THIS PROSPECTUS SUPPLEMENT RELATES TO AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933, BUT IS NOT COMPLETE AND MAY BE CHANGED. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
Filed Pursuant to Rule 424(b)(2)
Registration No. 333-62044
SUBJECT TO COMPLETION, DATED APRIL 3, 2002
PRELIMINARY PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED JULY 2, 2001
8,000,000 Shares
[Flowserve LOGO]
Common Stock
------------------
Our common stock is listed on The New York Stock Exchange under the symbol
"FLS". The last reported sale price on April 1, 2002 was $32.35 per share.
The underwriters have an option to purchase a maximum of 1,200,000
additional shares to cover over-allotments of shares.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "SUPPLEMENTAL RISK
FACTORS" BEGINNING ON PAGE S-12 OF THIS PROSPECTUS SUPPLEMENT AND "RISK FACTORS"
BEGINNING ON PAGE 6 OF THE ACCOMPANYING PROSPECTUS.
<Table>
<Caption>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS FLOWSERVE
-------------- -------------- --------------
Per Share............................................ $ $ $
Total................................................ $ $ $
</Table>
Delivery of the shares of common stock will be made on or about , 2002.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus supplement or the prospectus to which it relates is truthful or
complete. Any representation to the contrary is a criminal offense.
Joint Lead Managers and Bookrunners
CREDIT SUISSE FIRST BOSTON MERRILL LYNCH & CO.
------------------
BANC OF AMERICA SECURITIES LLC
BEAR, STEARNS & CO. INC.
The date of this prospectus supplement is , 2002.
------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<Table>
<Caption>
PAGE
----
ABOUT THIS PROSPECTUS SUPPLEMENT...... ii
CURRENCY TRANSLATIONS................. ii
SUMMARY............................... S-1
SUPPLEMENTAL RISK FACTORS............. S-12
FORWARD-LOOKING STATEMENTS............ S-15
USE OF PROCEEDS....................... S-16
PRICE RANGE OF COMMON STOCK........... S-17
DIVIDEND POLICY....................... S-17
CAPITALIZATION........................ S-18
UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS................ S-20
SELECTED HISTORICAL FINANCIAL DATA OF
FLOWSERVE CORPORATION............... S-27
MANAGEMENT'S DISCUSSION AND
ANALYSIS............................ S-29
</Table>
<Table>
<Caption>
PAGE
----
MANAGEMENT............................ S-43
DESCRIPTION OF THE IFC PURCHASE AND
SALE AGREEMENT...................... S-46
UNDERWRITING.......................... S-51
NOTICE TO CANADIAN RESIDENTS.......... S-53
LEGAL MATTERS......................... S-54
EXPERTS............................... S-54
WHERE YOU CAN FIND MORE INFORMATION... S-55
INCORPORATION OF INFORMATION WE FILE
WITH THE SEC........................ S-55
INDEX TO COMBINED FINANCIAL STATEMENTS
OF INVENSYS FLOW CONTROL............ F-1
</Table>
PROSPECTUS
<Table>
<Caption>
PAGE
----
ABOUT THIS PROSPECTUS................. 2
WHERE YOU CAN FIND MORE INFORMATION... 3
INCORPORATION OF INFORMATION WE FILE
WITH THE SEC........................ 3
FORWARD-LOOKING STATEMENTS............ 4
ABOUT FLOWSERVE CORPORATION........... 5
RISK FACTORS.......................... 6
USE OF PROCEEDS....................... 10
RATIO OF EARNINGS TO FIXED CHARGES.... 10
DESCRIPTION OF DEBT SECURITIES AND
GUARANTEES.......................... 11
DESCRIPTION OF CAPITAL STOCK.......... 19
PLAN OF DISTRIBUTION.................. 22
VALIDITY OF SECURITIES................ 24
EXPERTS............................... 24
</Table>
------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
i
ABOUT THIS PROSPECTUS SUPPLEMENT
This prospectus supplement contains the terms of this offering. A
description of our capital stock is contained in the accompanying prospectus.
This prospectus supplement, or the information incorporated by reference herein
or in the accompanying prospectus, may add, update or change information in the
accompanying prospectus.
It is important for you to read and consider all information contained in
this prospectus supplement and the accompanying prospectus, including the
documents incorporated by reference herein or therein, in making your investment
decision. You should also read and consider the information in the documents we
have referred you to in the section entitled "Where You Can Find More
Information".
CURRENCY TRANSLATIONS
This prospectus supplement contains financial information related to
certain divisions of Invensys plc, a company organized under the laws of England
and Wales. Invensys and these divisions publish their financial statements in
pounds sterling. The combined results of operations and other financial data of
these divisions are translated into U.S. dollars using the average exchange
rates in effect during the respective periods and the combined balance sheet
data of these divisions is translated into U.S. dollars using the exchange rates
in effect at the respective balance sheet dates. See "Summary -- Summary
Historical Combined Financial Information of IFC".
ii
SUMMARY
This summary highlights selected information from this prospectus
supplement and the accompanying prospectus. This summary may not contain all of
the information that may be important to you. You should read this entire
prospectus supplement and the entire accompanying prospectus, including the
financial data and other information incorporated by reference, before making an
investment decision. Unless the context otherwise requires, when used in this
prospectus supplement, references to "Flowserve", "we", "our" and "us" refer to
Flowserve Corporation and its subsidiaries.
FLOWSERVE
We believe that we are the largest manufacturer and aftermarket service
provider of comprehensive flow control systems in the world. We have been in the
flow control industry for over 125 years. We develop and manufacture
precision-engineered flow control equipment for critical service applications
where high reliability is required. The flow control system components we
produce include pumps, valves and mechanical seals. We manage our operations
through three business segments: (1) Pump Division (FPD) for engineered and
industrial pumps, (2) Flow Control Division (FCD) for automated and manual
quarter-turn valves, control valves, nuclear valves and valve actuators and (3)
Flow Solutions Division (FSD) for precision mechanical seals and flow management
services.
Our products and services are used in several industries, including
petroleum, chemical, power generation and water treatment. Our sales mix by
industry of end use in 2001 consisted of petroleum (29%), chemical (24%), power
(20%), water resources (7%) and general industry and other (20%). Our revenues
by geographic region in 2001 consisted of the United States (52%), Europe, the
Middle East and Africa (26%), Latin America (9%), Asia (8%) and Canada (5%). In
2001, we had sales of $1.9 billion, EBITDA, before special items, of $279.4
million and a net loss of $1.5 million.
We believe that we have the most comprehensive product portfolio and most
geographically diversified scope of operations in the industry. We sell our
products and services to more than 1,000 companies, including some of the
world's leading engineering and construction firms, original equipment
manufacturers, or OEMs, distributors and end users. Some of our top customers
include ABB, BASF, Bayer, Bechtel, BP, Dow Chemical, Duke Energy, DuPont,
Eastman Chemical, ExxonMobil, Royal Dutch/Shell, Aramco, ChevronTexaco, Total
Elf-FINA and the United States Navy. No single customer accounted for more than
3% of our total revenues in 2001.
We are the second largest manufacturer of pumps and have an installed base
of approximately 1,100,000 pumps worldwide, which we believe represents the most
extensive installed base of engineered and industrial pumps in the industry. We
believe we are the largest independent provider of aftermarket products and
services and offer a full range of parts and services to maintain this installed
base. Our aftermarket products and services business provides us with a steady
source of revenues at higher margins than original equipment sales and allows us
to be in frequent contact with our customers, provide better customer service
and generate additional sales. In 2001, we derived approximately 51% of our
sales from aftermarket products and services.
IFC ACQUISITION
On March 21, 2002, we entered into a Purchase and Sale Agreement with
Invensys plc pursuant to which we agreed to acquire Invensys' flow control
division (IFC) for an aggregate cash purchase price of $535.0 million, subject
to adjustment pursuant to the terms of the Purchase and Sale Agreement. We and
Invensys currently expect to close the acquisition of IFC in May 2002. We refer
to the acquisition of IFC in this prospectus supplement as the "IFC
Acquisition". For a complete discussion of the terms of the Purchase and Sale
Agreement, see "Description of the IFC Purchase and Sale Agreement". The IFC
Acquisition, if consummated, will make us the second largest manufacturer of
valves in the world and will provide us with a more balanced mix of revenue
among pumps, valves and seals and from different geographic regions and end
markets.
S-1
IFC is one of the world's foremost manufacturers of valves, actuators and
associated flow control products, including steam systems. IFC was formed in
1999 through the combination of the flow control divisions of BTR plc and Siebe
plc. IFC's 12 operating companies have been selling flow control products for an
average of approximately 85 years. IFC has a comprehensive portfolio of widely
recognized and industry leading brands, offering high quality engineered
solutions to its customers. IFC's customer base consists of businesses in
several industries, including chemical, petroleum, power, water resources and
pharmaceutical. IFC's sales mix by industry of end use for the fiscal year ended
March 31, 2001, consisted of chemical (31%), petroleum (17%), power (16%), water
resources (6%) and general industry and other (30%), which includes
pharmaceutical (6%). IFC's revenue by geographic region for the fiscal year
ended March 31, 2001, consisted of Europe, the Middle East and Africa (47%), the
United States (40%), Asia (7%), Latin America (3%) and Canada (3%).
For the fiscal year ended March 31, 2001, IFC had sales of $500.4 million,
EBITDA, before special items, of $82.3 million and net earnings of $4.5 million.
We anticipate that for the fiscal year ended March 31, 2002, IFC will generate
sales of approximately $516 million, a 3.1% increase over the prior year, and
EBITDA, before special items, of approximately $87 million, a 5.7% increase over
the prior year.
We intend to integrate IFC into our Flow Control Division (FCD). FCD's
sales mix by industry of end use for 2001 consisted of chemical (50%), petroleum
(14%), power (14%), water resources (1%) and general industry and other (21%).
FCD's revenue by geographic region for 2001 consisted of the United States
(55%), Europe, the Middle East and Africa (29%), Asia (12%), Latin America (2%)
and Canada (2%). For 2001, FCD had sales of $271.2 million and EBITDA, before
special items, of $39.6 million.
We expect to realize a number of significant strategic and competitive
benefits as a result of the IFC Acquisition, including the following:
- Expanded Geographic and Market Opportunities. We expect the IFC
Acquisition to provide us with opportunities to expand both our
geographic and industry reach. IFC's significant global presence,
particularly in Europe, will enhance our ability to capitalize on the
trend among global customers toward consolidated sourcing of their flow
control products. The IFC Acquisition will also make us the second
largest manufacturer of valves in the world and provide us with a more
balanced revenue mix by strengthening our presence in valve products in
the petroleum, power, water resources, pharmaceutical and general
industry markets. In addition, as IFC's historical focus has been more on
valve products than on service, the IFC Acquisition will provide us with
an opportunity to service the significant portion of IFC's installed base
of valves whose service needs are currently being provided by third
parties.
- Broad Line of Complementary Product Offerings. The IFC Acquisition will
provide us with a broad line of valve and actuator products to supplement
our existing valve business by adding strong brands and an established
customer base. IFC's portfolio of products complements our existing valve
product offerings with limited overlap.
- Cost Savings and Manufacturing Efficiencies. As a result of the IFC
Acquisition, we expect to achieve cost savings of $10 million to $15
million per year primarily from the consolidation of manufacturing
facilities. Despite the limited overlap in products, we believe these
savings are possible due to the compatibility of the products and
similarity in manufacturing processes. In addition, cost savings will be
achieved from the elimination of duplicative administrative functions and
increased procurement opportunities. Due to timing, these projected
synergies will not have a significant impact on 2002 results. The
consolidation necessary to yield these projected savings, at an expected
cost of three times projected yearly synergies, should be complete within
approximately 18 months from the closing of the IFC Acquisition.
S-2
- Enhanced Research and Development Capabilities. We believe that IFC is
one of the most innovative companies in the valve industry, particularly
with respect to the application of automation technology in its products.
We expect to leverage our combined research and development efforts to
develop new and improved products that better meet the needs of our
customers.
INDUSTRY
Based on industry sources, we estimate that the markets we serve in the
flow control industry generate $50 billion to $60 billion per year in worldwide
sales of pumps, valves, seals and aftermarket services. We estimate annual
spending for such items to be as follows: pumps ($20 billion to $25 billion),
valves ($20 billion to $22 billion), seals ($2 billion to $3 billion) and
aftermarket service ($8 billion to $10 billion).
Products and services in the flow control industry are sold to engineering
and construction firms, OEMs, distributors and end users throughout the world.
Of the three product types, at the time of the original equipment purchase,
pumps are generally the most expensive followed by valves then seals. Seals may
have to be replaced every few hours in highly corrosive applications, while
pumps can run for months or years before needing replacement. Despite the
consolidation trend over the past ten years, the flow control industry remains
highly fragmented. Competition for original equipment sales among the industry
leaders is primarily from a select group of large companies operating on a
global scale, and is generally based on price, technical expertise, delivery
times, breadth of product offerings, contractual terms, previous installation
history and reputation for quality and reliability.
COMPETITIVE STRENGTHS
GLOBAL LEADER IN FLOW CONTROL MARKET. We believe we are the largest
provider of comprehensive flow control systems in the world, offering an
extensive range of pumps, valves, mechanical seals and aftermarket services. We
believe we are the largest pump manufacturer serving the petroleum, chemical and
power industries and we are the second largest overall pump manufacturer. Our
acquisition of IFC will make us the second largest valve manufacturer as well.
We believe we are also the largest independent provider of aftermarket products
and services for the flow control industry. Many of our large customers operate
globally and seek providers like us that can offer a broad range of products and
services on a global basis.
COMPREHENSIVE PRODUCT OFFERINGS WITH LEADING BRANDS. We believe we offer
the most comprehensive array of products and services in the industry. This
breadth enables us to provide a "one-stop shop" for our customers, who
increasingly require comprehensive flow control solutions including pumps,
valves, actuators, positioners, seals and services. Many of our brands and IFC's
brands have an extensive history within our industry and are well-known for
their quality, reliability and performance. Our brand identity has created
customer loyalty and helps us capture additional business, as well as maintain
existing business, particularly as our customers look to procure equipment from
fewer manufacturers and increase efficiency and reliability in closely monitored
environments.
LARGE INSTALLED EQUIPMENT BASE WITH STABLE, CONSISTENT AFTERMARKET
REVENUE. We believe our global installed base of approximately 1,100,000 pumps
is the largest in the industry and provides a unique platform to grow our
aftermarket services business. A high percentage of the total lifecycle cost of
a pump consists of aftermarket products and services, such as replacement parts,
mechanical seals and maintenance. Our installed base continues to require
maintenance and the installation of replacement parts. Our installed base
provides us with a steady source of aftermarket revenues at higher margins than
our original equipment business. When outsourced, a majority of replacement
parts orders and aftermarket services business is awarded to the original
equipment manufacturer.
GLOBAL MANUFACTURING AND SERVICE CAPABILITIES. We believe we have one of
the most extensive global manufacturing, marketing and service networks in the
industry, with approximately 50 manufacturing facilities and approximately 150
service centers located in 30 countries. Our acquisition
S-3
of IFC will substantially expand our global reach, especially in Europe, the
Middle East and Africa. Our global operations help us serve our customers'
manufacturing and aftermarket service needs on a 24-hour basis. Original
equipment sales benefit from our global presence, as our customers often require
real-time design and engineering assistance for new projects. In addition,
following the IFC Acquisition, our network will provide us with a platform to
cross-sell our products and services to IFC's customers, as well as to offer IFC
products to our existing customers.
BROAD AND DIVERSE CUSTOMER BASE. We sell our products and services to more
than 1,000 companies globally, including the world's leading engineering and
construction firms, OEMs, distributors and end users. In 2001, no one customer
accounted for more than 3% of our revenues and our top ten customers accounted
for less than 15% of our revenues. We expect the acquisition of IFC to increase
the percentage of our valve and actuator revenue derived from the petroleum,
power, water resources, pharmaceutical and general industry end markets.
EXPERIENCED MANAGEMENT TEAM. Our senior management team has significant
experience in industrial manufacturing. In addition, this team has substantial
experience in the acquisition and integration of businesses, supply chain
management and lean manufacturing techniques, all of which represent activities
that are critical to our long-term growth strategy. Our operating division
managers are among the most experienced in the flow control industry, with an
average of more than 20 years of industry experience.
BUSINESS STRATEGY
In order to maintain our position as a market leader in the flow control
industry, while maximizing revenues and earnings, we seek to: (1) become the low
cost producer of flow control products, (2) grow revenues organically in excess
of the market rate and (3) continue to pursue strategic acquisitions. The key
elements of our strategy are as follows:
BECOME THE LOW COST PRODUCER. We continue to lower costs, enhance product
quality, improve manufacturing efficiency and increase product throughput. We
believe the initiatives that we have in process will improve the efficiency of
our overall operations and help increase our margins and profitability. The
initiatives we have in process and intend to undertake upon the acquisition of
IFC include the following:
- Integrate IFC and Realize Operating Synergies. We intend to integrate
IFC's business quickly into FCD in order to realize potential operating
and financial benefits. We expect to achieve these anticipated cost
savings and operating synergies primarily through: (1) consolidating
manufacturing facilities to reduce fixed costs and leverage resources,
(2) eliminating redundant administrative overhead and (3) realizing
volume procurement savings and other opportunities. We followed a similar
plan in integrating our acquisition of Ingersoll-Dresser Pump Company
(IDP), which we acquired in August 2000. As of December 31, 2001, we had
generated incremental cost savings from the IDP acquisition of
approximately $79 million, with an annual run rate of approximately $90
million, 20% higher than our originally announced target of $75 million.
We estimate that our integration of IFC will generate cost savings with
an annual run rate of $10 million to $15 million within approximately 18
months from the closing of the IFC Acquisition.
- Focus on Supply Chain Management. We utilize supply chain management to
reduce procurement costs. We have implemented several initiatives,
including consolidating vendors to receive a higher quantity-based
discount, creating alliances, standardizing procedures, negotiating more
favorable contract terms and conditions and forming dedicated teams for
procurement of raw materials on a company-wide basis. We believe that the
IFC Acquisition will provide us with additional opportunities to reduce
our procurement costs. IFC has pursued a number of successful sourcing
strategies to obtain raw materials at competitive prices through
suppliers in India and China. We intend to extend this program more
broadly to our combined operations.
- Increase Operational Efficiency. In 2001, we introduced a Continuous
Improvement Process, or CIP, throughout our company to increase our
operational efficiency. CIP utilizes tools such as lean
S-4
manufacturing, Six Sigma Methodology and constraint management to improve
quality and processes, reduce product cycle times and lower costs. The
Six Sigma Methodology is a statistically-based method of improving
product quality and streamlining manufacturing and transactional
processes, while constraint management identifies and assists in
alleviating bottlenecks in the production process. IFC has initiated
implementation of lean manufacturing and one-piece flow in all of its
facilities and we expect to capitalize on those efforts.
- Improve Working Capital Management. We are currently making improvements
to our utilization of working capital, with a particular focus on
improving the management of our inventory and accounts receivable. Our
efforts are comprehensive, involving all areas of our operations. In the
near term, we intend to focus on improving our results in inventory turns
and accounts receivable days sales outstanding. We have announced our
goal to reduce our working capital requirements by $70 million during
2002. Our planned consolidation of manufacturing facilities associated
with the IFC Acquisition should enable us to reduce our combined working
capital requirements, especially as they relate to inventory.
GROW REVENUES ORGANICALLY IN EXCESS OF MARKET RATE. Our "customer first"
philosophy, customer partnering relationships and emphasis on providing customer
solutions should enable us to grow our revenues. Our specific organic growth
initiatives include the following:
- Grow Our Aftermarket Services Business. Our substantial installed pump
base provides us with a strong platform from which to expand our
aftermarket services business. Customers are increasingly utilizing
third-party aftermarket service providers like us to reduce their fixed
costs and improve profitability and we are aggressively pursuing these
opportunities. Our acquisition of IFC, whose historical focus has been
more on valve products than service, will provide us with an additional
group of established customers to whom we can market our aftermarket
services and an opportunity to increase our aftermarket revenues.
