<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 September 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 SEPTEMBER 30, 2000 37,446,306
<PAGE> 2
FLOWSERVE CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
No.
----
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Income -
Three Months Ended September 30, 2000 and 1999 (unaudited) 3
Consolidated Statements of Comprehensive Income -
Three Months Ended September 30, 2000 and 1999 (unaudited) 3
Consolidated Statements of Income -
Nine Months Ended September 30, 2000 and 1999 (unaudited) 4
Consolidated Statements of Comprehensive Income -
Nine Months Ended September 30, 2000 and 1999 (unaudited) 4
Consolidated Balance Sheets -
September 30, 2000 (unaudited) and December 31, 1999 5
Consolidated Statements of Cash Flows -
Nine Months Ended September 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 20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISKS 29
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 29
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 29
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 29
SIGNATURE 30
INDEX TO EXHIBITS 31
</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 September 30,
--------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
Sales $ 412,105 $ 253,973
Cost of sales 281,983 165,658
------------ ------------
Gross profit 130,122 88,315
Selling and administrative expense 89,861 69,689
Research, engineering and development expense 6,004 5,905
Integration expense 10,470 2,984
Restructuring expense 17,102 --
------------ ------------
Operating income 6,685 9,737
Net interest expense 23,423 3,614
Other expense (income), net 299 (1,238)
------------ ------------
Net (loss) earnings before income taxes (17,037) 7,361
Provision for income taxes (6,103) 2,503
------------ ------------
Net (loss) earnings before extraordinary items (10,934) 4,858
Extraordinary items, net of tax 2,067 --
------------ ------------
Net (loss) earnings $ (13,001) $ 4,858
============ ============
Net (loss) earnings per share (basic and diluted):
Before extraordinary items $ (0.29) $ 0.13
Extraordinary items, net of tax (0.05) --
------------ ------------
Net (loss) earnings per share $ (0.34) $ 0.13
============ ============
Average shares outstanding 37,824 37,739
</TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
Net (loss) earnings $ (13,001) $ 4,858
Foreign currency translation adjustments (23,600) (4,737)
------------ ------------
Comprehensive (loss) income $ (36,601) $ 121
============ ============
</TABLE>
See accompanying notes to consolidated financial statement.
3
<PAGE> 4
FLOWSERVE CORPORATION
(UNAUDITED)
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
2000 1999
------------- --------------
<S> <C> <C>
Sales $ 996,567 $ 798,556
Cost of sales 664,054 519,561
------------ ------------
Gross profit 332,513 278,995
Selling and administrative expense 232,079 203,002
Research, engineering and development expense 18,358 19,103
Integration expense 10,470 10,821
Restructuring expense 17,102 --
------------ ------------
Operating income 54,504 46,069
Net interest expense 36,312 10,245
Other income, net (2,174) (138)
------------ ------------
Net earnings before income taxes 20,366 35,962
Provision for income taxes 6,801 12,227
------------ ------------
Net earnings before extraordinary items 13,565 23,735
Extraordinary items, net of tax 2,067 --
------------ ------------
Net earnings $ 11,498 $ 23,735
============ ============
Net earnings per share (basic and diluted):
Before extraordinary items $ 0.35 $ 0.63
Extraordinary items, net of tax (0.05) --
------------ ------------
Net earnings per share $ 0.30 $ 0.63
============ ============
Average shares outstanding 37,819 37,844
</TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
2000 1999
------------- --------------
<S> <C> <C>
Net earnings $ 11,498 $ 23,735
Foreign currency translation adjustments (39,803) (8,615)
------------ --------------
Comprehensive (loss) income $ (28,305) $ 15,120
============ ==============
</TABLE>
See accompanying notes to consolidated financial statement.
4
<PAGE> 5
FLOWSERVE CORPORATION
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, December 31,
2000 1999
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 56,825 $ 30,463
Accounts receivable, net 419,026 213,625
Inventories 327,127 168,356
Prepaids and other current assets 56,112 41,344
------------ ------------
Total current assets 859,090 453,788
Property, plant and equipment, net 406,283 209,976
Goodwill, net 506,208 90,198
Other intangible assets, net 140,460 6,237
Other assets 134,231 77,952
------------ ------------
Total assets $ 2,046,272 $ 838,151
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 142,051 $ 72,103
Notes payable 298 734
Income taxes 4,722 7,878
Accrued liabilities 237,889 111,820
Long-term debt due within one year 12,000 3,125
------------ ------------
Total current liabilities 396,960 195,660
Long-term debt due after one year 1,121,012 198,010
Postretirement benefits and deferred items 249,076 136,207
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 66,084 67,963
Retained earnings 355,752 344,254
------------ ------------
473,692 464,073
Treasury stock at cost - 4,038 and 4,071 shares (92,314) (93,448)
Accumulated other comprehensive expense (102,154) (62,351)
------------ ------------
Total shareholders' equity 279,224 308,274
------------ ------------
Total liabilities and shareholders' equity $ 2,046,272 $ 838,151
============ ============
</TABLE>
See accompanying notes to consolidated financial statement.
5
<PAGE> 6
FLOWSERVE CORPORATION
(Unaudited)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS - OPERATING ACTIVITIES:
Net earnings $ 11,498 $ 23,735
Adjustments to reconcile net earnings to net cash (used) provided
by operating activities:
Depreciation 25,866 23,482
Amortization 8,544 3,427
Net (gain) loss on the sale of fixed assets (14) 170
Change in assets and liabilities, net of effects of
acquisitions:
Accounts receivable (11,369) 5,485
Inventories (20,781) 20,206
Prepaid expenses 11,371 3,088
Other assets (47,393) 10,335
Accounts payable (8,045) (5,814)
Accrued liabilities (1,190) (17,183)
Income taxes (5,784) (10,092)
Postretirement benefits and deferred items 14,515 (19,909)
Net deferred taxes 8,532 3,331
------------- -------------
Net cash flows (used) provided by operating activities (14,250) 40,261
------------- -------------
CASH FLOWS - INVESTING ACTIVITIES:
Capital expenditures, net of disposals (16,339) (28,402)
Payment for acquisitions, net of cash acquired (786,356) (6,365)
------------- -------------
Net cash flows used by investing activities (802,695) (34,767)
------------ -------------
CASH FLOWS - FINANCING ACTIVITIES:
Net (repayments) borrowings under short-term debt -- (10,684)
Payments on long-term debt including revolving credit facility (426,706) (11,404)
Proceeds from long-term debt including revolving credit facility 1,271,753 32,467
Treasury share purchases -- (5,249)
Other stock activity 637 (1,232)
Dividends paid -- (15,877)
------------ -------------
Net cash flows provided (used) by financing activities 845,684 (11,979)
Effect of exchange rate changes on cash (2,377) (526)
------------ -------------
Net change in cash and cash equivalents 26,362 (7,011)
Cash and cash equivalents at beginning of year 30,463 24,928
------------ -------------
Cash and cash equivalents at end of period $ 56,825 $ 17,917
============ =============
Taxes paid $ 4,344 $ 23,563
Interest paid $ 19,405 $ 10,985
</TABLE>
See accompanying notes to consolidated financial statement.
