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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
---------
For Quarter Ended March 31, 2001 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 APRIL 25, 2001 37,922,589
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FLOWSERVE CORPORATION
INDEX
Page
No.
----
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Income --
Three Months Ended March 31, 2001 and 2000 (unaudited) 3
Consolidated Statements of Comprehensive Income --
Three Months Ended March 31, 2001 and 2000 (unaudited) 3
Consolidated Balance Sheets --
March 31, 2001 (unaudited) and December 31, 2000 4
Consolidated Statements of Cash Flows --
Three Months Ended March 31, 2001 and 2000 (unaudited) 5
Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISKS 24
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 26
SIGNATURE 27
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FLOWSERVE CORPORATION
(UNAUDITED)
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
Three Months Ended March 31,
----------------------------
2001 2000
--------- ---------
Sales $ 444,035 $ 285,309
Cost of sales 306,461 186,080
--------- ---------
Gross profit 137,574 99,229
Selling, general and administrative expense 100,105 77,783
Integration expense 19,139 --
--------- ---------
Operating income 18,330 21,446
Net interest expense 31,810 6,206
Other income, net (135) (2,900)
--------- ---------
Net (loss) earnings before income taxes (13,345) 18,140
(Benefit) provision for income taxes (4,805) 6,258
--------- ---------
Net (loss) earnings $ (8,540) $ 11,882
========= =========
Net (loss) earnings per share (basic and diluted) $ (0.22) $ 0.31
========= =========
Average shares outstanding 38,187 37,810
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
Three Months Ended March 31,
----------------------------
2001 2000
-------- --------
Net (loss) earnings $ (8,540) $ 11,882
Other comprehensive (income) expense:
Foreign currency translation adjustments 39,144 9,253
Cumulative effect of change in accounting principle, net of tax
of $472 (Adoption of SFAS 133 -- See footnote 3) (840) --
Fair market adjustment of derivative instruments, net of tax
benefit of $2,093 3,720 --
-------- --------
Other comprehensive expense 42,024 9,253
-------- --------
Comprehensive (loss) income $(50,564) $ 2,629
======== ========
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FLOWSERVE CORPORATION
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share data) MARCH 31, December 31,
2001 2000
----------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 18,621 $ 42,341
Accounts receivable, net 449,716 487,274
Inventories 314,468 305,958
Current deferred tax asset 42,007 39,726
Prepaid expenses 20,979 22,753
----------- -----------
Total current assets 845,791 898,052
Property, plant and equipment, net 386,009 405,412
Goodwill, net 515,638 514,441
Other intangible assets, net 130,418 131,330
Other assets 160,165 160,908
----------- -----------
Total assets $ 2,038,021 $ 2,110,143
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 166,625 $ 172,366
Accrued liabilities 194,540 243,553
Long-term debt due within one year 27,020 18,098
----------- -----------
Total current liabilities 388,185 434,017
Long-term debt due after one year 1,141,129 1,111,108
Postretirement benefits and deferred items 253,970 260,107
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 65,742 65,785
Retained earnings 348,955 357,495
----------- -----------
466,553 475,136
Treasury stock at cost -- 4,026 and 4,048 shares (92,311) (92,545)
Deferred compensation obligation 6,743 6,544
Accumulated other comprehensive loss (126,248) (84,224)
----------- -----------
Total shareholders' equity 254,737 304,911
----------- -----------
Total liabilities and shareholders'
equity $ 2,038,021 $ 2,110,143
=========== ===========
See accompanying notes to consolidated financial statements.
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FLOWSERVE CORPORATION
(Unaudited)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands) Three Months Ended March 31,
----------------------------
2001 2000
-------- --------
CASH FLOWS -- OPERATING ACTIVITIES:
Net (loss) earnings $ (8,540) $ 11,882
Adjustments to reconcile net earnings to net cash used by operating
activities:
Depreciation 12,848 8,041
Amortization 6,051 2,574
Net (gain) loss on the sale of fixed assets (224) 1
Change in assets and liabilities, net of effects of acquisitions
and dispositions:
Accounts receivable 25,663 7,955
Inventories (16,038) (15,861)
Prepaid expenses 2,972 1,572
Other assets (6,740) (2,916)
Accounts payable (12,300) (2,535)
Accrued liabilities (60,117) (21,568)
Income taxes (374) (2,988)
Postretirement benefits and deferred items (6,838) (1,568)
Net deferred taxes 1,150 1,235
-------- --------
Net cash flows used by operating activities (62,487) (14,176)
-------- --------
CASH FLOWS -- INVESTING ACTIVITIES:
Capital expenditures, net of disposals (3,514) (4,394)
Payment for acquisitions, net of cash acquired and dispositions -- (22,172)
-------- --------
Net cash flows used by investing activities (3,514) (26,566)
-------- --------
CASH FLOWS -- FINANCING ACTIVITIES:
Net repayments under lines of credit -- (831)
Payments of long-term debt (5,263) (1,062)
Proceeds from long-term debt 50,000 36,798
Proceeds from issuance of common stock 389 168
-------- --------
Net cash flows provided by financing activities 45,126 35,073
Effect of exchange rate changes (2,845) (859)
-------- --------
Net change in cash and cash equivalents (23,720) (6,528)
Cash and cash equivalents at beginning of year 42,341 30,463
-------- --------
Cash and cash equivalents at end of period $ 18,621 $ 23,935
======== ========
Taxes (refunded) paid $ (6,972) $ 9,453
Interest paid $ 48,296 $ 5,751
See accompanying notes to consolidated financial statements.
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FLOWSERVE CORPORATION
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
1. ACCOUNTING POLICIES - BASIS OF PRESENTATION
The accompanying consolidated balance sheet as of March 31, 2001, and the
related consolidated statements of income, comprehensive income and cash flows
for the three months ended March 31, 2001 and 2000 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 2000 Annual Report.
