<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
----------------------------------
For Quarter Ended March 31, 1999 Commission File Number 1-13179
FLOWSERVE CORPORATION
(Exact name of Registrant as specified in its charter)
NEW YORK
(State or other jurisdiction of incorporation or organization)
31-0267900
(I.R.S. Employer Identification Number)
222 W. LAS COLINAS BLVD., SUITE 1500, IRVING, TEXAS 75039
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (972) 443-6500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
SHARES OF COMMON STOCK, $1.25 PAR VALUE,
OUTSTANDING AS OF MARCH 31, 1999 37,468,589
<PAGE> 2
FLOWSERVE CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
No.
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Income and Comprehensive Income -
Three Months Ended March 31, 1999 and 1998 (unaudited) 3
Consolidated Balance Sheets -
March 31, 1999 (unaudited) and December 31, 1998 4
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1999 and 1998 (unaudited) 5
Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISKS 15
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURES 16
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FLOWSERVE CORPORATION
(UNAUDITED)
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
--------- ---------
<S> <C> <C>
Sales $ 269,387 $ 258,317
Cost of sales 172,597 157,119
--------- ---------
Gross profit 96,790 101,198
Selling and administrative expense 67,310 64,201
Research, engineering and development expense 6,872 7,365
Merger integration expense 3,432 7,645
--------- ---------
Operating income 19,176 21,987
Interest expense 3,083 3,125
Other expense (income), net 323 (1,308)
--------- ---------
Earnings before income taxes $ 15,770 20,170
Provision for income taxes 5,362 7,059
--------- ---------
Net earnings $ 10,408 $ 13,111
========= =========
Net earnings per share (diluted and basic) $ 0.28 $ 0.32
========= =========
Average shares outstanding 37,591 41,018
</TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
---------- ---------
<S> <C> <C>
Net earnings $10,408 $13,111
Foreign currency translation adjustments 779 2,786
------- -------
Comprehensive income $ 9,629 $10,325
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
3
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FLOWSERVE CORPORATION
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share data) MARCH 31, December 31,
1999 1998
--------- --------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 11,340 $ 24,928
Accounts receivable, net 242,535 234,191
Inventories 194,808 199,286
Prepaids and other current assets 28,945 28,885
--------- --------
Total current assets 477,628 487,290
Property, plant and equipment, net 212,930 209,032
Intangible assets, net 90,578 91,384
Other assets 82,661 82,491
--------- --------
Total assets $ 863,797 $870,197
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 70,641 $ 76,745
Notes payable 2,702 3,488
Income taxes 16,061 17,472
Accrued liabilities 100,751 107,028
Long-term debt due within one year 13,750 14,393
--------- --------
Total current liabilities 203,905 219,126
Long-term debt due after one year 195,076 186,292
Postretirement benefits and deferred items 118,839 120,015
Commitments and contingencies
Shareholders' equity:
Serial preferred stock, $1.00 par value
Shares authorized - 1,000
Shares issued and outstanding - None
Common stock, $1.25 par value
Shares authorized - 120,000
Shares issued and outstanding - 41,484 51,856 51,856
Capital in excess of par value 70,701 70,698
Retained earnings 358,369 353,249
--------- --------
480,926 475,803
Treasury stock at cost - 4,016 and 3,817 shares (93,535) (90,404)
Accumulated other comprehensive expense (41,414) (40,635)
--------- --------
Total shareholders' equity 345,977 344,764
--------- --------
Total liabilities and shareholders' equity $ 863,797 $870,197
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
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FLOWSERVE CORPORATION
(Unaudited)
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands) Three Months Ended March 31,
----------------------------
1999 1998
----------- ---------
<S> <C> <C>
CASH FLOWS - OPERATING ACTIVITIES:
Net earnings $ 10,408 $ 13,111
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation 9,551 8,919
Amortization 806 898
Loss on the sale of fixed assets 539 23
Change in assets and liabilities, net of effects of
acquisitions:
Accounts receivable (9,095) 8,361
Inventories 3,808 (10,686)
Prepaid expenses (113) 2,800
Other assets (2,995) (4,699)
Accounts payable (5,570) (2,098)
Accrued liabilities (5,539) (26,023)
Income taxes (1,748) 3,230
Postretirement benefits and deferred items (247) (2,297)
Net deferred taxes (1,543) (430)
-------- --------
Net cash flows used by operating activities (1,738) (8,891)
CASH FLOWS - INVESTING ACTIVITIES:
