<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 June 30, 2000 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 JUNE 30, 2000 37,419,249
<PAGE> 2
FLOWSERVE CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
No.
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Income - Three
Months Ended June 30, 2000 and 1999 (unaudited) 3
Consolidated Statements of Comprehensive Income -
Three Months Ended June 30, 2000 and 1999 (unaudited) 3
Consolidated Statements of Income - Six
Months Ended June 30, 2000 and 1999 (unaudited) 4
Consolidated Statements of Comprehensive Income -
Six Months Ended June 30, 2000 and 1999 (unaudited) 4
Consolidated Balance Sheets -
June 30, 2000 (unaudited) and December 31, 1999 5
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2000 and 1999 (unaudited) 6
Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISKS 20
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 20
SIGNATURE 21
INDEX TO EXHIBITS 22
</TABLE>
<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 June 30,
---------------------------------
2000 1999
---------- ---------
<S> <C> <C>
Sales $ 299,153 $ 275,196
Cost of sales 195,990 181,307
---------- ---------
Gross profit 103,163 93,889
Selling and administrative expense 70,590 66,204
Research, engineering and development expense 6,198 6,327
Merger integration expense -- 4,406
---------- ---------
Operating income 26,375 16,952
Interest expense 7,054 4,120
Other expense, net 56 1
---------- ---------
Earnings before income taxes 19,265 12,831
Provision for income taxes 6,647 4,362
---------- ---------
Net earnings $ 12,618 $ 8,469
========== =========
Earnings per share (basic and diluted): $ 0.33 $ 0.22
========== =========
Average shares outstanding 37,809 37,771
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended June 30,
--------------------------------
2000 1999
--------- ---------
<S> <C> <C>
Net earnings $ 12,618 $ 8,469
Foreign currency translation adjustments 6,952 3,099
--------- ---------
Comprehensive income $ 5,666 $ 5,370
========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
3
<PAGE> 4
FLOWSERVE CORPORATION
(UNAUDITED)
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------------
2000 1999
---------- ----------
<S> <C> <C>
Sales $ 584,462 $ 544,583
Cost of sales 382,070 353,903
---------- ----------
Gross profit 202,392 190,680
Selling and administrative expense 142,220 133,314
Research, engineering and development expense 12,353 13,199
Merger integration expense -- 7,838
---------- ----------
Operating income 47,819 36,329
Interest expense 13,576 7,203
Other (income) expense, net (3,161) 525
---------- ----------
Earnings before income taxes 37,404 28,601
Provision for income taxes 12,905 9,724
---------- ----------
Net earnings $ 24,499 $ 18,877
========== ==========
Earnings per share (basic and diluted): $ 0.65 $ .50
========== ==========
Average shares outstanding 37,810 37,771
</TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------------
2000 1999
---------- ---------
<S> <C> <C>
Net earnings $ 24,499 $ 18,877
Foreign currency translation adjustments 16,202 3,878
---------- ---------
Comprehensive income $ 8,297 $ 14,999
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
FLOWSERVE CORPORATION
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
JUNE 30, December 31,
2000 1999
----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 14,495 $ 30,463
Accounts receivable, net 246,331 213,625
Inventories 210,617 168,356
Prepaids and other current assets 37,094 41,344
---------- ------------
Total current assets 508,537 453,788
Property, plant and equipment, net 221,336 209,976
Intangible assets, net 151,352 96,435
Other assets 80,851 77,952
---------- ------------
Total assets $ 962,076 $ 838,151
========== ============
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable $ 76,802 $ 72,103
Notes payable 531 734
Income taxes 8,904 7,878
Accrued liabilities 96,957 111,820
Long-term debt due within one year 44 3,125
---------- ------------
Total current liabilities 183,238 195,660
Long-term debt due after one year 315,348 198,010
Postretirement benefits and deferred items 146,963 136,207
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 67,697 67,963
Retained earnings 368,754 344,254
--------- ------------
488,307 464,073
Treasury stock at cost - 4,065 and 4,071 shares (93,226) (93,448)
Accumulated other comprehensive expense (78,554) (62,351)
--------- ------------
Total shareholders' equity 316,527 308,274
--------- ------------
Total liabilities and shareholders' equity $ 962,076 $ 838,151
========= ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