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 September 30, 2000, and
the related consolidated statements of income and comprehensive income for the
three months and nine months ended September 30, 2000 and 1999, and the
statements of cash flows for the nine months ended September 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. Certain amounts in 1999 have been
reclassified or restated to conform with the 2000 presentation.
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>
SEPTEMBER 30, December 31,
2000 1999
-------------- --------------
<S> <C> <C>
Raw materials $ 52,371 $ 29,674
Work in process and finished goods 347,045 182,493
Less: Progress billings (34,381) (5,746)
-------------- --------------
365,035 206,421
LIFO reserve (37,908) (38,065)
-------------- --------------
Net inventory $ 327,127 $ 168,356
============== ==============
Percent of inventory accounted for by LIFO 30% 64%
Percent of inventory accounted for by FIFO 70% 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 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 adopt
SAB 101 in its fourth quarter, retroactive to January 1, 2000. The Company is
currently reviewing its revenue recognition policies 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. The Company is currently
reviewing its revenue recognition policies under the guidance provided by SAB
101 to determine the impact, if any, on the Company's reported financial
position, results of operations or cash flows.
4. ACQUISITIONS
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 was approximately
$18.3 million in cash. Liabilities of $94.9 million were simultaneously paid
off through borrowings under Flowserve's revolving credit agreement.
On August 8, 2000, the Company completed the acquisition of
Ingersoll-Dresser Pump Company (IDP), a leading manufacturer of pumps with a
diverse mix of pump products and customers with operations in 30 countries, for
$775 million in cash. 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 also
refinanced. (See Note 6 for information on the debt incurred to finance the
acquisition).
The purchase price has been allocated to assets acquired and liabilities
assumed based on estimated fair market value at the date of the acquisition.
These allocations include $134.5 million for intangibles and $360.3 million
recorded as goodwill.
The purchase price allocation for these acquisitions is preliminary and
further refinements are likely to be made based on the completion of final
valuation studies. The operating results of these acquired businesses have been
included in the consolidated statements of income from the dates of
acquisition.
8
<PAGE> 9
The table below reflects unaudited pro forma results of the Company,
Invatec and IDP as if the acquisitions had taken place at the beginning of
fiscal 2000 and 1999.
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Net Sales $ 1,418,396 $ 1,517,646
Net (loss) earnings before extraordinary items (26,025) (13,236)
Net (loss) earnings (28,092) (13,236)
Net (loss) earnings per share (basic and diluted)
Before extraordinary items $ (0.69) $ (0.35)
Net (loss) earnings (0.74) (0.35)
</TABLE>
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.
5. RESTRUCTURING AND ACQUISITION RELATED CHARGES
In August 2000, in conjunction with the acquisition of IDP, the Company
initiated a restructuring program designed to streamline the Company by
reducing costs and to eliminate excess capacity by consolidating facilities.
The Company's actions, approved and committed to in the third quarter of 2000,
will result in the reduction of approximately 1,100 positions. The program
includes the closure of IDP's former headquarters, a number of pump
manufacturing facilities and service and repair centers and the reduction of
sales and sales support personnel. The Company estimates that the costs
associated with these activities will be approximately $61 million.
Approximately $44 million of the total cost relates to the IDP operations
acquired and $28 million has been recorded in goodwill as part of the purchase
price of IDP ($44 million of estimated costs less deferred tax effect of $16
million), while the remaining cost of $17 million relates to the existing
Flowserve operations and has been recorded as restructuring expense.
During the third quarter of 2000, the Company incurred $10.5 million in
integration costs in conjunction with this program. As of September 30, 2000,
the program had resulted in a net reduction of 170 employees.
9
<PAGE> 10
Expenditures charged to the 2000 restructuring reserve were:
<TABLE>
<CAPTION>
Other Exit
Severance Costs Total
------------ ------------ ------------
<S> <C> <C> <C>
Balance at August 16, 2000 $ 45,980 $ 14,832 $ 60,812
Cash expenditures (3,508) (12) (3,520)
------------ ------------ ------------
Balance at September 30, 2000 $ 42,472 $ 14,820 $ 57,292
============ ============ ============
</TABLE>
In the fourth quarter of 1999, the Company initiated a restructuring
program that included a one-time charge of $15.9 million 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.
In July 2000, the Company announced, as part of its agreement with the
Department of Justice to acquire IDP, that it was required to sell a facility
which had previously been targeted for closure in the fourth quarter of 1999.
This resulted in a non-cash reduction of the existing restructuring liability
of $5.3 million. Of this total, $1.3 million was recorded as part of the IDP
restructuring reserve and the remaining balance was applied against
restructuring expense during the current quarter.
The Company is in the process of selling the facility and certain product
lines. Any gain or loss on the sale will be recorded in the period in which a
sales agreement is reached.
The restructuring program is expected to result in a net reduction of
approximately 280 employees at a cost of $12.9 million. In addition, exit costs
associated with the facilities closings are estimated at $3.0 million. As of
September 30, 2000, the program had resulted in a net reduction of 199
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
CASH EXPENDITURES (1,199) (336) (1,535)
NONCASH REDUCTION (4,364) (1,028) (5,392)
------------ ------------ ------------
BALANCE AT SEPTEMBER 30, 2000 $ 4,231 -- $ 4,231
============ ============ ============
</TABLE>
10
<PAGE> 11
6. DEBT
In connection with the acquisition of IDP and payoff of the Company's
existing debt, on August 8, 2000 the Company entered into a Credit Agreement
for senior secured credit facilities which included a $275 million term loan
due June 2006, a $475 million term loan due June 2008, and a $300 million
revolving credit facility with a final maturity of June 2006. The term loans
bear floating interest rates based on LIBOR (either one, two, three, or six
month LIBOR at the Company's discretion) plus a credit spread, or the Prime
Rate plus a credit spread, at the option of the Company. At September 30, 2000,
the interest rate on the term loans and revolving credit facility was 9.50%,
10.25% and 9.375%, respectively. The term loans require scheduled principal
payments beginning June 30, 2001. All of the senior secured credit facilities
are secured by the domestic assets of the Company and a pledge of 65% of the
stock of the foreign subsidiaries. As of September 30, 2000, $10 million of the
revolving credit was drawn and the full amount of the term loans were
outstanding.
The scheduled principal payments of the term loans outstanding at September
30, 2000 are summarized as follows: $18 million in 2001, $45 million in 2002,
$60 million in 2003, $64 million in 2004, $68 million in 2005, $106.6 million
in 2006, $258.7 million in 2007 and $129.7 million in 2008. Beginning in 2002,
the Company is required to use a percentage of excess cash from operations, as
defined in the Credit Agreement, to reduce the outstanding principal of the
term loans.
