<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
July 19, 2000 (July 14, 2000)
Date of Report (Date of earliest event reported)
FLOWSERVE CORPORATION
(Exact name of registrant as specified in its charter)
NEW YORK 1-13179 31-0267900
(State or other jurisdiction of (Commission file number) (IRS Employer
incorporation or organization) identification no.)
222 W. LAS COLINAS BLVD., SUITE 1500
IRVING, TEXAS 75039
(Address and zip code of principal executive offices)
(972) 443-6500
(Registrant's telephone number, including area code)
ITEM 5. OTHER EVENTS
(a) Amendment to Purchase Agreement
On February 9, 2000, Flowserve Corporation ("Flowserve") and
Flowserve RED Corporation, a wholly owned subsidiary of Flowserve (collectively,
the "Buyers"), entered into a definitive purchase agreement (the "Purchase
Agreement") with Ingersoll-Rand Corporation ("Ingersoll-Rand"), and IDP
Acquisition, LLC (collectively, the "Sellers"), whereby the Buyers will purchase
100% of the partnership interests in Ingersoll-Dresser Pump Company, a Delaware
partnership ("IDP") for $775 million in cash (the "Acquisition"). The Buyers and
Sellers entered into Amendment No.1 to the Purchase Agreement as of July 14,
2000 (the "Amendment"). A copy of the Amendment is set forth as Exhibit 2.1 to
this Current Report on Form 8-K and is hereby incorporated by reference herein.
The material terms of the Amendment are summarized as follows.
(i) Conditions to the Acquisition are amended to the following effect:
o In lieu of providing bank letters of credit, Flowserve shall provide
unsecured corporate guarantees in favor of Ingersoll-Rand and IDP
Acquisition, LLC to guarantee certain obligations of Ingersoll-Rand
and IDP Acquisition, LLC under certain credit support instruments
issued on behalf of IDP and its subsidiaries and outstanding and
unexpired as of the closing date of the Acquisition and shall assume
all credit support instruments issued by any member of the IDP group
outstanding and unexpired as of the closing date of the Acquisition;
and
o Requirements for IDP and its subsidiaries to meet certain EBITDA
targets are deleted.
(ii) Provisions relating to employee benefit matters are amended to the
following effect:
o Ingersoll-Rand has agreed to retain liability for certain enhanced
pension benefits payable to transferred employees under such defined
benefit pension plans that may be triggered by plant shutdowns
occurring until the first anniversary
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of the closing date of the Acquisition, and has agreed to grant one
year's service credit for purposes of determining accrued benefits
under such defined benefit pension plans to transferred employees at
certain facilities.
(iii) The following provisions are added:
o Ingersoll-Rand will provide certain transitional services at no
charge to the Buyers from the closing date of the Acquisition
through December 31, 2000;
o The Sellers agree to reimburse the Buyers for up to $5,000,000
(or $3,000,000 if the August grace period referred to below is
utilized and the closing occurs after August 13, 2000) incurred in
connection with certain environmental problems identified by
Flowserve's consultants;
o on the closing date of the Acquisition, Flowserve or one of its
designated subsidiaries will directly purchase the shares of certain
subsidiaries of Ingersoll-Rand, IDP Acquisition, LLC and IDP; and
o immediately before the consummation of the Acquisition,
the Sellers will cause IDP to distribute all receivables (except
for the $3 million loan Ingersoll-Rand owes to IDP Austrian
subsidiary) held by subsidiaries of IDP which are owed by
Ingersoll-Rand in the form of capital reductions of Ingersoll-Rand's
capital account in IDP. To the extent that the sum of cash retained
by the non-U.S. Subsidiaries of IDP and the principal amount of the
loan Ingersoll-Rand owes to the IDP Austrian subsidiary exceeds or
falls below $25 million as of the closing date, the amount of any
such excess or shortfall will be paid by Flowserve or Ingersoll-Rand
to the other party. In any event, Ingersoll-Rand will repay the loan
it owes to the IDP Austrian subsidiary on the closing date.
(iv) Obligations of the parties are amended to the following effect:
o Buyers agreed to take all steps necessary to obtain approval of
the Department of Justice with respect to the Acquisition.
o If, all conditions to closing have been satisfied but the Buyers
do not have sufficient funds to complete the Acquisition, the
Buyers have the right to extend the closing date of the
Acquisition until financing for such funds has been obtained (but
not later than October 31, 2000). If the Buyers use the extension
period, the Buyers will have to pay interest on the purchase price
to the sellers during the extension period. The Buyers, however,
will be granted a four week grace period during this extension
period when such interest will not accrue and, in addition, such
interest shall not accrue, during the month of August 2000 and
during that month, if applicable, the four week grace period
mentioned above will be tolled.
(v) Provisions relating to termination of the Purchase Agreement are
amended to the following effect:
o The Purchase Agreement may be terminated if the closing of the
Acquisition has not occurred by October 31, 2000 (unless the failure
to close is due to the failure of the party seeking to terminate to
fulfill any of its Purchase Agreement obligations).
(b) Financing Transactions
(i) High Yield Offering
Flowserve and a wholly owned Dutch subsidiary that is in the process of
being formed, Flowserve Finance B.V. ("Flowserve Finance"), intend to offer the
dollar equivalent of $375 million in aggregate principal amount of senior
subordinated notes due 2010 (the "Notes") pursuant to Rule 144A and Regulation S
under the Securities Act of 1933, as amended (the "Securities Act").