- Introduce New Products. We are continuing to expand our business by
developing new, differentiated products in each of our business segments.
We work closely with our customers to develop new products or
enhancements to existing products that improve performance and meet their
needs. We also expect to benefit from IFC's expertise as one of the most
innovative companies in our industry, particularly with respect to the
application of automation technology in its products. We expect to be
able to leverage our research and development efforts and apply the
combined technology to our existing and new products.
- Expand Breadth of Products Across Customer Base. We will pursue
additional sales by leveraging our expanded breadth of products across a
larger customer base. As a result of the IFC Acquisition, we will be able
to add IFC's products to the portfolio of products offered to our
existing customers. We expect to benefit from our more comprehensive line
of products by capturing a greater share of projects and end user
opportunities.
- Sell Our Existing Products to New Geographic Markets and to New
Industries. We are continuing to expand our geographic and industry
reach with existing products. IFC will expand our sales and manufacturing
presence into new countries, allowing us to better serve existing
customers on a global basis and reach new customers in these markets. We
believe there are attractive growth opportunities in international
markets, particularly in Latin America and Asia, and we will continue to
leverage our global presence to further penetrate these markets. In
addition, IFC will expand our penetration of valve products, as measured
by percentage of revenue, in the petroleum, power, water resources,
pharmaceutical and general industry market segments, thereby reducing our
reliance on the chemical industry for sales of valves and actuators.
PURSUE STRATEGIC ACQUISITIONS. We intend to continue to be a consolidator
in our fragmented industry and to pursue complementary strategic acquisitions to
grow our business. We will continue to evaluate acquisitions in each of our
business segments. In evaluating potential acquisitions, we will focus on
opportunities to expand our customer base, broaden our product line, realize
operating synergies and enter
S-5
new markets. We target acquisitions that will be neutral to accretive to
earnings within twelve months of completion and can be financed in a manner that
will maintain leverage, as measured by the ratio of debt to EBITDA, before
special items, relatively constant with or below current leverage levels. Our
management team has extensive experience in acquiring and integrating companies,
with our company today being the product of 23 acquisitions since 1990 through
which more than a dozen facilities were closed or consolidated.
FINANCING FOR THE IFC ACQUISITION
We estimate that the cash funding requirements to consummate the IFC
Acquisition, including the payment of related transaction fees and expenses,
will be approximately $560 million. In order to finance the total cash funding
requirements for the IFC Acquisition, we will (1) issue common stock in this
offering, resulting in expected net proceeds of at least $200.0 million, and (2)
amend the terms of our existing senior credit facilities in the manner described
below and incur additional borrowings thereunder of up to $360.0 million.
Our existing senior credit facilities consist of the following three
facilities (with the following amounts outstanding as of March 31, 2002): (1) a
tranche A term loan facility with $249.7 million aggregate principal amount
outstanding, (2) a tranche B term loan facility with $468.8 million aggregate
principal amount outstanding and (3) a $300.0 million revolving credit facility
with $42.0 million aggregate principal amount outstanding. In connection with
the IFC Acquisition, we intend to amend the terms of our existing senior credit
facilities to provide for: (1) $99.8 million additional aggregate principal
amount of term loans under our existing tranche A term loan facility (we refer
to the additional borrowings under the tranche A term loan facility as the
"Incremental Tranche A Term Loan") and (2) a new tranche C term loan facility in
an aggregate principal amount of up to $730 million (we refer to this new term
loan as the "New Tranche C Term Loan"). Assuming the net proceeds from this
offering in excess of $200.0 million are used to reduce the amount of additional
borrowings under the amended senior credit facilities in the manner described
below, the aggregate principal amount of the New Tranche C Term Loan will be
$671.1 million, of which $468.8 million will be used to refinance our existing
tranche B term loan facility and $202.3 million will be used to finance the IFC
Acquisition. We refer to the portion of the New Tranche C Term Loan to be used
to refinance our existing tranche B term loan facility as the "Refinancing Loan"
and the portion of the New Tranche C Term Loan Facility to be used to finance
the IFC Acquisition as the "Incremental Tranche C Term Loan".
In the event we are unable to refinance our existing tranche B term loan
facility with the New Tranche C Term Loan, we intend to amend the terms of our
existing senior credit facilities to provide only for the Incremental Tranche A
Term Loan and the Incremental Tranche C Term Loan.
To the extent that the net proceeds from this offering exceed $200.0
million, we will either (1) reduce the amount of our additional borrowings under
the Incremental Tranche C Term Loan by the entire excess amount or (2) we will
apply such amount of the excess as is necessary to repay outstanding
indebtedness under our revolving credit facility, with any remaining excess
being used to reduce the amount of additional borrowings under the Incremental
Tranche C Term Loan.
The Incremental Tranche A Term Loan and the New Tranche C Term Loan are
currently in general syndication in the banking community. We have received
commitments from a syndicate of financial institutions for the Incremental
Tranche A Term Loan and the Incremental Tranche C Term Loan, but we have not
received commitments for the entire New Tranche C Term Loan. The amendment of
the terms of our existing senior credit facilities to provide for the
Incremental Tranche A Term Loan and the New Tranche C Term Loan, and to provide
for certain additional amendments necessary to consummate the IFC Acquisition,
will require the consent of lenders under our existing credit facilities
representing a majority of the outstanding loans and commitments under the
facilities.
S-6
THE OFFERING
Common stock offered by us.... 8,000,000 shares
Common stock to be outstanding
after this offering........... 53,310,922 shares
Use of proceeds............... We intend to use the net proceeds from this
offering, together with additional borrowings
under our amended senior credit facilities, to
finance the IFC Acquisition, to refinance our
existing tranche B term loan facility and to
pay transaction costs and expenses. In the
event that the IFC Acquisition is not
consummated, we will use the net proceeds from
this offering to repay a portion of the
outstanding indebtedness under our existing
senior credit facilities. See "Use of
Proceeds".
New York Stock Exchange
symbol........................ FLS
The number of shares of our common stock shown above to be outstanding
after this offering is based on the number of shares outstanding as of March 4,
2002, and excludes:
- 3,573,026 shares of treasury stock;
- 3,303,410 shares of common stock issuable upon the exercise of
outstanding stock options at a weighted average exercise price of $21.87
per share; and
- 799,845 shares of common stock reserved for additional grants under our
stock option plans.
Unless we indicate otherwise, the share information in this prospectus
supplement assumes the underwriters' option to cover over-allotments is not
exercised. See "Underwriting".
------------------
RISK FACTORS
You should carefully consider all of the information in this prospectus
supplement. In particular, you should evaluate the specific risk factors set
forth in the section entitled "Supplemental Risk Factors" in this prospectus
supplement and the section entitled "Risk Factors" in the accompanying
prospectus for a discussion of risks relating to an investment in our common
stock.
------------------
Our executive offices are located at 222 West Las Colinas Boulevard, Suite
1500, Irving, Texas 75039, and our telephone number is (972) 443-6500.
S-7
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL INFORMATION OF FLOWSERVE
CORPORATION
The historical consolidated financial information as of and for each of the
three years ended December 31, 2001 set forth below has been derived from our
audited consolidated financial statements and the related notes. The unaudited
pro forma consolidated results of operations and other financial data for the
twelve months ended December 31, 2001 set forth below give effect to the IFC
Acquisition, the financing for the IFC Acquisition, the refinancing of our
existing tranche B term loan facility and the application of the estimated net
proceeds of such financing as described under "Use of Proceeds", as if each had
occurred on January 1, 2001. The unaudited pro forma consolidated balance sheet
data as of December 31, 2001 set forth below gives effect to the IFC
Acquisition, the financing for the IFC Acquisition, the refinancing of our
existing tranche B term loan facility and the application of the estimated net
proceeds of such financing as described under "Use of Proceeds", as if each had
occurred on December 31, 2001. See "Unaudited Pro Forma Consolidated Financial
Statements" for a complete discussion of the assumptions underlying the pro
forma consolidated financial information below. You should read the following
summary historical and pro forma consolidated financial information in
conjunction with (1) our audited consolidated financial statements and the
related notes, (2) IFC's audited and unaudited combined financial statements and
the related notes, (3) the section entitled "Management's Discussion and
Analysis" and (4) the section entitled "Unaudited Pro Forma Consolidated
Financial Statements", each included or incorporated by reference in this
prospectus supplement.
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------------------
PRO FORMA
1999 2000 2001 2001
-------- -------- -------- ---------
(IN MILLIONS, EXCEPT PER SHARE DATA)
RESULTS OF OPERATIONS:
Sales............................................... $1,061.3 $1,538.3 $1,917.5 $2,442.2
Cost of sales....................................... 697.9 1,031.4 1,302.9 1,626.5
-------- -------- -------- --------
Gross profit........................................ 363.4 506.9 614.6 815.7
Selling, general and administrative expense....... 301.5 360.3 410.6 546.8
Restructuring and integration expense............. 30.1 54.6 61.8 69.2
-------- -------- -------- --------
Operating income.................................... 31.8 92.0 142.2 199.7
Interest expense, net............................. 14.7 70.3 118.1 124.4
Other income, net................................. (1.2) (1.5) (1.5) (4.3)
-------- -------- -------- --------
Earnings before income taxes........................ 18.3 23.2 25.6 79.6
Provision for income taxes........................ 6.1 7.9 9.2 32.2
-------- -------- -------- --------
Earnings before extraordinary items................. 12.2 15.3 16.4 $ 47.4
========
Extraordinary items, net of income taxes.......... -- (2.1) (17.9)
-------- -------- --------
Net earnings (loss)................................. $ 12.2 $ 13.2 $ (1.5)
======== ======== ========
PER SHARE:
Earnings before extraordinary items (basic and
diluted).......................................... $ 0.32 $ 0.40 $ 0.42 $ 1.00
Net earnings (loss) (basic and diluted)............. 0.32 0.35 (0.04)
Dividends paid...................................... 0.56 -- -- --
Book value(1)....................................... 8.23 8.14 9.18 12.31
Average shares outstanding.......................... 37.9 37.8 39.3 47.3
</Table>
S-8
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------------------
PRO FORMA
1999 2000 2001 2001
-------- -------- -------- ---------
(IN MILLIONS, EXCEPT PER SHARE DATA)
OTHER FINANCIAL DATA:
Bookings(2)......................................... $1,039.3 $1,521.6 $1,975.5 $2,511.2
EBITDA before special items(3)(4)................... 113.6 205.1 279.4 374.6
Net cash flows provided (used) by operating
activities........................................ 84.1 18.4 (47.9) 43.3
Depreciation and amortization....................... 39.6 57.0 73.9 102.5
Capital expenditures................................ 40.5 27.8 35.2 52.4
Net earnings per share before special items(4)...... 1.04 1.35 1.42 1.87
BALANCE SHEET DATA (AS OF END OF PERIOD):
Working capital..................................... $ 258.1 $ 464.0 $ 481.4 $ 622.8
Total assets........................................ 838.2 2,110.1 2,052.0 2,693.8
Long-term debt due after one year................... 198.0 1,111.1 996.2 1,298.4
Shareholders' equity................................ 308.3 304.9 411.0 650.1
</Table>
- ---------------
(1) Calculated as shareholders' equity as of the end of the period divided by
common shares issued as of the end of the period, less shares held in
treasury. Common shares issued for purposes of calculating the pro forma
book value per share include the number of shares we expect to issue in this
offering.
(2) Bookings are the amount of incoming new orders for which there are purchase
commitments.
(3) EBITDA means net earnings before interest, income taxes, depreciation and
amortization. EBITDA is commonly used as an analytical indicator and also
serves as a measure of leverage capacity and debt servicing ability. EBITDA
should not be considered as an alternative to net income, cash flows from
operating activities or any other items calculated in accordance with
accounting principles generally accepted in the United States (US GAAP) or
as an indicator of our operating performance. The definition of EBITDA used
in this prospectus supplement as it relates to our company may differ from
the definition of EBITDA used by other companies.
(4) Special items in 1999 include restructuring and integration expense of $30.1
million, other nonrecurring items for inventory and fixed asset impairment
of $5.1 million and costs related to facility closures of $5.8 million.
Special items in 2000 include restructuring and integration expense of $54.6
million and an extraordinary loss of $2.1 million net of tax. Special items
in 2001 actual results include restructuring and integration expense of
$61.8 million and an extraordinary loss of $17.9 million net of tax. Special
items in 2001 pro forma results include restructuring and integration
expense of $69.2 million and an extraordinary loss of $17.9 million net of
tax. Net earnings per share before special items should not be considered as
an alternative to net earnings (loss) per share calculated in accordance
with US GAAP or as an indicator of our operating performance.
S-9
SUMMARY HISTORICAL COMBINED FINANCIAL INFORMATION OF IFC
The following summary historical combined financial information is derived
from IFC's reconciliation of its combined financial statements to US GAAP. The
summary combined results of operations and other financial data and the summary
combined balance sheet data are translated into U.S. dollars in the manner set
forth below. You should read the following summary historical combined financial
information in conjunction with IFC's audited and unaudited combined financial
statements and the related notes and "Management's Discussion and
Analysis -- IFC", each included elsewhere in this prospectus supplement.
<Table>
<Caption>
LAST 12
NINE MONTHS NINE MONTHS MONTHS
YEAR ENDED MARCH 31, ENDED ENDED ENDED
--------------------------- DECEMBER 30, DECEMBER 29, DECEMBER 29,
2000 2001 2000 2001 2001(1)
------------ ------------ ------------ ------------ ------------
(IN MILLIONS)
RESULTS OF OPERATIONS(2):
Sales.............................. $555.5 $500.4 $363.6 $386.7 $524.7
Cost of sales...................... 328.8 306.4 230.7 243.8 320.7
------ ------ ------ ------ ------
Gross profit....................... 226.7 194.0 132.9 142.9 204.0
Selling, general and
administrative expense........ 167.7 147.4 105.8 102.0 143.9
Restructuring and integration
expense....................... 21.2 27.3 24.5 4.5 7.4
------ ------ ------ ------ ------
Operating income................... 37.8 19.3 2.6 36.4 52.7
Interest expense, net............ 9.3 7.3 7.8 4.7 4.3
Other income, net................ (2.4) (2.4) (1.5) (1.9) (2.7)
------ ------ ------ ------ ------
Earnings (loss) before income
taxes............................ 30.9 14.4 (3.7) 33.6 51.1
Provision for income taxes....... 23.7 9.9 4.3 16.2 21.8
------ ------ ------ ------ ------
Net earnings (loss)................ $ 7.2 $ 4.5 $ (8.0) $ 17.4 $ 29.3
====== ====== ====== ====== ======
OTHER FINANCIAL DATA(2):
Bookings(4)........................ $555.9 $515.6 $370.5 $389.5 $535.7
EBITDA before special
items(5)(6)...................... 95.4 82.3 52.8 66.0 95.2
Net cash flows provided (used) by
operating activities............. 54.4 39.5 (12.9) 42.1 93.1
Depreciation and amortization...... 34.0 34.4 24.2 23.2 33.5
Capital expenditures............... 23.0 21.2 12.4 8.5 17.2
BALANCE SHEET DATA (AS OF END OF
PERIOD)(3):
Working capital.................... $166.2 $159.7 $152.7
Total assets....................... 966.2 882.7 868.2
Long-term debt..................... 16.4 13.7 13.0
Shareholders' equity............... 470.0 454.8 474.2
</Table>
- ---------------
(1) Information for the last 12 months ended December 29, 2001 was derived using
IFC's unaudited combined financial statements for the nine months ended
December 30, 2000 and December 29, 2001, and its audited combined financial
statements for the year ended March 31, 2001, and has been translated into
U.S. dollars using the average exchange rate for the 12 months ended
December 29, 2001. The information for the last 12 months ended December 29,
2001 may not match the result derived using prior period financial
statements as the amounts for each component period were determined using
the currency exchange rates applicable for such period.
(2) The summary combined results of operations and other financial data are
translated into U.S. dollars using the following average exchange rates in
effect during the respective periods: (a) for the year
S-10
ended March 31, 2000, L1.00 = $1.6093, (b) for the year ended March 31, 2001,
L1.00 = $1.4832, (c) for the nine months ended December 30, 2000, L1.00 =
$1.4958, (d) for the nine months ended December 29, 2001, L1.00 = $1.4369, and
(e) for the last 12 months ended December 29, 2001, L1.00 = $1.4438.
(3) The summary combined balance sheet data are translated into U.S. dollars
using the following exchange rates in effect at the respective balance sheet
dates: (a) as of March 31, 2000, L1.00 = $1.5933, (b) as of March 31, 2001,
L1.00 = $1.4159, (c) as of December 30, 2000, L1.00 = $1.4931, and (d) as of
December 29, 2001, L1.00 = $1.4560.
(4) Bookings are the amount of incoming new orders for which there are purchase
commitments.
(5) EBITDA means net earnings before interest, income taxes, depreciation and
amortization. EBITDA is commonly used as an analytical indicator and also
serves as a measure of leverage capacity and debt servicing ability. EBITDA
should not be considered as an alternative to net income, cash flows or any
other items calculated in accordance with US GAAP or as an indicator of our
operating performance. The definition of EBITDA used in this prospectus
supplement as it relates to IFC may differ from the definition of EBITDA
used by other companies.
(6) Special items for the fiscal years ended March 31, 2000 and 2001 include
restructuring and integration expense of $21.2 million and $27.3 million,
respectively. Special items for the nine month periods ended December 30,
2000 and December 29, 2001 include restructuring and integration expense of
$24.5 million and $4.5 million, respectively. Special items for the last 12
months ended December 29, 2001 include restructuring and integration expense
of $7.4 million.
S-11
SUPPLEMENTAL RISK FACTORS
Before making an investment in shares of our common stock, you should
carefully consider the following Supplemental Risk Factors and the Risk Factors
contained in the accompanying prospectus, in addition to the other information
included or incorporated by reference in this prospectus supplement and the
accompanying prospectus.
OUR ABILITY TO CONSUMMATE THE IFC ACQUISITION IS SUBJECT TO THE SATISFACTION OF
A NUMBER OF CONDITIONS AND THE RECEIPT OF CERTAIN CONSENTS, AND IT IS POSSIBLE
THAT WE WILL BE UNABLE TO CONSUMMATE THE IFC ACQUISITION.
The IFC Acquisition is subject to the satisfaction or waiver of a number of
closing conditions, including, among other things, the receipt of governmental
and third-party consents, the absence of any material adverse change with
respect to IFC and the absence of breaches of the representations, warranties
and covenants of each of Flowserve and Invensys set forth in the Purchase and
Sale Agreement. See "Description of the IFC Purchase and Sale Agreement". In
addition, the amendment of the terms of our existing senior credit facilities to
provide for the financing for the IFC Acquisition as described under
"Summary -- Financing for the IFC Acquisition" will require the consent of
lenders under our existing senior credit facilities representing a majority of
the outstanding loans and commitments under the facilities. We cannot assure you
that all of the closing conditions to the IFC Acquisition will be satisfied or
waived or that we will be successful in obtaining the required consents from
lenders under our existing credit facilities. Accordingly, we cannot assure you
that we will consummate the IFC Acquisition. In the event that the IFC
Acquisition is not consummated, we will be unable to realize the anticipated
strategic benefits from the IFC Acquisition described in this prospectus
supplement. In such an event, we will be required by the terms of our existing
senior credit facilities to use the proceeds from this offering to repay
outstanding indebtedness under those facilities. As a result, holders of our
common stock would likely realize an immediate dilution in pro forma earnings
per share following the completion of this offering.
THE IFC ACQUISITION IS SUBJECT TO THE RECEIPT OF CONSENTS AND APPROVALS FROM
VARIOUS GOVERNMENT ENTITIES, WHICH MAY JEOPARDIZE OR DELAY COMPLETION OF THE IFC
ACQUISITION OR REDUCE THE ANTICIPATED BENEFITS OF THE IFC ACQUISITION.