The revolving credit facility allows the Company to issue up to $200
million in letters of credit. As of September 30, 2000, $14.7 million of
letters of credit had been issued under the facility. This, coupled with the
$10.0 million in borrowings under the facility, left the Company with $275.3
million remaining in unused borrowing capacity under the revolving credit
facility.
The Company also issued 10 year, senior subordinated notes on August 8,
2000 in a US dollar tranche and a Euro tranche. Proceeds of $285.9 million from
the dollar tranche, and EUR 98.6 million from the euro tranche were also used
in completing the IDP acquisition. The notes were issued at a fixed rate of
12.25%, were originally priced at a discount to yield 12.50%, and have no
scheduled principal prepayments prior to maturity in August 2010. Interest on
the notes is payable semi-annually, with the first payment commencing in
February 2001.
The provisions of the Credit Agreement require the Company to meet or
exceed specified financial covenants that are defined in the Credit Agreement.
These covenants include a leverage ratio, an interest coverage ratio, and a
fixed charge coverage ratio. Further, the provisions of the Credit Agreement
and the senior subordinated notes require the Company to contain limitations or
restrictions relating to new indebtedness, prepayment of subordinated debt,
liens, sale and leaseback transactions, disposition of assets, payment of
dividends or other distributions, and capital expenditures, among other things.
On August 8, 2000 the existing five year, $600 million revolving credit
agreement was cancelled, and the remaining senior notes issued in 1992 and in
1996 were repaid in full.
As a result of the cancellation of the existing credit agreement and the
prepayment of the existing senior notes, the Company recorded extraordinary
items charges, net of tax of $1.2 million, of $2.1 million which represents
11
<PAGE> 12
prepayment penalties on the senior notes and the write-off of deferred
financing fees associated with the credit agreement.
7. GUARANTOR AND NONGUARANTOR FINANCIAL STATEMENTS
In connection with the IDP acquisition and as part of the related
financing, the Company and a newly formed Dutch subsidiary, Flowserve Finance
B.V., issued an aggregate of $375 million of dollar-denominated senior
sub-ordinated notes (the dollar Notes) and euro-denominated senior subordinated
notes (the euro Notes) in private placements pursuant to Rule 144A and
Regulation S. The dollar Notes and the euro Notes are general unsecured
obligations of the Company and Flowserve Finance B.V., respectively,
subordinated in right of payment to all existing and future senior indebtedness
of the Company and Flowserve Finance B.V., respectively, and guaranteed on a
full, unconditional, joint and several basis by the Company's wholly owned
domestic subsidiaries and, in the case of the euro Notes, by the Company.
The following condensed consolidating financial information presents:
(1) Condensed consolidating balance sheet as of December 31,1999 and the
related statements of income and cash flows for the nine months ended
September 30, 1999, of (a) Flowserve Corporation, the parent; (b) the
guarantor subsidiaries; (c) the non-guarantor subsidiaries; and the
Company on a consolidated basis, and
(2) Condensed consolidating balance sheet as of September 30, 2000 and the
related statements of income and cash flows for the nine months ended
September 30, 2000, of (a) Flowserve Corporation, the parent, (b)
Flowserve Finance B.V., (c) the guarantor subsidiaries, (d) the
non-guarantor subsidiaries, and the Company on a consolidated basis,
and
(3) Elimination entries necessary to consolidate Flowserve Corporation,
the parent, with Flowserve Finance B.V., guarantor and non-guarantor
subsidiaries.
(4) Investments in subsidiaries are accounted for by the parent using the
equity method of accounting. The guarantor and non-guarantor
subsidiaries are presented on a combined basis. The principal
elimination entries eliminate investments in subsidiaries and
inter-company balances and transactions. Separate financial statements
for the guarantor subsidiaries and the non-guarantor subsidiaries are
not presented because management believes that such financial
statements would not be meaningful to investors.
12
<PAGE> 13
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
Flowserve Guarantor Nonguarantor Consolidated
Parent Finance B.V. Subsidiaries Subsidiaries Eliminations Total
---------- ----------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Sales ............................................. $ 118,626 $ -- $ 565,437 $ 374,302 $ (61,798) $ 996,567
Cost of sales ..................................... 86,637 -- 388,598 250,617 (61,798) 664,054
--------- --------- --------- --------- --------- ---------
Gross Profit ...................................... 31,989 -- 176,839 123,685 -- 332,513
Selling and administrative expense ............ 35,030 -- 124,414 72,635 -- 232,079
Research, engineering and
development expense ........................ 4,321 -- 11,328 2,709 -- 18,358
Restructuring Expenses ........................ 6,846 -- 7,649 2,607 -- 17,102
Integration expense ........................... 4,242 -- 5,844 384 -- 10,470
--------- --------- --------- --------- --------- ---------
Operating income .................................. (18,450) -- 27,604 45,350 -- 54,504
Net Interest expense .......................... 17,881 1,710 23,958 4,425 (11,662) 36,312
Other (income) expense, net ................... (11,514) (1,581) (9,039) 8,298 11,662 (2,174)
Equity in (earnings) loss of
subsidiaries ............................... (28,225) -- -- -- 28,225 --
--------- --------- --------- --------- --------- ---------
Net earnings (loss) before income taxes ........... 3,408 (129) 12,685 32,627 (28,225) 20,366
Provision for income taxes ........................ (9,223) -- 5,299 10,725 -- 6,801
--------- --------- --------- --------- --------- ---------
Net earnings (loss) before extraordinary
items ......................................... 12,631 (129) 7,386 21,902 (28,225) 13,565
Extraordinary items, net of tax ................... 1,133 -- 934 -- -- 2,067
--------- --------- --------- --------- --------- ---------
Net earnings (loss) ............................... $ 11,498 $ (129) $ 6,452 $ 21,902 $ (28,225) $ 11,498
========= ========= ========= ========= ========= =========
</TABLE>
13
<PAGE> 14
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
--------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Sales ................................................. $ 105,852 $ 407,714 $ 337,116 $ (52,126) $ 798,556
Cost of sales ......................................... 76,815 273,093 221,779 (52,126) 519,561
--------- --------- --------- --------- ---------
Gross Profit .......................................... 29,037 134,621 115,337 -- 278,995
Selling and administrative expense ................. 47,736 86,649 68,617 -- 203,002
Research, engineering and
development expense ............................ 4,015 12,285 2,803 -- 19,103
Integration expense ............................... -- 9,423 1,398 -- 10,821
--------- --------- --------- --------- ---------
Operating income ...................................... (22,714) 26,264 42,519 -- 46,069
Net Interest expense .............................. 1,000 9,474 1,785 (2,014) 10,245