A portion of the aggregate principal amount of the Notes will be denominated
in U.S. dollars and will be senior unsecured subordinated obligations of
Flowserve, which will be fully and unconditionally guaranteed by Flowserve's
material domestic subsidiaries, Flowserve Finance and Flowserve International
Limited ("Flowserve International"), a U.K. subsidiary of Flowserve.
The remaining portion of the aggregate principal amount of senior
subordinated notes will be denominated in euros and will be senior unsecured
subordinated obligations of Flowserve Finance, fully and unconditionally
guaranteed by Flowserve, Flowserve International and Flowserve's material
domestic subsidiaries, ("Subsidiary Guarantors").
The Notes have not been registered under the Securities Act and may not be
offered or sold in the United States absent
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registration or an applicable exemption from registration under the Securities
Act.
(ii) Senior Credit Facilities
At the closing of the Note Offerings, Flowserve also intends to enter into
new senior credit facilities (the "Senior Credit Facilities") which consist of a
term loan A facility of $275.0 million ("Term Loan A"), a term loan B facility
of $475.0 million ("Term Loan B") and a revolving credit facility of $300.0
million (the "Revolving Credit Facility").
The obligations under the Senior Credit Facilities will be unconditionally
guaranteed by the Subsidiary Guarantors.
We expect to use the proceeds from the Term Loan A and Term Loan B
facilities, together with the proceeds of the offerings of the Notes to fund the
Acquisition, refinance existing indebtedness of Flowserve and pay related fees
and expenses.
(c) Agreement in principle with the U.S. Department of Justice
In connection with the Acquisition, Flowserve has reached an agreement in
principle with the U.S. Department of Justice to resolve its antitrust concerns
related to the Acquisition. This agreement in principle includes a post-closing
divestiture of certain product lines, a manufacturing facility and two service
and repair centers. The press release announcing Flowserve's reaching an
agreement with the Department of Justice is set forth in Exhibit 99.1 to this
Current Report on Form 8-K and is hereby incorporated by reference herein.
Pursuant to this agreement in principle, Flowserve has committed to divest
the following assets:
o certain designated models of highly engineered pumps in four product
lines serving the oil refinery and power industry markets;
o Flowserve's Tulsa manufacturing facility; and
o on-site plant and equipment at two IDP service and repair centers
located in the United States.
In the divestures of product lines, Flowserve will be able to retain
certain overlapping models in all of the product lines. In addition, Flowserve
will be required to grant the purchaser of the divested product line(s) the
exclusive right to sell such product line(s) for installation within the United
States and a non-exclusive right to sell such product line(s) for installation
outside the United States, except for special provisions permitting sales in the
U.S. to two major alliance customers of equipment and parts on certain product
lines for specified periods of time from the date of entry of the final consent
decree.
With respect to the divestiture of the Tulsa manufacturing facility,
Flowserve must leave all production equipment and related assets used to
manufacture the pump product lines to be divested.
Flowserve must make the above divestitures within 150 calendar days after
the filing of the consent decree, subject to one 30-day extension by the
Department of Justice, in its sole discretion. If Flowserve has not divested
these assets within that time period, a trustee will be appointed by the federal
district court, who shall have the sole right to divest the assets following
such appointment.
The above divestitures would affect less than three percent of the combined
1999 revenues of Flowserve and IDP. In the opinion of management of Flowserve,
the impact of these divestitures is not material to its overall pro forma
financial position or results of operations.
Flowserve has negotiated a draft consent decree that implements the terms
of its agreement in principle with the Department of Justice. Flowserve expects
the consent decree to be finalized, signed and filed with the U.S. District
Court for the District of Columbia by the end of July, 2000.
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(d) Unaudited Pro Forma Consolidated Financial Statements
The following unaudited pro forma consolidated financial statements (the
"Unaudited Pro Forma Financial Statements") are based on the historical
consolidated financial statements of Flowserve, Innovative Valve Technologies,
Inc. ("Invatec") (which Flowserve acquired on January 13, 2000) and IDP,
adjusted to give effect to the transactions described herein.
The Unaudited Pro Forma Consolidated Statements of Operations for the year
ended December 31, 1999, twelve months ended March 31, 2000 ("LTM March 31,
2000") and three months ended March 31, 1999 and March 31, 2000, respectively,
give effect to the Acquisition, the financing transactions described in Section
1(b) above of this Report on Form 8-K and the application of the proceeds
therefrom (collectively, the "Transactions") and the acquisition of Invatec as
if they had occurred on January 1, 1999. The Unaudited Pro Forma Consolidated
Balance Sheet gives effect to the Transactions as if they had occurred as of
March 31, 2000.
Information for LTM March 31, 2000 represents the sum of the amounts set
forth in the unaudited pro forma condensed consolidated statement of income for
the year ended December 31, 1999 and the amounts set forth in the unaudited pro
forma condensed consolidated statement of income for the three months ended
March 31, 2000, less the amounts set forth in the unaudited pro forma condensed
consolidated statement of income for the three months ended March 31, 1999.