Completion of the IFC Acquisition is conditioned upon filings with, and the
receipt of required consents, orders, approvals or clearances from, various
governmental agencies, including the Federal Trade Commission or the Antitrust
Division of the U.S. Department of Justice and regulatory bodies in various
foreign countries, including certain member states of the European Union. These
consents, orders, approvals and clearances may impose conditions on or require
divestitures relating to the divisions, operations or assets of IFC or us. Such
conditions or divestitures may jeopardize or delay completion of the IFC
Acquisition or may reduce the anticipated benefits of the IFC Acquisition. The
Purchase and Sale Agreement relating to the IFC Acquisition provides that we and
Invensys will use our reasonable best efforts to obtain the consents of the
Federal Trade Commission or the U.S. Department of Justice and the various
foreign regulatory bodies that are reviewing the IFC Acquisition.
WE HAVE LIMITED INFORMATION CONCERNING IFC AND IT MAY HAVE LIABILITIES OR
OBLIGATIONS THAT ARE NOT ADEQUATELY REFLECTED IN ITS HISTORICAL FINANCIAL
STATEMENTS.
In connection with the IFC Acquisition, we have conducted a limited review
of information available to us regarding IFC; however, we have been unable to
perform a complete review of the past activities and financial performance of
IFC. Prior to our acquisition of IFC, it may have incurred contractual,
financial, regulatory, environmental or other obligations and liabilities that
may impact us in the future and that are not currently adequately reflected in
the historical financial statements of IFC or Invensys or otherwise known to us.
In addition, we have received limited warranties with respect to these
obligations and liabilities from Invensys, and the indemnity obligations of
Invensys with respect to such obligations or liabilities may be limited by the
terms of the Purchase and Sale Agreement for the IFC Acquisition. Any
S-12
such material obligation or liability could have a material adverse effect on
our business, financial condition and results of operations.
THE IFC ACQUISITION WILL INCREASE OUR EXPOSURE TO ECONOMIC, POLITICAL AND OTHER
RISKS ASSOCIATED WITH INTERNATIONAL SALES AND OPERATIONS.
Given the global scope of our operations, we currently face a number of
risks associated with doing business internationally. See "Risk
Factors -- Economic, political and other risks associated with international
sales and operations could adversely affect our business" in the accompanying
prospectus for a complete discussion of these risks. In particular, the
continued deterioration of the political climate in the Middle East could
adversely affect our business and the business of our customers and suppliers
operating in that region. Our acquisition of IFC will increase the percentage of
our sales derived from international operations. Our sales to destinations
outside the United States, as a percentage of our total sales, were 48% in 2001.
However, on a pro forma basis after giving effect to the IFC Acquisition, our
sales to destinations outside the United States, as a percentage of total sales,
would have been approximately 50% in 2001. As a result, following our
acquisition of IFC, we will be more susceptible to the adverse consequences of
the risks associated with our international operations.
THE IFC ACQUISITION WILL INCREASE THE AMOUNT OF OUR OUTSTANDING INDEBTEDNESS,
AND WILL INCREASE OUR EXPOSURE TO THE RISKS ASSOCIATED WITH OUR INDEBTEDNESS.
We expect to incur additional indebtedness to finance the IFC Acquisition.
See "Summary -- Financing for the IFC Acquisition". This increase in our
outstanding indebtedness will increase our exposure to the risks associated with
our indebtedness. See "Risk Factors -- Our leverage could adversely affect our
financial health, make us vulnerable to adverse economic and industry conditions
and prevent us from fulfilling our obligations under debt securities currently
outstanding or issued pursuant to this prospectus" in the accompanying
prospectus for a complete discussion of these risks. The increase in our
outstanding indebtedness may also make it more difficult for us to meet the
maximum leverage ratio or other financial covenants in our amended senior credit
facilities. A failure to comply with these financial covenants may result in an
event of default under our amended senior credit facilities and, in some cases,
a cross-default with respect to certain of our other outstanding indebtedness.
THE IFC ACQUISITION MAY RESULT IN INCREASED ENVIRONMENTAL COSTS AND LIABILITIES.
IFC's operations and properties are subject to environmental regulation.
Such regulation can result in increased compliance costs and the risk of
penalties for environmental violations. IFC's operations, including past
disposal practices, may subject IFC to additional potential liabilities relating
to the investigation and clean-up of contaminated properties and to potential
claims alleging personal injury. Pursuant to the terms of the Purchase and Sale
Agreement, Invensys agreed to compensate us for a specified amount of these
clean-up costs, and we currently believe that this amount will be sufficient to
cover those costs. In addition, Invensys has agreed to retain specific potential
environmental liabilities and to indemnify us for liabilities relating to
certain other environmental matters. While we believe that the Purchase and Sale
Agreement will protect us from exposure to material environmental liabilities
relating to IFC, we cannot assure you that IFC's environmental liabilities will
not exceed our estimates and that the protections afforded by the Purchase and
Sale Agreement will be sufficient to address these potential liabilities.
WE MAY NOT BE ABLE TO EFFECTIVELY INTEGRATE THE BUSINESSES OF IFC.
Our future success will depend in part on our ability to effectively
integrate the businesses of IFC into our operations. We will face significant
challenges in consolidating functions and integrating procedures, personnel,
product lines and operations in a timely and efficient manner. The integration
process will be
S-13
complex and time consuming, may be disruptive to the businesses and may cause an
interruption of, or a loss of momentum in, the businesses as a result of a
number of obstacles such as:
- the loss of key employees or customers;
- the failure to maintain the quality of customer service that each
business has historically provided;
- the need to coordinate geographically diverse organizations;
- retooling and reprogramming of equipment; and
- the resulting diversion of management's attention from our day-to-day
business and the need to hire additional management personnel to address
integration obstacles.
If we are not successful in this combination, if the combination takes
longer than anticipated, or if our integrated product and service offerings fail
to achieve market acceptance, our business could be adversely affected.
WE MAY NOT BE ABLE TO REALIZE THE ANTICIPATED COST SAVINGS, SYNERGIES OR REVENUE
ENHANCEMENTS FROM COMBINING FLOWSERVE AND IFC AND WE WILL INCUR SIGNIFICANT CASH
INTEGRATION COSTS TO ACHIEVE THESE COST SAVINGS.
Even if we are able to integrate the operations of Flowserve and IFC
successfully, we cannot assure you that we will realize the cost savings,
synergies or revenue enhancements that we anticipate from such integration or
that we will realize such benefits within the time frame that we currently
expect. Our ability to realize anticipated cost savings, synergies or revenue
enhancements may be affected by a number of factors, including the following:
- Our ability to effectively eliminate redundant administrative overhead
and overlapping sales personnel, rationalize manufacturing capacity and
shift production to more economical facilities is difficult to predict.
Accordingly, the actual amount and timing of the resulting cost savings
are inherently difficult to predict.
- We will incur significant cash integration costs in achieving these cost
savings, and any cost savings and other synergies from the IFC
Acquisition may be offset by such integration costs.
- The cost savings and other synergies may be offset by increases in other
expenses, by operating losses or by problems unrelated to the IFC
Acquisition.
- Labor cost savings depend on the avoidance of labor disruptions in
connection with the integration of the businesses.
REPERCUSSIONS FROM THE TERRORIST ACTS COMMITTED IN THE UNITED STATES COULD HARM
OUR BUSINESS OPERATIONS AND ADVERSELY IMPACT OUR ABILITY TO MEET OUR
EXPECTATIONS AND OTHER FORWARD-LOOKING STATEMENTS CONTAINED IN THIS PROSPECTUS
SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS.
The terrorist attacks on September 11, 2001, have caused instability in the
world's markets. There can be no assurance that the current armed hostilities
will not escalate or that these terrorist attacks, or the United States'
responses to them, will not lead to further acts of terrorism and civil
disturbances in the United States or elsewhere, which may further contribute to
the economic instability in the United States and the other markets we serve.
Specifically, such continued instability could cause a reduction in, or impact
the timing of, product sales to companies in certain industries from which we
derive substantial revenues. We believe that we have already experienced some
negative effects on our business from the events of September 11th, such as the
slow-down in our maintenance, repair and overhaul business resulting from our
customers instituting tighter security measures at their plant sites. While our
business has begun to adjust to these types of security measures, armed
conflict, civil unrest, additional terrorist activities and the attendant
political instability and societal disruption may reduce demand for our
products, which could harm our business.
S-14
SUBSTANTIAL SALES OF OUR COMMON STOCK COULD CAUSE OUR STOCK PRICE TO DECLINE.
If our existing shareholders sell a large number of shares of our common
stock or the public market perceives that existing shareholders might sell
shares of common stock, the market price of our common stock could significantly
decline. All of the shares offered by this prospectus supplement and the
accompanying prospectus will be freely tradable without restriction or further
registration under the federal securities laws unless purchased by an
"affiliate" as that term is defined in Rule 144 under the Securities Act of
1933. The outstanding shares subject to lock up agreements between certain of
our directors and executive officers and the underwriters may be sold 90 days
after the date of this prospectus supplement.
OUR STOCK PRICE MAY BECOME VOLATILE IN THE FUTURE, RESULTING IN SUBSTANTIAL
LOSSES FOR INVESTORS PURCHASING SHARES IN THIS OFFERING. INVESTORS MAY NOT BE
ABLE TO RESELL THEIR SHARES AT OR ABOVE THE PRICE TO THE PUBLIC.
The trading price of our common stock may become volatile in the future.
Many factors may contribute to this volatility, including, but not limited to:
- changes in marketing, product pricing and sales strategies or development
of new products by us or our competitors;
- changes in domestic or foreign governmental regulations;
- variations in our results of operations;
- perceptions about market conditions in the industries we serve; and
- general market conditions.
Volatility may have a significant impact on the market price of our common
stock. Moreover, the possibility exists that the stock market could experience
extreme price and volume fluctuations unrelated to our operating performance.
Such volatility makes it difficult to ascribe a stable valuation to a
shareholder's holdings of our common stock.
FORWARD-LOOKING STATEMENTS
This prospectus supplement, the accompanying prospectus and the documents
incorporated by reference herein and therein contain various "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934, and include assumptions
about future market conditions, operations and results. You can identify these
statements by forward-looking words such as "anticipate," "believe," "could,"
"estimate," "expect," "intend," "may," "should," "will," and "would" or similar
words. You should read statements that contain these words carefully because
they discuss our future expectations, contain projections of our future results
of operations or of our financial position or state other "forward-looking
information". We believe that it is important to communicate our future
expectations to our investors. However, there may be events in the future that
we are not able to accurately predict or control. The factors listed in the
"Supplemental Risk Factors" section in this prospectus supplement, in the "Risk
Factors" section in the accompanying prospectus, as well as any cautionary
language in this prospectus supplement, the accompanying prospectus and
documents incorporated by reference herein and therein, provide examples of
risks, uncertainties and events that may cause our actual results to differ
materially from the expectations we describe in our forward-looking statements.
We undertake no obligation to publicly update or revise any forward-looking
statements after the date of this prospectus supplement, whether as a result of
new information, future events or otherwise. Before you invest in our common
stock, you should be aware that the occurrence of the events described in these
risk factors, and those discussed elsewhere in this prospectus supplement, the
accompanying prospectus and in the documents incorporated by reference herein
and therein could have a material adverse effect on our business, results of
operations, financial position and the value of our common stock. Accordingly,
you should not rely on the accuracy of predictions contained in forward-looking
statements.
S-15
USE OF PROCEEDS
The net proceeds to us from the sale of common stock in this offering are
estimated to be $246.3 million, or $283.3 million if the underwriters'
over-allotment option is exercised in full, after deducting underwriting
discounts and commissions and estimated offering expenses payable by us. We
intend to use the net proceeds from this offering, together with additional
borrowings under our amended senior credit facilities, to finance the IFC
Acquisition, to refinance our existing tranche B term loan facility and to pay
transaction costs and expenses. See "Summary -- Financing for the IFC
Acquisition".
The following table sets forth the estimated sources and uses of funds for
the IFC Acquisition and the refinancing of our existing tranche B term loan
facility:
(IN MILLIONS)
<Table>
<Caption>
SOURCES: USES:
Incremental Tranche A Term Acquisition of IFC..................
Loan(1)........................... $ 99.8 $ 535.0
Refinance Existing Tranche B
New Tranche C Term Loan(2).......... 671.1 Facility............................ 468.8
Common Stock........................ 246.3 Transaction Fees and Expenses(3).... 13.4
-------- --------
Total Sources.................. $1,017.2 Total Uses...................... $1,017.2
======== ========
</Table>
- ---------------
(1) The aggregate principal amount of term loans provided by the Incremental
Tranche A Term Loan will be added to our borrowings under the tranche A term
loan facility of our existing senior credit facility. See
"Summary -- Financing for the IFC Acquisition".
(2) The New Tranche C Term Loan is expected to refinance our existing tranche B
term loan facility, which had $468.8 million outstanding as of March 31,
2002, and provide for up to $260.0 million additional aggregate principal
amount of borrowings to finance the IFC Acquisition. In the event we are
unable to refinance our existing tranche B term loan facility with the New
Tranche C Term Loan, we intend to enter into an amendment to our existing
credit agreement to provide only for the Incremental Tranche A Term Loan and
the Incremental Tranche C Term Loan. To the extent that the net proceeds
from this offering exceed $200.0 million, we will either (1) reduce the
amount of our additional borrowings under the Incremental Tranche C Term
Loan by the entire excess amount or (2) we will apply such amount of the
excess as is necessary to repay outstanding indebtedness under our revolving
credit facility, with any remaining excess being used to reduce the amount
of additional borrowings under the Incremental Tranche C Term Loan. The
table above assumes that net proceeds from this offering in excess of $200.0
million have been applied to reduce the amount of borrowings under the
Incremental Tranche C Term Loan. See "Summary -- Financing for the IFC
Acquisition".
(3) This amount does not include underwriting discounts and commissions and
offering expenses payable by us in connection with this offering.
In the event that the IFC Acquisition is not consummated, we would use the
net proceeds from this offering to repay a portion of the outstanding
indebtedness under our existing tranche A term loan facility and tranche B term
loan facility, as required by the terms of such facilities. Our existing senior
credit facilities are composed of the following three facilities (with the
following amounts outstanding as of March 31, 2002 and the following
maturities): (1) a tranche A term loan facility, which has $249.7 million
aggregate principal amount outstanding and which matures in 2006, (2) a tranche
B term loan facility, which has $468.8 million outstanding and which matures in
2008, and (3) a $300.0 million revolving credit facility which has $42.0 million
aggregate principal amount outstanding and which matures in 2006. As of March
31, 2002, interest rates for the various components of our existing senior
credit facilities ranged from approximately 4.63% to 5.44%.
S-16
PRICE RANGE OF COMMON STOCK
Our common stock is listed for trading on the New York Stock Exchange under
the symbol "FLS". The following table sets forth on a per share basis the
intraday high and low sales prices for our common stock for the quarters
indicated.
<Table>
<Caption>
HIGH LOW
------ ------
1999:
First Quarter............................................. $17.50 $15.00
Second Quarter............................................ 21.56 15.31
Third Quarter............................................. 20.00 15.50
Fourth Quarter............................................ 17.88 15.38
2000:
First Quarter............................................. $17.00 $10.56
Second Quarter............................................ 17.69 12.00
Third Quarter............................................. 18.88 14.50
Fourth Quarter............................................ 23.50 16.13
2001:
First Quarter............................................. $24.35 $19.22
Second Quarter............................................ 33.30 20.76
Third Quarter............................................. 31.15 18.90
Fourth Quarter............................................ 27.02 18.70
2002:
First Quarter............................................. $32.43 $22.65
Second Quarter (through April 1, 2002).................... 32.49 31.81
</Table>
On April 1, 2002, the reported last sale price for our common stock on The
New York Stock Exchange was $32.35 per share. Stockholders should obtain current
market quotations before making any decision with respect to an investment in
our common stock. As of February 28, 2002, there were approximately 1,800
holders of record of our common stock. This number excludes beneficial owners of
common stock held in street name.
DIVIDEND POLICY
In 1999, we paid a dividend of $0.14 per share each calendar quarter. In
February 2000, we announced the suspension of this dividend as a result of our
decision to acquire IDP. In addition, our existing senior credit facilities
limit our ability to pay dividends under certain circumstances, and we are
currently prohibited from doing so. The policy of our board of directors is to
retain earnings to finance the operations and expansion of our business. The
board has no current plans to change the current dividend policy or resume
dividend payments.
S-17
CAPITALIZATION
The following table sets forth our cash and capitalization as of December
31, 2001 (1) on an actual basis and (2) on a pro forma basis to give effect to
the IFC Acquisition, the financing for the IFC Acquisition, the refinancing of
our existing tranche B term loan facility and the application of the estimated
net proceeds of such financing as described under "Use of Proceeds", as if each
had occurred on December 31, 2001.
For purposes of the following table, we assume that we will be able to
refinance our existing tranche B term loan facility. We also assume that the net
proceeds from this offering in excess of $200.0 million have been applied to
reduce the amount of additional borrowings under our amended senior credit
facilities. Specifically, we assume that the financing for the IFC Acquisition
and the refinancing of our existing tranche B term loan facility will include
(1) the offering of 8,000,000 shares of common stock resulting in net proceeds
of $246.3 million, (2) $99.8 million aggregate principal amount of borrowings
under the Incremental Tranche A Term Loan and (3) $672.2 million aggregate
principal amount of borrowings under the New Tranche C Term Loan, of which
$469.8 million (the outstanding balance of our existing tranche B term loan
facility as of December 31, 2001) will be in the form of the Refinancing Loan
and $202.4 million will be in the form of the Incremental Tranche C Term Loan.
The following table should be read in conjunction with our audited
consolidated financial statements and the related notes, "Summary -- Financing
for the IFC Acquisition", "Use of Proceeds" and "Unaudited Pro Forma
Consolidated Financial Statements", each included or incorporated by reference
in this prospectus supplement.
<Table>
<Caption>
DECEMBER 31, 2001
------------------------
ACTUAL PRO FORMA
-------- -----------
(IN MILLIONS)
Cash and cash equivalents.............................. $ 21.5 $ 26.4(4)
-------- --------
Long-term debt, including current portion:
Senior credit facilities:
Revolving credit facility(1)...................... $ 70.0 $ 70.0(5)
Term loan facilities(2)........................... 726.9 1,029.1(5)
Senior subordinated notes(3)......................... 243.4 243.4
Other long-term debt................................. 0.4 0.4
-------- --------
Total long-term debt.............................. 1,040.7 1,342.9(5)(6)
-------- --------
Shareholders' equity:
Serial preferred stock, $1.00 par value:
Shares authorized -- 1,000,000
Shares issued and outstanding -- None............. -- --
Common shares, $1.25 par value:
Shares authorized -- 120,000,000
Shares issued -- 48,414,000 actual; 56,414,000 pro
forma........................................... 60.5 70.5
Capital in excess of par value....................... 211.1 447.4
Retained earnings.................................... 356.0 348.8(6)(7)
Treasury stock, at cost -- 3,622,000 shares.......... (82.7) (82.7)
Deferred compensation obligation..................... 8.3 8.3
Accumulated other comprehensive loss................. (142.2) (142.2)
-------- --------
Total shareholders' equity........................ 411.0 650.1
-------- --------
Total capitalization.............................. $1,451.7 $1,993.0(5)(6)
======== ========
</Table>
S-18
- ---------------
(1) The revolving credit facility has a total commitment of $300.0 million and
expires in 2006. We had $27.4 million in undrawn letters of credit issued
under the revolving credit facility as of December 31, 2001. As a result, we
had unused borrowing capacity under our revolving credit facility, net of
issued letters of credit, of $202.6 million as of December 31, 2001.
(2) Reflects outstanding indebtedness under our existing tranche A term loan
facility and our existing tranche B term loan facility as of December 31,
2001 of $257.1 million and $469.8 million, respectively. Our outstanding
indebtedness under our existing tranche A term loan facility and our
existing tranche B term loan facility as of March 31, 2002 was $249.7
million and $468.8 million, respectively.
(3) Reflects outstanding $186.2 million senior subordinated dollar notes and
E64.1 million senior subordinated euro notes, each at 98.8% of face value.