Interim results are not necessarily indicative of results to be expected for a
full year. Certain amounts in 2000 have been reclassified or restated to conform
with the 2001 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:
MARCH 31, December 31,
2001 2000
--------- ------------
Raw materials $ 54,359 $ 51,981
Work in process and finished goods 337,305 330,060
Less: Progress billings (39,487) (38,605)
--------- ---------
352,177 343,436
LIFO reserve (37,709) (37,478)
--------- ---------
Net inventory $ 314,468 $ 305,958
========= =========
Percent of inventory accounted for by LIFO 66% 67%
Percent of inventory accounted for by FIFO 34% 33%
3. ADOPTION OF SFAS NO. 133 -- ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES
The Company adopted SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, and the corresponding amendments on January 1, 2001. In
accordance with the transition provisions of SFAS 133, the Company recorded a
cumulative-effect adjustment in other comprehensive income as of January 1, 2001
of $1.3 million representing the current fair-value of hedging instruments. Of
this amount, $3.4 million related to foreign currency forward contracts offset
by $2.1 million related to interest rate swap agreements.
The Company reclassified the transition adjustment relating to foreign
currency forward contracts to earnings during the first quarter of 2001. At
March 31, 2001, the fair-value of the hedging instruments is a
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liability of $7.5 million and included in other comprehensive income. The
Company expects that within the next twelve months it will reclassify as expense
$3.6 million of this amount recorded in accumulated other comprehensive income.
The Company is party to forward contracts for purposes of hedging certain
transactions denominated in foreign currencies. The Company has a
risk-management and derivatives policy statement outlining the conditions in
which the Company can enter into hedging or forward transactions. The maximum
length of the contracts currently in place as of March 31, 2001 is about 2
years.
The Company is exposed to credit-related losses in the event of
nonperformance by counterparties to financial instruments, but it expects all
counterparties to meet their obligations given their high credit ratings.
The Company, as part of its risk management program, is party to interest
rate swap agreements for the purpose of hedging its exposure to floating
interest rates on certain portions of its debt. As of March 31, 2001, the
Company had $150 million of notional amount in outstanding interest rate swaps
with third parties. The maximum length of the interest rate swaps currently in
place as of March 31, 2001 is approximately 6 years.
All derivatives are recognized on the balance sheet at their fair-value. On
the date that the Company enters into a derivative contract, it designates the
derivative as (1) a hedge of (a) a forecasted transaction or (b) the variability
of cash flows that are to be received or paid in connection with a recognized
asset or liability (a "cash flow" hedge); or (2) a foreign-currency fair-value
or cash flow hedge (a "foreign currency" hedge). Changes in the fair-value of a
derivative that is highly effective as -- and that is designated and qualifies
as -- a cash flow hedge, to the extent that the hedge is effective, are recorded
in other comprehensive income, until earnings are affected by the variability of
cash flows of the hedged transaction (e.g., until periodic settlements of a
variable-rate asset or liability are recorded in earnings). Any hedge
ineffectiveness (which represents the amount by which the changes in the
fair-value of the derivative exceed the variability in the cash flows of the
forecasted transaction) is recorded in current-period earnings. Changes in the
fair-value of a derivative that is highly effective as -- and that is designated
and qualifies as -- a foreign-currency hedge is recorded in other comprehensive
income, since it satisfies the criteria for a cash-flow hedge. As of March 31,
2001, all hedges outstanding were highly effective.
The Company formally documents all relationships between hedging
instruments and hedge items, as well as its risk-management objective and
strategy for undertaking various hedge transactions. This process includes
linking all derivatives that are designated as fair-value, cash flow, or
foreign-currency hedges to (1) specific assets and liabilities on the balance
sheet or (2) specific firm commitments or forecasted transactions. The Company
also formally assesses (both at the hedge's inception and on an ongoing basis)
whether the derivatives that are used in hedging transactions have been highly
effective in offsetting changes in the fair value or cash flows of hedged items
and whether those derivatives may be expected to remain highly effective in
future periods. When it is determined that a derivative is not (or has ceased to
be) highly effective as a hedge, the Company discontinues hedge accounting
prospectively, as discussed below.
The Company discontinues hedge accounting prospectively when (1) it
determines that the derivative is no longer effective in offsetting changes in
the fair-value or cash flows of a hedge item (including hedged items such as
firm
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commitments or forecasted transactions); (2) the derivative expires or is
sold, terminated, or exercised; (3) it is no longer probable that the forecasted
transaction will occur; or (4) management determines that designating the
derivative as a hedging instrument is no longer appropriate.
When the Company discontinues hedge accounting because it is no longer
probable that the forecasted transaction will occur in the originally expected
period, the gain or loss on the derivative remaining in accumulated other
comprehensive income is reclassified into earnings. In all situations in which
hedge accounting is discontinued and the derivative remains outstanding, the
Company will carry the derivative at its fair-value on the balance sheet,
recognizing changes in the fair-value in current-period earnings.
4. ACQUISITION
In August 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 senior secured financing and senior subordinated notes. Upon
closing of the transaction, the existing Company debt was also refinanced.
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 $137.6 million for intangibles and $376.4 million
recorded as goodwill. The purchase price allocation for this acquisition is
preliminary and further refinements are likely to be made based on the final
determination of the fair-value of the assets acquired and the resolution of
remaining contingencies.
The operating results of IDP have been included in the consolidated
statements of income from the date of acquisition.
The table below reflects unaudited pro forma results of the Company and IDP
as if the acquisition had taken place at the beginning of fiscal year 2000,
including purchase accounting adjustments and estimated financing costs.
PRO FORMA
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share amounts)
Three Months Ended
March 31, 2000
------------------
Net sales $ 460,241
Operating income 22,506
Net loss (4,042)
Net loss per share (basic and diluted) (0.11)
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 reduce costs and to eliminate
excess capacity by consolidating facilities. The Company's actions, approved and
committed to in the third quarter of 2000, are expected to result in the net
reduction of approximately 1,200 positions upon estimated completion before the
end of 2001. The program includes the closure of IDP's former headquarters, the
closure or significant downsizing of a number of pump manufacturing facilities,
service and repair centers, and reduction of sales and sales support personnel.
The Company currently
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estimates that the costs associated with the restructuring portion of the
program will be approximately $68 million. The Company had originally estimated
these costs to be approximately $61 million. The increase from the original
estimate is primarily due to updated actuarial information for post-retirement
and pension expense relating to a plant closure. This increase was offset by a
non-cash reclassification from the restructuring accrual to post-retirement
benefits and pension liabilities which resulted in a net reduction to the
accrual of $8.8 million during the fourth quarter of 2000.