Capital expenditures, net of disposals (11,504) (9,939)
-------- --------
Net cash flows used by investing activities (11,504) (9,939)
CASH FLOWS - FINANCING ACTIVITIES:
Net (repayments) borrowings under lines of credit (317) 9,260
Payments on long-term debt (6,310) (8,903)
Proceeds from long-term debt 15,547 2,916
Treasury share purchases (3,333) --
Proceeds from stock activity 238 3,196
Dividends paid (5,290) (5,696)
-------- --------
Net cash flows provided by financing activities 535 773
Effect of exchange rate changes (881) (529)
-------- --------
Net change in cash and cash equivalents (13,588) (18,586)
Cash and cash equivalents at beginning of year 24,928 58,602
-------- --------
Cash and cash equivalents at end of period $ 11,340 $ 40,016
======== ========
Taxes paid $ 6,772 $ 3,638
Interest paid $ 2,615 $ 1,997
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
FLOWSERVE CORPORATION
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
1. ACCOUNTING POLICIES - BASIS OF PRESENTATION
The accompanying consolidated balance sheet as of March 31, 1999, and the
related consolidated statements of income, comprehensive income and cash flows
for the three months ended March 31, 1999 and 1998, are unaudited. In
management's opinion, all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of such financial statements have
been made. The accompanying consolidated financial statements and notes in this
Form 10-Q are presented as permitted by Regulation S-X and do not contain
certain information included in the Company's annual financial statements and
notes to the financial statements. Accordingly, the accompanying consolidated
financial information should be read in conjunction with the Company's 1998
Annual Report. Interim results are not necessarily indicative of results to be
expected for a full year.
2. 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.
Inventories and the method of determining costs were as follows:
<TABLE>
<CAPTION>
MARCH 31, December 31,
1999 1998
--------- ---------
<S> <C> <C>
Raw Materials $ 26,119 $ 26,088
Work in process and
finished goods 218,757 226,843
Less: Progress billings (11,008) (15,024)
--------- ---------
233,868 237,907
LIFO reserve (39,060) (38,621)
--------- ---------
Net inventory $ 194,808 $ 199,286
========= =========
Percent of inventory
accounted for by LIFO 67% 61%
Percent of inventory
accounted for by FIFO 33% 39%
</TABLE>
3. EARNINGS PER SHARE
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.
4. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In 1998, the Financial Accounting Standards Board issued Statement of
Position (SOP) No. 98-1, "Accounting for the Costs of Software
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Developed or Obtained for Internal Use." SOP 98-1 is effective for fiscal
periods beginning after December 15, 1998, and establishes guidelines to
determine whether software related costs should be capitalized or expensed. The
Company is currently accounting for software costs in accordance with these
guidelines.
In 1998, the Financial Accounting Standards Board also issued Statement of
Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This standard is effective for fiscal years
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.
5. 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.
In 1997, the Company developed a merger integration program that included
facility rationalizations in North America and Europe, organizational
realignments at the corporate and divisional 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
$32,600 related to this program. In the first quarter ended March 31, 1999,
severance costs of $400 were paid and charged against the restructuring reserve.
The Company has currently paid severance relating to approximately 300
employees.
The remaining expense of the merger integration program is being recognized
as incurred. Since the inception of the program, the Company has incurred costs
related to the program of $48,731. Of this amount, $3,432 was incurred during
the first quarter of 1999, compared with $7,645 during the first quarter of
1998.
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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
CASH EXPENDITURES (400) -- (400)
NONCASH EXPENDITURES -- -- --
-------- -------- --------
BALANCE AT MARCH 31, 1999 $ 2,300 $ -- $ 2,300
======== ======== ========
</TABLE>
The Company's Board of Directors also approved a $120 million investment in
"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
Flowserver is expected to occur over a five-year period. Less than one-third of
the costs associated with this program are expected to be capitalized, with the
balance expensed. During 1999, it is estimated that expense associated with this
program will be approximately $15 million.