Assumes a conversion rate of euro into U.S. dollars of E1.12 to $1.00, which
was the rate in effect on December 31, 2001.
(4) Reflects cash to be acquired in the IFC Acquisition.
(5) In the event we elect to apply the net proceeds from this offering in excess
of $200.0 million to repay outstanding indebtedness under our revolving
credit facility, the amount of borrowings under the Incremental Tranche C
Term Loan would be $248.7 million. In such an event, the pro forma
outstanding amounts under our revolving credit facility and our term loan
facilities as of December 31, 2001 would be $23.7 million and $1,075.4
million, respectively.
(6) In the event that the IFC Acquisition is not consummated, we would not
borrow additional amounts under our senior credit facilities. In such event,
we would use the net proceeds from this offering to repay a portion of the
outstanding indebtedness under our existing senior credit facilities. We
would incur a $2.3 million net of tax extraordinary loss on repayment of a
portion of the outstanding indebtedness under our existing tranche A term
loan facility and tranche B term loan facility, as required by the terms of
such facilities. The loss would result from writing off a portion of our
existing unamortized prepaid financing fees. Under these circumstances, our
as adjusted total long-term debt and total capitalization as of December 31,
2001 would be $794.4 million and $1,449.4 million, respectively.
(7) Reflects the extraordinary loss arising from the refinancing of our existing
tranche B term loan facility with the New Tranche C Term Loan, assuming we
fully extinguish our existing tranche B term loan facility. The loss is
comprised of the write-off of the unamortized balance of existing tranche B
term loan facility prepaid financing fees and estimated fees to amend our
existing senior credit facilities totaling $7.2 million, net of tax.
S-19
UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS
The following unaudited pro forma consolidated financial statements are
based on our historical consolidated financial statements and IFC's historical
combined financial statements, each included or incorporated by reference in
this prospectus supplement, adjusted to give effect to the IFC Acquisition, the
financing for the IFC Acquisition, the refinancing of our existing tranche B
term loan facility and the application of the estimated net proceeds of such
financing as described under "Use of Proceeds". The unaudited pro forma
consolidated statement of operations for the year ended December 31, 2001 gives
effect to the IFC Acquisition, the financing for the IFC Acquisition, the
refinancing of our existing tranche B term loan facility and the application of
the estimated net proceeds of such financing as described under "Use of
Proceeds", as if each had occurred on January 1, 2001. The unaudited pro forma
consolidated balance sheet as of December 31, 2001 gives effect to the IFC
Acquisition, the financing for the IFC Acquisition, the refinancing of our
existing tranche B term loan facility and the application of the estimated net
proceeds of such financing as described under "Use of Proceeds", as if each had
occurred on December 31, 2001.
For purposes of the following unaudited pro forma financial information, we
assume that we will be able to refinance our existing tranche B term loan
facility. We also assume that the net proceeds from this offering in excess of
$200.0 million have been applied to reduce the amount of additional borrowings
under the Incremental Tranche C Term Loan. Specifically, we assume that the
financing for the IFC Acquisition and the refinancing of our existing tranche B
term loan facility will include (1) the offering of 8,000,000 shares of common
stock resulting in net proceeds of $246.3 million, (2) $99.8 million aggregate
principal amount of borrowings under the Incremental Tranche A Term Loan and (3)
$672.2 million aggregate principal amount of borrowings under the New Tranche C
Term Loan, of which $469.8 million (the outstanding balance of our existing
tranche B term loan facility as of December 31, 2001) will be in the form of the
Refinancing Loan and $202.4 million will be in the form of the Incremental
Tranche C Term Loan.
The unaudited pro forma consolidated financial statements reflect pro forma
adjustments that are described in the accompanying notes and are based on
available information and certain assumptions we believe are reasonable but are
subject to change. In our opinion, all adjustments that are necessary to present
fairly the pro forma information have been made. The unaudited pro forma
consolidated financial statements do not purport to represent what our results
of operations or financial position would actually have been if the IFC
Acquisition, the financing for the IFC Acquisition, the refinancing of our
existing tranche B term loan facility and the application of the estimated net
proceeds of such financing as described under "Use of Proceeds" had occurred on
such dates or to project our results of operations or financial position for any
future date or period. The unaudited pro forma consolidated financial statements
reflect our preliminary estimates of the allocation of the purchase price for
the IFC Acquisition and are subject to change. The unaudited pro forma
consolidated financial statements do not reflect any operating efficiencies and
cost savings that we may achieve with respect to the combined entities nor any
expense associated with achieving these benefits.
The historical combined financial statements of IFC in the pro forma
consolidated financial information are based on IFC's combined financial
statements after conversion to US GAAP and U.S. dollars. We derived IFC's
combined financial statements as of and for the twelve months ended December 29,
2001 based on IFC's unaudited combined financial statements for the nine months
ended December 29, 2001 and December 30, 2000, and audited combined financial
statements for the fiscal year ended March 31, 2001. IFC's historical combined
statement of operations for the twelve months ended December 29, 2001 was
prepared in pounds sterling, and has been converted into U.S. dollars using the
average exchange rate for the year ended December 31, 2001 of L1.00 = $1.4438.
IFC's historical combined balance sheet as of December 29, 2001 was prepared in
pounds sterling, and has been converted into U.S. dollars using the exchange
rate at December 31, 2001 of L1.00 = $1.4560.
S-20
You should read the following unaudited pro forma consolidated financial
statements in conjunction with our audited consolidated financial statements and
the related notes, IFC's audited and unaudited combined financial statements and
the related notes and "Management's Discussion and Analysis", each included or
incorporated by reference in this prospectus supplement.
S-21
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001
<Table>
<Caption>
PRO FORMA
FLOWSERVE IFC ADJUSTMENTS PRO FORMA
---------- -------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Sales......................................... $1,917,507 $524,694 $ -- $2,442,201
Cost of sales................................. 1,302,955 320,678 2,819 (a) 1,626,452
---------- -------- ------- ----------
Gross profit.................................. 614,552 204,016 (2,819) 815,749
Selling, general and administrative
expense.................................. 410,563 143,951 (7,670)(a) 546,844
Restructuring and integration expenses...... 61,835 7,364 -- 69,199
---------- -------- ------- ----------
Operating income.............................. 142,154 52,701 4,851 199,706
Net interest expense........................ 118,072 4,332 6,339 (b) 124,411
(4,332)(c)
Other income, net........................ (1,547) (2,743) -- (4,290)
---------- -------- ------- ----------
Earnings before income taxes and extraordinary
items....................................... 25,629 51,112 2,844 79,585
Provision for income taxes.................... 9,275 21,802 1,152 (d) 32,229
---------- -------- ------- ----------
Earnings before extraordinary items........... $ 16,354 $ 29,310 $ 1,692 $ 47,356
========== ======== ======= ==========
Earnings per share before extraordinary items
(basic and diluted)......................... $ 1.00
==========
Weighted average shares outstanding........... 39,330 8,000 (e) 47,330
</Table>
See accompanying notes to unaudited pro forma consolidated financial statements.
S-22
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2001
<Table>
<Caption>
PRO FORMA
FLOWSERVE IFC ADJUSTMENTS PRO FORMA
---------- ------------ ----------- ----------
(IN THOUSANDS)
Current assets:
Cash and cash equivalents........... $ 21,533 $ 62,608 $ (57,783)(f) $ 26,358
Accounts receivable, net............ 455,861 72,654 (3,203)(f) 525,312
Inventories......................... 347,591 102,939 4,713(g) 455,243
Other current assets................ 73,154 23,005 (6,843)(f) 89,316
---------- -------- --------- ----------
Total current assets.............. 898,139 261,206 (63,116) 1,096,229
Property, plant and equipment, net..... 362,388 155,210 32,555(h) 550,153
Goodwill and other intangible assets,
net................................. 646,254 270,816 (22,962)(i) 894,108
Invensys Group balances................ -- 171,080 (171,080)(f) --
Other assets........................... 145,194 9,901 3,025(j) 153,330
(9,672)(k)
4,882(l)
---------- -------- --------- ----------
Total assets........................... $2,051,975 $868,213 $(226,368) $2,693,820
========== ======== ========= ==========
Current liabilities:
Accounts payable.................... $ 178,480 $ 39,166 $ (2,766)(f) $ 214,880
Accrued expenses and other current
liabilities....................... 193,768 65,666 (45,427)(f) 214,007
Long-term debt due within one
year.............................. 44,523 3,640 (3,640)(f) 44,523
---------- -------- --------- ----------
Total current liabilities......... 416,771 108,472 (51,833) 473,410
Long-term debt due after one year...... 996,222 12,958 (12,958)(f) 1,298,373
302,151(m)
Invensys Group balances................ -- 195,832 (195,832)(f) --
Retirement benefits and deferred
items............................... 227,963 76,731 (32,760)(f) 271,934
Shareholders' equity................... 411,019 474,220 246,254(e) 650,103
(7,170)(l)
(474,220)(n)
---------- -------- --------- ----------
Total liabilities and shareholders'
equity.............................. $2,051,975 $868,213 $(226,368) $2,693,820
========== ======== ========= ==========
</Table>
See accompanying notes to unaudited pro forma consolidated financial statements.
S-23
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(a) Reflects the change in IFC's depreciation and amortization expense due to
(i) depreciation of the step-up in its property, plant and equipment to
fair value over estimated average useful lives ranging from 7 to 25 years,
(ii) amortization of the identifiable intangible assets with definite lives
at estimated fair value over estimated useful lives ranging from 3 to 15
years and (iii) elimination of its historical goodwill amortization which
is included in selling, general and administrative expense (see Note (i)).
This adjustment is based on our estimated allocation of the purchase price
for the IFC Acquisition. We will base the final allocation on appraisals
that have not yet been completed.
(b) Reflects the following interest on the estimated borrowings necessary to
finance a portion of the IFC Acquisition:
<Table>
<Caption>
(IN THOUSANDS)
Interest on the Incremental Tranche A Term Loan ($99,800 at
4.75%).................................................... $ 4,741
Interest on New Tranche C Term Loan ($672,193 at 5.25%)..... 35,290
Elimination of historical interest expense on our existing
tranche B term loan facility.............................. (32,552)
--------
Cash interest expense adjustment.......................... 7,479
Amortization of estimated financing fees totaling $3,025 to
issue the New Tranche C Term Loan......................... 432
Eliminate amortization of prepaid financing fees for our
existing tranche B term loan facility..................... (1,572)
--------
Total adjustment.......................................... $ 6,339
========
</Table>
For purposes of determining the adjustment to interest expense in the pro
forma statement of operations, the current LIBOR rate was used with an
assumed credit spread of 2.75% for loans made under the Incremental Tranche
A Term Loan, which is similar to the credit spread that is applicable to
our existing tranche A term loan, and an assumed credit spread of 3.25% for
loans made under the New Tranche C Term Loan.
Each 0.125% change in the interest rates payable on the Incremental Tranche
A Term Loan and the New Tranche C Term Loan would change annual interest
expense by $0.1 million and $0.8 million, respectively.
In the event we are unable to refinance our existing tranche B term loan
facility with the New Tranche C Term Loan, we intend to enter into an
amendment to our existing senior credit facilities to provide only for the
Incremental Tranche A Term Loan and the Incremental Tranche C Term Loan. In
such an event, the Incremental Tranche C Term Loan will have terms
substantially similar to those of our existing tranche B term loan
facility, resulting in a credit spread 0.25% higher than we have assumed
for the New Tranche C Term Loan. The higher credit spread would increase
interest expense on a pro forma basis by $1.7 million.
(c) Reflects the elimination of interest expense incurred by IFC on long-term
debt that will not be assumed by us in the IFC Acquisition.
(d) Reflects the income tax effect of the pro forma adjustments at the combined
effective income tax rate for Flowserve and IFC of 40.5%.
(e) Reflects the estimated proceeds from this offering for the sale of 8.0
million common shares for $32.35 per share, net of estimated offering costs
totaling approximately $12.5 million.
(f) Reflects the elimination of assets and liabilities we are not acquiring
under the terms of the Purchase and Sale Agreement, including cash
balances, non-trade intercompany balances with Invensys and its
subsidiaries (excluding IFC) current and deferred income tax balances,
long-term debt and certain other balances.
S-24
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(g) Reflects the estimated purchase accounting adjustment for capitalization of
estimated manufacturing profit in inventory acquired with IFC. The pro
forma statement of operations does not reflect the impact of the one-time
adjustment on cost of sales during the period this inventory is sold.
(h) Reflects the estimated purchase accounting adjustment to IFC's property,
plant and equipment to step-up the basis to estimated fair value net of a
reduction for a capital lease not being assumed in the purchase. This
adjustment is based on our estimated allocation of the purchase price for
the IFC Acquisition. We will base the final allocation on appraisals that
have not yet been completed.
(i) Reflects the estimated net fair value adjustment to IFC's goodwill and
other intangible assets as a result of the following estimated purchase
price allocation:
<Table>
<Caption>
(IN THOUSANDS)
Cash paid at closing........................................ $ 535,000
Cash to be paid for estimated direct acquisition costs,
including financial advisory, legal, accounting and other
costs..................................................... 8,000
---------
Aggregate purchase price.................................. 543,000
Book value of IFC's net assets.............................. (474,220)
Elimination of net balances not being acquired (see Note
(f))...................................................... (54,474)
Capitalized estimated manufacturing profit in inventory
acquired.................................................. (4,713)
Step-up in property, plant and equipment to fair value...... (32,555)
---------
Net adjustment to goodwill and other intangible assets.... $ (22,962)
=========
</Table>
This reflects our preliminary estimates of the purchase price allocation
for the IFC Acquisition, which may change upon completion of appraisals.
Further, we may identify other assets and liabilities to which a portion of
the purchase price will be allocated. The purchase price allocation also
does not include an accrual for our anticipated restructuring activities in
connection with the IFC Acquisition. We have not yet performed a detailed
analysis to identify and measure any adjustments that may be necessary to
conform IFC's accounting policies under US GAAP with our accounting
policies.
The adjusted pro forma balance of IFC's goodwill and other intangible
assets is estimated to be comprised of the following:
<Table>
<Caption>
(IN THOUSANDS)
Goodwill.................................................... $156,354
Trademarks and trade names, indefinite lives................ 30,700
Patents, to be amortized over 8 to 15 years................. 30,000
Unpatented technology, to be amortized over 15 years........ 27,000
Noncompetition agreement, to be amortized over 3 years...... 3,800
--------
Total pro forma goodwill and other intangible assets for
IFC.................................................... $247,854
========
</Table>
In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and
No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that
all business combinations initiated after June 30, 2001 be accounted for
using the purchase method. Additionally, SFAS No. 141 establishes specific
criteria for the recognition of intangible assets separately from goodwill.
SFAS No. 142 primarily addresses the accounting for goodwill and intangible
assets subsequent to their acquisition and became effective on January 1,
2002. The most significant changes made by SFAS No. 142 require that
goodwill and indefinite lived intangible assets no longer be amortized and
be tested for impairment at least on an annual basis. This provision of
SFAS No. 142 applies to business combinations with acquisition dates after
June 30, 2001. Additionally, the amortization period for intangible assets
is no longer limited to 40 years. The pro forma income statement does not
include amortization for goodwill and other intangible assets with
indefinite useful lives acquired with IFC
S-25
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
since the business combination will be consummated after June 30, 2001. We
have not eliminated amortization, totaling approximately $19 million, of
our goodwill and other intangible assets with indefinite useful lives from
our historical financial statements for the year ended December 31, 2001.
The purchase price payable by us in the IFC Acquisition is subject to
potential upward or downward adjustment at the closing date based on the
net amount of intercompany payables and receivables owed by or to IFC as of
the date of closing. In addition, the purchase price is subject to
potential downward adjustment after the closing based on the amount by
which IFC's EBITDA for the period from April 1, 2001 to March 31, 2002, as
calculated in the manner set forth in the Purchase and Sale Agreement, is
less than $81.0 million. The purchase price is also subject to downward
adjustment after the closing based on the amount, if any, by which the net
book value of IFC as of March 31, 2001, as calculated in the manner set
forth in the Purchase and Sale Agreement, is less than $262.5 million.
Finally, the purchase price is subject to potential upward or downward
adjustment after the closing based on the net cash position of IFC as of
the date of closing, as calculated in the manner set forth in the Purchase
and Sale Agreement.
(j) Reflects estimated financing fees that will be incurred to issue the New
Tranche C Term Loans. These prepaid financing fees will be amortized over
the term of the New Tranche C Term Loans of approximately seven years.
(k) Reflects the write-off of the unamortized balance of existing tranche B
term loan facility prepaid financing fees as a result of refinancing our
existing tranche B term loan facility with the New Tranche C Term Loan. The
amount of the write-off could change depending on the composition of
lenders in the New Tranche C Term Loan as compared to those in our existing
tranche B term loan facility.
(l) Reflects the extraordinary loss of $12.1 million arising from the
refinancing of the tranche B term loan facility with the New Tranche C Term
Loan and estimated fees to amend our existing senior credit facilities, net
of income taxes of $4.9 million, assuming our existing tranche B term loan
facility is fully extinguished. The estimated income tax effects are based
on the combined effective income tax rate for Flowserve and IFC of 40.5%.
The amount of the extraordinary loss could change depending on the
composition of lenders in the New Tranche C Term Loan as compared to those
in our existing tranche B term loan facility.
(m) Reflects the Incremental Tranche A Term Loan and Incremental Tranche C Term
Loan, as detailed in Note (b), to finance the IFC Acquisition.
(n) Reflects the elimination of IFC's historical combined equity.
S-26
SELECTED HISTORICAL FINANCIAL DATA
OF FLOWSERVE CORPORATION
The following selected historical data as of and for each of the five years
in the period ended December 31, 2001 have been derived from our audited
consolidated financial statements and the related notes. You should read the
following selected historical financial data in conjunction with "Management's
Discussion and Analysis -- Flowserve" and our audited consolidated financial
statements and the related notes included or incorporated by reference in this
prospectus supplement.
In January 2000, we completed our acquisition of Innovative Valve
Technologies, Inc. (Invatec) and in August 2000, we completed our acquisition of
IDP. Each of these acquisitions was accounted for under the purchase method of
accounting. Accordingly, the operating results of each of Invatec and IDP are
included from their respective dates of acquisition.
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1997 1998 1999 2000 2001
-------- -------- -------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE DATA)
RESULTS OF OPERATIONS:
Sales...................................... $1,152.2 $1,083.1 $1,061.3 $1,538.3 $1,917.5
Cost of sales.............................. 703.3 667.8 697.9 1,031.4 1,302.9
-------- -------- -------- -------- --------
Gross profit............................... 448.9 415.3 363.4 506.9 614.6
Selling, general and administrative
expense............................... 312.8 291.9 301.5 360.3 410.6
Restructuring and integration expense.... 51.5 38.3 30.1 54.6 61.8
-------- -------- -------- -------- --------
Operating income........................... 84.6 85.1 31.8 92.0 142.2
Interest expense, net.................... 11.3 11.4 14.7 70.3 118.1
Other (income) expense, net.............. (16.5) 0.5 (1.2) (1.5) (1.5)
-------- -------- -------- -------- --------
Earnings before income taxes............... 89.8 73.2 18.3 23.2 25.6
Provision for income taxes............... 38.2 25.5 6.1 7.9 9.2
-------- -------- -------- -------- --------
Earnings before extraordinary items and
cumulative effect of change in accounting
principle................................ 51.6 47.7 12.2 15.3 16.4
Extraordinary items, net of income
taxes................................. -- -- -- (2.1) (17.9)
Cumulative effect of change in accounting
principle, net of income taxes........ -- 1.2 -- -- --
-------- -------- -------- -------- --------
Net earnings (loss)........................ $ 51.6 $ 48.9 $ 12.2 $ 13.2 $ (1.5)
======== ======== ======== ======== ========
PER SHARE:
Net earnings (loss) (basic and
diluted).............................. $ 1.26 $ 1.23 $ 0.32 $ 0.35 $ (0.04)
Dividends paid........................... 0.65 0.56 0.56 -- --
Book value(1)............................ 9.74 9.15 8.23 8.14 9.18
Weighted average shares outstanding...... 40.9 39.9 37.9 37.8 39.3
OTHER FINANCIAL DATA:
Bookings(2).............................. $1,172.4 $1,082.5 $1,039.3 $1,521.6 $1,975.5
EBITDA before special items(3)(4)........ 180.1 166.0 113.6 205.1 279.4
Net cash flows provided (used) by
operating activities.................. 90.0 54.1 84.1 18.4 (47.9)
Depreciation and amortization............ 38.9 39.3 39.6 57.0 73.9
Capital expenditures..................... 39.6 38.2 40.5 27.8 35.2
Net earnings per share before special
items(4).............................. 2.01 1.88 1.04 1.35 1.42
</Table>
S-27
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1997 1998 1999 2000 2001
-------- -------- -------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE DATA)
BALANCE SHEET DATA (AS OF END OF PERIOD):
Working capital.......................... $ 284.2 $ 268.2 $ 258.1 $ 464.0 $ 481.4
Total assets............................. 880.0 870.2 838.2 2,110.1 2,052.0
Long-term debt........................... 128.9 186.3 198.0 1,111.1 996.2
Shareholders' equity..................... 395.3 344.8 308.3 304.9 411.0
</Table>
- ---------------
(1) Calculated as shareholders' equity as of the end of the period divided by
common shares issued as of the end of the period, less shares held in
treasury.