Approximately $44 million of the total cost relates to the IDP operations
acquired and $28 million has been capitalized 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 $24 million relates to the
Flowserve operations and was recorded as restructuring expense in 2000.
During the first three months of 2001, the Company incurred $19.1 million
in integration costs in conjunction with this program.
As of March 31, 2001, the program had resulted in a net reduction of 1,139
employees.
Expenditures charged to the 2000 restructuring reserve were:
Other
Exit
Severance Costs Total
--------- -------- --------
Balance at August 16, 2000 $ 45,980 $ 14,832 $ 60,812
Cash expenditures (18,645) (2,434) (21,079)
Net non-cash reduction (8,849) -- (8,849)
-------- -------- --------
Balance at December 31, 2000 $ 18,486 $ 12,398 $ 30,884
CASH EXPENDITURES (5,729) (4,029) (9,758)
-------- -------- --------
BALANCE AT MARCH 31, 2001 $ 12,757 $ 8,369 $ 21,126
======== ======== ========
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 reduction in workforce at those other locations.
The 1999 restructuring program is expected to result in a net reduction of
approximately 275 employees at a cost of $12.9 million upon estimated completion
during the second quarter of 2001. In addition, exit costs associated with the
facilities closings were $3.0 million. As of March 31, 2001, the program has
resulted in a net reduction of 268 employees.
Expenditures charged to the 1999 restructuring reserve were:
Other
Exit
Severance Costs Total
--------- -------- --------
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 (6,766) (1,932) (8,698)
Non-cash reduction (4,364) (1,028) (5,392)
-------- -------- --------
Balance at December 31, 2000 $ 1,668 $ -- $ 1,668
CASH EXPENDITURES (495) -- (495)
-------- -------- --------
BALANCE AT MARCH 31, 2001 $ 1,173 $ -- $ 1,173
======== ======== ========
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6. ASSETS HELD FOR SALE
The Company is in the process of selling certain facilities, machinery and
equipment and other fixed assets as part of its plan to eliminate excess
capacity by consolidating facilities. The Company is in the process of
negotiating the sale of these facilities and fixed assets and expects the sale
of such items to be completed by the end of 2002. The remaining assets not yet
sold, totaling $9,172, have been identified separately within property, plant
and equipment as Assets Held For Sale and have been recorded at their estimated
net realizable value.
7. GUARANTOR AND NONGUARANTOR FINANCIAL STATEMENTS
In connection with the IDP acquisition and as part of the related
financing, the Company and newly formed Dutch subsidiary, Flowserve Finance
B.V., issued an aggregate of $375 million of dollar-denominated senior
subordinated notes (the dollar Notes and 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 March 31, 2001 and the related
statements of income and cash flows for the three months ended March 31,
2001 of (a) Flowserve Corporation, the parent, (b) Flowserve Finance B.V.,
(c) the guarantor subsidiaries, (d) the nonguarantor subsidiaries, and the
Company on a consolidated basis, and
(2) Condensed consolidating balance sheet as of December 31, 2000 and the
related statements of income and cash flows for the three months ended
March 31, 2000, of (a) Flowserve Corporation, the parent, (b) the guarantor
subsidiaries, (c) 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.
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 intercompany balances and transactions. Separate
financial statements for the guarantor subsidiaries and the nonguarantor
subsidiaries are not presented because management believes such financial
statements would not be meaningful to investors.
Effective January 1, 2001, the Company effected a domestic legal
reorganization. This primarily resulted in a reclassification between the Parent
and Guarantor Subsidiaries.
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FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2001
FLOWSERVE GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT FINANCE B.V. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
--------- ------------ ------------ ------------ ------------ ------------
Sales $ -- $ -- $ 299,139 $ 170,796 $ (25,900) $ 444,035
Cost of sales -- -- 217,716 114,645 (25,900) 306,461
--------- --------- --------- --------- --------- ---------
Gross profit -- -- 81,423 56,151 -- 137,574
Selling, general and
administrative expense 7 -- 68,965 31,133 -- 100,105
Integration expense -- -- 15,448 3,691 -- 19,139
--------- --------- --------- --------- --------- ---------
Operating (loss) income (7) -- (2,990) 21,327 -- 18,330
Net interest expense 6,961 224 21,330 3,900 (605) 31,810
Other (income) expense, net -- 3 (4,198) 3,455 605 (135)
Equity in loss (earnings)
of subsidiaries 6,523 -- -- -- (6,523) --
--------- --------- --------- --------- --------- ---------
Net (loss) earnings before
income taxes (13,491) (227) (20,122) 13,972 6,523 (13,345)
(Benefit) provision for
income taxes (4,951) -- (5,400) 5,546 -- (4,805)
--------- --------- --------- --------- --------- ---------
Net (loss) earnings $ (8,540) $ (227) $ (14,722) $ 8,426 $ 6,523 $ (8,540)
========= ========= ========= ========= ========= =========
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FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2000
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
--------- ------------ ------------ ------------ ------------
Sales $ 39,531 $ 167,001 $ 101,430 $ (22,653) $ 285,309
Cost of sales 25,825 116,826 66,082 (22,653) 186,080
--------- --------- --------- --------- ---------
Gross profit 13,706 50,175 35,348 -- 99,229
Selling, general and
administrative expense 13,453 41,785 22,545 -- 77,783
--------- --------- --------- --------- ---------
Operating income 253 8,390 12,803 -- 21,446
Net interest expense (1,153) 7,119 162 78 6,206
Other (income)
expense, net (291) (5,381) 2,850 (78) (2,900)