During the quarter ended March 31, 1999, the Company incurred costs
associated with this project of $3,432 recorded as merger integration expense
and $1,665 as capital expenditures.
6. SEGMENT INFORMATION
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 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.
The Company evaluates segment performance and allocates resources based on
operating income or loss before special items and taxes. Intersegment sales and
transfers are recorded at cost plus a profit margin.
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<TABLE>
<CAPTION>
ROTATING FLOW FLOW CONSOLIDATED
THREE MONTHS ENDED MARCH 31, 1999 EQUIPMENT CONTROL SOLUTIONS ALL OTHER TOTAL
--------- ------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
SALES TO EXTERNAL CUSTOMERS $ 86,410 $ 71,470 $105,741 $ 5,766 $269,387
INTERSEGMENT SALES 1,442 4,102 2,956 (8,500) --
SEGMENT OPERATING INCOME (BEFORE
SPECIAL ITEMS) 4,800 7,965 14,834 (4,991) 22,608
IDENTIFIABLE ASSETS $258,046 $222,980 $286,220 $ 96,551 $863,797
</TABLE>
<TABLE>
<CAPTION>
Rotating Flow Flow Consolidated
Three months ended March 31, 1998 Equipment Control Solutions All Other Total
--------- ------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
Sales to external customers $ 90,975 $ 66,869 $ 98,807 $ 1,666 $258,317
Intersegment sales 1,739 3,744 1,475 (6,958) --
Segment operating income (before special
items) 8,644 9,747 15,519 (4,278) 29,632
Identifiable assets $338,437 $215,682 $211,853 $ 97,649 $863,621
</TABLE>
Reconciliation of the segment's total operating income before special items
(merger-related expenses) to consolidated earnings before income taxes follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
------- -------
<S> <C> <C>
Total segment operating income (before special items) $27,599 $33,910
Corporate expenses and other 4,991 4,278
Merger integration expense 3,432 7,645
Interest expense 3,083 3,125
Other expense(income) 323 (1,308)
------- -------
Earnings before income taxes $15,770 $20,170
======= =======
</TABLE>
7. SHARE REPURCHASE PROGRAM
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. In
the first quarter ended March 31, 1999, the Company spent $3.3 million to
repurchase an additional 206,700 shares. The Company generally used credit
facilities to fund the purchases.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 1999
In general, results for the first quarter of 1999 were lower than the
corresponding period in the previous year due to weaker market conditions and an
increasingly competitive environment. Sales increased 4.3% to $269.4 million for
the three months ended March 31, 1999, compared with $258.3 million for the same
period in 1998. The change in sales is discussed further in the following
section on business segments. In total, sales outside the United States were 52%
during the first quarter of 1999, compared with 50% during the first quarter of
1998. Bookings (incoming orders for which there are purchase commitments) were
5.7% lower in the first quarter of 1999 at $252.6 million, compared with $268.0
million for the same period last year.
BUSINESS SEGMENTS
Flowserve manages its operations through three business segments: Rotating
Equipment Division (RED) for modular and engineered pumps; Flow Control Division
(FCD) for automated and manual quarter-turn valves, control valves and valve
actuators; and Flow Solutions Division (FSD) for precision mechanical seals and
flow management services.
Sales and operating income before special items (merger-related expenses)
for each of the three business segments are:
<TABLE>
ROTATING EQUIPMENT
DIVISION
-----------------------
Three Months Ended
March 31,
-----------------------
(in millions of dollars) 1999 1998
--------- ---------
<S> <C> <C>
Sales $87.8 $92.7
Operating income 4.8 8.6
</TABLE>
The sales decline in 1999 was generally due to weakness in the markets for
chemical process pumps and parts business, as well as the timing of shipments of
nuclear pumps. This weakness was due to relatively poor economic conditions and
continued low oil prices, and a reduction in the number and size of projects
normally available as customers continue to adjust the extent and timing of
their investment plans.
Operating income before special items, as a percentage of sales, declined
to approximately 5.5% in 1999 from about 9.3% in the prior-year period. The
decline was due to lower sales and lower margins resulting from an unfavorable
product and market mix, as well as some competitive pricing pressures.