(2) Bookings are the amount of incoming new orders for which there are purchase
commitments.
(3) EBITDA means net earnings before interest, income taxes, depreciation and
amortization. EBITDA is commonly used as an analytical indicator and also
serves as a measure of leverage capacity and debt servicing ability. EBITDA
should not be considered as an alternative to net income, cash flows or any
other items calculated in accordance with US GAAP or as an indicator of our
operating performance. The definition of EBITDA used in this prospectus
supplement as it relates to our company may differ from the definition of
EBITDA used by other companies.
(4) Special items in 1997 include restructuring and integration expense of $51.5
million and an $11.4 million gain on the sale of a subsidiary. Special items
in 1998 include integration expenses of $38.3 million, an obligation under
an executive employment agreement of $3.8 million (included in selling and
administrative expense) and the benefit of the cumulative effect of an
accounting change of $1.2 million. Special items in 1999 include
restructuring and integration expense of $30.1 million, other nonrecurring
items for inventory and fixed asset impairment of $5.1 million and certain
costs related to facility closures of $5.8 million. Special items in 2000
include restructuring and integration expense of $54.6 million and an
extraordinary loss of $2.1 million net of tax. Special items in 2001 include
restructuring and integration expense of $61.8 million and an extraordinary
loss of $17.9 million net of tax. Net earnings per share before special
items should not be considered as an alternative to net earnings (loss) per
share calculated in accordance with US GAAP or as an indicator of our
operating performance.
S-28
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and related notes of Flowserve and IFC
appearing elsewhere in this prospectus supplement. For information regarding our
pro forma financial condition and results of operations, see "Unaudited Pro
Forma Consolidated Financial Statements".
FLOWSERVE
OVERVIEW
We produce engineered and industrial pumps, precision mechanical seals,
automated and manual quarter-turn valves, control valves and valve actuators,
and provide a range of related flow management services worldwide, primarily for
the process industries. Equipment manufactured and serviced by us is
predominately used in industries that deal with difficult-to-handle and often
corrosive fluids in environments with extreme temperature, pressure, horsepower
and speed. Our businesses are affected by economic conditions in the United
States and other countries where our products are sold and serviced, the
cyclical nature of the petroleum, chemical, power and other industries served,
the relationship of the U.S. dollar to other currencies, and the demand for and
pricing of our customers' products. We believe the impact of these conditions is
somewhat mitigated by the strength and diversity of our product lines,
geographic coverage and significant installed base, which provides the potential
for an annuity stream of revenue from parts and services.
On March 21, 2002, we entered into a Purchase and Sale Agreement with
Invensys plc pursuant to which we agreed to acquire IFC from Invensys for an
aggregate cash purchase price of $535.0 million, subject to adjustment pursuant
to the terms of the Purchase and Sale Agreement. We and Invensys currently
expect to close the acquisition of IFC in May 2002. The transaction is expected
to be financed from the proceeds of this offering and additional borrowings
under our amended senior credit facilities. See "Summary -- IFC Acquisition" and
"-- Financing for the IFC Acquisition", and "Description of the IFC Purchase and
Sale Agreement".
RESULTS OF OPERATIONS
In general, our 2001 results were higher than the prior year due to our
acquisition of IDP on August 8, 2000. That acquisition and our acquisition of
Invatec on January 12, 2000, generally resulted in 2000 results being greater
than those of 1999. These acquisitions are discussed in further detail in the
subsection entitled "-- Liquidity and Capital Resources". Pro forma results
referenced throughout this discussion and analysis give effect as if our August
2000 acquisition of IDP had been completed on January 1, 2000 and include
purchase accounting adjustments and estimated financing costs, but do not give
effect to the IFC Acquisition. Special items include integration expense,
restructuring expense, extraordinary items and, in 1999, other special items for
asset impairment, executive separation contracts and facilities closure costs.
SALES AND BOOKINGS
Sales increased 24.7% to $1,917.5 million in 2001, compared with $1,538.3
million in 2000. Pro forma sales in 2000 were $1,960.1 million. Sales for 2001
compared to the prior year on a pro forma basis were adversely affected by an
unfavorable currency translation of approximately 1.9%, the divestiture of
product lines in late 2000 to comply with the Department of Justice consent
decree that we entered into in connection with the acquisition of IDP and the
closure or sale of several service operations. Additionally, sales in 2001 were
adversely impacted by the disruption following the September 11, 2001 terrorist
attacks and the resultant impact on an already weakening U.S. economy, which
contributed to a reduction in quick turnaround business. Sales increased 44.9%
to $1,538.3 million in 2000, compared with
S-29
$1,061.3 million in 1999. This increase was largely a result of the IDP and
Invatec acquisitions discussed above. For additional information on sales, see
"-- Business Segments" below.
<Table>
<Caption>
1999 2000 2001
-------- -------- --------
(IN MILLIONS)
Bookings............................................... $1,039.3 $1,521.6 $1,975.5
Sales.................................................. 1,061.3 1,538.3 1,917.5
</Table>
Bookings, or incoming orders for which there are purchase commitments, were
$1,975.5 million in 2001, 29.9% higher than 2000, when bookings were $1,521.6
million. Pro forma bookings in 2000 were $2,036.8 million. Bookings in 2001 were
relatively strong in the petroleum, power and water markets. Bookings activity
was mixed-to-slightly weaker in the chemical and general industrial markets.
Bookings might have been greater had it not been for the adverse impact of the
September 11th terrorist attacks. The quick turnaround business, including
maintenance, repair and overhaul, or MRO, manual valves, parts, seals and ISO
and ANSI pump bookings, slowed after September 11th as many of the our customers
instituted tighter security measures at their plant sites. Bookings in 2000 were
46.4% higher than in 1999 when bookings were $1,039.3 million. This increase was
largely a result of the acquisitions of IDP and Invatec. Backlog at December 31,
2001 was $662.8 million compared with $659.3 million in the previous year. The
increase in backlog in 2001 reflects bookings strength in the petroleum, power
and water markets, products which tend to have longer lead times, partially
offset by a downturn in the chemical and industrial markets, products which tend
to have shorter lead times. Backlog in 2000 was up from 1999 due to the
acquisitions of IDP and Invatec.
Sales originating outside the United States were 43% of total sales in
2001, compared with 38% in 2000 and 42% in 1999. The higher 2001 percentage is
primarily due to including IDP's significant international operations for the
full year in 2001. The lower 2000 percentage is primarily due to Invatec's
markets being principally in the United States and the negative impact of
currency translation. Sales to destinations outside the United States were 48%,
unchanged from the prior year.
BUSINESS SEGMENTS
We manage our operations through three business segments: (1) Pump Division
(FPD) for engineered and industrial pumps; (2) Flow Control Division (FCD) for
automated and manual quarter-turn valves, control valves, nuclear valves and
valve actuators; and (3) Flow Solutions Division (FSD) for precision mechanical
seals and flow management services.
Sales, including intersegment sales, and operating income before special
items, for each of the three business segments are as follows:
<Table>
<Caption>
PUMP DIVISION
--------------------------
1999 2000 2001
------ ------ --------
(IN MILLIONS)
Sales..................................................... $353.2 $672.2 $1,030.5
Operating income (before special items)................... 23.1 78.8 124.4
</Table>
Sales of pumps and pump parts for FPD increased to $1,030.5 million in 2001
from $672.2 million in 2000 and $353.2 million in 1999. The sales increases were
due to the acquisition of IDP. On a pro forma basis, revenues were $1,048.6
million in 2000. The decrease in 2001 sales compared to 2000 pro forma sales
generally resulted from unfavorable currency translation, which reduced sales by
about 2.1% year-over-year, and the divestiture of product lines in late 2000 to
comply with the Department of Justice consent decree. Sales would likely have
been higher if not for the slowdown in quick turnaround sales following
September 11th. On a comparable operations basis without IDP and Invatec, sales
in 2000 declined slightly compared to 1999 primarily due to unfavorable currency
translation.
FPD operating income in 2001, before special items, increased 57.9% from
2000 results of $78.8 million and 72.8% from pro forma 2000 results of $72.0
million. FPD operating income in 2000, before special items, increased 241.1%
from 1999 results of $23.1 million. Operating income, before special
S-30
items, as a percentage of FPD sales increased to approximately 12.1% in 2001
from 11.7% in 2000 on an as reported basis and 6.9% on a pro forma basis and
from 6.5% in 1999. The increase primarily resulted from the synergy savings
realized from the IDP integration activities, which include the reduction of
overlapping sales activities and the closure, divestiture or significant
downsizing of a number of pump plants.
<Table>
<Caption>
FLOW CONTROL DIVISION
------------------------
1999 2000 2001
------ ------ ------
(IN MILLIONS)
Sales...................................................... $295.3 $276.3 $278.9
Operating income (before special items).................... 25.1 28.8 31.5
</Table>
Sales of valves and valve automation products for FCD increased to $278.9
million in 2001 from $276.3 million in 2000 and were below the $295.3 million in
1999. Sales in 2001 increased slightly over 2000 despite an unfavorable currency
translation, which reduced sales by about 1.8% and the slowdown in quick
turnaround manual valve sales after the September 11th terrorist attacks. Sales
in 2000 decreased primarily due to a general decline in business levels in the
served markets of chemical, petrochemical and refining. The decline in 2000 was
also caused by unfavorable currency translation of about 4%.
FCD operating income in 2001 of $31.5 million, before special items,
increased 9.4% from 2000 results of $28.8 million. FCD operating income, before
special items, in 2000 increased 14.7% from 1999 results of $25.1 million.
Operating income before special items, as a percentage of FCD sales was 11.3% in
2001, compared with 10.4% in 2000 and 8.5% in 1999. The improved operating
margin in 2001 was primarily due to efficiency improvements, which resulted in
cost reductions. The increase in 2000 was primarily due to the benefits of the
1999 restructuring program.
<Table>
<Caption>
FLOW SOLUTIONS DIVISION
------------------------
1999 2000 2001
------ ------ ------
(IN MILLIONS)
Sales...................................................... $438.5 $624.0 $638.5
Operating income (before special items).................... 56.1 68.2 79.4
</Table>
Sales of seal products and services for FSD increased to $638.5 million in
2001, compared with $624.0 million in 2000 and $438.5 million in 1999. Sales in
2001 were higher than in 2000 primarily due to a full year of the inclusion of a
portion of IDP's service repair business in 2001. Pro forma sales were $669.5
million in 2000. The decrease from pro forma sales is due to unfavorable
currency translation of 1.5%, the reduction in quick turnaround seal shipments
and service business after the September 11th terrorist attacks, and the closure
or sale of several service operations. The sales increase in 2000 was primarily
due to the acquisitions of IDP and Invatec. On a comparable operations basis
without IDP and Invatec, sales in 2000 increased slightly, generally due to the
seal business.
FSD operating income in 2001 of $79.4 million, before special items, was
16.4% above 2000 results of $68.2 million and 4.6% above 2000 pro forma results
of $75.9 million. FSD operating income in 2000, before special items, increased
21.6% from 1999 results of $56.1 million. Operating income, before special
items, as a percentage of FSD sales increased to 12.4% in 2001 from 10.9% in
2000 on an as reported basis and 11.3% on a pro forma basis, and from 12.8% in
1999. The improvement in 2001 reflects the benefits of the integration of the
service operations and the consolidation of the North American seal business.
The decrease in 2000 is due to the acquisition of Invatec, including disruption
during the integration of Invatec and Invatec's historically lower gross
margins, and unfavorable variances and period costs related to the restructuring
of the seal business.
CONSOLIDATED RESULTS
The gross profit of $614.6 million in 2001 increased 21.2%, compared with
2000 reflecting the IDP acquisition. The gross profit in 2001 increased 2.5%
compared with 2000 on a pro forma basis, despite a 2.2% reduction in pro forma
sales. Gross profit margin, gross profit as a percentage of sales, was 32.0% in
S-31
2001, 33.0% in 2000 and 34.2% in 1999. The decrease in 2001 and 2000 gross
profit as reported was primarily due to the acquisition of IDP, as IDP's margins
historically are lower than those for the balance of our company. Our margin in
2001 increased 1.4% when compared with the 2000 pro forma margin of 30.6%. This
improvement primarily resulted from IDP manufacturing integration synergies that
resulted from closing, divesting or significantly downsizing a number of pump
manufacturing facilities and numerous service and repair facilities.
Additionally, we benefited from the consolidation of our North American seal
business and consolidation of certain other valve businesses throughout 2000.
The benefits were partially offset by a less profitable product mix of chemical
process pumps, manual valves, seals and service which was caused by the slowdown
in quick turnaround business.
Inventories are stated at the lower of cost or market. Cost is determined
for U.S. inventories by the last-in, first-out, or LIFO, method and for other
inventories by the first-in, first-out, or FIFO, method. Our LIFO reserve for
U.S. inventories declined to $33.9 million at December 31, 2001 from $37.5
million at December 31, 2000 due primarily to a reduction in the FIFO cost
caused by deflation in materials cost in 2001. Therefore, the impact of this
reduction on 2001 earnings was not significant.
Selling, general and administrative expense was $410.6 million in 2001,
compared with $360.3 million in 2000 and $301.5 million in 1999. The increased
expense in 2001 and 2000 was due to our acquisitions of IDP and Invatec and
period costs associated with our various facility consolidation projects.
Selling, general and administrative expense of $410.6 million in 2001 declined
9.3% from 2000 on a pro forma basis. Selling, general and administrative expense
in 1999 included $5.8 million in special items for executive separation
contracts and certain costs relating to fourth-quarter 1999 facility closings.
On a comparable operations basis without IDP and Invatec, the expense in 2000
was down over 8%, compared with 1999 (excluding the results of IDP and Invatec).
Selling, general and administrative expense as a percentage of net sales was
21.4% in 2001, compared with 23.4% in 2000 as reported and 23.1% in 2000 on a
pro forma basis, and 27.9% in 1999, excluding $5.8 million in special items for
executive separation contracts and certain costs relating to fourth-quarter 1999
facility closings. The decrease in 2001 from the 2000 and 1999 percentages is
due to IDP integration savings, including sales force reductions, the IDP
headquarters closure, productivity improvements, a reduction in incentive
compensation due to lower than planned performance and other cost reduction
initiatives.
Operating income of $204.0 million, before special items, in 2001 increased
39.2% over 2000 and 38.4% over 2000 on a pro forma basis. Operating income of
$146.6 million, before special items, in 2000 increased 101.7% over 1999. The
improvements generally reflect synergy benefits related to the acquisition and
integration of IDP, offset in part by the impact of the aforementioned product
mix shift.
The 2001 restructuring benefit of $1.2 million and 2000 restructuring
charge of $19.4 million were realized as part of the IDP integration program.
The benefit resulted from a change in estimate in 2001. The charge of $15.9
million in 1999 was related to the 1999 restructuring program. Integration
expense was $63.0 million in 2001, $35.2 million in 2000, and $14.2 million in
1999. Integration expense in 2001 and 2000 related to the acquisition of IDP.
The 1999 expense related solely to the Flowserver program, a business process
improvement program, which was an extension of the 1997 and 1998 Flowserve
merger integration program. As part of the 1999 restructuring program, we also
recorded special items of $5.1 million in cost of sales for inventory and fixed
asset impairments and special items of $5.8 million in selling, general and
administrative expense for executive separation contracts and certain costs
related to fourth-quarter 1999 facility closures.
Net interest expense was $118.1 million in 2001, compared with $70.3
million in 2000 and $14.7 million in 1999. The 2001 and 2000 amounts reflect the
increased interest costs associated with the financing of the Invatec and IDP
acquisitions partially offset by lower borrowing rates during 2001. About
two-thirds of the debt at December 31, 2001 is floating rate debt and can be
impacted by market interest rate changes.
The effective tax rate, before extraordinary items, was 36.2% in 2001,
compared with 34.0% in 2000 and 33.3% in 1999. The increased tax rates in 2001
and 2000 reflect the acquisition of IDP, which has a greater mix of business in
foreign countries with higher tax rates.
S-32
In 2001, we recognized an extraordinary item of $17.9 million, or $0.46 per
share, net of tax, related to the prepayment premium, other direct costs, and
write-off of unamortized prepaid financing fees and discount as a result of the
early extinguishment of $133 million of 12.25% senior subordinated notes with
proceeds from a sale of our common shares. In 2000, we recognized an
extraordinary item which totaled $0.05 per share, net of tax, related to the
prepayment of our outstanding indebtedness which was required as part of the
financing to acquire IDP.
Earnings (loss) after special items were a loss of $1.5 million ($0.04 per
share) in 2001, compared with earnings of $13.2 million ($0.35 per share) in
2000 and earnings of $12.2 million ($0.32 per share) in 1999. Special items
include extraordinary items, restructuring expenses (benefit), integration
expenses and, in 1999, inventory and fixed asset impairments, and costs
associated with obligations under executive employment and separation
agreements. Earnings before special items were $55.8 million ($1.42 per share)
in 2001, compared with $51.0 million ($1.35 per share) in 2000 and $39.5 million
($1.04 per share) in 1999. Earnings before special items were $10.7 million
($0.28 per share) in 2000 on a pro forma basis. The increase in earnings before
special items in 2001 and 2000 was due to the acquisitions during 2000, synergy
benefits related to the acquisitions, as well as the benefits of our
restructuring program initiated at the end of 1999.
Operating results before special items and pro forma results should not be
considered an alternative to operating results calculated in accordance with
generally accepted accounting principles.
RESTRUCTURING
In August 2000, in conjunction with the acquisition of IDP, we initiated a
restructuring program designed to reduce costs and to eliminate excess capacity
by consolidating facilities. Our actions, approved and committed to in the third
quarter of 2000, resulted in the net reduction of approximately 1,100 positions
and have resulted in at least $90 million in annual synergy savings at full
run-rates. We expect the cost of achieving these synergies will be approximately
$158 million, net of the Tulsa reversal, described below, and excluding capital
expenditures associated with the integration. The program included the closure
of IDP's former headquarters, the closure, divestiture or significant downsizing
of a number of pump manufacturing facilities and service and repair centers, and
a reduction of sales and sales support personnel.
Our current estimate of $65 million in restructuring costs is comprised of
approximately $42 million which relates to the IDP operations acquired, of which
$26 million has been capitalized in goodwill as part of the purchase price of
IDP ($42 million of estimated costs less deferred tax effect of $16 million),
while the remaining $23 million relates to our operations and was recorded as
restructuring expense. This expense was offset by a reversal of a restructuring
charge of $5.3 million recorded in 1999 for our Tulsa facility. As part of an
agreement with the Department of Justice to acquire IDP, we were required to
sell our Tulsa facility. This facility had been previously targeted for closure
in 1999. Additionally, during 2000 and 2001, we recorded non-cash reductions to
reclassify certain retirement obligations and other liabilities from the
restructuring reserve and to recognize changes in estimate in the restructuring
reserve.