FLOWSERVE CORPORATION
(Unaudited)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------------
2000 1999
--------- ---------
<S> <C> <C> <C> <C>
CASH FLOWS - OPERATING ACTIVITIES:
Net earnings $ 24,499 $ 18,877
Adjustments to reconcile net earnings to net cash (used) provided
by operating activities:
Depreciation 16,474 19,187
Amortization 3,902 2,008
Net (Gain) Loss on the sale of fixed assets (148) 55
Change in assets and liabilities, net of effects of acquisitions:
Accounts receivable (7,773) 757
Inventories (19,651) 12,570
Prepaid expenses 9,191 925
Other assets (6,935) (1,148)
Accounts payable (6,537) (7,485)
Accrued liabilities (30,946) (12,140)
Income taxes 5,071 (7,794)
Postretirement benefits and deferred items 6,773 (3,636)
Net deferred taxes (474) (31)
--------- ---------
Net cash flows (used) provided by operating activities (6,554) 22,145
CASH FLOWS - INVESTING ACTIVITIES:
Capital expenditures, net of disposals (12,434) (20,201)
Payment for acquisitions, net of cash acquired (21,703) --
--------- ---------
Net cash flows used by investing activities (34,137) (20,201)
CASH FLOWS - FINANCING ACTIVITIES:
Net (repayments) borrowings under short-term debt (3,079) 729
Payments on long-term debt including revolving credit facility (96,405) (9,256)
Proceeds from long-term debt including revolving credit facility 125,134 11,890
Treasury share purchases -- (3,333)
Other stock activity 239 (679)
Dividends paid -- (10,575)
--------- ---------
Net cash flows provided (used) by financing activities 25,889 (11,224)
Effect of exchange rate changes (1,166) (952)
--------- ---------
Net change in cash and cash equivalents (15,968) (10,232)
Cash and cash equivalents at beginning of year 30,463 24,928
--------- ---------
Cash and cash equivalents at end of period $ 14,495 $ 14,696
========= =========
Taxes paid $ 8,205 $ 17,905
Interest paid $ 12,107 $ 8,276
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
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 June 30, 2000, and the
related consolidated statements of income and comprehensive income for the three
months and six months ended June 30, 2000 and 1999, and the statements of cash
flows for the six months ended June 30, 2000 and 1999, are unaudited. In
management's opinion, all adjustments comprising 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 1999 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:
<TABLE>
<CAPTION>
JUNE 30, December 31,
2000 1999
-------- -----------
<S> <C> <C>
Raw materials $ 31,839 $ 29,674
Work in process and
finished goods 230,810 182,493
Less: Progress billings (14,213) (5,746)
-------- -----------
248,436 206,421
LIFO reserve (37,819) (38,065)
-------- -----------
Net inventory 210,617 $168,356
======== ===========
Percent of inventory
accounted for by LIFO 62% 64%
Percent of inventory
accounted for by FIFO 38% 36%
</TABLE>
3. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In 1999, the Financial Accounting Standards Board issued one Statement of
Financial Accounting Standard (SFAS) that was applicable to the Company - SFAS
No. 137, "Deferral of the Effective Date of SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 is now effective
for fiscal years beginning after June 15, 2000. In June 2000, in conjunction
with this standard, the Board also issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities". SFAS No. 138 amends the
accounting and reporting standards of SFAS No. 133 for certain derivative
instruments and certain hedging activities which have caused implementation
difficulties. These standards are not expected to materially impact Flowserve's
reported financial position, results of operations or cash flows.
7
<PAGE> 8
In addition, in December 1999, the Securities and Exchange Commission staff
issued Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial
Statements. This SAB does not change any of the existing rules on revenue
recognition. Rather, the SAB provides additional guidance for transactions not
addressed by existing rules. The Company is required to review its revenue
recognition policies by the fourth quarter of fiscal year 2000 to determine that
its recognition criteria is in compliance with the SAB interpretations. Any
change in accounting principle required in order to comply with the SAB may be
reported as a cumulative catch-up adjustment at that time. The Company is
currently reviewing its revenue recognition policies and does not feel that any
change in accounting required would have a material impact Flowserve's reported
financial position, results of operations or cash flows.