Other (income)expense, net ........................ (938) (9,426) 8,212 2,014 (138)
Equity in (earnings) loss of
subsidiaries ................................... (38,868) -- -- 38,868 --
--------- --------- --------- --------- ---------
Net Earnings before income taxes ...................... 16,092 26,216 32,522 (38,868) 35,962
Provision for income taxes ............................ (7,643) 8,426 11,444 -- 12,227
--------- --------- --------- --------- ---------
Net earnings (loss) ................................... $ 23,735 $ 17,790 $ 21,078 $ (38,868) $ 23,735
========= ========= ========= ========= =========
</TABLE>
14
<PAGE> 15
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
Flowserve Guarantor Nonguarantor Consolidated
Parent Finance B.V. Subsidiaries Subsidiaries Eliminations Total
----------- ----------- ------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents......................... $ -- $ -- $ -- $ 62,550 $ (5,725) $ 56,825
Inter-company receivables......................... 20,890 -- 30,025 112,304 (163,219) --
Accounts receivable, net.......................... 23,204 -- 200,230 195,592 -- 419,026
Inventories....................................... 8,541 -- 196,408 122,178 -- 327,127
Prepaids and other current assets................. 2,122 -- 46,629 7,358 3 56,112
----------- ----------- ----------- ----------- ----------- -----------
Total current assets.................. 54,757 -- 473,292 499,982 (168,941) 859,090
Property, plant and equipment, net.................. 34,176 -- 195,756 176,351 -- 406,283
Investment in subsidiaries.......................... 785,839 -- 468,007 -- (1,253,846) --
Inter-company receivables........................... 513,188 84,316 27,549 36,916 (661,969) --
Goodwill, net....................................... 7,904 -- 447,512 50,792 -- 506,208
Other intangible assets,net......................... -- -- 128,118 12,342 -- 140,460
Other assets........................................ 53,495 4,671 72,164 3,901 -- 134,231
----------- ----------- ----------- ----------- ----------- -----------
Total assets.......................... $ 1,449,359 $ 88,987 $ 1,812,398 $ 780,284 $(2,084,756) $ 2,046,272
=========== =========== =========== =========== =========== ===========
Current liabilities:
Accounts payable.................................. $ 11,304 $ -- $ 69,304 $ 67,168 $ (5,725) $ 142,051
Inter-company payables............................ 33,753 2,133 31,180 96,263 (163,329) --
Notes payable..................................... -- -- 298 -- 298
Income taxes...................................... (1,157) -- 1,104 4,775 -- 4,722
Accrued liabilities............................... 23,884 38 116,263 97,704 -- 237,889
Long-term debt due within one year................ 12,000 -- -- -- 12,000
----------- ----------- ----------- ----------- ----------- -----------
Total current liability............... 79,784 2,171 218,149 265,910 (169,054) 396,960
Long-term debt due after one year................... 1,033,960 86,949 8 95 -- 1,121,012
Inter-company payables.............................. 4,851 -- 482,665 174,454 (661,970) --
Post-retirement benefits and deferred
items............................................. 51,540 -- 180,125 17,411 -- 249,076
Shareholders' equity:
Serial preferred stock, $1.00 par
value............................................ -- -- -- -- -- --
Common shares, $1.25 par value...................... 51,855 -- 1 198,923 (198,923) 51,856
Capital in excess of par value...................... 66,084 -- 614,466 90,899 (705,365) 66,084
Retained earnings................................... 355,752 (129) 337,515 169,159 (506,545) 355,752
----------- ----------- ----------- ----------- ----------- -----------
473,691 (129) 951,982 458,981 (1,410,833) 473,692
Treasury stock at cost.............................. (92,314) -- (613) -- 613 (92,314)
Accumulated other comprehensive
(expense) income................................. (102,153) (4) (19,918) (136,567) 156,488 (102,154)
----------- ----------- ----------- ----------- ----------- -----------
Total shareholders' equity............ 279,224 (133) 931,451 322,414 (1,253,732) 279,224
Total liabilities and shareholders'
equity............................ $ 1,449,359 $ 88,987 $ 1,812,398 $ 780,284 $(2,084,756) $ 2,046,272
=========== =========== =========== =========== =========== ===========
</TABLE>
15
<PAGE> 16
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
CONSOLIDATED BALANCE SHEETS
December 31, 1999
<TABLE>
<CAPTION>
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
----------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents ..................... $ -- $ 889 $ 29,966 $ (392) $ 30,463
Inter-company receivables ..................... 194,594 930 7,640 (203,164) --
Accounts receivable, net ...................... 16,702 94,639 102,284 -- 213,625
Inventories ................................... 17,811 76,580 73,965 -- 168,356
Prepaids and other current assets ............. -- 34,639 11,733 (5,028) 41,344
----------- ------------- ------------- ------------- -------------
Total current assets .............. 229,107 207,677 225,588 (208,584) 453,788
Property, plant and equipment ................... 33,223 118,356 58,397 -- 209,976
Investment in subsidiaries ...................... 403,643 273,430 -- (677,073) --
Inter-company receivables ....................... 60,432 209,138 20,674 (290,244) --
Goodwill, net ................................... 2,744 33,004 54,450 -- 90,198
Other intangible assets, net .................... -- 6,041 196 6,237
Other assets .................................... 40,954 35,175 1,823 -- 77,952
----------- ------------- ------------- ------------- -------------
Total assets ...................... $ 770,103 $ 882,821 $ 361,128 $ (1,175,901) $ 838,151
=========== ============= ============= ============= =============
Current liabilities:
Accounts payable .............................. $ 12,481 $ 31,659 $ 32,164 $ (4,201) $ 72,103
Inter-company payables ........................ 159,578 21,494 22,092 (203,164) --
Notes payable ................................. 734 -- -- -- 734
Income taxes .................................. 3,592 -- 5,505 (1,219) 7,878
Accrued liabilities ........................... 11,813 64,963 35,044 -- 111,820
Long-term debt due within one year ............ 870 387 1,868 -- 3,125
----------- ------------- ------------- ------------- -------------
Total current liabilities ......... 189,068 118,503 96,673 (208,584) 195,660
Long-term debt due after one year ............... 4,610 190,000 3,400 -- 198,010
Inter-company payables .......................... 233,473 16,479 40,292 (290,244) --
Post-retirement benefits and deferred
items ....................................... 34,678 86,640 14,889 -- 136,207
Shareholders' equity:
Serial preferred stock, $1.00 par
value ....................................... -- -- -- -- --
Common shares, $1.25 par value .................. 51,856 1 71,933 (71,934) 51,856
Capital in excess of par value .................. 67,963 168,495 91,238 (259,733) 67,963
Retained earnings ............................... 344,254 357,605 46,468 (404,073) 344,254
----------- ------------- ------------- ------------- -------------
464,073 526,101 209,639 (735,740) 464,073
Treasury stock at cost .......................... (93,448) (612) 1,837 (1,225) (93,448)