The balance of the $158.0 million in cost was recorded as integration
expense as incurred. During 2001 and 2000, we incurred $63.0 million and $35.2
million, respectively, in integration costs in conjunction with this program. We
have substantially completed our integration activities as of December 31, 2001.
S-33
Expenditures charged to the 2000 restructuring reserve were:
<Table>
<Caption>
SEVERANCE OTHER EXIT COSTS TOTAL
--------- ---------------- --------
(IN THOUSANDS)
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................................ (13,267) (6,712) (19,979)
Net non-cash reduction........................... (2,817) (2,567) (5,384)
-------- ------- --------
Balance at December 31, 2001..................... $ 2,402 $ 3,119 $ 5,521
======== ======= ========
</Table>
In the fourth quarter of 1999, we 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 several facilities
and a reduction in workforce at those and other locations.
As part of an agreement with the Department of Justice to acquire IDP, we
were required to sell our Tulsa facility. Since the facility had been previously
targeted for closure in 1999, this resulted in a non-cash reduction of the
existing 1999 restructuring reserve of $5.3 million in 2000.
The 1999 restructuring program resulted in a net reduction of approximately
261 employees at a cost of $8.5 million. In addition, exit costs associated with
the facilities closings were $1.9 million.
Expenditures charged to the 1999 restructuring reserve were:
<Table>
<Caption>
SEVERANCE OTHER EXIT COSTS TOTAL
--------- ---------------- -------
(IN THOUSANDS)
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.................................. (1,668) -- (1,668)
------- ------- -------
Balance at December 31, 2001....................... $ -- $ -- $ --
======= ======= =======
</Table>
BUSINESS PROCESS IMPROVEMENT INITIATIVE
In 1998, our Board of Directors approved a $120 million expenditure for
"Flowserver". This business process improvement program was planned to have
costs and benefits incremental to the initial merger integration program for the
merger of BW/IP, Inc. and Durco International in 1997 forming our company.
Flowserver included the standardization of our processes and implementation of a
global information system to facilitate common practices.
In the fourth quarter of 1999, we re-evaluated the Flowserver project and
determined that the scope of the program would be scaled back significantly and
the overall duration of the program would extend beyond its original five-year
plan.
In 2000, we incurred costs associated with the project of $7.3 million
recorded as selling and administrative expense and $4.8 million as capital
expenditures. In 1999, these costs were $14.2 million recorded as integration
expenses and $11.4 million as capital expenditures. Expenses prior to 2000 were
recorded as integration expenses as they generally related to the development of
a common, integrated business model. No costs were incurred for this project in
2001.
S-34
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
This "Management's Discussion and Analysis" is based on our consolidated
financial statements and related footnotes. Our more critical accounting
policies used in the preparation of those consolidated financial statements are
discussed below.
Revenues and costs are generally recognized based on the shipping terms
agreed to with the customer and fulfillment of all but inconsequential or
perfunctory actions required of us. Revenue for certain longer-term contracts is
recognized based on the percentage of completion method.
The preparation of financial statements in conformity with generally
accepted accounting principles requires our management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Significant estimates made by our management include the
allowance for doubtful accounts, inventory valuation, deferred tax asset
valuation allowances, restructuring accruals, warranty accruals, legal and
environmental accruals, insurance accruals, and retirement benefit obligations.
Our estimates for uncollectible accounts receivable are based upon an
analysis of our prior collection experience, customer creditworthiness and
current economic trends, including changes in the industries served by us.
Estimates are determined for inventory valuation reserves based upon our
management's assessment of the market conditions for our products. We have
recorded valuation allowances to reflect the estimated amount of deferred tax
assets that may not be realized based upon our analysis of existing net
operating losses and tax credits by jurisdiction and expectations of our ability
to utilize these tax attributes through a review of estimated future taxable
income and establishment of tax strategies. These estimates could be impacted by
changes in future taxable income and the results of tax strategies. We have net
deferred tax assets totaling $51 million related to net operating loss and
foreign tax credit carryforwards at December 31, 2001.
Warranty obligations are contingent upon product failure rates, materials
usage or service delivery costs. We estimate our warranty provisions based upon
an analysis of all identified or expected claims and an estimate of the cost to
resolve those claims. Legal and environmental reserves are recorded based upon a
case by case analysis of the facts, circumstances and related costs. Insurance
reserves are recorded based upon an analysis of our claim loss history and an
estimate of incurred but not recorded claims. Retirement benefit obligations are
affected by a number of estimates made by management in consultation with
independent actuaries, including the discount rate, long-term rate of return on
assets, and assumed rate of increase in health care costs.
These estimates and assumptions are based upon the best available
information and are subject to change as conditions within and beyond our
control change, including but not limited to economic conditions, the
availability of additional information and actual experience rates different
from those used in our estimates. Accordingly, actual results could differ from
those estimates.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows from Operations
Cash flows from operations and borrowings available under our existing
credit agreement are our primary sources of short-term liquidity. Cash flows
used in operating activities in 2001 were $47.9 million, compared with providing
$18.4 million in 2000 and $84.1 million in 1999. Cash flows from operating
activities for 2001 were significantly below 2000 cash flows, generally due to
payments associated with the IDP integration program, including restructuring
and integration payments, higher interest payments attributable to the August
2000 acquisition of IDP and increases in working capital. The primary reasons
for the increase in working capital were an increase in inventories in support
of backlog for future shipments, and increased finished goods safety stock to
meet customer deliveries during the integration process, and a systems
conversion at a valve plant. At December 31, 2001, we had drawn $70.0 million of
revolving credit primarily to fund integration activities and increases in
working capital. We believe cash flows from operating activities would have
provided approximately $6 million in 2001 if not for funding the
S-35
costs of the restructuring activities, integration of IDP and the extraordinary
items. The decrease in operating cash flow in 2000 from 1999 primarily resulted
from an increase in accounts receivable due to the high volume of FPD shipments
late in the year. FPD shipments, on a pro forma basis including IDP, have been
historically weighted toward the fourth quarter of each year.
We expect improved cash flows from operating activities in 2002 due to
reduced restructuring and integration payments, a full year of synergy benefits
and an increased focus on working capital management. We believe improved cash
flows from operating activities combined with availability under our existing
credit agreement will be sufficient to enable us to meet our cash flow needs
during 2002. However, cash flows from operations could be adversely affected by
economic, political and other risks associated with international sales and
operations, intense competition, fluctuations in foreign exchange rates and
fluctuations in interest rates, among other factors.
Payments for Acquisitions
In January 2000, we acquired Invatec, a company principally engaged in
providing comprehensive maintenance, repair, replacement and value-added
distribution services for valves, piping systems, instrumentation and other
process-system components for industrial customers.
The purchase involved acquiring all of the outstanding stock of Invatec and
assuming Invatec's existing debt and related obligations. The transaction was
accounted for under the purchase method of accounting and was financed by
utilizing available funds. The results of operations for Invatec are included in
our consolidated financial statements from the date of acquisition. The purchase
price was approximately $16.6 million in cash for shares tendered. Net debt of
$87.7 million was simultaneously paid off through borrowings under our revolving
credit agreement.
In August 2000, we completed the acquisition of 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, we 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
term loans and the issuance of senior subordinated notes. Upon closing of the
transaction, our existing debt was also refinanced into our existing senior
credit facilities.
In March 2002, we entered into a Purchase and Sale Agreement with Invensys
plc pursuant to which we agreed to acquire IFC from Invensys for an aggregate
cash purchase price of $535.0 million, subject to adjustment pursuant to the
terms of the Purchase and Sale Agreement. We and Invensys currently expect to
close the IFC Acquisition in May 2002. See "Summary -- IFC Acquisition" and
"Description of the IFC Purchase and Sale Agreement". We estimate that the cash
funding requirements to consummate the IFC Acquisition, including the payment of
related transaction fees and expenses, will be approximately $560 million. In
order to finance the IFC Acquisition, we will (1) issue common stock in this
offering, resulting in expected net proceeds of at least $200.0 million, and (2)
amend the terms of our existing senior credit facilities and incur additional
borrowings thereunder of approximately $360.0 million. To the extent that the
net proceeds from this offering exceed $200.0 million, we will either (1) reduce
the amount of our additional borrowings under the Incremental Tranche C Term
Loan by the entire excess amount or (2) we will apply such amount of the excess
as is necessary to repay outstanding indebtedness under our revolving credit
facility, with any remaining excess being used to reduce the amount of
additional borrowings under the Incremental Tranche C Term Loan. See
"Summary -- Financing for the IFC Acquisition".
Capital Expenditures
Capital expenditures were $35.2 million in 2001, compared with $27.8
million in 2000 and $40.5 million in 1999. Capital expenditures were funded
primarily by operating cash flows and bank borrowings. For each of the three
years, capital expenditures were invested in new and replacement
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machinery and equipment, information technology, integration activities
including structures and realignment and equipment required at receiving
facilities. Capital expenditures included $4.8 million in 2000 and $11.4 million
in 1999 related to Flowserver.
Cash proceeds on the disposal of assets associated with the IDP integration
activities were $8.7 million in 2001. Cash proceeds from the sale of Tulsa and
disposal of other assets were $5.4 million in 2000.
Financing
During the third quarter of 2000, in connection with the acquisition of
IDP, we entered into our existing senior credit facilities which include a $275
million tranche A term loan facility due June 2006, a $475 million tranche B
term loan facility due June 2008, and a $300 million revolving credit facility
with a final maturity of June 2006. Our existing senior credit facilities are
secured by substantially all of our domestic assets and a pledge of 65% of the
stock of foreign subsidiaries. The term loans bear floating interest rates based
on LIBOR plus a credit spread, or the prime rate plus a credit spread, at our
option. The credit spread can increase or decrease based on our leverage ratio
as defined. At December 31, 2001 the interest rates on the term loans were
4.69%, 4.88% and 5.06% relating to the tranche A term loan facility and 5.63%
and 5.81% relating to the tranche B term loan facility. As of December 31, 2001,
$70.0 million of the revolving credit facility was drawn and $726.9 million of
the term loans were outstanding.
The term loans require scheduled principal payments which began June 30,
2001. At December 31, 2001, we had repaid $23 million of the term loans. The
scheduled principal payments of the term loans outstanding at December 31, 2001
are summarized as follows: $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, $257.5 million
in 2007 and $129.1 million in 2008. Effective December 31, 2001, we are required
to use a percentage of excess cash from operations, as defined in the existing
credit facilities and the indenture governing or existing senior subordinated
notes, to reduce the outstanding principal of the term loans in the following
year. No additional principal payments are due in 2002 under this provision.
The revolving credit facility allows us to issue up to $200 million in
letters of credit. As of December 31, 2001, $27.4 million of letters of credit
had been issued under the facility. As letters of credit issued under the
facility reduce availability, we had $202.6 million remaining in unused
borrowing capacity at December 31, 2001 under the revolving credit facility.
In connection with the IFC Acquisition, we intend to enter into an
amendment to the credit agreement for our existing senior credit facilities to
provide for: (1) the $99.8 million Incremental Tranche A Term Loan under our
existing tranche A term loan facility and (2) the New Tranche C Term Loan
Facility in an aggregate principal amount of up to $730 million. Assuming the
net proceeds from this offering in excess of $200.0 million are used to reduce
the amount of additional borrowings under the amended senior credit facilities,
the aggregate principal amount of the New Tranche C Term Loan will be $671.1
million, of which $468.8 million (the outstanding balance of our existing
tranche B term loan facility as of March 31, 2002) will be in the form of the
Refinancing Loan used to refinance our existing tranche B term loan facility and
$202.3 million will be in the form of the Incremental Tranche C Term Loan used
to finance the IFC Acquisition. Borrowings under the Incremental Tranche A Term
Loan will bear interest at the same rates as are applicable for borrowings under
our existing tranche A term loan. Borrowings under the New Tranche C Term Loan
are expected to bear interest at rates that are lower than those that are
applicable for borrowings under our existing tranche B term loan facility.
In the event we are unable to refinance our existing tranche B term loan
facility with the New Tranche C Term Loan, we intend to enter into an amendment
to our existing credit agreement to provide only for the $260.0 million
Incremental Tranche C Term Loan. In such an event, the Incremental Tranche C
Term Loan will have terms substantially similar to those of our existing tranche
B term loan facility and borrowings under the Incremental Tranche C Term Loan
will bear interest at the same rates as are applicable for borrowings under our
existing tranche B term loan facility. Upon closing of the IFC
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Acquisition, the credit spread for loans made under the Incremental Tranche C
Term Loan (provided we have not entered into the entire New Tranche C Term Loan)
would be 2.50% for prime rate borrowings and 3.50% for LIBOR borrowings.
The Incremental Tranche A Term Loan and the New Tranche C Term Loan are
currently in general syndication in the banking community. We have received
commitments from a syndicate of financial institutions for the Incremental
Tranche A Term Loan and the Incremental Tranche C Term Loan, but we have not
received commitments for the entire New Tranche C Term Loan.
In connection with the acquisition of IDP, we issued 10 year senior
subordinated notes on August 8, 2000 in a U.S. dollar tranche and a Euro
tranche. Proceeds of $285.9 million from the dollar tranche and E98.6 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. Beginning in August 2005, the notes
become callable at a fixed redemption price. The notes can also be redeemed by
us under certain circumstances and have mandatory redemption features under
certain circumstances, including a change in control as defined. Interest on the
notes is payable semi-annually in February and August. A portion of these notes
was repaid in 2001 as described in the next paragraph.
During 2001, we completed an offering of approximately 6.9 million shares
of our common stock for net proceeds of approximately $154 million. These
proceeds were used to prepay $101.5 million of the U.S. dollar tranche, E35
million of the Euro tranche of the senior subordinated notes, and to pay
associated prepayment premiums and other direct costs. We recorded an
extraordinary item of $17.9 million, net of tax, comprised of the prepayment
premiums, other direct costs, and the write-off of unamortized prepaid financing
fees and discount for the portion of the senior subordinated notes that was
prepaid.
We have incurred significant indebtedness for the IDP and Invatec
acquisitions that is substantial in relation to shareholders' equity. The
financing for the IFC Acquisition will increase the amount of our outstanding
indebtedness and, accordingly, will increase our debt service costs. Our
indebtedness increases our vulnerability to adverse economic and industry
conditions, requires us to dedicate a substantial portion of cash flow from
operating activities to payments on the indebtedness and could limit our ability
to borrow additional funds and/or raise additional capital. The increase in our
outstanding indebtedness as a result of the financing for the IFC Acquisition
will increase our exposure to these factors.
The provisions of our existing senior credit facilities require us to meet
or exceed specified financial covenants that are defined in our existing senior
credit facilities. The terms of our amended senior credit facilities will also
contain such financial covenants. These covenants include a leverage ratio, an
interest coverage ratio, and a fixed charge coverage ratio. The increase in our
outstanding indebtedness as a result of the financing for the IFC Acquisition
may make it more difficult for us to meet these ratios. Further, the provisions
of our existing senior credit facilities and the senior subordinated notes
contain, and the provisions of our amended senior credit facilities will
contain, limitations or restrictions on indebtedness, liens, sale and leaseback
transactions, acquisitions, asset sales, payment of dividends or other
distributions, capital expenditures, and other customary restrictions. At
December 31, 2001, we were in compliance with these covenants.
At December 31, 2001, net debt was 71.3% of our capital structure, compared
with 78.1% at December 31, 2000 and 35.7% at December 31, 1999. The ratio
decreased in 2001 due to the repayment of a portion of our existing senior
subordinated notes and the term loans combined with an increase in shareholders'
equity due to the common stock offering. The ratio increased in 2000 due to the
financing incurred for the 2000 acquisitions. The interest coverage ratio of our
indebtedness, as defined in our existing senior credit facility, was 2.1 times
interest at December 31, 2001, compared with 2.2 times interest at December 31,
2000 and 4.3 times interest at December 31, 1999.
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Maturities of our long-term debt, and future capital lease and operating
lease obligations, at December 31, 2001 are summarized as follows: $57 million
in 2002, $69 million in 2003, $70 million in 2004, $73 million in 2005, $179
million in 2006 and $635 million thereafter.
Our return on average net assets, before special items, based on results
for 2001, was 7.8%, compared with 8.9% for 2000 and 7.7% for 1999. Including the
impact of special items, the return on average net assets was 4.4% for 2001,
compared with 5.5% for 2000 and 3.4% for 1999. The decrease in the return on
average net assets both before and after special items in 2001 compared with
2000 is generally due to the goodwill and other intangible assets associated
with the IDP acquisition. The increase in 2000 compared with 1999 is due to the
benefits of the 1999 restructuring program and a disproportionate share of IDP's
2000 earnings included during the period from the acquisition date through
December 31, 2000 due to the seasonality of its business. The return on average
shareholders' equity before special items was 18.5% for 2001, compared with
16.7% for 2000 and 11.7% for 1999. The increases in return on average
shareholders' equity before special items in 2001 compared with 2000 and in 2000
compared with 1999 are due to improved earnings before special items and the
reduction in shareholders' equity due to other comprehensive expense
(principally for cumulative translation adjustment). The return on shareholders'
equity, including special items, was (0.5)% for 2001, 4.4% for 2000 and 3.6% for
1999. The decrease in return on average shareholders' equity including special
items in 2001 compared with 2000 is generally due to an increase in special
items. The increase in return on average shareholders' equity including special
items in 2000 compared with 1999 is generally due to earnings from IDP,
partially offset by increased special items.
Inflation during the past three years had little impact on our consolidated
financial performance. Foreign currency translation had the effect of reducing
our sales by 2% and earnings before income taxes by 9% in 2001, sales by 5% and
earnings before income taxes by 12% in 2000 and sales by 1% and earnings before
income taxes by 9% in 1999.
Retirement Benefits
We sponsor several defined benefit pension plans and post-retirement health
care plans. Our recorded liability for these plans was $146.8 million at
December 31, 2001 and $122.2 million at December 31, 2000. The increase in the
liability in 2001 reflects a decline in the fair value of pension plan assets
due to weak market performance and increased benefits payments due to personnel
reductions in recent years. We expect to fund contributions to the plans from
operating cash flows.
MARKET RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS
We have market risk exposure arising from changes in interest rates and
foreign currency exchange rate movements.
Our earnings are impacted by changes in short-term interest rates as a
result of borrowings under our existing senior credit facilities, which bear
interest based on floating rates. At December 31, 2001, after the effect of the
interest rate swaps we hold, we had approximately $650 million of variable-rate
debt obligations outstanding with a weighted average interest rate of 5.79%. A
hypothetical change of 100-basis points in the interest rate for these
borrowings, assuming debt levels at December 31, 2001, would change interest
expense by approximately $6.5 million for the year ended December 31, 2001.
As part of our risk management program, we are party to interest rate swap
agreements for the purpose of hedging our exposure to floating interest rates on
certain portions of our debt. We are exposed to credit-related losses in the
event of non-performance by counterparties to financial instruments, but we
expect all counterparties to meet their obligations given their
creditworthiness. As of December 31, 2001 and 2000, we had $150 million and $75
million of notional amount in outstanding interest rate swaps with third parties
with maturities of up to 5 years.
We employ 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
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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 December 31, 2001, a 10% adverse change in
the foreign currency exchange rates could impact the our results of operation by
$3.0 million. The primary currencies to which we have exposure are the Euro,
British pound, Canadian dollar, Mexican peso, Japanese yen, Singapore dollar,
Brazilian real and Australian dollar.
Exposures are hedged primarily with foreign currency forward contracts that
generally have maturity dates of less than one year. Our policy allows foreign
currency coverage only for identifiable foreign currency exposures and,
therefore, we do not enter into foreign currency contracts for trading purposes
where the objective is to generate profits. As of December 31, 2001 and 2000, we
had an U.S. dollar equivalent of $69.4 million and $103.9 million in outstanding
forward contracts with third parties.