4. RESTRUCTURING
In the fourth quarter of 1999, the Company initiated a restructuring program
that included a one-time charge of $15,860 recorded as restructuring expense.
The restructuring charge related to the planned closure of 10 facilities and a
corresponding reduction in workforce at those locations, as well as at other
locations that are part of the restructuring.
The restructuring program is expected to result in a net reduction of
approximately 300 employees at a cost of $12,900. In addition, exit costs
associated with the facilities closings are estimated at $2,960. As of June 30,
2000, the program had resulted in a net reduction of 149 employees.
Expenditures charged to the 1999 restructuring reserve were:
<TABLE>
<CAPTION>
Other Exit
Severance Costs Total
---------------------------- ---------- -------- ---------
<S> <C> <C> <C>
Balance at December 24, 1999 $12,900 $2,960 $15,860
Cash expenditures (102) -- (102)
---------- -------- ---------
Balance at December 31, 1999 12,798 2,960 15,758
Cash expenditures (1,693) (583) (2,276)
---------- -------- ---------
Balance at March 31, 2000 11,105 2,377 13,482
CASH EXPENDITURES (1,311) (1,013) (2,324)
---------- -------- ---------
BALANCE AT JUNE 30, 2000 $ 9,794 $1,364 $11,158
========== ======== =========
</TABLE>
5. ACQUISITION
On January 13, 2000, the Company acquired Innovative Valve Technologies,
Inc. (Invatec), a company which is principally engaged in providing
comprehensive maintenance, repair, replacement and value-added distribution
services for valves, piping systems, instrumentation and other process-system
components for industrial customers.
The purchase involved acquiring all of the outstanding stock of Invatec and
assuming Invatec's existing debt and related obligations. The transaction was
accounted for under the purchase method of accounting and was financed by
utilizing funds from the Company's working capital. The results of operations
for Invatec are included in the Company's condensed consolidated financial
statements from the date of acquisition. The purchase price
8
<PAGE> 9
was approximately $18.3 million in cash. Liabilities of $94.9 million were
simultaneously paid off through borrowings under Flowserve's revolving credit
agreement.
The purchase price has been allocated to the net assets acquired based
primarily on information furnished by management of the acquired company.
The following unaudited pro forma information presents the consolidated
results of operations as if the acquisition occurred on January 1, 1999, after
giving effect to certain adjustments, including, goodwill amortization, interest
and related income tax effects. The pro forma information does not purport to
represent what the Company's results of operations actually would have been had
such transactions or events occurred on the dates specified, or to project the
Company's results of operations for any future period. Pro forma information has
not been presented for 2000 as results prior to the acquisition, (January 1,
2000 to January 12, 2000), are not material.
9
<PAGE> 10
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Historical
----------------------------
Innovative Pro Forma
Flowserve Valve Pro Forma Combined
Corp. Technologies Adjustments Company
--------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
Net Sales $ 544,583 $ 87,103 $ -- $ 631,686
Cost of Sales 353,903 60,902 -- 414,805
--------- ------------ ----------- ---------
Gross Profit 190,680 26,201 -- 216,881
Selling and administrative expense 133,314 22,062 (28)(a) 155,348
Research, engineering and development expense 13,199 -- -- 13,199
Merger integration expense 7,838 -- -- 7,838
--------- ------------ ----------- ---------
Operating Income 36,329 4,139 28 40,496
Interest expense 7,203 6,197 (3,464)(b) 9,936
Loss on assets held for sale -- 3,810 3,810
Other expense (income), net 525 (60) -- 465
--------- ------------ ----------- ---------
Earnings before income taxes 28,601 (5,808) 3,492 26,285
Provision for income taxes 9,724 (547) (109)(c) 9,068
--------- ------------ ----------- ---------
Net income (loss) $ 18,877 $ (5,261) $ 3,601 $ 17,217
========= ============ =========== =========
Earnings per share (basic and diluted) $ 0.50 $ -- $ -- $ 0.46
Weighted average shares outstanding (basic and diluted) 37,771 9,665 -- 37,771
</TABLE>
<TABLE>
<CAPTION>
Pro Forma Adjustments
<S> <C> <C>
Selling and administrative expense:
(a) Represents incremental decrease in annual goodwill amortization based
on decrease of $4,279 in estimated goodwill originating from the
acquisition and the reduction of the amortization period from 40 to 20
years. (28)
Interest expense:
(b) Represents reduction in consolidated interest expense related to debt
financing prior to the acquisition date (3,464)
Provision for income taxes:
(c) Represents income tax adjustment required to arrive at a combined
company pro forma effective tax rate of 34.5% (109)
</TABLE>
10
<PAGE> 11
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, 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 Corporate Headquarters costs and
other minor entities that are not considered separate segments. The Company
evaluates segment performance and allocates resources based on profit or loss
excluding merger integration, interest expense, other income or expense and
income taxes. Intersegment sales and transfers are recorded at cost plus a
profit margin. Minor reclassifications have been made to certain previously
reported information to conform to the current business configuration.