The Transactions and the acquisition of Invatec and the related adjustments
are described in the accompanying notes. The pro forma adjustments are based
upon available information and certain assumptions that we believe are
reasonable. In our opinion, all adjustments that are necessary to present fairly
the pro forma data have been made. The Unaudited Pro Forma Financial Statements
have not been reviewed by the SEC and while we believe that such information is
in accordance with the applicable rules of the SEC and related interpretations,
there can be no assurance that the SEC may not challenge our basis of
presentation and certain adjustments included herein. The Unaudited Pro Forma
Financial Statements do not purport to represent what our results of operations
or financial condition would actually have been had the Transactions in fact
occurred on such dates or to project our results of operations or financial
condition for any future period or date.
The unaudited pro forma consolidated financial statements do not include
the impact of any post-closing regulatory divestitures as required by the U.S.
Department of Justice in connection with the Acquisition to address its
antitrust concerns primarily related to sales of highly engineered pumps for
installation in oil refineries and power generation facilities in the United
States. These divestitures would affect less than three percent of the combined
1999 revenues of Flowserve and IDP. In the opinion of management, the impact of
these divestiture actions is not material to our overall pro forma financial
position or results of operations.
The unaudited pro forma information with respect to the Invatec acquisition
and the Acquisition is based on the historical financial statements of
Flowserve, Invatec and IDP. The Invatec acquisition and the Acquisition have
been accounted for under the purchase method of accounting. The total purchase
price for the Invatec acquisition and the Acquisition has been allocated to the
tangible and identifiable intangible assets and liabilities of the acquired
businesses based upon our preliminary estimates of their fair value with the
remainder allocated to goodwill. The purchase price allocations for the Invatec
acquisition and the Acquisition are subject to refinement when additional
information concerning asset and liability valuations is obtained.
The historical consolidated financial statements of Flowserve, Invatec and
IDP were prepared in accordance with accounting principles generally accepted in
the United States. In addition, because Flowserve is, and prior to its
acquisition by Flowserve, Invatec was, a publicly traded company, Flowserve's
and Invatec's historical consolidated financial statements comply as to form in
all material respects with the applicable accounting requirements of the
Securities Act and the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and the related rules and regulations adopted by the SEC. IDP's
historical consolidated
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statements have not been prepared with the intention of being in compliance with
such accounting requirements and are not in compliance therewith as the
consolidated financial statements are stated at historical cost and do not give
effect to push-down accounting relating to Ingersoll-Rand's acquisition of
Halliburton Company's 49% interest in IDP on December 30, 1999. Giving effect to
"push-down" accounting would have resulted in allocating the purchase price paid
by Ingersoll-Rand for Halliburton's interest in IDP to the fair value of the
purchased assets and liabilities with the excess of the fair value allocated to
goodwill. Had IDP's historical financial statements given effect to "push-down"
accounting, its consolidated balance sheet as of March 31, 2000 would have
reflected property, plant and equipment, intangible assets and goodwill at
$159.1 million, $45.4 million and $188.4 million, respectively. In addition, our
pro forma depreciation and amortization related to property, plant and
equipment, intangible assets and goodwill for the twelve months ended March 31,
2000 would have been $7.4 million, $9.1 million and $9.3 million, instead of
$5.9 million, $8.6 million and $8.2 million, respectively. Because our revised
pro forma adjustments would offset the IDP adjustments, there would have been no
impact on our pro forma consolidated balance sheet or our pro forma consolidated
statement of operations.
Consolidated financial statements for IDP and pro forma financial
information complying as to form with the applicable accounting requirements of
the Securities Act and the Exchange Act and the related rules and regulations
adopted by the SEC will be filed under Form 8-K within the time period specified
by Item 7 of Form 8-K, following consummation of the Acquisition.
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UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
PRO IDP
HISTORICAL INVATEC FORMA HISTORICAL ACQUISITION/
--------------------- ACQUISITION FLOWSERVE/ ---------- FINANCING PRO FORMA
FLOWSERVE INVATEC ADJUSTMENTS(1) INVATEC IDP ADJUSTMENTS(1) CONSOLIDATED
---------- -------- -------------- ---------- ---------- -------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales.................... $1,061,272 $160,991 $ -- $1,222,263 $838,390 $ -- $2,060,653
Cost of sales................ 697,928 115,956 -- 813,884 610,745 (2,000)(f) 1,428,539
5,910(g)
---------- -------- -------- ---------- -------- --------- ----------
Gross profit................. 363,344 45,035 -- 408,379 227,645 (3,910) 632,114
Selling and administrative
expense.................. 275,884 40,368 (1,554)(a) 314,642 162,047 (3,600)(h) 485,695
(56)(b) (4,200)(i)
8,642(j)
8,164(k)
Research, engineering and
development expense...... 25,645 -- -- 25,645 2,984 -- 28,629
Merger transaction and
restructuring
expense(2)............... 15,860 -- -- 15,860 200 -- 16,060
Merger integration
expense(3)............... 14,207 -- -- 14,207 -- -- 14,207
---------- -------- -------- ---------- -------- --------- ----------
Operating income............. 31,748 4,667 1,610 38,025 62,414 (12,916) 87,523
Interest expense........... 15,504 12,724 (6,928)(c) 21,300 1,362 94,025(l) 116,687
Loss on assets held for
sale..................... -- 3,810 -- 3,810 -- -- 3,810
Impairment of goodwill..... -- 39,073 (39,073)(d) -- -- -- --
Other income, net.......... (2,001) (174) -- (2,175) (7,446) -- (9,621)
---------- -------- -------- ---------- -------- --------- ----------
Earnings (loss) before income
taxes...................... 18,245 (50,766) 47,611 15,090 68,498 (106,941) (23,353)
Provision (benefit) for
income taxes............. 6,068 6,372 (7,234)(e) 5,206 18,965 (32,578)(m) (8,407)
---------- -------- -------- ---------- -------- --------- ----------
Net income (loss).......... $ 12,177 $(57,138) $ 54,845 $ 9,884 $ 49,533 $ (74,363) $ (14,946)
========== ======== ======== ========== ======== ========= ==========
OTHER FINANCIAL DATA:
EBITDA(n).................... $ 113,114 $ 11,484 $ 1,554 $ 126,152 $ 87,065 $ 9,800 $ 223,017
Adjusted EBITDA(o)........... 267,117
Depreciation and
amortization............... 39,599 4,851 (56) 44,394 18,251 22,716 85,361
Cash interest expense(p)..... 116,687
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma
consolidated financial statements.