Generally, we view our investments in foreign subsidiaries from a long-term
perspective, and therefore, do not hedge these investments. We use capital
structuring techniques to manage our investment in foreign subsidiaries as
deemed necessary.
We incurred foreign currency translation losses of $37.6 million in 2001,
$20.7 million in 2000 and $20.9 million in 1999. These losses, included in other
comprehensive expense, were the result of a general strengthening of the U.S.
dollar versus the Euro and other currencies of our foreign subsidiaries.
EURO CONVERSION
On January 1, 1999, 11 European Union member states (Germany, France, The
Netherlands, Austria, Italy, Spain, Finland, Ireland, Belgium, Portugal and
Luxembourg) adopted the Euro as their common national currency. Until January 1,
2002, either the Euro or a participating country's national currency will be
accepted as legal tender. Beginning on January 1, 2002, Euro-denominated bills
and coins will be issued, and by July 1, 2002, only the Euro will be accepted as
legal tender. We do not expect our future financial condition, results of
operations or cash flows to be materially impacted by the Euro conversion.
ACCOUNTING DEVELOPMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS
No. 141 requires that all business combinations initiated after June 30, 2001 be
accounted for using the purchase method. Additionally, SFAS No. 141 establishes
specific criteria for the recognition of intangible assets separately from
goodwill. SFAS No. 142 primarily addresses the accounting for goodwill and
intangible assets subsequent to their acquisition and was effective for us on
January 1, 2002. The most significant changes made by SFAS No. 142 require that
goodwill and indefinite lived intangible assets no longer be amortized and be
tested for impairment at least on an annual basis. Additionally, the
amortization period for intangible assets will no longer be limited to forty
years.
We are currently assessing the impact of SFAS 141 and 142 and have not yet
determined the full effects these statements will have on our consolidated
financial position or results of operations. However, we have estimated that the
reduction in annual amortization expense for goodwill and indefinite lived
intangible assets will total approximately $19 million, or approximately $14
million or $0.30 per share after-tax.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS No. 143 is effective for
us on January 1, 2003. We are currently assessing the impact of SFAS No. 143 and
have not yet determined the effects, if any, it will have on our consolidated
financial position or results of operations.
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IFC
OVERVIEW
IFC is one of the world's foremost manufacturers of valves, actuators and
associated flow control products, including steam systems. IFC was formed in
1999 through the combination of the flow control divisions of BTR plc and Siebe
plc. IFC's 12 operating companies have been selling flow control products for an
average of approximately 85 years. IFC has a comprehensive portfolio of widely
recognized and industry leading brands, offering high quality engineered
solutions to its customers. IFC's core customer base consists of businesses in
the chemical, petroleum, power, water resources and pharmaceutical industries.
The following discussion and analysis should be read in conjunction with
the combined audited and unaudited financial statements and the related notes of
IFC appearing elsewhere in this prospectus supplement. The historical combined
financial statements of IFC to which the following discussion relates were
prepared in accordance with UK GAAP with a footnote reconciliation to US GAAP.
The following discussion is based on financial information of IFC on a US GAAP
basis translated into U.S. dollars using the average exchange rates in effect
during the respective periods.
RESULTS OF OPERATIONS
Sales and operating income, before special items, for IFC for the periods
indicated are as follows:
<Table>
<Caption>
FISCAL YEAR ENDED NINE MONTHS NINE MONTHS
MARCH 31, ENDED ENDED
----------------- DECEMBER 30, DECEMBER 29,
2000 2001 2000 2001
------ ------ ------------ ------------
(IN MILLIONS)
Sales.................................... $555.5 $500.4 $363.6 $386.7
Operating income (before special
items)................................. 59.0 46.6 27.1 40.9
</Table>
NINE MONTHS ENDED DECEMBER 29, 2001 COMPARED TO NINE MONTHS ENDED DECEMBER 30,
2000
Sales of $386.7 million for the nine month period ended December 29, 2001
were up 6.4% compared with sales of $363.6 million for the nine months ended
December 30, 2000. The improvement in sales reflects market share gains due to
improved product lead times and more focused sales and marketing efforts as well
as improvements in the petroleum market during the period. These benefits were
partially offset by unfavorable currency exchange rates related to the weakening
of European currencies against the U.S. dollar during the year.
Gross profit for the nine month period ended December 29, 2001 of $142.9
million was up 7.5% from $132.9 million for the nine months ended December 30,
2000. Gross profit as a percentage of sales improved to 37.0% from 36.6% in the
prior year. The improvement reflects benefits from procurement initiatives,
plant consolidation and downsizing actions implemented in previous periods and
lean manufacturing efforts.
Selling, general and administrative expense, including research and
development expense, for the nine month period ended December 29, 2001 of $102.0
million was down 3.6% from $105.8 million for the nine month period ended
December 30, 2000 due to administrative efficiency improvements and currency
exchange rates.
Restructuring and integration expense of $4.5 million was down
significantly from $24.5 million in the prior year. This expense in both years
reflects costs associated with plant consolidations identified after the
formation of IFC and implemented throughout these periods. From the time of its
formation, IFC has reduced its headcount by 800 people, or approximately 20%,
through the closure of four facilities and downsizing. All remaining costs,
which amount to $5.5 million, have been fully accrued.
Operating income for the nine months ended December 29, 2001 improved to
$36.4 million, compared with $2.6 million in the nine month period ended
December 30, 2000. The improvement reflects
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lower restructuring and integration expense and the improvement in sales coupled
with the benefit of the cost savings initiatives. EBITDA, before special items,
for the period was up 25.0% to $66.0 million from $52.8 million in the prior
year due to the factors discussed above. EBITDA, before special items, improved
to 17.1% as a percentage of sales compared with 14.5% in the prior year.
The effective tax rate for the nine month period ended December 29, 2001
was 48.2%. This compares favorably with the prior year, but reflects IFC's mix
of earnings in higher taxed foreign countries and the negative impact of
non-deductible goodwill. The above factors resulted in net earnings of $17.4
million for the nine months ended December 29, 2001 compared with a net loss of
$8.0 million for the nine months ended December 30, 2000.
YEAR ENDED MARCH 31, 2001 COMPARED TO YEAR ENDED MARCH 31, 2000
Sales of $500.4 million for the fiscal year ended March 31, 2001 were down
9.9% compared with $555.5 million in 2000. The decline in sales resulted from
unfavorable currency exchange rates related to the weakening of European
currencies against the U.S. dollar during the period and to a lesser extent
disruption early in the fiscal year caused by plant closures initiated in 2000.
Gross profit of $194.0 million for the year was down 14.4% compared with
$226.7 million for the prior year due to the decline in sales and resultant
overhead absorption costs. Partially offsetting these impacts were favorable
cost savings associated with procurement efforts.
Selling, general and administrative expense, including research and
development expense, of $147.4 million for the year ended March 31, 2001 was
down 12.1% from the prior year of $167.7 million reflecting cost savings
associated with restructuring efforts and currency translation. Selling, general
and administrative expense as a percentage of sales was 29.5%, down from 30.2%
in the prior year.
Restructuring and integration costs for the year of $27.3 million compare
with costs of $21.2 million in the prior year. This expense in both years
reflects costs associated with plant consolidations identified after the
formation of IFC and implemented throughout these periods.
Operating income for the fiscal year ended March 31, 2001 of $19.3 million
was down from $37.8 million for the prior year due to the impact of the lower
sales volume, currency exchange rates and the higher restructuring and
integration costs, offset in part by benefits from plant consolidations and
procurement benefits. EBITDA, before special items, of $82.3 million for the
year was down 13.7% from $95.4 million in the prior year due to the factors
discussed above. EBITDA, before special items, was 16.7% as a percentage of
sales compared with 17.2% in the prior year.
The effective tax rate for the fiscal year ended March 31, 2001 was 68.8%,
compared with 76.7% in the prior year. The tax rate reflects IFC's mix of
earnings in higher taxed foreign countries and the negative impact of
non-deductible goodwill. Net earnings were $4.5 million for the fiscal year
ended March 31, 2001 compared with $7.2 million in the prior year.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The table below sets forth, as of March 1, 2002, the names and ages of our
executive officers and directors, as well as the positions and offices held by
such persons.
MANAGEMENT AND BOARD OF DIRECTORS
<Table>
<Caption>
NAME AGE POSITION
- ---- --- --------
C. Scott Greer............................ 51 Chairman, President, Chief Executive
Officer and Director
Carlos M. Cardoso......................... 43 Vice President and President of Pump
Division
Mark D. Dailey............................ 43 Vice President, Supply Chain and Continuous
Improvement
Renee J. Hornbaker........................ 49 Vice President and Chief Financial Officer
Rory E. MacDowell......................... 51 Vice President and Chief Information
Officer
Cheryl D. McNeal.......................... 51 Vice President, Human Resources
George A. Shedlarski...................... 58 Vice President, President of Flow Solutions
Division and President of Flow Control
Division
Ronald F. Shuff........................... 49 Vice President, Secretary and General
Counsel
David F. Chavenson........................ 49 Vice President and Treasurer
Kathleen A. Giddings...................... 39 Vice President and Controller
Diane C. Harris........................... 59 Director
James O. Rollans.......................... 59 Director
Hugh K. Coble............................. 67 Director
George T. Haymaker, Jr. .................. 64 Director
William C. Rusnack........................ 57 Director
Michael F. Johnston....................... 54 Director
Charles M. Rampacek....................... 58 Director
Kevin E. Sheehan.......................... 56 Director
</Table>
C. SCOTT GREER has been our President since 1999, our Chief Executive
Officer since January 2000 and our Chairman since April 2000. He has also been a
director since 1999. Mr. Greer was Chief Operating Officer in 1999 until
becoming Chief Executive Officer in January 2000. Before joining us, Mr. Greer
had been President of UT Automotive, a subsidiary of United Technologies
Corporation, a supplier of automotive systems and components, from 1997 to 1999.
He was President and a director of Echlin, Inc., an automotive parts supplier,
from 1990 to 1997, and its Chief Operating Officer from 1994 to 1997.
CARLOS M. CARDOSO has been our Vice President and President of our Pump
Division since August 2001. He had been Vice President and General Manager of
the Engine Systems and Accessories Division of Honeywell International Inc.
(formerly Allied Signal Inc.) from 1999 to August 2001. Prior to that, he served
as Vice President and General Manager of Marketing, Sales and Services/Aerospace
Services of Allied Signal Inc. from 1998 to 1999. He was Vice President of
Operations for Aerospace Equipment Systems, a division of the Allied Signal
Aerospace Sector, from 1996 to 1998.
MARK D. DAILEY has been our Vice President, Supply Chain and Continuous
Improvement since 1999. He was Vice President, Supply Chain and held other
supply chain management positions, from 1992 to 1999, for the North American
Power Tools Division of The Black and Decker Company, a manufacturer of power
tools, fastening and assembly systems, security hardware and plumbing products.
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RENEE J. HORNBAKER has been our Vice President and Chief Financial Officer
since December 1997. She was Vice President, Business Development and Chief
Information Officer in 1997. She served as Vice President, Finance and Chief
Financial Officer of BW/IP, Inc. in 1997 and its Vice President, Business
Development from 1996 to 1997.
RORY E. MACDOWELL has been our Vice President and Chief Information Officer
since 1998. He served as Chief Information Officer of Keystone International,
Inc., a manufacturer and distributor of flow control products, from 1993 to
1997.
CHERYL D. MCNEAL has been our Vice President, Human Resources since 1996.
GEORGE A. SHEDLARSKI has been our Vice President since 1987, President of
our Flow Solutions Division since January 1999 and President of our Flow Control
Division since August 1999. He was President of the Fluid Sealing Division from
1997 to 1999, President of the Service Repair Division in 1997, President of the
Rotating Equipment Group in 1997 and Group Vice President, Industrial Products
Group from 1994 to 1997.
RONALD F. SHUFF has been our Vice President since 1990 and Secretary and
General Counsel since 1988.
DAVID F. CHAVENSON has been our Vice President and Treasurer since October
2001. Formerly, he was Senior Vice President and Chief Financial Officer for
Worldwide Flight Services, Inc. from 2000 to October 2001, and Vice President,
Finance and Chief Financial Officer of Rutherford-Moran Oil Corporation from
1996 to 1999.
KATHLEEN A. GIDDINGS has been our Vice President and Controller since
October 2000. She served as Vice President and Controller of the Pump Division
from 1997 to October 2000, and as Controller from 1993 to 1997.
DIANE C. HARRIS has been a director since 1993. She is President of
Hypotenuse Enterprises, Inc., a merger and acquisition service and corporate
development outsourcing company. She was Vice President, Corporate Development,
of Bausch & Lomb, an optics and health care products company, from 1981 to 1996,
when she left to lead Hypotenuse Enterprises, Inc. She was a director of the
Association for Corporate Growth from 1993 to 1998 and its President from 1997
to 1998.
JAMES O. ROLLANS has been a director since 1997. He has been Group
Executive, Fluor Corporation, a major engineering and construction firm, since
2001. Mr. Rollans was President and Chief Executive Officer of Fluor Signature
Services, a subsidiary of Fluor Corporation, from 1999 to 2001. He was Senior
Vice President of Fluor from 1992 to 1999. He was also its Chief Financial
Officer from 1998 to 1999 and 1992 to 1994, Chief Administrative Officer from
1994 to 1998 and Vice President, Corporate Communications from 1982 to 1992. Mr.
Rollans is also a director of Fluor Corporation and Cupertino Electric, an
electrical contractor.
HUGH K. COBLE has been a director since 1994. He is Vice Chairman Emeritus
of Fluor Corporation. He was a director of Fluor Corporation from 1984 and Vice
Chairman from 1994 until his retirement in 1997. He joined Fluor Corporation in
1966 and was Group President of Fluor Daniel, Inc., a subsidiary of Fluor
Corporation, from 1986 to 1994. He is also a director of Beckman Coulter, Inc.,
a company that sells medical instruments, and Escend Technologies, a software
development company.
GEORGE T. HAYMAKER, JR. has been a director since 1997. He has been the
non-executive Chairman of the Board of Kaiser Aluminum Corporation, a company
that operates in all principal aspects of the aluminum industry, since October
2001 and the non-executive Chairman of the Board of Safelite Auto Glass, a
provider of automobile replacement glass, since October 2000. He was Chairman of
the Board of Kaiser Aluminum Corporation from 1994 until May 2001, serving as
non-executive Chairman after January 2000, and was Chief Executive Officer from
1994 to 1999. Prior to joining Kaiser Aluminum in 1993 as President and Chief
Operating Officer, Mr. Haymaker worked with a private partner in the acquisition
and redirection of several metal fabricating companies. He was Executive Vice
President of Alumax, Inc. from 1984 to 1986, and was Vice
President -- International Operations for Alcoa, Inc. from
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1982 to 1984. He is also a director of CII Carbon, LLC, a supplier for aluminum
smelters, and of Mid-America Holdings, Ltd., an aluminum extruder.
WILLIAM C. RUSNACK has been a director since 1997. He is an advisor to and
former President, Chief Executive Officer and a director of Premcor, Inc., a
company which refines crude oil to manufacture petroleum products, since 1998.
Before joining Premcor, Inc., Mr. Rusnack was Senior Vice President of Atlantic
Richfield Company, or ARCO, an integrated petroleum company, from 1990 to 1998,
and was President of ARCO Products Company from 1993 to 1998. He is also a
director of Sempra Energy, an energy-services company, and Peabody Energy, a
coal company.
MICHAEL F. JOHNSTON has been a director since 1997. He has been President
and Chief Operating Officer of Visteon Corporation, an automotive parts
supplier, since September 2000. Before joining Visteon, he was employed by
Johnson Controls, Inc., a company serving the automotive and building services
industries, as President of North America/Asia Pacific Automotive Systems Group
from 1999 to September 2000, President of Americas Automotive Group from 1997 to
1999, Vice President and General Manager of ASG Interior Systems Business during
1997, Vice President and General Manager of the Johnson Controls Battery Group
from 1993 to 1997 and Vice President and General Manager of SLI Battery Division
from 1991 to 1993.
CHARLES M. RAMPACEK has been a director since 1998. He has been Chairman of
the Board of Probex Corp., an energy technology company providing proprietary
oil recovery services, since December 2000, and its President and Chief
Executive Officer since August 2000. He was President and Chief Executive
Officer of Lyondell-Citgo Refining LP, a manufacturer of petroleum products,
from 1996 to 2000. From 1982 to 1995, he held various executive positions with
Tenneco Inc., and its energy-related subsidiaries, including President of
Tenneco Gas Transportation Company, Executive Vice President of Tenneco Gas
Operations and Senior Vice President of Refining. He is also a director of Orion
Refining Corporation, a crude oil refinery.
KEVIN E. SHEEHAN has been a director since 1990. He is Managing General
Partner and has been since 1994 a partner of CID Equity Partners, a venture
capital firm that concentrates on early-stage and high-growth entrepreneurial
companies. Before joining CID Equity Partners, he was employed by Cummins Engine
Company, a manufacturer of diesel engines and related components, for 22 years.
He served as Vice President -- Computer Systems and Telecommunications from 1980
to 1983, Vice President -- Worldwide Parts and Service from 1983 to 1986, and
Vice President -- Components Group from 1986 to 1993.
S-45
DESCRIPTION OF THE IFC PURCHASE AND SALE AGREEMENT
THE ACQUISITION
On March 21, 2002, we entered into a Purchase and Sale Agreement with
Invensys plc pursuant to which we agreed to acquire IFC from Invensys for an
aggregate cash purchase price of $535.0 million, subject to adjustment as more
fully described below. We and Invensys currently expect to close the acquisition
of IFC in May 2002.
The IFC Acquisition will be effected through our purchase of the
subsidiaries and assets that constitute IFC. Pursuant to the terms of the
Purchase and Sale Agreement, Invensys has agreed to retain specific liabilities
of IFC, including liabilities relating to specific tax matters, liabilities
relating to specific pre-closing indebtedness of IFC and liabilities resulting
from product liability claims arising out of pre-closing occurrences.
CONSIDERATION PAYABLE BY FLOWSERVE
At the closing of the IFC Acquisition, we will pay Invensys a purchase
price of $535.0 million in cash. We have also agreed to assume specific
liabilities of IFC.
The purchase price payable by us in the IFC Acquisition is subject to
potential upward or downward adjustment at the closing based on the net amount
of intercompany payables and receivables owed by or to IFC as of the date of
closing. In addition, the purchase price is subject to potential downward
adjustment after the closing of the IFC Acquisition based on:
- the amount, if any, by which IFC's EBITDA for the period from April 1,
2001 to March 31, 2002, as calculated in the manner set forth in the
Purchase and Sale Agreement, is less than $81.0 million; and
- the amount, if any, by which the net book value of IFC at March 31, 2002,
as calculated in the manner set forth in the Purchase and Sale Agreement,
is less than $262.5 million.
The purchase price is also subject to potential upward or downward
adjustment after the closing based on the net cash position of IFC as of the
date of closing.
CONDITIONS TO THE IFC ACQUISITION
Each party's obligation to consummate the IFC Acquisition is subject to a
number of standard terms and conditions, including, among other things, the
following:
- all applicable waiting periods under the Hart-Scott-Rodino Antitrust
Improvements Act with respect to the IFC Acquisition having expired or
been terminated, and all notices, consents or approvals required to be
made or obtained prior to the closing date under merger control or
competition laws, rules or regulations of any other jurisdiction
applicable to the IFC Acquisition having been made or obtained;
- all other required governmental and third-party consents and approvals
and all permits necessary for Flowserve to operate the business of IFC in
all material respects having been obtained without the imposition of
terms that would have a material adverse effect on us or IFC; and
- on the closing date there not being pending any claim, objection or
threatened objection, suit, action or other proceeding brought by a
governmental agency before any court or governmental agency seeking to
delay, prohibit or restrain the IFC Acquisition or seeking material
damages in connection with the IFC Acquisition.