Accumulated other comprehensive
(expense)/income ............................ (62,351) (54,290) (5,602) 59,892 (62,351)
----------- ------------- ------------- ------------- -------------
Total shareholders' equity ........ 308,274 471,199 205,874 (677,073) 308,274
Total liabilities and shareholders'
equity ........................ $ 770,103 $ 882,821 $ 361,128 $ (1,175,901) $ 838,151
=========== ============= ============= ============= =============
</TABLE>
16
<PAGE> 17
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
Flowserve Guarantor Nonguarantor Consolidated
Parent Finance B.V. Subsidiaries Subsidiaries Eliminations Total
----------- ------------ ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS-OPERATING ACTIVITIES:
Net earnings ..................... $ 11,498 $ (128) $ 6,452 $ 21,901 $ (28,225) $ 11,498
Adjustments to reconcile net earnings
to cash provided by operating
activities:
Depreciation ..................... 4,698 -- 13,319 7,849 -- 25,866
Amortization ..................... 351 -- 6,248 1,945 -- 8,544
Net (gain)-loss on sale of fixed
assets ........................ -- -- 87 (101) -- (14)
Change in operating assets and
liabilities, net of effects of
acquisitions and dispositions:
Accounts receivable .............. (6,501) -- (7,788) 2,920 -- (11,369)
Inventories ...................... 9,271 -- (30,143) 91 -- (20,781)
Intercompany receivable and
payables ...................... (632,814) (82,183) 399,184 (258,785) 574,598 --
Prepaid expenses ................. (2,121) -- 1,599 16,533 (4,640) 11,371
Other assets ..................... (18,053) (4,671) (6,580) (18,089) -- (47,393)
Accounts payable ................. (1,177) -- 1,254 (6,598) (1,524) (8,045)
Accrued liabilities .............. 12,071 38 19,588 (32,887) -- (1,190)
Income taxes ..................... (4,750) -- (810) (1,444) 1,220 (5,784)
Post-retirement benefits and
deferred items ................ 16,862 -- (2,074) (273) -- 14,515
Net deferred taxes ............... -- -- 14,605 (6,073) -- 8,532
----------- ----------- ----------- ----------- ----------- -----------
Net cash (used) provided by
operating activities ............. (610,665) (86,944) 414,941 (273,011) 541,429 (14,250)
----------- ----------- ----------- ----------- ----------- -----------
CASH FLOWS-INVESTING ACTIVITIES
Capital expenditures, net of
disposals ..................... (5,650) -- (5,204) (5,485) -- (16,339)
Payments for acquisitions, net
of cash acquired .............. (560,312) -- (226,044) -- -- (786,356)
----------- ----------- ----------- ----------- ----------- -----------
Net cash flows used in investing
activities .................... (565,962) -- (231,248) (5,485) -- (802,695)
----------- ----------- ----------- ----------- ----------- -----------
CASH FLOWS-FINANCING ACTIVITIES
Net borrowings (repayments)
under lines of credit ......... 4,396 -- (90) (4,306) -- --
Payments on long-term debt ....... (148,108) -- (278,598) -- -- (426,706)
Proceeds from long-term debt ..... 1,184,804 86,949 -- -- -- 1,271,753
Other activity ................... 135,535 -- 94,106 312,033 (541,037) 637
----------- ----------- ----------- ----------- ----------- -----------
Net cash flows provided (used)
by financing activities .......... 1,176,627 86,949 (184,582) 307,727 (541,037) 845,684
----------- ----------- ----------- ----------- ----------- -----------
Effect of exchange rate changes
on cash ......................... -- (5) -- (2,372) -- (2,377)
----------- ----------- ----------- ----------- ----------- -----------
Net change in cash and cash
equivalents ...................... -- -- (889) 26,859 392 26,362
Cash and cash equivalents at
beginning of year .... ........... -- -- 889 29,966 (392) 30,463
----------- ----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at
end of period .................... $ -- $ -- $ -- $ 56,825 $ -- $ 56,825
=========== =========== =========== =========== =========== ===========
</TABLE>
17
<PAGE> 18
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)
CONSOLIDATED STATEMENT OF CASH FLOWS
For the nine months ended September 30, 1999
<TABLE>
<CAPTION>
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
--------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS-OPERATING ACTIVITIES:
Net earnings .......................................... $ 23,735 $ 17,790 $ 21,078 $ (38,868) $ 23,735
Adjustments to reconcile net earnings to cash
provided by operating activities:
Depreciation .......................................... 3,829 12,248 7,405 -- 23,482
Amortization .......................................... 340 1,528 1,559 -- 3,427
Net (gain) loss on sale of fixed assets ............... -- (194) 364 -- 170
Change in operating assets and liabilities, net
of effects of acquisitions and dispositions:
Accounts receivable ................................... (1,040) 12,746 (6,221) -- 5,485
Inventories ........................................... 9,814 8,552 1,840 -- 20,206
Intercompany receivable and payables .................. 37,740 (126,609) (9,946) 98,815 --
Prepaid expenses ...................................... 30,988 7,747 (15,188) (20,459) 3,088
Other assets .......................................... 25,433 (16,262) 1,164 -- 10,335
Accounts payable ...................................... 5,656 (12,030) 350 210 (5,814)
Accrued liabilities ................................... (18,904) 5,036 (3,315) -- (17,183)
Income taxes .......................................... (2,354) (25,245) (2,952) 20,459 (10,092)
Post-retirement benefits and deferred
items .............................................. (52,144) 33,926 (1,691) -- (19,909)
Net deferred taxes .................................... (16,753) 3,072 17,012 -- 3,331
--------- --------- --------- --------- ---------
Net cash provided (used) by operating activities .......... 46,340 (77,695) 11,459 60,157 40,261
--------- --------- --------- --------- ---------
CASH FLOWS-INVESTING ACTIVITIES
Capital expenditures, net of disposals ................ (9,442) (12,600) (6,360) -- (28,402)
Payments for acquisitions, net of cash
acquired ........................................... (6,365) -- -- -- (6,365)
--------- --------- --------- --------- ---------
Net cash flows used in investing activities ............... (15,807) (12,600) (6,360) -- (34,767)
--------- --------- --------- --------- ---------
CASH FLOWS-FINANCING ACTIVITIES
Net repayments under lines of credit .................. (43) (7,865) (2,776) -- (10,684)
Payments on long-term debt ............................ (11,404) -- -- -- (11,404)
Proceeds from long-term debt .......................... -- 32,467 -- -- 32,467
Repurchase of common stock ............................ (5,591) (1,226) 467 1,101 (5,249)
Other stock activity .................................. 1 -- 31,989 (33,222) (1,232)
Dividends paid ........................................ (15,877) -- -- -- (15,877)
Other activity ........................................ 10,997 40,989 2,872 (54,858) --
--------- --------- --------- --------- ---------
Net cash flows (used) provided by financing activities .... (21,917) 64,365 32,552 (86,979) (11,979)
--------- --------- --------- --------- ---------
Effect of exchange rate changes on cash ................... (8,616) 25,930 (44,872) 27,032 (526)
--------- --------- --------- --------- ---------
Net change in cash and cash