First quarter 1998 results included a higher percentage of more profitable
chemical process, nuclear and parts business compared with 1999.
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<TABLE>
<CAPTION>
FLOW CONTROL DIVISION
----------------------
Three Months Ended
March 31,
----------------------
(in millions of dollars) 1999 1998
----------- --------
<S> <C> <C>
Sales $75.6 $70.6
Operating income 8.0 9.7
</TABLE>
The increase in sales was due to the acquisition of a licensee in July
1998, as well as higher sales in Europe and Australia.
Operating income before special items, as a percentage of sales, was 10.6%
in the first quarter of 1999, compared with 13.7% in 1998. The decline in 1999
was generally due to lower selling prices on manual and control valve products,
a decline in replacement parts business, and a slight increase in selling and
administrative expenses primarily due to the Valtek Engineering acquisition.
<TABLE>
<CAPTION>
FLOW SOLUTIONS DIVISION
-----------------------
Three Months Ended
March 31,
-----------------------
(in millions of dollars) 1999 1998
---------- ----------
<S> <C> <C>
Sales $108.7 $100.3
Operating Income 14.8 15.5
</TABLE>
Sales increased due to new seal alliances, 1998 acquisitions, expanded
service capabilities and improved customer service.
Operating income before special items, as a percentage of sales, decreased
to 13.6% from 15.5% in 1998. The lower margins were generally due to some
original equipment price discounts and higher selling and administrative
expenses, the result of an investment in additional personnel to support the
growth of service operations and acquisition of new service centers.
CONSOLIDATED RESULTS
The gross profit margin was 35.9% for the three months ended March 31,
1999, compared with 39.2% for the same period in 1998. The decrease in the gross
profit margin was due to unfavorable product and market mix and pricing
pressures in the marketplace, as well as our continued investment in service
related operations.
Selling and administrative expenses as a percentage of net sales were 25.0%
for the three- month period ended March 31, 1999, compared with 24.9% for the
corresponding 1998 period. The slight increase in selling and administrative
expenses percentage was primarily due to 1998 acquisitions, increased expenses
associated with some organizational changes and additional investments in
personnel to support the growth of service operations. These factors were
mitigated somewhat by the merger benefits that reduced selling and
administrative expense year-over-year by about $1.5 million.
Research, engineering and development expense was $6.9 million for the
first quarter of 1999, compared with $7.4 million during the same period last
year. The lower level of spending was the result of the revamping of the R&D
process to ensure a more productive use of R&D spending.
Interest expense during the first three months of 1999 was $3.1 million,
the same as the prior-year period.
Tax savings initiatives that were part of the merger integration tax
planning project reduced the effective tax rate to 34.0% during the first three
months of 1999, compared with 35.0% during the same period in 1998.
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Earnings before special items for the first quarter of 1999 were $12.7
million, or $0.34 per share. This was 30% below the $18.1 million, or $0.44 per
share, for the same period in 1998. Net earnings after special items were $10.4
million, or $0.28 per share, for the three months ended March 31, 1999, compared
with $13.1 million, or $0.32 per share, for the same period in 1998.
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 divisional 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 $32,600 related to this
program. The remaining expense of the merger integration program is being
recognized as incurred. Since the inception of the program, the Company has
incurred costs related to the program of $48,731. Of this amount, $3,432 was
incurred during the first quarter of 1999, compared with $7,645 during the first
quarter of 1998.
The Company's Board of Directors also approved a $120 million investment in
"Flowserver." This business process improve-ment 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
Flowserver is expected to occur over a five-year period. Less than one-third of
the costs associated with this program are expected to be capitalized, with the
balance expensed. During 1999, it is estimated that expense associated with this
program will be approximately $15 million.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities for the first three months of 1999
were above those during the same period in 1998. The increase in cash flows in
1999 was primarily due to a lower level of incentive payouts and reduced merger
related payments.
Capital expenditures, net of disposals, were $11.5 million during the first
quarter, compared with $9.9 million in the first quarter of 1998. Capital
expenditures were funded primarily by operating cash flows. Capital expenditures
in 1999 included about $1.7 million related to Flowserver.
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. In the first quarter of 1999, the Company spent $3.3 million to
repurchase an additional 206,700 shares.