<TABLE>
<CAPTION>
ROTATING FLOW CONSOLIDATED
SIX MONTHS ENDED JUNE 30, 2000 EQUIPMENT FLOW CONTROL SOLUTIONS ALL OTHER TOTAL
---------------------------------------------- --------- ------------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
SALES TO EXTERNAL CUSTOMERS $152,854 $129,754 $298,732 $ 3,122 $584,462
INTERSEGMENT SALES 2,891 5,448 9,700 (18,039) --
SEGMENT OPERATING INCOME 10,108 16,195 35,350 (13,834) 47,819
IDENTIFIABLE ASSETS $238,745 $210,143 $428,899 $84,289 $962,076
</TABLE>
<TABLE>
<CAPTION>
Rotating Flow Consolidated
Six months ended June 30, 1999 Equipment Flow Control Solutions All Other Total
----------------------------------------------- --------- ------------ --------- --------- ------------
<S> <C> <C> <C> <C> <C>
Sales to external customers $187,077 $143,694 $210,341 $ 3,471 $544,583
Intersegment sales 2,632 7,998 7,573 (18,203) --
Segment operating income (before special items) 11,548 15,094 27,945 (10,420) 44,167
Identifiable assets $248,850 $212,684 $271,506 $111,968 $845,008
</TABLE>
Reconciliation of the total segment operating income before special items to
consolidated earnings before income taxes follows:
<TABLE>
<CAPTION>
Six Months Ended June 30,
2000 1999
------- -------
<S> <C> <C>
Total segment operating income (before special items) $ 61,653 $ 54,587
Corporate expenses and other 13,834 10,420
Merger integration expense -- 7,838
Interest expense 13,576 7,203
Other (income) expense (3,161) 525
-------- --------
Earnings before income taxes $ 37,404 $ 28,601
======== ========
</TABLE>
11
<PAGE> 12
7 SUBSEQUENT EVENT
On February 10, 2000, the Company announced that it had signed a definitive
agreement to acquire Ingersoll-Dresser Pumps (IDP) from the Ingersoll-Rand
Company for $775 million in cash. On August 8, 2000, the Company announced the
completion of the acquisition. The transaction, which was accounted for as a
purchase, was financed with a combination of bank financing and senior
subordinated notes. Upon closing of the transaction, the existing Flowserve debt
was repaid. Flowserve has received $1,425 million of financing to pay for the
acquisition and pay off existing debt as well as provide for a $300 million
revolving credit facility in connection with the acquisition. The financing
consists of approximately $375 million of 12.25% Senior Subordinated Notes and
$1.05 billion of senior credit facilities. The credit facilities consist of a
$275 million term loan with a final maturity of six years and an initial
interest rate of LIBOR plus 2.75%, a $475 million term loan with a final
maturity of eight years and an initial interest rate of LIBOR plus 3.50%, and a
$300 million revolving credit facility with a term of six years and an initial
interest rate of LIBOR plus 2.75%
----------
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2000
In general, results for the second quarter of 2000 were higher than the
corresponding period in the previous year due to the Company's acquisition of
Innovative Valve Technologies, Inc. (Invatec) on January 12, 2000. The
acquisition of Invatec is discussed in further detail in the Liquidity and
Capital Resources section of this Management Discussion and Analysis.