equivalents ........................................... -- -- (7,221) 210 (7,011)
Cash and cash equivalents at beginning of
year .................................................. -- -- 31,062 (6,134) 24,928
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of period ................ $ -- $ -- $ 23,841 $ (5,924) $ 17,917
========= ========= ========= ========= =========
</TABLE>
18
<PAGE> 19
8. 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 results for
Invatec and IDP are included in the Flow Solutions Division and Flowserve Pump
Division, respectively, from the date of acquisition. 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>
FLOWSERVE FLOW FLOW CONSOLIDATED
NINE MONTHS ENDED SEPTEMBER 30, 2000 PUMP CONTROL SOLUTIONS ALL OTHER TOTAL
------------------------------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
SALES TO EXTERNAL CUSTOMERS $ 348,398 $ 199,086 $ 444,339 $ 4,744 $ 996,567
INTERSEGMENT SALES 8,441 7,663 12,325 (28,429) --
SEGMENT OPERATING INCOME (BEFORE SPECIAL
ITEMS) 27,426 23,688 52,633 (21,671) 82,076
IDENTIFIABLE ASSETS $ 1,342,266 $ 203,168 $ 419,302 $ 81,536 $ 2,046,272
</TABLE>
<TABLE>
<CAPTION>
Flowserve Flow Flow Consolidated
Nine months ended September 30, 1999 Pump Control Solutions All Other Total
------------------------------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Sales to external customers $ 267,945 $ 212,442 $ 312,910 $ 5,259 $ 798,556
Intersegment sales 4,497 10,207 11,361 (26,065) --
Segment operating income (before special
items) 16,484 20,671 42,032 (22,297) 56,890
Identifiable assets $ 243,723 $ 211,894 $ 297,213 $ 78,989 $ 831,819
</TABLE>
Reconciliation of the total segment operating income before special items
to consolidated earnings before income taxes follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
2000 1999
------------ ------------
<S> <C> <C>
Total segment operating income (before special items) $ 103,747 $ 79,187
Corporate expenses and other 21,671 22,297
Integration expense 17,102 10,821
Restructuring 10,470 --
Net interest expense 36,312 10,245
Other income (2,174) (138)
------------ ------------
Earnings before income taxes $ 20,366 $ 35,962
============ ============
</TABLE>
19
<PAGE> 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2000
In general, results for the third quarter of 2000 were higher than the
corresponding period in the previous year due to the Company's acquisitions of
Innovative Valve Technologies, Inc. (Invatec) on January 12, 2000 and
Ingersoll-Dresser Pump Company (IDP), on August 8, 2000. These acquisitions are
discussed in further detail in the Liquidity and Capital Resources section of
this Management Discussion and Analysis.
Sales increased 62.2% to $412.1 million for the three months ended
September 30, 2000, compared with $254.0 million for the same period in 1999.
Sales for the quarter would have been $255.1 million on a comparable basis,
excluding acquisitions, slightly higher than the prior year. 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
48% during the third quarter of 2000, compared with 51% during the third
quarter of 1999. The lower 2000 percentage is due to Invatec's markets being
principally in the U.S. Bookings (incoming orders for which there are purchase
commitments) were $399.2 million, 54.1% higher than the third quarter of 1999
when bookings were $259.0 million. Bookings from comparable operations,
excluding unfavorable currency translation, were virtually unchanged from the
prior year period.
BUSINESS SEGMENTS
Flowserve manages its operations through three business segments: Flowserve
Pump Division (FPD), formerly the Rotating Equipment Division, for engineered
and industrial pumps; Flow Control Division (FCD) for automated and manual
quarter-turn valves, control valves, 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>
FLOWSERVE PUMP DIVISION
-----------------------
Three Months Ended
September 30,
-----------------------
(In millions of dollars) 2000 1999
------------------------ ---------- ----------
<S> <C> <C>
Sales $ 201.1 $ 82.7
Operating income 17.3 4.9
</TABLE>
The sales increase in 2000 was due to the acquisition of IDP. Excluding
IDP, revenues would have been $80.7 million in the third quarter of 2000.
Unfavorable currency translation reduced sales by about 3%
quarter-over-quarter.
Operating income before special items, as a percentage of sales, increased
to approximately 8.6% in 2000 from about 5.9% in the prior-year period. The
operating income margin increased as a result of ongoing cost reduction efforts
and the benefits of the IDP acquisition.
<TABLE>
<CAPTION>
FLOW CONTROL DIVISION
---------------------
Three Months Ended
September 30,
---------------------
(In millions of dollars) 2000 1999
------------------------ --------- ---------
<S> <C> <C>
Sales $ 71.5 $ 71.0
Operating income 7.5 5.6
</TABLE>
Sales were essentially flat compared with the prior year. Unfavorable
currency translation also reduced sales by about 3%.
20
<PAGE> 21
Operating income before special items, as a percentage of sales, was 10.5%
in the third quarter of 2000, compared with 7.9% in 1999. The improved
operating margin in 2000 was primarily due to 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
September 30,
-----------------------
(In millions of dollars) 2000 1999
------------------------ ---------- ----------
<S> <C> <C>
Sales $ 148.2 $ 106.4
Operating Income 17.3 14.1
</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 13.3% 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. Operating income before special items, as
a percentage of sales, for comparable operations was 13.6% in 2000
CONSOLIDATED RESULTS
The gross profit margin was 31.6% for the three months ended September 30,
2000, compared with 34.8% for the same period in 1999. The decrease was
primarily due to the acquisition of IDP and Invatec as both historically are
lower than the balance of the Company. Additional factors included product mix
and under-absorption during the quarter.
Selling and administrative expense as a percentage of net sales was 21.8%
for the three- month period ended September 30, 2000, compared with 27.4% for
the corresponding 1999 period. The decrease was due to the Company's cost
reduction initiatives.
Research, engineering and development expense was $6.0 million for the
third quarter of 2000, compared with $5.9 million during the same period last
year.
Net interest expense during the third quarter of 2000 was $23.4 million,
compared with $3.6 million in the same period in 1999 due to the increased
borrowing levels required to acquire Invatec and IDP, the amortization of
deferred financing fees related to the new debt, and higher interest rates.
Other income was $0.3 million in the third quarter of 2000 compared with
$1.2 million of income in the same period in 1999. The 1999 amounts resulted
from the receipt of back rent previously written off, foreign currency gains
and royalty income.
The Company's effective tax rate for the third quarter of 2000 was 35.8%
compared with 34.0% in the third quarter of 1999. The increase was due to the
acquisitions.
Extraordinary items, net of tax of $1.2 million, of $2.1 million in 2000
represents the after tax impact of the write-off of deferred financing fees and
prepayment penalties associated with the cancellation and pay-off of the
Company's debt in conjunction with the IDP acquisition.