Equity in (earnings)
loss of subsidiaries (10,812) -- -- 10,812 --
--------- --------- --------- --------- ---------
Net earnings before
income taxes 12,509 6,652 9,791 (10,812) 18,140
Provision for income taxes 627 1,793 3,838 -- 6,258
--------- --------- --------- --------- ---------
Net earnings (loss) $ 11,882 $ 4,859 $ 5,953 $ (10,812) $ 11,882
========= ========= ========= ========= =========
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FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED BALANCE SHEET
MARCH 31, 2001
FLOWSERVE GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT FINANCE B.V. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
----------- ----------- ------------ ------------ ------------ -----------
Current assets:
Cash and cash equivalents $ -- $ -- $ -- $ 35,211 $ (16,590) $ 18,621
Intercompany receivables 43,097 -- 54,363 100,013 (197,473) --
Accounts receivable, net 12 -- 234,787 214,917 -- 449,716
Inventories -- -- 197,981 116,487 -- 314,468
Current deferred tax asset -- -- 39,425 2,582 -- 42,007
Prepaid expenses -- -- 15,983 4,996 -- 20,979
----------- ----------- ----------- ----------- ----------- -----------
Total current assets 43,109 -- 542,539 474,206 (214,063) 845,791
Property, plant and
equipment, net 34 -- 215,642 170,333 -- 386,009
Investment in subsidiaries 418,185 -- 476,308 -- (894,493) --
Intercompany receivables 859,996 83,958 11,548 29,039 (984,541) --
Goodwill, net -- -- 458,421 57,217 -- 515,638
Other intangible assets, net -- -- 113,536 16,882 -- 130,418
Other assets 45,917 4,415 96,721 13,112 -- 160,165
----------- ----------- ----------- ----------- ----------- -----------
Total assets $ 1,367,241 $ 88,373 $ 1,914,715 $ 760,789 $(2,093,097) $ 2,038,021
=========== =========== =========== =========== =========== ===========
Current liabilities:
Accounts payable $ 2,186 $ -- $ 101,523 $ 79,506 $ (16,590) $ 166,625
Intercompany payables 4,194 2,279 71,046 119,954 (197,473) --
Income taxes -- -- -- -- -- --
Accrued liabilities 8,305 171 120,979 65,085 -- 194,540
Long-term debt due within
one year 26,500 -- 520 -- -- 27,020
----------- ----------- ----------- ----------- ----------- -----------
Total current
liabilities 41,185 2,450 294,068 264,545 (214,063) 388,185
Long-term debt due after
one year 1,054,402 86,641 1 85 -- 1,141,129
Intercompany payables -- -- 850,701 133,840 (984,541) --
Post-retirement benefits and
deferred items 16,917 -- 195,688 41,365 -- 253,970
Shareholders' equity:
Serial preferred stock,
$1.00 par value -- -- -- -- -- --
Common shares, $1.25 par value 51,856 -- 2 182,547 (182,549) 51,856
Capital in excess of par value 65,742 -- 349,411 72,990 (422,401) 65,742
Retained earnings 348,955 (570) 243,921 117,768 (361,119) 348,955
----------- ----------- ----------- ----------- ----------- -----------
466,553 (570) 593,334 373,305 (966,069) 466,553
Treasury stock at cost (92,311) -- -- -- -- (92,311)
Accumulated other
comprehensive (loss) income (126,248) (148) (19,077) (52,351) 71,576 (126,248)
Deferred compensation
obligation 6,743 -- -- -- -- 6,743
----------- ----------- ----------- ----------- ----------- -----------
Total shareholders' equity 254,737 (718) 574,257 320,954 (894,493) 254,737
----------- ----------- ----------- ----------- ----------- -----------
Total liabilities and
shareholders' equity $ 1,367,241 $ 88,373 $ 1,914,715 $ 760,789 $(2,093,097) $ 2,038,021
=========== =========== =========== =========== =========== ===========
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2000
FLOWSERVE GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT FINANCE B.V. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
----------- ----------- ------------ ------------ ------------ ------------
Current assets:
Cash and cash equivalents $ -- $ -- $ -- $ 50,239 $ (7,898) $ 42,341
Intercompany receivables 23,530 -- 33,252 104,836 (161,618) --
Accounts receivable, net 20,767 -- 224,746 241,761 -- 487,274
Inventories 10,432 -- 181,258 114,268 -- 305,958
Current deferred tax asset -- -- 38,765 961 -- 39,726
Prepaid expenses 6,261 -- 12,216 4,276 -- 22,753
----------- ----------- ----------- ----------- ----------- -----------
Total current assets 60,990 -- 490,237 516,341 (169,516) 898,052
Property, plant and
equipment, net 34,332 -- 189,978 181,102 -- 405,412
Investment in subsidiaries 791,437 -- 443,092 -- (1,234,529) --
Intercompany receivables 501,286 90,112 10,849 21,598 (623,845) --
Goodwill, net 7,814 -- 459,983 46,644 -- 514,441
Other intangible assets, net -- -- 114,129 17,201 -- 131,330
Other assets 52,991 4,865 97,861 5,191 -- 160,908
----------- ----------- ----------- ----------- ----------- -----------
Total assets $ 1,448,850 $ 94,977 $ 1,806,129 $ 788,077 $(2,027,890) $ 2,110,143
=========== =========== =========== =========== =========== ===========
Current liabilities:
Accounts payable $ 5,588 $ 1 $ 76,910 $ 97,766 $ (7,899) $ 172,366
Intercompany payables 33,973 2,279 20,704 104,658 (161,614) --
Income taxes 4,679 -- 2,928 (7,607) -- --
Accrued liabilities 13,443 111 120,729 110,202 (932) 243,553
Long-term debt due
within one year 18,000 -- 90 8 -- 18,098
----------- ----------- ----------- ----------- ----------- -----------
Total current
liabilities 75,683 2,391 221,361 305,027 (170,445) 434,017
Long-term debt due after
one year 1,018,063 92,958 2 85 -- 1,111,108
Intercompany payables 131 -- 468,840 154,873 (623,844) --
Post-retirement benefits and
deferred items 50,062 -- 166,187 42,926 932 260,107
Shareholders' equity:
Serial preferred stock,
$1.00 par value -- -- -- -- -- --
Common shares, $1.25 par value 51,856 -- 2 197,582 (197,584) 51,856
Capital in excess of par value 65,785 -- 676,035 89,489 (765,524) 65,785
Retained earnings 357,495 (343) 285,998 138,332 (423,987) 357,495
----------- ----------- ----------- ----------- ----------- -----------
475,136 (343) 962,035 425,403 (1,387,095) 475,136
Treasury stock at cost (92,545) -- (613) 2,246 (1,633) (92,545)