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UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
IDP
HISTORICAL INVATEC PRO FORMA HISTORICAL ACQUISITION/
------------------- ACQUISITION FLOWSERVE/ ---------- FINANCING PRO FORMA
FLOWSERVE INVATEC ADJUSTMENTS INVATEC IDP ADJUSTMENTS(1) CONSOLIDATED
--------- ------- ----------- ------------ ---------- -------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales....................... $269,387 $43,931 $313,318 $192,200 $ -- $505,518
Cost of sales................... 172,597 30,803 203,400 146,254 (500)(f) 350,632
1,478(g)
-------- ------- ------- -------- -------- -------- --------
Gross profit.................... 96,790 13,128 -- 109,918 45,946 (978) 154,886
Selling and administrative
expense..................... 67,110 11,005 (14)(b) 78,101 37,161 (900)(h) 118,621
58(i)
2,160(j)
2,041(k)
Research, engineering and
development expense......... 6,872 -- -- 6,872 724 -- 7,596
Merger integration
expense(3).................. 3,432 -- -- 3,432 -- -- 3,432
-------- ------- ------- -------- -------- -------- --------
Operating income................ 19,376 2,123 14 21,513 8,061 (4,337) 25,237
Interest expense.............. 3,083 1,932 (1,732)(c) 3,283 414 25,475(l) 29,172
Other (income) expense, net... 523 (38) -- 485 (1,468) -- (983)
-------- ------- ------- -------- -------- -------- --------
Earnings (loss) before income
taxes......................... 15,770 229 1,746 17,745 9,115 (29,812) (2,952)
Provision (benefit) for income
taxes....................... 5,362 271 489(e) 6,122 3,550 (10,735)(m) (1,063)
-------- ------- ------- -------- -------- -------- --------
Net income (loss)............. $ 10,408 $ (42) $ 1,257 $ 11,623 $ 5,565 $(19,077) $ (1,889)
======== ======= ======= ======== ======== ======== ========
OTHER FINANCIAL DATA:
EBITDA(n)....................... $ 53,757
Adjusted EBITDA(o).............. 64,782
Depreciation and amortization... 22,384
Cash interest expense(p)........ 29,172
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma
consolidated financial statements.
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UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA IDP
----------------------- FLOWSERVE/ ACQUISITION/FINANCING PRO FORMA
FLOWSERVE(A) IDP INVATEC/IDP ADJUSTMENTS(1) CONSOLIDATED
------------ -------- ----------- --------------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales.................. $285,309 $174,932 $460,241 $ -- $460,241
Cost of sales.............. 186,080 131,707 317,787 (500)(f) 318,765
1,478(g)
-------- -------- -------- -------- --------
Gross profit............... 99,229 43,225 142,454 (978) 141,476
Selling and
administrative
expense............... 71,628 33,413 105,041 (900)(h) 108,897
555(i)
2,160(j)
2,041(k)
Research, engineering and
development expense... 6,155 645 6,800 -- 6,800
-------- -------- -------- -------- --------
Operating income........... 21,446 9,167 30,613 (4,834) 25,779
Interest expense......... 6,523 272 6,795 24,109 30,904
Other (income) expense,
net................... (3,217) 72 (3,145) -- (3,145)
-------- -------- -------- -------- --------
Earnings (loss) before
income
taxes................. 18,140 8,823 26,963 (28,943) (1,980)
Provision (benefit) for
income taxes.......... 6,258 3,220 9,478 (10,191)(m) (713)
-------- -------- -------- -------- --------
Net income (loss)........ $ 11,882 $ 5,603 $ 17,485 $(18,752) $ (1,267)
======== ======== ======== ======== ========
OTHER FINANCIAL DATA:
EBITDA(n).................. $ 47,636
Adjusted EBITDA(o)......... 58,661
Depreciation and
amortization............. 20,942
Cash interest expense(p)... 30,904
</TABLE>
-------------------------
(A) Includes the results of Invatec from January 13, 2000.
The accompanying notes are an integral part of the unaudited pro forma
consolidated financial statements.