21
<PAGE> 22
Net earnings for the third quarter of 2000 was a loss of $13.0 million or
$0.34 per share, compared to income of $4.9 million or $0.13 per share for the
same period in 1999. Excluding special items, net earnings for the third
quarter of 2000 were $6.8 million or $0.18 per share which was equal to the
prior year.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2000
In general, results for the first nine months of 2000 were higher than the
corresponding period in the previous year due to the Company's acquisition of
Invatec and IDP. The acquisitions are discussed in further detail in the
Liquidity and Capital Resources section of this Management Discussion and
Analysis.
Sales increased 24.8% to $996.6 million for the nine months ended September
30, 2000, compared with $798.6 million for the same period in 1999. Sales for
the period would have been $756.3 million on a comparable basis, excluding
acquisitions, 5.3% 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 46% during the first nine months of 2000, compared with 52%
during the first nine months of 1999. The lower 2000 percentage is primarily
due to Invatec's markets being principally in the U.S. Bookings (incoming
orders for which there are purchase commitments) were $1,019.3 million, 33.6%
higher than the first nine months of 1999 when bookings were $763.2 million.
Bookings from comparable operations also showed year-on-year improvement of
2.4%.
BUSINESS SEGMENTS
Sales and operating income before special items for each of the three
business segments are:
<TABLE>
<CAPTION>
FLOWSERVE PUMP DIVISION
-----------------------
Nine Months Ended
September 30,
-----------------------
(In millions of dollars) 2000 1999
------------------------ ---------- ----------
<S> <C> <C>
Sales $ 356.8 $ 272.4
Operating income 27.4 16.5
</TABLE>
The sales increase in 2000 was generally due to the acquisition of IDP.
Excluding IDP, revenues would have been $236.4 million due to a lower backlog
at the beginning of 2000. Unfavorable currency translation reduced sales by 3%.
Operating income before special items, as a percentage of sales, increased
to approximately 7.7% 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
-----------------------
Nine Months Ended
September 30,
-----------------------
(In millions of dollars) 2000 1999
------------------------ ---------- ----------
<S> <C> <C>
Sales $ 206.7 $ 222.6
Operating income 23.7 20.7
</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 11.5%
in the first nine months of 2000, compared with 9.3% in 1999. The improved
operating margin in 2000 was primarily 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.
22
<PAGE> 23
<TABLE>
<CAPTION>
FLOW SOLUTIONS DIVISION
-----------------------
Nine Months Ended
September 30,
-----------------------
(In millions of dollars) 2000 1999
------------------------ ---------- ----------
<S> <C> <C>
Sales $ 456.7 $ 324.3
Operating Income 52.6 42.0
</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 11.5% from 13.0% 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. Operating income before special items, as
a percentage of sales, for comparable operations was 13.3% in 2000.
CONSOLIDATED RESULTS
The gross profit margin was 33.4% for the nine months ended September 30,
2000, compared with 34.9% for the same period in 1999. The decrease was
primarily due to the lower margins associated with IDP and Invatec, as both are
historically lower than the balance of the Company.
Selling and administrative expense as a percentage of net sales was 23.3%
for the nine-month period ended September 30, 2000, compared with 25.4% for the
corresponding 1999 period. The 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 $4.7 million in the first nine months of 2000. In 1999, Flowserver
expenses were $10.8 million and were identified and disclosed separately as
merger integration expense.
Research, engineering and development expense was $18.4 million for the
first nine months of 2000, compared with $19.1 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.
Net interest expense during the first nine months of 2000 was $36.3
million, compared with $10.2 million in the same period in 1999 due to
increased borrowing levels required to acquire Invatec and IDP, the
amortization of deferred financing fees related to the new debt, and higher
interest rates.
The Company recorded other income of $2.2 million during the nine months
ended September 30, 2000 primarily as a result of two factors. Income of $0.5
million was realized due to the required mark-to-market adjustments 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 nine of 2000 was 32.9%
compared with 34.0% in the first nine months of 1999.
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<PAGE> 24
Extraordinary items, net of tax of $1.2 million, of $2.1 million in 2000
represents the impact of the write-off of deferred financing fees and
prepayment penalties associated with the cancellation and pay-off of the
Company's debt in connection with the IDP acquisition.
Net earnings for the first nine months of 2000 were $11.5 million or $0.30
per share. This was 51.6% below the net earnings of $23.7 million, or $0.63 per
share, for the same period of 1999. Excluding special items, net earnings for
the first nine months of 2000 were $31.9 million or $0.84 per share compared
with $30.9 million, or $0.82 per share for the same period in 1999.
RESTRUCTURING
In August 2000, in conjunction with the acquisition of IDP, the Company
initiated a restructuring program designed to streamline the Company by reducing
costs and to eliminate excess capacity by consolidating facilities. The
Company's actions, approved and committed to in the third quarter of 2000, will
result in the reduction of approximately 1,100 positions and are expected to
result in an estimated $75 million in annual synergy savings by December 2001.
The program includes the closure of IDP's former headquarters, a number of pump
manufacturing facilities and service and repair centers and reduction of sales
and sales support personnel. The Company estimates that the costs associated
with these activities will be approximately $61 million. Approximately $44
million of the total cost relates to the IDP operations acquired and $28 million
has been recorded in goodwill as part of the purchase price of IDP ($44 million
of estimated costs less deferred tax effect of $16 million), while the remaining
cost of $17 million relates to the existing Flowserve operations and has been
recorded as restructuring expense.
During the third quarter of 2000, the Company incurred $10.5 million in
integration costs in conjunction with this program. As of September 30, 2000,
the program had resulted in a net reduction of 170 employees.
Expenditures charged to the 2000 restructuring reserve were:
<TABLE>
<CAPTION>
Other Exit
Severance Costs Total
------------ ------------ ------------
<S> <C> <C> <C>
Balance at August 16, 2000 $ 45,980 $ 14,832 $ 60,812
Cash expenditures (3,508) (12) (3,520)
------------ ------------ ------------
Balance at September 30, 2000 $ 42,472 $ 14,820 $ 57,292
============ ============ ============
</TABLE>
In the fourth quarter of 1999, the Company initiated a restructuring
program that included a one-time charge of $15.9 million 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.
In July 2000, the Company announced, as part of its agreement with the
Department of Justice to acquire IDP, that it was required to sell a facility
which had previously been
24
<PAGE> 25
targeted for closure in the fourth quarter of 1999. This resulted in a non-cash
reduction of the existing restructuring liability of $5.3 million. Of this
total, $1.3 million was recorded as part of the IDP restructuring reserve and
the remaining balance was applied against restructuring expense during the
current quarter.
The Company is in the process of selling the facility and certain product
lines. Any gain or loss on the sale will be recorded in the period in which a
sales agreement is reached.