Accumulated other
comprehensive (loss) income (84,224) (29) (11,683) (142,483) 154,195 (84,224)
Deferred compensation
obligation 6,544 -- -- -- -- 6,544
----------- ----------- ----------- ----------- ----------- -----------
Total shareholders' equity 304,911 (372) 949,739 285,166 (1,234,533) 304,911
----------- ----------- ----------- ----------- ----------- -----------
Total liabilities and
shareholders' equity $ 1,448,850 $ 94,977 $ 1,806,129 $ 788,077 $(2,027,890) $ 2,110,143
=========== =========== =========== =========== =========== ===========
14
15
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2001
FLOWSERVE GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT FINANCE B.V. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
--------- ------------ ------------ ------------ ------------ ------------
CASH FLOWS -- OPERATING ACTIVITIES:
Net (loss) earnings $ (8,540) $ (227) $ (14,722) $ 8,426 $ 6,523 $ (8,540)
Adjustments to reconcile net
earnings to cash provided (used)
by operating activities:
Depreciation 7 -- 7,432 5,409 -- 12,848
Amortization -- -- 5,180 871 -- 6,051
Net (gain) loss on sale of
fixed assets -- -- 54 (278) -- (224)
Change in operating assets and
liabilities:
Accounts receivable (212) -- 9,349 16,526 -- 25,663
Inventories (5,758) -- 440 (10,720) -- (16,038)
Intercompany receivable and
payable (28,287) 25 296,036 21,498 (289,272) --
Prepaid expenses 876 -- 1,530 566 -- 2,972
Other assets (143) 123 2,797 (9,517) -- (6,740)
Accounts payable 4,284 -- 15,603 (24,457) (7,730) (12,300)
Accrued liabilities (6,921) 70 (12,683) (40,583) -- (60,117)
Income taxes -- -- -- (374) -- (374)
Post-retirement benefits and
deferred items (65) -- (226) (6,547) -- (6,838)
Net deferred taxes (61) -- (4,528) 5,739 -- 1,150
--------- --------- --------- --------- --------- ---------
Net cash (used) provided by
operating activities (44,820) (9) 306,262 (33,441) (290,479) (62,487)
--------- --------- --------- --------- --------- ---------
CASH FLOWS -- INVESTING ACTIVITIES:
Capital expenditures, net of
disposals (306) -- (2,084) (1,124) -- (3,514)
--------- --------- --------- --------- --------- ---------
Net cash flows used by investing
activities (306) -- (2,084) (1,124) -- (3,514)
--------- --------- --------- --------- --------- ---------
CASH FLOWS -- FINANCING ACTIVITIES:
Payments on long-term debt (5,263) -- -- -- -- (5,263)
Proceeds from long-term debt 50,000 -- -- -- -- 50,000
Other activity 389 9 (304,178) 22,382 281,787 389
--------- --------- --------- --------- --------- ---------
Net cash flows provided (used) by
financing activities 45,126 9 (304,178) 22,382 281,787 45,126
Effect of exchange rate changes -- -- -- (2,845) -- (2,845)
--------- --------- --------- --------- --------- ---------
Net change in cash and cash
equivalents -- -- -- (15,028) (8,692) (23,720)
Cash and cash equivalents at
beginning of year -- -- -- 50,239 (7,898) 42,341
--------- --------- --------- --------- --------- ---------
Cash and cash equivalents at end
of period $ -- $ -- $ -- $ 35,211 $ (16,590) $ 18,621
========= ========= ========= ========= ========= =========
15
16
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
--------- ------------ ------------ ------------ ------------
CASH FLOWS -- OPERATING ACTIVITIES:
Net earnings $ 11,882 $ 4,859 $ 5,953 $(10,812) $ 11,882
Adjustments to reconcile net
earnings to cash provided (used)
by operating activities:
Depreciation 1,547 4,500 1,994 -- 8,041
Amortization 109 1,907 558 -- 2,574
Net (gain) loss on sale of
fixed assets -- 8 (7) -- 1
Change in operating assets and
liabilities, net of effects of
acquisitions and dispositions:
Accounts receivable 27 2,807 5,121 -- 7,955
Inventories 5,969 (18,406) (3,424) -- (15,861)
Intercompany receivable and
payable 7,696 (4,814) (2,882) -- --
Prepaid expenses (2,787) 1,385 7,611 (4,637) 1,572
Other assets (3,996) (4,999) 6,079 -- (2,916)
Accounts payable (5,376) 4,035 137 (1,331) (2,535)
Accrued liabilities 17,843 (29,178) (10,233) -- (21,568)
Income taxes (3,597) 136 (746) 1,219 (2,988)
Post-retirement benefits and
deferred items (978) 2,830 (3,420) -- (1,568)
Net deferred taxes -- (1,463) 2,698 -- 1,235
-------- -------- -------- -------- --------
Net cash provided (used) by
operating activities 28,339 (36,393) 9,439 (15,561) (14,176)
-------- -------- -------- -------- --------
CASH FLOWS -- INVESTING ACTIVITIES:
Capital expenditures, net of
disposals (979) (2,728) (687) -- (4,394)
Payments for acquisitions, net
of cash acquired and dispositions (22,172) -- -- -- (22,172)
-------- -------- -------- -------- --------
Net cash flows used in investing
activities (23,151) (2,728) (687) -- (26,566)
-------- -------- -------- -------- --------
CASH FLOWS -- FINANCING ACTIVITIES:
Net repayments under lines of
credit (769) -- (62) -- (831)
Payments on long-term debt -- -- (1,062) -- (1,062)
Proceeds from long-term debt 477 35,452 869 -- 36,798
Other stock activity 168 -- -- -- 168
Other activity (5,064) 2,780 (8,137) 10,421 --
-------- -------- -------- -------- --------
Net cash flows (used) provided by
financing activities (5,188) 38,232 (8,392) 10,421 35,073
Effect of exchange rate changes
on cash -- -- (859) -- (859)
-------- -------- -------- -------- --------
Net change in cash and cash
equivalents -- (889) (499) (5,140) (6,528)
Cash and cash equivalents at
beginning of year -- 889 29,966 (392) 30,463
-------- -------- -------- -------- --------
Cash and cash equivalents at end
of period $ -- $ -- $ 29,467 $ (5,532) $ 23,935
======== ======== ======== ======== ========
16
17
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 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
IDP are included in the Flowserve Pump Division and a portion of its service
business in Flow Solutions Division from the date of acquisition. The Company
evaluates segment performance and allocates resources based on profit or loss
excluding integration expense, 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.