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UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
TWELVE MONTHS ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
PRO FORMA
FLOWSERVE/ IDP
INVATEC/ ACQUISITION/FINANCING PRO FORMA
FLOWSERVE(A) IDP IDP ADJUSTMENTS(1) CONSOLIDATED
------------ -------- ---------- --------------------- ------------
(DOLLARS IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C>
Net sales...................... $1,194,254 $821,122 $2,015,376 $ -- $2,015,376
Cost of sales.................. 796,564 596,198 1,392,762 (2,000)(f) 1,396,672
5,910(g)
---------- -------- ---------- -------- ----------
Gross profit................... 397,690 224,924 622,614 (3,910) 618,704
Selling and administrative
expense................... 308,169 158,299 466,468 (3,600)(h) 475,971
(3,703)(i)
8,642(j)
8,164(k)
Research, engineering and
development expense....... 24,928 2,905 27,833 -- 27,833
Merger transaction and
restructuring
expense(2)................ 15,860 200 16,060 -- 16,060
Merger integration
expense(3)................ 10,775 -- 10,775 -- 10,775
---------- -------- ---------- -------- ----------
Operating income............... 37,958 63,520 101,478 (13,413) 88,065
Interest expense............. 24,540 1,220 25,760 92,659(l) 118,419
Loss on assets held for
sale...................... 3,810 -- 3,810 -- 3,810
Other income, net............ (5,877) (5,906) (11,783) -- (11,783)
---------- -------- ---------- -------- ----------
Earnings (loss) before income
taxes........................ 15,485 68,206 83,691 (106,072) (22,381)
Provision (benefit) for income
taxes........................ 5,342 18,635 23,977 (32,034)(m) (8,057)
---------- -------- ---------- -------- ----------
Net income (loss)......... $ 10,143 $ 49,571 $ 59,714 $(74,038) $ (14,324)
========== ======== ========== ======== ==========
OTHER FINANCIAL DATA:
EBITDA(n)...................... $ 121,688 $ 85,892 $ 207,580 $ 9,303 $ 216,883
Adjusted EBITDA(o)............. 260,983
Depreciation and
amortization................. 43,484 17,719 61,203 22,716 83,919
Cash interest expense(p)....... 118,419
Ratio of total net debt to
Adjusted EBITDA................ 4.2x
Ratio of Adjusted EBITDA
to cash interest expense..... 2.2x
Ratio of earnings to fixed
charges(q)................... --
</TABLE>
---------------
(A) Represents Flowserve after giving pro forma effect to the acquisition of
Invatec as though such acquisition had occurred on January 1, 1999.
The accompanying notes are an integral part of the unaudited pro forma
consolidated financial statements.
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NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT
OF OPERATIONS
NOTE 1: PRO FORMA ADJUSTMENTS
The following pro forma adjustments have been applied to the accompanying
historical statements of operations of Flowserve, Invatec and IDP to give effect
to the Invatec acquisition and the Acquisition (see note 2 to the unaudited pro
forma consolidated balance sheet) and the financing transactions as if they had
all occurred on January 1, 1999.
<TABLE>
<S> <C>
(a) Represents reduction in Invatec selling and administrative
costs for non-recurring items associated with
pre-acquisition bank fees and other credit facility related
expenses.
(b) Represents incremental decrease in annual goodwill
amortization based on decrease of $4.3 million of estimated
goodwill originating from the Invatec acquisition and
reduction of amortization period from 40 to 20 years.
(c) Represents the net reduction in consolidated interest
expense related to Invatec debt financing.
(d) Represents reversal of Invatec goodwill impairment charge.
(e) Represents income tax adjustments required to arrive at the
expected pro forma effective tax rate of 34.5% after
Flowserve's acquisition of Invatec.
(f) Represents retiree pension and post-retirement benefits
expense for IDP that, pursuant to the IDP purchase
agreement, will be retained by Ingersoll-Rand, IDP's
predecessor parent.
(g) Represents increase in depreciation expense in cost of sales
based on $88.2 million estimated fair market value of
property, plant and equipment over estimated useful lives of
3 to 40 years.
This adjustment is based on a preliminary allocation of the
purchase price for the Acquisition. The final allocation of
the purchase price is contingent upon valuations that have
not been completed. See note 2 to the unaudited pro forma
consolidated balance sheet for further discussion on the
purchase price allocations related to our recent
acquisitions.
(h) Represents the elimination of corporate overhead expenses
allocated by Ingersoll-Rand to IDP. Pursuant to the IDP
purchase agreement, this allocation will be eliminated upon
consummation of the Acquisition.
(i) Represents the elimination of expense recorded by IDP
related to a phantom stock incentive plan that will be
eliminated upon consummation of the Acquisition.
(j) Represents incremental increase in annual goodwill
amortization based on $345.7 million of estimated goodwill
over an estimated useful life of 40 years related to the
Acquisition.
(k) Represents increase in amortization expense based on $141.3
million estimated fair value of other intangible assets
acquired over their estimated useful lives of approximately
17 years.