At March 31, 1999, total debt was 37.9% of the Company's capital structure,
compared with 37.2% at December 31, 1998. The interest coverage ratio of the
Company's indebtedness was 6.1 times interest at March 31, 1999, compared with
6.6 times interest at December 31, 1998.
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The Company believes that internally generated funds, together with access
to external capital resources, will be sufficient to satisfy existing
commitments and plans and will provide adequate financial flexibility to take
advantage of potential strategic business opportunities should they arise.
YEAR 2000 COSTS
As is more fully described in the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998, 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 plan has not changed significantly
since the end of the most recent fiscal year.
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 more than 95 percent
complete.
Testing is also about 95 percent complete and implementation is about 90 percent
complete. The Company expects that efforts in these areas will be substantially
complete by July 1999.
The Company's preliminary estimate of the total cost for Year 2000
compliance is approximately $7.0 million, of which approximately $6.0 million
had been incurred through March 31, 1999. 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
addressing Year 2000 issues, as well as costs for improved systems that are Year
2000 compliant. These systems would have been acquired in the ordinary course of
business, but their acquisition was 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 completed a preliminary Year 2000 contingency plan. A
comprehensive analysis of the operational problems and costs (including loss of
revenues) that would likely result from the failure by the Company and certain
third parties to complete efforts necessary to achieve Year 2000 compliance on a
timely basis will be completed by June 1999.
The Company believes that the Year 2000 issue will not pose significant
operational
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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.
- --------------------------------------------------------------------------------
FORWARDING-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY
The Financial Information portion (Part I), of this Report on Form 10-Q
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.
- --------------------------------------------------------------------------------
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
There have been no material changes in reported market risk since the end
of 1998.
PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) During the first quarter of 1999, the Company issued 550 shares of
restricted common stock pursuant to an exemption from registration under
Section 4(2) of the Securities Act of 1933. Shares were issued for the
benefit of two employees of the company, subject to restrictions on
transfer and vesting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit - 10. Amendment No. 1 to Flowserve Corporation 1998 Restricted
Stock Plan.
(b) Exhibit - 27. Financial Data Schedule
(c) There were no reports on Form 8-K filed during the quarter ended March 31,
1999.
15
<PAGE> 16
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FLOWSERVE CORPORATION
(Registrant)
/s/ Renee J. Hornbaker
-------------------------------------------
Renee J. Hornbaker
Vice President and Chief Financial Officer
Date: May 12, 1999
--------------------
16
<PAGE> 17
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10 Amendment No. 1 to Flowserve Corporation 1998 Restricted Stock Plan.
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10
AMENDMENT NO. 1 TO
FLOWSERVE CORPORATION
1998 RESTRICTED STOCK PLAN
Effective April 22, 1999, the first sentence of "Section 4 Shares Subject to the
Plan" is hereby amended and restated in its entirety as follows:
"Subject to adjustment as provided in Section I of Article IV, the maximum
number of shares which may be granted as Restricted Shares under the Plan
shall be 250,000 Shares."
The remainder of the Plan shall remain unchanged and in full force and effect.
FLOWSERVE CORPORATION
By /s/ Ronald F. Shuff
---------------------------------
Ronald F. Shuff
Vice President, Secretary & General
Counsel
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 11,340
<SECURITIES> 0
<RECEIVABLES> 246,720
<ALLOWANCES> 4,185
<INVENTORY> 194,808
<CURRENT-ASSETS> 477,628
<PP&E> 496,546
<DEPRECIATION> 283,616
<TOTAL-ASSETS> 863,797
<CURRENT-LIABILITIES> 203,905
<BONDS> 195,076
0
0
<COMMON> 51,856
<OTHER-SE> 294,121
<TOTAL-LIABILITY-AND-EQUITY> 863,797
<SALES> 269,387
<TOTAL-REVENUES> 269,387
<CGS> 172,597
<TOTAL-COSTS> 246,779
<OTHER-EXPENSES> 3,755
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,083
<INCOME-PRETAX> 15,770
<INCOME-TAX> 5,362
<INCOME-CONTINUING> 10,408
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,408
<EPS-PRIMARY> 0.28
<EPS-DILUTED> 0.28
</TABLE>