Sales increased 8.7% to $299.2 million for the three months ended June 30,
2000, compared with $275.2 million for the same period in 1999. Sales for the
quarter would have been $256.4 million without the acquisition of Invatec, 6.8%
below the second quarter of 1999. The change in sales is discussed further in
the following section on Business Segments. Net sales to international
customers, including export sales from the U.S., were approximately 44% during
the second quarter of 2000, compared with 55% during the second quarter of 1999.
The lower 2000 percentage is due to Invatec's markets being principally U.S.
Bookings (incoming orders for which there are purchase commitments) were $309.4
million, 23.0% higher than the second quarter of 1999 when bookings were $251.6
million. Excluding Invatec, bookings also showed year-on-year improvement of
4.7%.
BUSINESS SEGMENTS
Flowserve manages its operations through three business segments: Rotating
Equipment Division (RED) for engineered pumps; Flow Control Division (FCD) for
automated and manual quarter-turn valves, control valves and nuclear 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>
<CAPTION>
ROTATING EQUIPMENT
DIVISION
------------------
Three Months Ended
June 30,
------------------
(In millions of dollars) 2000 1999
------------------------ ------- ------
<S> <C> <C>
Sales $82.3 $ 98.2
Operating income 6.2 5.0
</TABLE>
The sales decrease in 2000 was generally due to a lower shipable beginning
backlog of highly engineered pumps. Unfavorable currency translation also
reduced sales by about 4%.
Operating income before special items, as a percentage of sales, increased
to approximately 7.5% in 2000 from about 5.1% in the prior-year period. The
operating income margin increased as a result of an improved gross margin due to
an improved product mix including parts, and ongoing cost reduction efforts.
<TABLE>
<CAPTION>
FLOW CONTROL DIVISION
------------------------
Three Months Ended
June 30,
------------------------
(In millions of dollars) 2000 1999
-------------------------- -------- --------
<S> <C> <C>
Sales $ 67.4 $ 76.1
Operating income 8.4 7.2
</TABLE>
The decrease in sales was due to reduced backlog at the beginning of the
quarter and lower book-to-build volume during the quarter. Unfavorable currency
translation also reduced sales by about 4%.
Operating income before special items, as a percentage of sales, was 12.5%
in the second
13
<PAGE> 14
quarter of 2000, compared with 9.4% in 1999. The improved operating margin in
2000 was generally due to improved gross margins and lower operating expenses.
These improvements were generally due to reduced costs principally related to
the Company's restructuring program initiated in the fourth quarter of 1999.
<TABLE>
<CAPTION>
FLOW SOLUTIONS DIVISION
-----------------------
Three Months Ended
June 30,
-----------------------
(In millions of dollars) 2000 1999
------------------------ ------- -------
<S> <C> <C>
Sales $ 159.6 $ 109.2
Operating Income 18.7 13.1
</TABLE>
Sales were higher than the prior-year period generally due to the
acquisition of Invatec. The increase in sales was offset slightly by an
unfavorable currency translation which reduced sales by about 3%.
Operating income before special items, as a percentage of sales, decreased
to 11.7% from 12.0% in 1999. The lower margins were generally due to the
acquisition of Invatec, as Invatec's gross margins are historically lower than
the balance of FSD operations, and period integration expenses relating to the
Company's 1999 restructuring program.
CONSOLIDATED RESULTS
The gross profit margin was 34.5% for the three months ended June 30, 2000,
compared with 34.1% for the same period in 1999. The increase was due to cost
reductions and a more favorable parts mix in pumps. Excluding period costs of
$0.7 million related to the 1999 restructuring program, the adjusted gross
margin excluding Invatec was the highest since the fourth quarter of 1998.
Selling and administrative expense as a percentage of net sales was 23.6%
for the three- month period ended June 30, 2000, compared with 24.1% for the
corresponding 1999 period. The decrease was due to the Company's cost reduction
initiatives.
Research, engineering and development expense was $6.2 million for the
second quarter of 2000, compared with $6.3 million during the same period last
year.
Interest expense during the second quarter of 2000 was $7.1 million, up
$2.9 million from the same period in 1999 due to higher interest rates and the
increased borrowing levels required to acquire Invatec stock and retire debt
obtained in the acquisition.