</TABLE>
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NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT
OF OPERATIONS -- (CONTINUED)
<TABLE>
<CAPTION>
PRO FORMA THREE MONTHS THREE MONTHS
FOR YEAR ENDED ENDED ENDED LTM
DECEMBER 31, 1999 MARCH 31, 1999 MARCH 31, 2000 MARCH 31, 2000
----------------- -------------- -------------- --------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
(l) Represents the following:
Interest on Term Loan A ($275.0 @ 9.4%).............. $ 25.9 $ 6.5 $ 6.5 $ 25.9
Interest on Term Loan B ($475.0 @ 9.6%).............. 45.8 11.5 11.5 45.8
Interest expense associated with note offerings
($375.0 @ 12.0%)..................................... 45.0 11.2 11.2 45.0
Letter of credit fee ($110.0 @ 1.64% weighted
average, including $30.0 under the Revolving Credit
Facility)............................................ 1.8 0.4 0.4 1.8
------ ----- ----- ------
Cash interest expense............................. 118.5 29.6 29.6 118.5
Non-cash increase in amortization associated with
$40.8 million in deferred financing costs incurred in
connection with entering into the Senior Credit
Facilities and issuing the notes offered by these
offerings, amortized over terms ranging from 6 to 10
years. .............................................. 5.1 1.3 1.3 5.1
------ ----- ----- ------
Sub-total interest expense........................ 123.6 30.9 30.9 123.6
Elimination of interest and associated fees on
borrowings to be repaid in connection with the
financings........................................... (29.6) (5.4) (6.8) (31.0)
------ ----- ----- ------
Net Adjustment.................................... $ 94.0 $25.5 $24.1 $ 92.6
====== ===== ===== ======
</TABLE>
<TABLE>
<S> <C>
For each 0.125% change in the interest rates payable on the
outstanding balance under the Senior Credit Facilities and
the Notes annual interest expense would change by $1.4
million before the effect of income taxes.
(m) Represents income tax adjustment required to arrive at the
expected pro forma effective tax rate of 36% and to provide
U.S. taxes on IDP partnership earnings.
(n) EBITDA means net income (loss) before interest, taxes,
depreciation, amortization, other income, net (excluding
commission and royalty income) and other non-recurring
items.
For Flowserve, other non-recurring items consist of merger
transaction and restructuring expense, merger integration
expense and in the year ended December 31, 1999 and twelve
months ended March 31, 2000, non-cash charges of $5.8
million related to executive severance and facility closures
and $5.1 million related to inventory and fixed asset
impairment.
For IDP, other non-recurring items consist of restructuring
expense and in 1999, $3.1 million of non-recurring
consultant expense and $0.9 million of severance expense.
Other non-recurring items in the three month period ended
March 31, 1999 and the twelve month period ended March 31,
2000 were $1.8 million and $2.4 million, respectively.
For Invatec, other non-recurring items in the year ended
December 31, 1999 and twelve months ended March 31, 2000
included $39.1 million of goodwill impairment, $3.8 million
of loss on assets held for sale and $2.0 million of merger
transaction costs.
</TABLE>
11
<PAGE> 12
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT
OF OPERATIONS -- (CONTINUED)
<TABLE>
<S> <C>
(o) Adjusted EBITDA represents EBITDA as adjusted to reflect certain other cost savings
which have been specifically identified in connection with the Transactions and the
acquisition of Invatec, but which are not included in EBITDA. Adjusted EBITDA was
calculated as follows:
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
PRO FORMA THREE MONTHS THREE MONTHS
FOR YEAR ENDED ENDED ENDED LTM
DECEMBER 31, 1999 MARCH 31, 1999 MARCH 31, 2000 MARCH 31, 2000
----------------- -------------- -------------- --------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
EBITDA, as defined................ $223.0 $53.7 $47.6 $216.9
Salesforce reduction(1)........... 13.6 3.4 3.4 13.6
Plant rationalization(2).......... 16.1 4.0 4.0 16.1
Headquarters cost reduction(3).... 6.1 1.5 1.5 6.1
Invatec cost savings(4)........... 8.3 2.2 2.2 8.3
------ ----- ----- ------
Adjusted EBITDA................... $267.1 $64.8 $58.7 $261.0
====== ===== ===== ======
</TABLE>
<TABLE>
<S> <C>
(1) Represents elimination of costs of overlapping salesforce coverage upon the closing of the
Acquisition. At, or near, the closing date of the Acquisition, a reduction of approximately 150 full-
time equivalent sales and sales support personnel will occur. The reduction of these 150 full-time
equivalent sales and sales support personnel will result in estimated savings of $13.6 million. In the
twelve months after the closing of the Acquisition, Flowserve estimates that an additional reduction of
approximately 150 full-time equivalent sale and sales support personnel will be made, resulting in
estimated annualized cost savings of $27.2 million by the end of 2001.
(2) Represents elimination of expenses of IDP relating to four plants and multiple service centers the
closure of which is expected to be announced shortly after the closing of the Acquisition. The
elimination of the four facilities and the service centers will result in estimated savings of $16.1
million. In the twelve to eighteen months after the closing of the Acquisition, we estimate additional
elimination of duplicative plant and service center expenses will result in annualized cost savings of
$25.0-$45.0 million.
(3) Represents elimination of expenses as a result of the closure of IDP's corporate headquarters
facility, at or near the closing date of the Acquisition, that will result in estimated savings of $6.1
million. These cost reductions include facility costs, personnel reductions and other headquarters items
that are duplicative of functions that Flowserve currently provides. In the next twelve months after the
closing of the Acquisition, Flowserve estimates that savings will increase to $14.0 million as we
complete the integration of IDP into our business.
(4) Represents elimination of Invatec expenses upon closure or realignment of 19 locations (of which 13
have been completed) and reduction of approximately 100 personnel (of whom 75 have been terminated) in
2000.