The restructuring program is expected to result in a net reduction of
approximately 280 employees at a cost of $12.9 million. In addition, exit costs
associated with the facilities closings are estimated at $3.0 million. As of
September 30, 2000, the program had resulted in a net reduction of 199
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
CASH EXPENDITURES (1,199) (336) (1,535)
NONCASH REDUCTION (4,364) (1,028) (5,392)
---------- ---------- ----------
BALANCE AT SEPTEMBER 30, 2000 $ 4,231 -- $ 4,231
========== ========== ==========
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities for the first nine 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
acquisitions.
Capital expenditures, net of disposals, were $16.3 million during the first
nine months of 2000, compared with $28.4 million in the first nine 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.
ACQUISITIONS
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
25
<PAGE> 26
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 was approximately $18.3 million in cash. Liabilities of $94.9
million were simultaneously paid off through borrowings under Flowserve's
revolving credit agreement.
On August 8, 2000, the Company completed the acquisition of
Ingersoll-Dresser Pump Company (IDP), a leading manufacturer of pumps with a
diverse mix of pump products and customers with operations in 30 countries, for
$775 million in cash. 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 five year, $600 million
revolving credit agreement was cancelled, and the remaining senior notes issued
in 1996 and 1997 were repaid in full.
The purchase price has been allocated to assets acquired and liabilities
assumed based on estimated fair market value after the date of the acquisition.
These allocations include $134.5 million for intangibles and $360.3 million
recorded as goodwill.
The purchase price allocation for these acquisitions is preliminary and
further refinements are likely to be made based on the completion of final
valuation studies. The operating results of these acquired businesses have been
included in the consolidated statements of income from the dates of
acquisition.
FINANCING
In connection with the acquisition of IDP, on August 8, 2000 the Company
entered into a Credit Agreement for senior secured credit facilities which
included a $275 million term loan due June 2006, a $475 million term loan due
June 2008, and a $300 million revolving credit facility with a final maturity
of June 2006. The term loans bear floating interest rates based on LIBOR
(either one, two, three, or six month LIBOR at the Company's discretion) plus a
credit spread, or the Prime Rate plus a credit spread, at the option of the
Company. At September 30, 2000, the interest rate on the term loans and
revolving credit facility was 9.50%, 10.25% and 9.375%, respectively. The term
loans require scheduled principal payments beginning June 30, 2001. All of the
senior secured credit facilities are secured by the domestic assets of the
Company and a pledge of 65% of the stock of the foreign subsidiaries. As of
September 30, 2000, $10 million of the revolving credit was drawn and the full
amount of the term loans were outstanding.
The scheduled principal payments of the term loans outstanding at September
30, 2000 are summarized as follows: $18 million in 2001, $45 million in 2002,
$60 million in 2003, $64 million in 2004, $68 million in 2005, $106.6 million
in 2006, $258.7 million in 2007 and $129.7 million in 2008. Beginning in 2002,
the Company is required to use a percentage of excess cash from operations, as
defined in the Credit Agreement, to reduce the outstanding principal of the
term loans.
The revolving credit facility allows the Company to issue up to $200
million in letters of credit. As of September 30, 2000, $14.7 million of
letters of credit had been issued under the facility. This, coupled with the
$10.0 million in borrowings under the facility, left the Company with $275.3
million remaining in unused borrowing capacity under the revolving credit
facility.
26
<PAGE> 27
The Company also issued 10 year, senior subordinated notes on August 8,
2000 in a US dollar tranche and a Euro tranche. Proceeds of $285.9 million from
the dollar tranche, and EUR 98.6 million from the euro tranche were also used
in completing the IDP acquisition. The notes were issued at a fixed rate of
12.25%, were originally priced at a discount to yield 12.50%, and have no
scheduled principal prepayments prior to maturity in August 2010. Interest on
the notes is payable semi-annually, with the first payment commencing in
February 2001.
The provisions of the Credit Agreement require the Company to meet or
exceed specified financial covenants that are defined in the Credit Agreement.
These covenants include a leverage ratio, an interest coverage ratio, and a
fixed charge coverage ratio. Further, the provisions of the Credit Agreement
and the senior subordinated notes require the Company to contain limitations or
restrictions relating to new indebtedness, prepayment of subordinated debt,
liens, sale and leaseback transactions, disposition of assets, payment of
dividends or other distributions, and capital expenditures, among other things.
The Company believes that internally generated funds, including synergies
from the IDP acquisition, will be adequate to service the debt.
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.
At September 30, 2000, total debt less cash on hand was 79.4% of the
Company's capital structure, compared with 35.7% at December 31, 1999. The
interest coverage ratio of the Company's indebtedness was 2.4 times interest at
September 30, 2000, compared with 4.3 times interest at December 31, 1999.
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<PAGE> 28
FORWARD-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.
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<PAGE> 29
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
The Company has market risk exposure arising from changes in interest rates
and foreign currency exchange rate movements.
The Company's earnings are affected by changes in short-term interest rates
as a result of borrowings under its senior secured credit facilities which bear
interest based on floating rates. At September 30, 2000, the Company had
approximately $760.0 million of variable-rate debt obligations outstanding with
a weighted average interest rate of 10.0%. A hypothetical increase of 100-basis
points in the interest rate for these borrowings, assuming debt levels at
September 30, 2000, would change interest expense by approximately $5.7
million for the nine months ended September 30, 2000.
There have been no material changes in reported market risk related to
foreign currency exchange rate movements since the end of 1999.
PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) During the third quarter of 2000, the Company issued 1,000 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, subject to restrictions on transfer and vesting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit - 27.Financial Data Schedule.
(b) Reports on Form 8-K
Form 8-K dated July 19, 2000, Item 5, Other Events. Announcement of an
amendment to the Purchase Agreement with Ingersoll-Rand Company dated
February 9, 2000 for the acquisition of Ingersoll-Dresser Pump Company.
Form 8-K dated August 2, 2000, Item 5, Other Events. Announcement of
Earnings Report for the quarter ended June 30, 2000, and of a definitive
written agreement with U. S. Department of Justice regarding the
acquisition by Flowserve of Ingersoll-Dresser Pump Company from
Ingersoll-Rand Company.
From 8-K dated August 8, 2000, Item 5, Other Events. Announcement of the
completion of the acquisition of Ingersoll-Dresser Pump Company from
Ingersoll-Rand Company.
Form 8-K dated August 23, 2000, Item 2, Acquisition or Disposition of
Assets. Information relating to the acquisition of Ingersoll-Dresser Pump
Company from Ingersoll-Rand Company.
Form 8-K dated August 30, 2000, Item 4, Changes in Registrant's Certifying
Accountant. Announcement of the approval of PriceWaterhouseCoopers LLP as
new independent accountants for the year ended December 31, 2000 to
replace Ernst & Young LLP.
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<PAGE> 30
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: November 14, 2000
------------------
30
<PAGE> 31
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
31