The Company's effective tax rate for the second quarter of 2000 was 34.5%
compared to 34.0% in the second quarter of 1999. The increase was due to the
acquisition of Invatec.
Net earnings for the second quarter of 2000 were $12.6 million or $0.33 per
share. This was 49.0% above net earnings of $8.5 million, or $0.22 per share,
for the same period in 1999. Excluding special items, net earnings for the
second quarter of 1999 were $11.4 million or $0.30 per share.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2000
In general, results for the first half of 2000 were higher than the
corresponding period in the previous year due to the Company's acquisition of
Invatec on January 12, 2000. The acquisition of Invatec is discussed in further
detail in the Liquidity and Capital Resources section of this Management
Discussion and Analysis.
Sales increased 7.3% to $584.5 million for the six months ended June 30,
2000, compared with $544.6 million for the same period in 1999. Sales for the
period would have been $501.2 million
14
<PAGE> 15
without the acquisition of Invatec, 8.0% below the same period of 1999. The
change in sales is discussed further in the following section on business
segments. Net sales to international customers, including export sales from the
U.S., were approximately 44% during the first half of 2000, compared with 55%
during the first half of 1999. The lower 2000 percentage is primarily due to
Invatec's markets being principally U.S. Bookings (incoming orders for which
there are purchase commitments) were $620.1 million, 23.0% higher than the first
half of 1999 when bookings were $504.2 million. Excluding Invatec, bookings also
showed year-on-year improvement of 5.3%.
BUSINESS SEGMENTS
Flowserve manages its operations through three business segments: Rotating
Equipment Division (RED) for engineered pumps; Flow Control Division (FCD) for
automated and manual quarter-turn valves, control valves and nuclear 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>
<CAPTION>
ROTATING EQUIPMENT
DIVISION
-------------------
Six Months Ended
June 30,
-------------------
(In millions of dollars) 2000 1999
------------------------ ------ ------
<S> <C> <C>
Sales $155.7 $189.7
Operating income 10.1 11.5
</TABLE>
The sales decrease in 2000 was generally due to a reduced opening backlog of
highly engineered pumps. Unfavorable currency translation also reduced sales by
about 3%.
Operating income before special items, as a percentage of sales, increased
to approximately 6.5% in 2000 from about 6.1% in the prior-year period. The
operating income margin increased due to an improved gross margin resulting from
an improved product mix and ongoing cost reduction efforts.
<TABLE>
<CAPTION>
FLOW CONTROL DIVISION
-----------------------
Six Months Ended
June 30,
-----------------------
(In millions of dollars) 2000 1999
------------------------ ------- -------
<S> <C> <C>
Sales $ 135.2 $ 151.7
Operating income 16.2 15.1
</TABLE>
The decrease in sales was due to reduced backlog at the beginning of the
year and lower book-to-build volume during the period. Unfavorable currency
translation also reduced sales by about 4%.
Operating income before special items, as a percentage of sales, was 12.0%
in the first half of 2000, compared with 10.0% in 1999. The improved operating
margin in 2000 was generally due to improved gross margins and lower operating
expenses. These improvements were generally due to a favorable product mix and
reduced costs principally related to the Company's restructuring program
initiated in the fourth quarter of 1999.
<TABLE>
<CAPTION>
FLOW SOLUTIONS DIVISION
-----------------------
Six Months Ended
June 30,
-----------------------
(In millions of dollars) 2000 1999
------------------------ ------- -------
<S> <C> <C>
Sales $ 308.4 $ 217.9
Operating Income 35.4 27.9
</TABLE>
Sales were higher than the prior-year period generally due to the
acquisition of Invatec. The increase in sales was offset slightly by an
unfavorable currency translation which reduced sales by about 2%.
15
<PAGE> 16
Operating income before special items, as a percentage of sales, decreased
to 11.5% from 12.8% in 1999. The lower margins were generally due to the
acquisition of Invatec, as Invatec's gross margins are historically lower than
the balance of FSD operations, and period integration expenses relating to the
Company's 1999 restructuring program.
CONSOLIDATED RESULTS
The gross profit margin was 34.6% for the six months ended June 30, 2000,
compared with 35.0% for the same period in 1999. The slight decrease was due to
the lower margins associated with Invatec. Excluding Invatec, margins are 0.7
percentage points above the prior year.