While we consider the numerical specificity of the foregoing preliminary estimates and anticipated cost
savings to be reasonable, these estimates and savings are based on a number of assumptions and estimates
that are subject to inherent uncertainty. The actual cost savings could vary from these estimates. We
will incur significant cash integration costs to achieve these cost savings.
(p) Cash interest expense is total interest expense less amortization of deferred financing costs.
(q) For purposes of determining the ratio of earnings to fixed charges, earnings
consist of income (loss) from continuing operations before income taxes, plus fixed
charges. Fixed charges consist of interest expense on all indebtedness,
amortization of deferred financing fees and the estimated interest portion of
rental expense estimated to be attributable to interest. For the twelve months
ended March 31, 2000, earnings were insufficient to cover fixed charges by $21.6
million.
</TABLE>
12
<PAGE> 13
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT
OF OPERATIONS -- (CONTINUED)
NOTE 2: MERGER TRANSACTION AND RESTRUCTURING EXPENSE
Represents non-recurring merger transaction and restructuring expenses. In
1999, $15.9 million for Flowserve represents facility closure and personnel
reductions of 9% to reduce excess capacity and $0.2 million for IDP relates to
additional costs incurred in regards to a foundry closure initiated in 1996.
NOTE 3: MERGER INTEGRATION EXPENSES
Represents non-recurring expenses related to the merger of BW/IP, Inc. and
Durco International Inc. in order to achieve the planned merger synergies. These
expenses were principally for costs for consultants and costs related to
integration team members including salaries, benefits and training.
13
<PAGE> 14
UNAUDITED PRO FORMA
CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 2000
ASSETS
<TABLE>
<CAPTION>
HISTORICAL
-------------------- PRO FORMA PRO FORMA
FLOWSERVE IDP(1) ADJUSTMENTS(2,3) CONSOLIDATED
--------- -------- ---------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.................. $ 23,935 $ 29,995 $ (30,208)(a) $ 23,722
Accounts receivable, net................... 233,364 174,389 -- 407,753
Inventories................................ 208,475 109,872 -- 318,347
Prepaids and other current assets.......... 42,701 31,937 -- 74,638
-------- -------- --------- ----------
Total current assets............... 508,475 346,193 (30,208) 824,460
Property, plant and equipment, net........... 223,450 99,382 88,170(b) 411,002
Intangibles assets, net...................... 149,719 9,113 486,980(c) 645,812
Other assets................................. 83,369 16,872 58,863(d) 159,104
-------- -------- --------- ----------
Total assets............................ $965,013 $471,560 $ 603,805 $2,040,378
======== ======== ========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.......... $ 1,488 $ 477 $ (1,488)(e) $ 477
Accounts and notes payable................. 80,424 167,830 (1,459)(e) 246,795
Income taxes............................... 977 -- 977
Accrued expenses and other liabilities..... 107,820 741 57,664(f) 166,225
-------- -------- --------- ----------
Total current liabilities.......... 190,709 169,048 54,717 414,474
-------- -------- --------- ----------
Noncurrent liabilities....................... -- 96 (96)(g) --
-------- -------- --------- ----------
Post-retirement benefits and deferred
items...................................... 140,946 75,010 (23,500)(h) 192,456
-------- -------- --------- ----------
Long-term debt due after one year............ 322,266 -- 802,734(e) 1,125,000
-------- -------- --------- ----------
Shareholders' equity:
Serial preferred stock
Common stock............................... 51,856 95,747 (95,747) 51,856
Capital in excess of par value............. 67,916 -- -- 67,916
Retained earnings.......................... 356,136 186,869 (189,513) 353,492
Treasury stock, at cost.................... (93,212) -- -- (93,212)
Accumulated other comprehensive income..... (71,604) (55,210) 55,210 (71,604)
-------- -------- --------- ----------
Total shareholders' equity.............. 311,092 227,406 (230,050)(i) 308,448
-------- -------- --------- ----------
Total liabilities and shareholders'
equity........................... $965,013 $471,560 $ 603,805 $2,040,378
======== ======== ========= ==========
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma
consolidated financial statements.
14
<PAGE> 15
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED BALANCE SHEET
The following pro forma adjustments have been applied to the accompanying
historical balance sheets of Flowserve and IDP to give effect to the Acquisition
and the financing transactions as if they had occurred on March 31, 2000.
NOTE 1. The historical balance sheet of IDP does not reflect the effects of
Ingersoll-Rand's acquisition of the 49% minority interest in IDP.
NOTE 2. ACQUISITIONS
On February 9, 2000 Flowserve entered into an acquisition agreement with
Ingersoll-Rand to acquire IDP, which was amended on July 14, 2000. The
Acquisition will be accounted for as a purchase, with the excess of the purchase
price over the fair value of net assets acquired allocated to goodwill.
A summary of the purchase price and related preliminary purchase price
allocation follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
----------------------
<S> <C>
Cash paid at closing........................................ $ 775,000
Cash paid for direct acquisition costs, including financial
advisory, accounting and legal costs...................... 9,156
---------
Aggregate purchase price.................................. 784,156
Book value of IDP net assets acquired....................... (245,911)
---------
Excess of cost over net book value of assets acquired....... 538,245
Adjustments to record assets and liabilities at fair market
values(a)
Property and equipment.................................... (88,170)
Intangible assets, including patents, trademarks and trade
names.................................................. (141,300)
Severance, facility closing expenses and other exit costs
assumed to be incurred in connection with the
Acquisition, net of taxation(b)........................ 36,905
---------
Net adjustment to goodwill........................ $ 345,680
=========
</TABLE>
-------------------------
(a) Upon completion of appraisals of the fair values of the acquired assets and
liabilities, our allocation of the purchase price may differ from that
presented above, and we may identify other assets to which a portion of the
purchase price will be allocated. We believe that the depreciation and
amortization periods for such identifiable other assets will be
approximately 17 years.
