURRENT-LIABILITIES> 219,126
<BONDS> 186,292
0
0
<COMMON> 51,856
<OTHER-SE> 292,908
<TOTAL-LIABILITY-AND-EQUITY> 870,197
<SALES> 1,083,086
<TOTAL-REVENUES> 1,083,086
<CGS> 667,753
<TOTAL-COSTS> 959,681
<OTHER-EXPENSES> 37,073
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,175
<INCOME-PRETAX> 73,157
<INCOME-TAX> 25,502
<INCOME-CONTINUING> 47,655
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 1,220
<NET-INCOME> 48,875
<EPS-PRIMARY> 1.23
<EPS-DILUTED> 1.23
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 58,602 38,933
<SECURITIES> 0 0
<RECEIVABLES> 234,437 223,274
<ALLOWANCES> 5,059 4,826
<INVENTORY> 184,944 182,423
<CURRENT-ASSETS> 514,664 469,035
<PP&E> 461,266 455,049
<DEPRECIATION> 251,757 243,311
<TOTAL-ASSETS> 880,025 829,776
<CURRENT-LIABILITIES> 230,444 189,063
<BONDS> 128,936 143,962
0 0
0 0
<COMMON> 51,856 51,854
<OTHER-SE> 343,417 336,770
<TOTAL-LIABILITY-AND-EQUITY> 880,025 829,776
<SALES> 1,152,196 1,097,645
<TOTAL-REVENUES> 1,152,196 1,097,645
<CGS> 703,319 668,718
<TOTAL-COSTS> 1,016,102 976,600
<OTHER-EXPENSES> 33,030 550
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 13,275 12,144
<INCOME-PRETAX> 89,789 108,351
<INCOME-TAX> 38,223 37,254
<INCOME-CONTINUING> 51,566 71,097
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 51,566 71,097
<EPS-PRIMARY> 1.26 1.72
<EPS-DILUTED> 1.26 1.72
</TABLE>