Selling and administrative expense as a percentage of net sales was 24.3%
for the six-month period ended June 30, 2000, compared with 24.5% for the
corresponding 1999 period. The slight decrease was due to the Company's cost
reduction initiatives which more than offset period costs incurred as a result
of the Company's 1999 restructuring program and costs associated with
Flowserver, the Company's global business process improvement initiative.
Flowserver expenses totaled $2.5 million in the first half of 2000. In 1999,
Flowserver expenses were $7.8 million and were identified and disclosed
separately as merger integration expense.
Research, engineering and development expense was $12.4 million for the
first six months of 2000, compared with $13.2 million during the same period
last year. The lower level of spending was generally the result of cost control
initiatives and the reallocation of resources to assist in project engineering.
Interest expense during the first half of 2000 was $13.6 million, up $6.4
million from the same period in 1999 due to higher interest rates and the
increased borrowing levels required to acquire Invatec stock and retire debt
obtained in the acquisition.
The Company recorded other income of $3.2 million during the six months
ended June 30, 2000 primarily as a result of two factors. Income of $1.1 million
was realized due to the quarterly mark-to-market adjustments requirement under
the provisions of EITF No. 97-14 "Accounting for Deferred Compensation
Agreements Where Amounts Earned are Held in a Rabbi Trust and Invested". In
addition, $1.0 million of income was recorded as a result of the Company
reaching an agreement and receiving payment on an outstanding promissory note
which had previously been fully reserved.
The Company's effective tax rate for the first half of 2000 was 34.5%
compared to 34.0% in the first half of 1999. The increase was due to the
acquisition of Invatec.
Net earnings for the first half of 2000 were $24.5 million or $0.65 per
share. This was 30.0% above net earnings of $18.9 million, or $0.50 per share,
for the same period in 1999. Excluding special items, net earnings for the first
half of 1999 were $24.1 million or $0.64 per share.
RESTRUCTURING
In the fourth quarter of 1999, the Company initiated a restructuring program
designed to streamline the Company for better value and improve asset
utilization. This $26.7 million program consisted of a one-time charge of $15.9
million recorded as restructuring expense and $10.8 million of other special
items. The restructuring charge related to the planned closure of 10 facilities
and a corresponding reduction in workforce at those locations, as well as at
other locations that are part of the restructuring. The other special items
related to
16
<PAGE> 17
inventory impairments, a fixed asset impairment, and executive separation
contracts and certain costs related to fourth-quarter 1999 facility closures.
The Company currently expects to realize ongoing annual operating income
benefits of approximately $20 million per year effective in 2001 from this
program. Approximately $10 million of savings are expected to be realized in
selling and administrative expense, while the remainder is expected in costs of
sales.
In 2000, period integration costs related to the implementation of the
program are expected to offset a majority of the potential benefit. Current
estimates are that planned savings of approximately $10 million will be offset
by period integration costs.
Additionally, in 2000, a majority of the costs associated with the
restructuring program will be incurred and charged against the restructuring
reserve.
The restructuring program is expected to result in a net reduction of
approximately 300 employees. As of June 30, 2000, the program had resulted in a
net reduction of 149 employees.
Expenditures charged to the 1999 restructuring reserve were:
<TABLE>
<CAPTION>
Other Exit
Severance Costs Total
---------------------------- --------- ---------- -------
<S> <C> <C> <C>
Balance at December 24, 1999 $12,900 $2,960 $15,860
Cash expenditures (102) -- (102)
-------- -------- -------
Balance at December 31, 1999 12,798 2,960 15,758
Cash expenditures (1,693) (583) (2,276)
-------- -------- -------
Balance at March 31, 2000 11,105 2,377 13,482
CASH EXPENDITURES (1,311) (1,013) (2,324)
-------- -------- -------
BALANCE AT JUNE 30, 2000 $9,794 $1,364 $11,158
======== ======== =======
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities for the first six months of 2000 were
significantly below the same period in 1999. The decrease in cash flows in 2000
was primarily due to payments relating to the restructuring program and Invatec
acquisition.
Capital expenditures, net of disposals, were $12.4 million during the first
six months of 2000, compared with $20.2 million in the first six months of 1999.