FLOWSERVE FLOW CONSOLIDATED
THREE MONTHS ENDED MARCH 31, 2001 PUMP SOLUTIONS FLOW CONTROL ALL OTHER TOTAL
- --------------------------------- ---------- ---------- ------------ ---------- ------------
SALES TO EXTERNAL CUSTOMERS $ 223,497 $ 151,881 $ 67,651 $ 1,006 $ 444,035
INTERSEGMENT SALES 1,201 5,058 1,721 (7,980) --
SEGMENT OPERATING INCOME (BEFORE INTEGRATION
EXPENSE) 18,116 18,051 8,385 (7,083) 37,469
IDENTIFIABLE ASSETS $1,662,265 $ 440,113 $ 196,686 $ (261,043) $2,038,021
Flowserve Flow Consolidated
Three months ended March 31, 2000 Pump Solutions Flow Control All Other Total
- --------------------------------- ---------- ---------- ------------ ---------- ------------
Sales to external customers $ 72,588 $ 145,922 $ 65,261 $ 1,538 $ 285,309
Intersegment sales 845 2,958 2,508 (6,311) --
Segment operating income 3,932 16,651 7,775 (6,912) 21,446
Identifiable assets $ 223,655 $ 434,173 $ 210,303 $ 96,882 $ 965,013
Reconciliation of the total segment operating income before integration
expense to consolidated earnings before income taxes follows:
Three Months Ended March 31,
2001 2000
-------- --------
Total segment operating income (before integration expense) $ 44,552 $ 28,358
Corporate expenses and other 7,083 6,912
Integration expense 19,139 --
Net interest expense 31,810 6,206
Other income (135) (2,900)
-------- --------
Net (loss) earnings before income taxes $(13,345) $ 18,140
======== ========
17
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS -- THREE MONTHS ENDED MARCH 31, 2001
In general, results for the first quarter of 2001 were higher than the
corresponding period in the previous year due to the Company's acquisition of
Ingersoll-Dresser Pump Company (IDP), on August 8, 2000. This acquisition is
discussed in further detail in the Liquidity and Capital Resources section of
this Management Discussion and Analysis.
Sales increased 55.6% to $444.0 million for the three months ended March
31, 2001, compared with $285.3 million for the same period in 2000. Pro forma
sales in the first quarter of 2000, including the results of IDP, were $460.2
million. Sales for the quarter compared to last year on a pro forma basis were
adversely affected by an unfavorable currency translation of approximately 2%,
temporary inefficiencies resulting from the integration of IDP, and the
divestiture of product lines in 2000 to comply with the Department of Justice
consent decree to acquire IDP. 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 consistent with the first quarter of
2000 at 45%.
Bookings, or incoming orders for which there are purchase commitments, were
$496.3 million, 59.7% higher than the first quarter of 2000 when bookings were
$310.7 million. Pro forma bookings in the first quarter of 2000 were $539.8
million. The decline in bookings on a pro forma basis was primarily due to a
large project recorded by IDP in the prior year. Bookings were also adversely
affected by an unfavorable currency translation of approximately 3%.
BUSINESS SEGMENTS
Flowserve manages its operations through three business segments: Flowserve
Pump Division (FPD), for engineered and industrial pumps; Flow Solutions
Division (FSD) for precision mechanical seals and flow management services; and
Flow Control Division (FCD) for automated and manual quarter-turn valves,
control valves, nuclear valves and valve actuators.
Sales and operating income before integration expense for each of the three
business segments are:
FLOWSERVE PUMP DIVISION
-----------------------
Three Months Ended
March 31,
(In millions of dollars) 2001 2000
- ------------------------ -------- -------
Sales $ 224.7 $ 73.4
Operating income 18.1 3.9
The sales increase in 2001 was due to the acquisition of IDP. On a pro
forma basis, revenues were $233.4 million in the first quarter of 2000. The
sales decrease on a pro forma basis resulted from temporary inefficiencies
associated with the integration of IDP and unfavorable currency translation
which reduced sales by about 3% quarter-over-quarter.
Operating income before integration expense, increased 364% from prior
period of $3.9 million and 484% from pro forma results of $3.1 million.
Operating income as a percentage of sales increased to approximately 8.1% in
2001 from about 5.3% in the prior-year period and 1.3% in 2000 on a pro forma
basis. The increase primarily resulted from the synergy savings realized from
the IDP integration activities.
18
19
FLOW SOLUTIONS DIVISION
-----------------------
Three Months Ended
March 31,
------------------
(In millions of dollars) 2001 2000
- ------------------------ -------- -------
Sales $ 156.9 $ 148.9
Operating income 18.1 16.7
Sales were higher than the prior-year period primarily due to the inclusion
of a portion of IDP's service repair business in 2001. Pro forma sales were
$163.8 million in the first quarter of 2000. The decrease from pro forma sales
was due to temporary integration dissynergies and an unfavorable currency
translation which reduced sales by about 2%.
Operating income before integration expense, as a percentage of sales,
increased to 11.5% from 11.2% in 2000 on an as reported basis and 11.3% on a pro
forma basis. Current quarter results were adversely impacted by inefficiencies
resulting from the integration of IDP's service business and period costs
related to the previously announced restructure of the Company's seal business.
FLOW CONTROL DIVISION
---------------------
Three Months Ended
------------------
March 31,
(In millions of dollars) 2001 2000
- ------------------------ ------ ------
Sales $ 69.4 $ 67.8
Operating income 8.4 7.8
Sales increased slightly over the prior year despite an unfavorable
currency translation which reduced sales by about 2%.
Operating income as a percentage of sales was 12.1% in the first quarter of
2001, compared with 11.5% in 2000. The improved operating margin in 2001 was
primarily due to efficiency improvements.
CONSOLIDATED RESULTS
The gross profit margin was 31.0% for the three months ended March 31,
2001, compared with 34.8% for the same period in 2000. The decrease was
primarily due to the acquisition of IDP as IDP's margins historically are lower
than the balance of the Company. The Company's margin increased 130 basis points
when compared to the first quarter 2000 pro forma margin of 29.7% This
improvement primarily resulted from manufacturing integration synergies and
productivity improvements.
Selling, general and administrative expense as a percentage of net sales
was 22.5% for the quarter ended March 31, 2001, compared with 27.3% in the
prior-year period and 24.9% in 2000 on a pro forma basis. The decrease from the
prior year percentages was due to IDP integration savings and productivity
improvements.