(b) Reflects exit costs to be incurred in connection with the Acquisition in
accordance with EITF 95-3, "Recognition of Liabilities in Connection with a
Purchase Business Combination."
15
<PAGE> 16
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED BALANCE SHEET -- (CONTINUED)
NOTE 3: PRO FORMA ADJUSTMENTS TO CONSOLIDATED BALANCE SHEET
The Unaudited Pro Forma Consolidated Balance Sheet reflects the Acquisition
and related financing transactions, as if they had occurred as of March 31,
2000. The application of the proceeds from borrowings under the Senior Credit
Facilities and the issuance of the Notes will occur concurrently with the
closing of the Notes offerings.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
----------------------
<S> <C> <C>
(a) Changes in cash and cash equivalents are:
Cash proceeds from initial borrowings under the Senior Credit
Facilities................................................... $ 750,000
Cash proceeds from issuance of the Notes....................... 375,000
-----------
Proceeds from these borrowings................................. 1,125,000
Payment to Ingersoll-Rand for purchase of IDP.................. (775,000)
Distribution of cash from IDP to Ingersoll-Rand at close of
Acquisition in accordance with the terms of the IDP purchase
agreement.................................................... (4,995)
Repayment of existing Flowserve debt........................... (325,213)
Transaction fees and expenses.................................. (50,000)
-----------
Uses of cash.............................................. (1,155,208)
-----------
Total adjustment to cash................................ $ (30,208)
===========
(b) To record property and equipment acquired at estimated fair value -- IDP
(c) Goodwill and intangible assets are reflected as follows:
To record goodwill resulting from the Acquisition.............. $ 345,680
To reflect adjustments to record fair value of intangible
assets acquired from the Acquisition........................... 141,300
-----------
Total intangible adjustments, including goodwill........ $ 486,980
===========
(d) To reflect adjustments to record the following:
To record deferred financing costs in connection with entering
into the Senior Credit Facilities and issuing the notes offered
by these offerings............................................. $ 40,844
Write-off of deferred financing fees related to existing
Flowserve credit facility...................................... (2,740)
Deferred taxes resulting from restructuring costs associated
with IDP....................................................... 20,759
-----------
Total adjustment to other assets........................ $ 58,863
===========
</TABLE>
16
<PAGE> 17
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED BALANCE SHEET -- (CONTINUED)
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
----------------------
<S> <C> <C>
(e) Reflects the issuance of the Notes
and proceeds from borrowings under the Senior Credit
Facilities, net of repayment of existing indebtedness:
Issuance of the Notes.......................................... $ 375,000
Proceeds from initial borrowings under the Senior Credit
Facilities..................................................... 750,000
-----------
1,125,000
Less: repayment of Flowserve long-term debt.................... (322,266)
-----------
Increase in long-term debt due after one year.................. 802,734
Less: repayment of current portion of long-term debt........... (1,488)
Less: repayments of note payable............................... (1,459)
-----------
Net Adjustment to long-term debt............................. $ 799,787
===========
(f) To reflect adjustments to record integration related restructuring costs associated with
the Acquisition in accordance with EITF 95-3 "Recognition of liabilities in connection
with a Purchase Business Combination"
(g) To eliminate a due to partners' liability retained by Ingersoll-Rand.
(h) Pension and post-retirement health care liabilities retained by Ingersoll-Rand, IDP's
predecessor parent.
(i) Represents adjustments to reflect the following:
Elimination of IDP contributed capital............... $ 95,747
Elimination of IDP retained earnings................. $186,869
Other................................................ ( 96)
Write-off of pre-existing deferred financing costs
related to existing Flowserve debt................... 2,740
--------
Sub-total, retained earnings adjustments............. 189,513
Elimination of IDP accumulated other comprehensive
income............................................... (55,210)
-----------
Total adjustments.................................... $ 230,050
===========
</TABLE>
17
<PAGE> 18
(c) EXHIBITS
2.1 Amendment No. 1, dated as of July 14, 2000 to the Purchase Agreement,
dated as of February 9, 2000 by and among Flowserve Corporation,
Flowserve Red Corporation, IDP Acquisition, LLC and Ingersoll-Rand
Company.
99.1 Press Release dated July 13, 2000.
[SIGNATURE PAGE FOLLOWS]
18
<PAGE> 19
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FLOWSERVE CORPORATION
By: /s/ RONALD F. SHUFF
-------------------------------
Ronald F. Shuff, Vice President,
Secretary and General Counsel
Date: July 20, 2000
<PAGE> 20
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
2.1 Amendment No. 1, dated as of July 14, 2000 to the
Purchase Agreement, dated as of February 9, 2000 by and
among Flowserve Corporation, Flowserve Red Corporation,
IDP Acquisition, LLC and Ingersoll-Rand Company.
99.1 Press Release dated July 13, 2000.
</TABLE>