The reduction reflects a concerted effort by the Company to reduce capital
spending. Capital expenditures were funded primarily by operating cash flows.
On January 13, 2000, the Company acquired Invatec, a company which is
principally engaged in providing comprehensive maintenance, repair, replacement
and value-added distribution services for valves, piping systems,
instrumentation and other process-system components for industrial customers.
The purchase involved acquiring all of the outstanding stock of Invatec and
assuming Invatec's existing debt and related obligations.
17
<PAGE> 18
The transaction was accounted for under the purchase method of accounting and
was financed through borrowings under the revolving credit facility. The results
of operations for Invatec are included in the Company's condensed consolidated
financial statements from the date of acquisition. The purchase price was
approximately $18.3 million in cash. Liabilities of $94.9 million were
simultaneously paid through borrowing under Flowserve's revolving credit
agreement.
The purchase price has been allocated to the net assets acquired based
primarily on information furnished by management of the acquired company.
On February 10, 2000, the Company announced it had reached a definitive
agreement to acquire Ingersoll-Dresser Pumps (IDP) from Ingersoll-Rand Company
for $775 million in cash. On August 8, 2000, the Company announced the
completion of the acquisition. The transaction, which was accounted for as a
purchase, was financed with a combination of bank financing and senior
subordinated notes.
Upon closing of the transaction, the existing Flowserve debt was repaid.
Flowserve has received $1,425 million of financing to pay for the acquisition
and pay off existing debt as well as provide for a $300 million revolving credit
facility in connection with the acquisition. The financing consists of
approximately $375 million of 12.25% Senior Subordinated Notes and $1.05 billion
of senior credit facilities. The credit facilities consist of a $275 million
term loan with a final maturity of six years and an initial interest rate of
LIBOR plus 2.75%, a $475 million term loan with a final maturity of eight years
and an initial interest rate of LIBOR plus 3.50%, and a $300 million revolving
credit facility with a term of six years and an initial interest rate of LIBOR
plus 2.75%. During the first quarter of 2000, the Company also announced it was
suspending the payment of its cash dividend which is required by the financing.
The Company believes that internally generated funds, including synergies from
the IDP acquisition, will be adequate to service the debt.
At June 30, 2000, total debt was 50.0% of the Company's capital structure,
compared with 39.6% at December 31, 1999. The interest coverage ratio of the
Company's indebtedness was 5.3 times interest at June 30, 2000, compared with
4.3 times interest at December 31, 1999.
18
<PAGE> 19
FORWARDING-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY
This Report on Form 10-Q and other written reports and oral statements made
from time to time by the Company contain various forward-looking statements and
include 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; the Company's ability to integrate IDP and Invatec into its
management and operations; 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; 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 including, without limitation, expenses incurred in
restructuring the Company's operations to incorporate IDP facilities, and the
cost of financing to be assumed in acquiring IDP. The Company undertakes no
obligation to publicly update or revise any forward-looking statement as a
result of new information, future events or otherwise.
19
<PAGE> 20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
There have been no material changes in reported market risk since the end of
1999.
PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) During the second quarter of 2000, the Company issued 24,645 shares of
restricted common stock pursuant to an exemption from registration under
Section 4(2) of the Securities Act of 1933. Shares were issued for the
benefit of directors, one officer and certain employees, subject to
restrictions on transfer and vesting.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Shareholders of the Company was held on April 20,
2000.
(c) (b) A proposal to approve re-election of three Directors to the Board of
Directors, in each case for a term of three years, was approved as follows
with respect to each nominee for office:
<TABLE>
<CAPTION>
Votes For Votes Withheld
---------- --------------
<S> <C> <C>
C. Scott Greer 30,729,759 2,302,279
Diane C. Harris 32,416,056 615,982
James O. Rollans 32,407,438 624,600
</TABLE>
The other directors, whose terms continued after the Annual Meeting, were Hugh
K. Coble, George T. Haymaker, Michael F. Johnston, Charles M. Rampacek, Williams
C. Rusnack and Kevin E. Sheehan.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit - 27. Financial Data Schedule.
(b) Reports on Form 8-K
None
20
<PAGE> 21
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: August 11, 2000
21
<PAGE> 22
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
22