Operating income before integration expense of $37.5 million increased 75%
over reported and 66% over pro forma quarterly comparisons. The improvement
reflects synergy benefits related to the acquisition and integration of IDP and
productivity improvements.
Net interest expense during the first quarter of 2001 was $31.8 million,
compared with $6.2 million in the same period in 2000 due to the increased
borrowing levels required to acquire IDP and the amortization of deferred
financing fees related to the new debt.
Other income was $0.1 million in the first quarter of 2001 compared with
$2.9 million of income in the same period in 2000. The 2000 amounts resulted
primarily from the quarterly mark-to-market adjustment required at the time
under the provisions of EITF No. 97-14 "Accounting for Deferred Compensation
Agreements Where Amounts Earned are Held in a Rabbi Trust and Invested". Due to
an amendment the Company made in the deferred compensation plans during the
fourth quarter of 2000, this adjustment is no longer applicable.
The Company's effective tax rate for the first quarter of 2001 was 36.0%
compared with 34.5% in the first quarter of 2000. The increase was due to the
acquisition.
Earnings before integration expense for the first quarter of 2001 were $3.7
million or $0.10 per share compared to a loss of $4.0 million or $0.11 per share
in the first quarter of 2000 on a
19
20
pro forma basis. Integration expense of $19.1 million in 2001 related to period
costs associated with the integration of the IDP acquisition. Net earnings for
the first quarter of 2001 were a loss of $8.5 million or $0.22 per share,
compared to income of $11.9 million or $0.31 per share for the same period in
2000.
RESTRUCTURING
In August 2000, in conjunction with the acquisition of IDP, the Company
initiated a restructuring program designed to reduce costs and to eliminate
excess capacity by consolidating facilities. The Company's actions, approved and
committed to in the third quarter of 2000, are expected to result in the net
reduction of approximately 1,200 positions and are expected to result in at
least $75 million in annual synergy savings upon estimated completion before the
end of 2001. The Company expects the cost of achieving these synergies will be
no more than $150 million. The program includes the closure of IDP's former
headquarters, the closure or significant downsizing of a number of pump
manufacturing facilities, service and repair centers, and reduction of sales and
sales support personnel. The Company currently estimates that the costs
associated with the restructuring portion of the program will be approximately
$68 million. The Company had originally estimated these costs to be
approximately $61 million. The increase from the original estimate is primarily
due to updated actuarial information for post-retirement and pension expense
relating to a plant closure. This increase was offset by a non-cash
reclassification from the restructuring accrual to post-retirement benefits and
pension liabilities which resulted in a net reduction to the accrual of $8.8
million during the fourth quarter of 2000.
Approximately $44 million of the total cost relates to the IDP operations
acquired and $28 million has been capitalized 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 $24 million relates to the
Flowserve operations and was recorded as restructuring expense in 2000. The
balance of the $150 million in costs is recorded as integration expense as
incurred.
During the first three months of 2001, the Company incurred $19.1 million
in integration costs in conjunction with this program.
As of March 31, 2001, the program had resulted in a net reduction of 1,139
employees. Expenditures charged to the 2000 restructuring reserve were:
Other
Exit
Severance Costs Total
-------- -------- --------
Balance at August 16, 2000 $ 45,980 $ 14,832 $ 60,812
Cash expenditures (18,645) (2,434) (21,079)
Net non-cash reduction (8,849) -- (8,849)
-------- -------- --------
Balance at December 31, 2000 $ 18,486 $ 12,398 $ 30,884
CASH EXPENDITURES (5,729) (4,029) (9,758)
-------- -------- --------
BALANCE AT MARCH 31, 2001 $ 12,757 $ 8,369 $ 21,126
-------- -------- --------
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 reduction in workforce at those other locations.
The 1999 restructuring program is expected to result in a net reduction of
approximately 275 employees at a cost of $12.9 million upon estimated completion
during the second quarter of 2001. In addition, exit costs associated with the
facilities closings were $3.0 million. As of March 31, 2001, the program has
resulted in a net reduction of 268 employees.
20
21
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities for the first three months of 2001
were significantly below the same period in 2000. The decrease in cash flows in
2001 was primarily due to the payment of accrued interest and payments relating
to the IDP restructuring and integration programs.
Capital expenditures, net of disposals, were $3.5 million during the first
three months of 2001, compared with $4.4 million in the first three months of
2000. Capital expenditures were funded primarily by operating cash flows.
ACQUISITION
In August 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. As part of the purchase, the Company acquired $25 million in cash. The
seller also agreed to provide for severance for certain employees and costs
related to the accelerated closure of several U.S. facilities which we estimated
at $52 million. The transaction, which was accounted for as a purchase, was
financed with a combination of senior secured financing and senior subordinated
notes. Upon closing of the transaction, the existing Company debt was also
refinanced.
FINANCING
During the third quarter of 2000, in connection with the acquisition of
IDP, 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 plus a credit spread, or the Prime Rate plus a credit spread, at the
option of the Company. At March 31, 2001, the interest rate(s) on the term loans
were 8.00% and 7.6875% relating to the Tranche A loan and 8.75% and 8.4375%
relating to the Tranche B loan. The term loans require scheduled principal
payments beginning June 30, 2001. 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 March 31, 2001, $50.0 million of the
revolving credit was drawn and $744.7 million of the term loans were
outstanding.
The scheduled principal payments of the term loans outstanding at March 31,
2001 are summarized as follows: $17.8 million in 2001, $44.5 million in 2002,
$59.4 million in 2003, $63.3 million in 2004, $67.3 million in 2005, $105.9
million in 2006, $257.4 million in 2007 and $129.1 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 March 31, 2001, $31.9 million of letters of
credit had been issued under the facility. This, coupled with the $50.0 million
in borrowings under the facility, left the Company with $218.1 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 U.S. dollar tranche and a Euro tranche, that are non-callable for 5
years. Proceeds of $285.9 million from the dollar tranche, and EUR 98.6 million
from the Euro tranche equivalent to $89.2 million, were also used in completing
the IDP acquisition. The notes, issued at a fixed rate of 12.25%, were
originally priced at a discount to yield 12.50%, and have no scheduled principal
payment prior to maturity in August 2010. At August 2005, the notes become
callable at a redemption price of 106.125%. At August of each subsequent year,
the notes are callable at
21
22
104.083%, 102.042% and 100.000% for 2006, 2007 and 2008 and thereafter,
respectively. Interest on the notes is payable semi-annually, with the first
payment occurring 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 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.
At March 31, 2001, total net debt was 81.9% of the Company's capital
structure, compared with 78.1% at December 31, 2000. The interest coverage ratio
of the Company's indebtedness was 1.5 times interest at March 31, 2001, compared
with 2.0 times interest at December 31, 2000.
22
23
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 past and future acquisitions 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
associated with the implementation of systems, 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, the
Company's ability to meet the financial covenants and other requirements of its
financing agreements. The Company undertakes no obligation to publicly update or
revise any forward-looking statement as a result of new information, future
events or otherwise.
23
24
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 March 31, 2001, given the effect of
interest rate swaps held by the Company, the Company had approximately $594.7
million of variable-rate debt obligations outstanding with a weighted average
interest rate of 8.452%. A hypothetical increase of 100-basis points in the
interest rate for these borrowings, assuming debt levels at March 31, 2001,
would change interest expense by approximately $1.5 million for the three months
ended March 31, 2001.
The Company employs a foreign currency hedging strategy to minimize
potential losses in earnings or cash flows from unfavorable foreign currency
exchange rate movements. Foreign currency exposures arise from transactions,
including firm commitments and anticipated transactions, denominated in a
currency other than an entity's functional currency and from foreign-denominated
revenues and profits translated back into U.S. dollars. Based on the sensitivity
analysis at March 31, 2001, a 10% adverse change in the foreign currency
exchange rates would impact the Company's results of operation by $0.3 million.
The primary currencies to which the Company has exposure are the Euro
currencies, the British pound, the Brazilian real, the Canadian dollar, the
Mexican peso, the Japanese yen, the Singapore dollar, and the Australian dollar.
The Company adopted SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, and corresponding amendments on January 1, 2001. In
accordance with the transition provisions of SFAS 133, the Company recorded a
cumulative-effect adjustment in other comprehensive income as of January 1, 2001
of $1.3 million representing the current fair-value of hedging instruments. Of
this amount, $3.4 million related to foreign currency forward contracts offset
by $2.1 million related to interest rate swap agreements.
The Company reclassified the transition adjustment relating to foreign
currency forward contracts to earnings during the first quarter of 2001. At
March 31, 2001, the fair-value of the hedging instruments is a liability of $7.5
million and included in other comprehensive income. The Company expects that
within the next twelve months it will reclassify as expense $3.6 million of this
amount recorded in accumulated other comprehensive income.
The Company is party to forward contracts for purposes of hedging certain
transactions denominated in foreign currencies. The Company has a
risk-management and derivatives policy statement outlining the conditions in
which the Company can enter into hedging or forward transactions. The maximum
length of the contracts currently in place as of March 31, 2001 is approximately
2 years.
The Company is exposed to credit-related losses in the event of
nonperformance by counterparties to financial instruments, but it expects all
counterparties to meet their obligations given their high credit ratings.
The Company, as part of its risk management program, is party to interest
rate swap agreements for the purpose of hedging its exposure to floating
interest rates on certain portions of its debt. As of March 31, 2001, the
Company had $150 million of notional amount in
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outstanding interest rate swaps with third parties. The maximum length of the
interest rate swaps currently in place as of March 31, 2001 is approximately 6
years.
All derivatives are recognized on the balance sheet at their fair-value. On
the date that the Company enters into a derivative contract, it designates the
derivative as (1) a hedge of (a) a forecasted transaction or (b) the variability
of cash flows that are to be received or paid in connection with a recognized
asset or liability (a "cash flow" hedge); or (2) a foreign-currency fair-value
or cash flow hedge (a "foreign currency" hedge). Changes in the fair-value of a
derivative that is highly effective as -- and that is designated and qualifies
as -- a cash flow hedge, to the extent that the hedge is effective, are recorded
in other comprehensive income, until earnings are affected by the variability of
cash flows of the hedged transaction (e.g., until periodic settlements of a
variable-rate asset or liability are recorded in earnings). Any hedge
ineffectiveness (which represents the amount by which the changes in the
fair-value of the derivative exceed the variability in the cash flows of the
forecasted transaction) is recorded in current-period earnings. Changes in the
fair-value of a derivative that is highly effective as - and that is designated
and qualifies as -- a foreign-currency hedge is recorded in other comprehensive
income, since it satisfies the criteria for a cash-flow hedge. As of March 31,
2001, all hedges outstanding were highly effective.
The Company formally documents all relationships between hedging
instruments and hedge items, as well as its risk-management objective and
strategy for undertaking various hedge transactions. This process includes
linking all derivatives that are designated as fair-value, cash flow, or
foreign-currency hedges to (1) specific assets and liabilities on the balance
sheet or (2) specific firm commitments or forecasted transactions. The Company
also formally assesses (both at the hedge's inception and on an ongoing basis)
whether the derivatives that are used in hedging transactions have been highly
effective in offsetting changes in the fair value or cash flows of hedged items
and whether those derivatives may be expected to remain highly effective in
future periods. When it is determined that a derivative is not (or has ceased to
be) highly effective as a hedge, the Company discontinues hedge accounting
prospectively, as discussed below.
The Company discontinues hedge accounting prospectively when (1) it
determines that the derivative is no longer effective in offsetting changes in
the fair-value or cash flows of a hedge item (including hedged items such as
firm commitments or forecasted transactions); (2) the derivative expires or is
sold, terminated, or exercised; (3) it is no longer probable that the forecasted
transaction will occur; or (4) management determines that designating the
derivative as a hedging instrument is no longer appropriate.
When the Company discontinues hedge accounting because it is no longer
probable that the forecasted transaction will occur in the originally expected
period, the gain or loss on the derivative remaining in accumulated other
comprehensive income is reclassified into earnings. In all situations in which
hedge accounting is discontinued and the derivative remains outstanding, the
Company will carry the derivative at its fair-value on the balance sheet,
recognizing changes in the fair-value in current-period earnings.
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PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
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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
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Renee J. Hornbaker
Vice President and Chief Financial Officer
Date: May 9, 2001
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