S-46
In addition, each party's obligation to consummate the IFC Acquisition is
further subject to a number of additional terms and conditions, including, among
other things, the following:
- the other party having performed and complied in all material respects
with all agreements and covenants required under the Purchase and Sale
Agreement to be performed by or complied with by it on or before the
closing date;
- the representations and warranties of the other party set forth in the
Purchase and Sale Agreement being true and correct in all material
respects as of the closing date as though such representations and
warranties were made as of the closing date, except (1) for each of the
representations and warranties of such party that are limited by
materiality, which representations and warranties must be true and
correct in all respects, (2) to the extent of changes or developments
contemplated by the terms of the Purchase and Sale Agreement and (3) for
representations and warranties that speak as of a specific date or time
(which need only be true and correct as of such date or time);
- with respect only to our obligation to consummate the IFC Acquisition,
there not having occurred any change or effect that, individually or
taken together with all other related changes or effects occurring prior
thereto, is or reasonably likely to be materially adverse to (1) the
business, assets, financial condition or results of operations of IFC,
(2) the ability of Invensys to perform its obligations under the Purchase
and Sale Agreement or (3) the ability of Invensys to consummate the IFC
Acquisition;
- with respect only to our obligation to consummate the IFC Acquisition,
there not having occurred any material disruption or material adverse
change in financial, banking or capital market conditions;
- with respect only to our obligation to consummate the IFC Acquisition,
Invensys having entered into the non-competition agreement more fully
described below; and
- with respect only to our obligation to consummate the IFC Acquisition,
our being reasonably satisfied that IFC's EBITDA for the period from
April 1, 2001 to March 31, 2002, as calculated in the manner set forth in
the Purchase and Sale Agreement, is not less than $83.0 million.
INDEMNIFICATION
Invensys has agreed to indemnify us in the manner and for the time periods
set forth in the Purchase and Sale Agreement. Specifically, Invensys has agreed
to indemnify us for any loss, liability, damage or expense (other than losses,
liabilities, damages or expenses relating to certain tax matters which are the
subject of a separate tax indemnity described below) arising out of:
- any breach of any representation or warranty of Invensys set forth in the
Purchase and Sale Agreement, the indemnification period for which is two
years from the closing date (except for the representations and
warranties relating to the organization and authority of Invensys and its
subsidiaries, and the absence of conflicts with respect to their
execution, delivery and performance of the Purchase and Sale Agreement,
and the representations and warranties relating to IFC's title to real
property, the indemnification period for each of which will continue
indefinitely);
- specific environmental matters, the indemnification period for which is
ten years from the closing date;
- the failure of Invensys to pay or satisfy any liabilities with respect to
IFC that have been retained by Invensys following the closing pursuant to
the terms of the Purchase and Sale Agreement, the indemnification period
for which will continue indefinitely; and
- any breach or non-fulfillment of any covenant or agreement of Invensys
set forth in the Purchase and Sale Agreement or any other document
executed and delivered at the closing, the indemnification period for
which will continue indefinitely.
S-47
We have agreed to indemnify Invensys in the manner and for the time periods
set forth in the Purchase and Sale Agreement. Specifically, we have agreed to
indemnify Invensys for any loss, liability, damage or expense (other than
losses, liabilities, damages or expenses relating to certain tax matters which
are the subject of a separate tax indemnity described below) arising out of:
- any breach of any of our representations or warranties set forth in the
Purchase and Sale Agreement, the indemnification period for which is two
years form the closing date (except for the representations and
warranties relating to our organization and authority and the absence of
conflicts with respect to our execution, delivery and performance of the
Purchase and Sale Agreement, the indemnification period for which will
continue indefinitely);
- our failure to pay or satisfy any liabilities with respect to IFC that
have been assumed by us at the closing, the indemnification period for
which will continue indefinitely;
- any breach or non-fulfillment of any of our covenants or agreements set
forth in the Purchase and Sale Agreement or any other document executed
and delivered at the closing, the indemnification period for which will
continue indefinitely; and
- our ownership, operation or control of IFC after the closing date.
Each party's indemnification obligations described above with respect to
breaches of representations and warranties are limited in the following manner:
- neither party shall be entitled to any recovery from the other party with
respect to such a breach unless and until the amount of losses arising
from such breach exceeds $2.0 million, calculated on a cumulative basis,
which amount is referred to as the "Basket Amount", and then only with
respect to the excess over such amount;
- no party shall be entitled to indemnification for, and the Basket Amount
shall not take into account, any individual claim for less than $250,000;
and
- the aggregate amount payable by either party in respect of such breaches
shall not exceed $184.0 million.
However, the foregoing indemnity limitations do not apply to losses based
on the fraud, willful misrepresentation or willful deceit of Invensys, or losses
arising from breaches of the representations and warranties relating to the
organization and authority of Invensys and its subsidiaries, and the absence of
conflicts with respect to their execution, delivery and performance of the
Purchase and Sale Agreement, and the representations and warranties relating to
IFC's title to real property. In addition, the foregoing limitations do not
apply to the separate tax indemnity described below.
In addition, Invensys' indemnification obligations with respect to specific
environmental matters are limited in the following manner:
- we will be responsible for the first $3.25 million of costs associated
with such environmental matters;
- we will be responsible for 20% of such environmental costs in excess of
$3.25 million and Invensys will be responsible for 80% of such
environmental costs in excess of $3.25 million; and
- Invensys' liability for all such environmental costs will be limited to
$50.0 million.
TAX INDEMNIFICATION
The Purchase and Sale Agreement also provides that each party will
indemnify the other party with respect to the breach of representations,
warranties and covenants relating to tax matters, certain pre-closing and
post-closing tax liabilities relating to IFC and other actions taken or
elections made in connection with the IFC Acquisition as contemplated by the
Purchase and Sale Agreement. These tax indemnities will survive for a period of
30 days following the expiration of the applicable statute of limitations.
S-48
EMPLOYEE BENEFIT MATTERS
Under the terms of the Purchase and Sale Agreement, we agreed to assume
most obligations owed by Invensys to employees transferred to us as a result of
the IFC Acquisition, except that we are not responsible for (1) severance or
termination benefits payable to individuals terminated on or before the closing
of the IFC Acquisition, (2) retirement benefits for non-union employees in the
United States, (3) bonuses earned by transferred employees for performance
periods ending on or before the closing, (4) welfare benefits accrued as of the
closing of the IFC Acquisition, to the extent such benefits exceed $1,500,000,
or (5) retention bonuses payable to certain transferred employees.
In addition, except as otherwise required by law, we have agreed to
maintain for one year after the closing of the IFC Acquisition employee benefits
for transferred employees that in the aggregate are substantially similar to
those benefits provided by us to similarly situated employees.
NON-COMPETITION AGREEMENT
Pursuant to the terms of the Purchase and Sale Agreement, Invensys has
agreed that, prior to closing, it will enter into a non-competition agreement
with us. The non-competition agreement will provide that for a period of five
years from the closing date, Invensys and its affiliates, subject to specific
exceptions, will not engage in activities or businesses, or establish any new
businesses, that are in direct competition with the business of IFC as it was
conducted at closing, including, without limitation, the manufacture, sale or
distribution anywhere in the world of certain valve products for the industrial
automation market. In addition, for a period of three years from the closing
date, the non-competition agreement will limit the ability of Invensys to
acquire control of any entity that derives more than 12.5% of its revenues from
the manufacture, sale or distribution of such valve products for the industrial
automation market. If Invensys is acquired by a third party, its obligations
under the non-competition agreement will cease on the third anniversary of the
closing of the IFC Acquisition (or upon the closing of such acquisition if it
occurs after the third anniversary of the closing of the IFC Acquisition). A
specific amount of the aggregate purchase price payable in respect of the IFC
Acquisition has been allocated as consideration for the non-competition
agreement.
TERMINATION
The Purchase and Sale Agreement may be terminated (1) by the mutual written
consent of us and Invensys, (2) by either party if any of the closing conditions
set forth in the Purchase and Sale Agreement become incapable of fulfillment at
any time or are not fulfilled at closing and have not been waived by such party
(other than such closing conditions which inure to the benefit of solely the
other party), (3) by either party if the closing has not occurred by July 31,
2002 (unless the failure to close is due to the failure of the party seeking to
terminate to fulfill any of its Purchase and Sale Agreement obligations) or (4)
by us, after June 15, 2002, if we have not obtained the funds necessary to
consummate the IFC Acquisition as contemplated in the commitment letter executed
by us and the syndicate of financial institutions who have agreed to provide the
financing for the IFC Acquisition (other than as a result of the breach of the
Purchase and Sale Agreement by us). In the event that we exercise our right to
terminate the Purchase and Sale Agreement pursuant to the preceding clause (4),
then we will pay to Invensys a termination fee of $20.0 million.
FEES AND EXPENSES
The Purchase and Sale Agreement provides that we and Invensys will each pay
our own expenses relating to the Purchase and Sale Agreement, and that Invensys
will pay the fees and expenses of IFC relating to the Purchase and Sale
Agreement.
REGULATORY APPROVALS
Under the Hart-Scott-Rodino Antitrust Improvements Act, the IFC Acquisition
may not be completed until notification has been given to the Federal Trade
Commission and the Antitrust Division of
S-49
the U.S. Department of Justice and the specified waiting period has been
terminated or expired. We and Invensys each filed a notification and report form
with the Federal Trade Commission and the U.S. Department of Justice on March
22, 2002. The waiting period under the Hart-Scott-Rodino Antitrust Improvements
Act, unless earlier terminated, will expire on April 22, 2002, although such
period may be extended in the event the Federal Trade Commission or the U.S.
Department of Justice request additional information regarding the IFC
Acquisition. In such an event, the waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act would expire twenty days after we and Invensys have
complied with such request.
The IFC Acquisition is also subject to regulatory review in various foreign
countries, including certain member states of the European Union.
S-50
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 2002, we have agreed to sell to the underwriters
named below, for whom Credit Suisse First Boston Corporation, Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Banc of America Securities LLC and Bear,
Stearns & Co. Inc. are acting as representatives, the following respective
numbers of shares of common stock:
<Table>
<Caption>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
Credit Suisse First Boston Corporation......................
Merrill Lynch, Pierce, Fenner & Smith.......................
Incorporated...................................
Banc of America Securities LLC..............................
Bear, Stearns & Co. Inc. ...................................
---------
Total.................................................. 8,000,000
=========
</Table>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults the
purchase commitments of non-defaulting underwriters may be increased or the
offering may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to 1,200,000 additional shares from us at the public offering
price less the underwriting discounts and commissions. The option may be
exercised only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus supplement and to
selling group members at that price less a selling concession of $ per
share. The underwriters and selling group members may allow a discount of
$ per share on sales to other broker/dealers. After the initial public
offering the representatives may change the public offering price and concession
and discount to broker/dealers.
The following table summarizes the compensation and estimated expenses we
will pay:
<Table>
<Caption>
PER SHARE TOTAL
------------------------------- -------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
-------------- -------------- -------------- --------------
Underwriting Discounts and
Commissions payable by us..... $ $ $ $
Expenses payable by us.......... $ $ $ $
</Table>
If we do not consummate the IFC Acquisition, we may use more than 10% of
the net proceeds from the sale of the common stock to repay indebtedness owed by
us to affiliates of Credit Suisse First Boston Corporation and Banc of America
Securities LLC, both of whom are underwriters in this offering. In that case,
this offering will be made in compliance with the requirements of Rule
2710(c)(8) of the National Association of Securities Dealers, Inc. Conduct
Rules.
We have agreed that we will not, subject to certain exceptions, offer,
sell, contract to sell, pledge or otherwise dispose of, directly or indirectly,
or file with the Securities and Exchange Commission a registration statement
under the Securities Act of 1933 (the "Securities Act") relating to any shares
of our common stock or securities convertible into or exchangeable or
exercisable for any shares of our common stock, or publicly disclose the
intention to make any offer, sale, pledge, disposition or filing,
S-51
without the prior written consent of Credit Suisse First Boston Corporation, for
a period of 90 days after the date of this prospectus.
Prior to the date of this prospectus supplement, our officers and directors
will have agreed that for a period of 90 days after the date of this prospectus
supplement they will not, subject to certain exceptions, offer, sell, contract
to sell, pledge or otherwise dispose of, directly or indirectly, any shares of
our common stock or securities convertible into or exchangeable or exercisable
for any shares of our common stock, enter into a transaction that would have the
same effect, or enter into any swap, hedge or other arrangement that transfers,
in whole or in part, any of the economic consequences of ownership of our common
stock, whether any of these transactions are to be settled by delivery of our
common stock or other securities, in cash or otherwise, or publicly disclose the
intention to make any such offer, sale, pledge or disposition, or enter into any
transaction, swap, hedge or other arrangement, without, in each case, the prior
written consent of Credit Suisse First Boston Corporation.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments that the underwriters may be required
to make in that respect.
Certain of the underwriters and their respective affiliates have from time
to time performed and may in the future perform various financial advisory,
commercial banking and investment banking services for us, for which they
received or will receive customary fees. Specifically, affiliates of Credit
Suisse First Boston Corporation and Bank of America Securities LLC are lenders
under our existing senior credit facilities and have received customary banking
fees in that capacity. In addition, affiliates of Credit Suisse First Boston
Corporation, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Banc of America
Securities LLC and Bear, Stearns & Co. Inc. have provided commitments under the
Incremental Tranche A Term Loan and the Incremental Tranche C Term Loan in
connection with the IFC Acquisition and have received customary banking fees in
that capacity.
In connection with the offering the underwriters may engage in stabilizing
transactions, over-allotment transactions, syndicate covering transactions, and
penalty bids in accordance with Regulation M under the Securities Exchange Act
of 1934 (the "Exchange Act").
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
- Over-allotment involves sales by the underwriters of shares in excess of
the number of shares the underwriters are obligated to purchase, which
creates a syndicate short position. The short position may be either a
covered short position or a naked short position. In a covered short
position, the number of shares over-allotted by the underwriters is not
greater than the number of shares that they may purchase in the
over-allotment option. In a naked short position, the number of shares
involved is greater than the number of shares in the over-allotment
option. The underwriters may close out any covered short position by
either exercising their over-allotment option and/or purchasing shares in
the open market.
- Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions. In determining the source of shares to
close out the short position, the underwriters will consider, among other
things, the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through the
over-allotment option. If the underwriters sell more shares than could be
covered by the over-allotment option, a naked short position, the
position can only be closed out by buying shares in the open market. A
naked short position is more likely to be created if the underwriters are
concerned that there could be downward pressure on the price of the
shares in the open market after pricing that could adversely affect
investors who purchase in the offering.
- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a stabilizing or syndicate covering
transaction to cover syndicate short positions.
S-52
These stabilizing transactions, syndicate covering transactions and penalty bids
may have the effect of raising or maintaining the market price of our common
stock or preventing or retarding a decline in the market price of the common
stock. As a result the price of our common stock may be higher than the price
that might otherwise exist in the open market. These transactions may be
effected on The New York Stock Exchange or otherwise and, if commenced, may be
discontinued at any time.
A prospectus in electronic format may be made available on the web sites
maintained by one or more of the underwriters, or selling group members, if any,
participating in this offering. The representatives may agree to allocate a
number of shares to underwriters and selling group members for sale to their
online brokerage account holders. Internet distributions will be allocated by
the underwriters and selling group members that will make internet distributions
on the same basis as other allocations.
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are made. Any resale of the common stock in Canada must
be made under applicable securities laws which will vary depending on the
relevant jurisdiction, and which may require resales to be made under available
statutory exemptions or under a discretionary exemption granted by the
applicable Canadian securities regulatory authority. Purchasers are advised to
seek legal advice prior to any resale of the common stock.
REPRESENTATIONS OF PURCHASERS
By purchasing common stock in Canada and accepting a purchase confirmation
a purchaser is representing to us and the dealer from whom the purchase
confirmation is received that
- the purchaser is entitled under applicable provincial securities laws to
purchase the common stock without the benefit of a prospectus qualified
under those securities laws,
- where required by law, that the purchaser is purchasing as principal and
not as agent, and
- the purchaser has reviewed the text above under Resale Restrictions.
RIGHTS OF ACTION -- ONTARIO PURCHASERS ONLY
Under Ontario securities legislation, a purchaser who purchases a security
offered by this prospectus during the period of distribution will have a
statutory right of action for damages, or while still the owner of the shares,
for rescission against us in the event that this prospectus contains a
misrepresentation. A purchaser will be deemed to have relied on the
misrepresentation. The right of action for damages is exercisable not later than
the earlier of 180 days from the date the purchaser first had knowledge of the
facts giving rise to the cause of action and three years from the date on which
payment is made for the shares. The right of action for rescission is
exercisable not later than 180 days from the date on which payment is made for
the shares. If a purchaser elects to exercise the right of action for
rescission, the purchaser will have no right of action for damages against us.
In no case will the amount recoverable in any action exceed the price at which
the shares were offered to the purchaser and if the purchaser is shown to have
purchased the securities with knowledge of the misrepresentation, we will have
no liability. In the case of an action for damages, we will not be liable for
all or any portion of the damages that are proven to not represent the
depreciation in value of the shares as a result of the misrepresentation relied
upon. These rights are in addition to, and without derogation from, any other
rights or remedies available at law to an Ontario purchaser. The foregoing is a
summary of the rights available to an Ontario purchaser. Ontario purchasers
should refer to the complete text of the relevant statutory provisions.
S-53
ENFORCEMENT OF LEGAL RIGHTS
All of our directors and officers as well as the experts named herein may
be located outside of Canada and, as a result, it may not be possible for
Canadian purchasers to effect service of process within Canada upon us or those
persons. All or a substantial portion of our assets and the assets of those
persons may be located outside of Canada and, as a result, it may not be
possible to satisfy a judgment against us or those persons in Canada or to
enforce a judgment obtained in Canadian courts against us or those persons
outside of Canada.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and about the eligibility of the common
stock for investment by the purchaser under relevant Canadian legislation.
RELATIONSHIP WITH AFFILIATES OF CERTAIN UNDERWRITERS
We are in compliance with the terms of the indebtedness owed by us to
affiliates of Credit Suisse First Boston Corporation and Banc of America
Securities LLC. The decision of Credit Suisse First Boston Corporation and Banc
of America Securities LLC to distribute our shares of common stock was not
influenced by their respective affiliates that are our lenders and those
affiliates had no involvement in determining whether or when to distribute our
shares of common stock under this offering or the terms of this offering. In the
event we do not consummate the IFC Acquisition, we intend to use the net
proceeds from this offering to repay indebtedness owed by us to affiliates of
Credit Suisse First Boston Corporation and Banc of America Securities LLC.
LEGAL MATTERS
Certain legal matters with respect to the validity of the common stock
offered hereby will be passed upon by Cravath, Swaine & Moore, New York, New
York. The underwriters have been represented by Davis Polk & Wardwell, New York,
New York.
EXPERTS
The consolidated financial statements of Flowserve Corporation as of
December 31, 2001 and 2000 and for each of the two years in the period ended
December 31, 2001 incorporated in this prospectus supplement by reference to its
Annual Report on Form 10-K for the year ended December 31, 2001, have been so
incorporated in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The consolidated financial statements of operations, comprehensive loss,
shareholders' equity and cash flows of Flowserve Corporation and its
subsidiaries for the year ended December 31, 1999, incorporated by reference in
Flowserve Corporation's Annual Report (Form 10-K) for the year ended December
31, 2001, and the related financial statement schedule for the year ended
December 31, 1999, included in the Annual Report (Form 10-K) for the year ended
December 31, 2001, have been audited by Ernst & Young LLP, independent auditors,
as set forth in their reports thereon included or incorporated by reference
therein and incorporated herein by reference. Such consolidated financial
statements and schedule are incorporated herein by reference in reliance upon
such report given on the authority of such firm as experts in auditing and
accounting.
The combined financial statements of Invensys Flow Control as of March 31,
2000 and 2001 and for each of the two years in the period ended March 31, 2001
included in this prospectus supplement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report appearing elsewhere herein,
and are included in reliance upon such report given on the authority of such
firm as experts in auditing and accounting.
S-54
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with SEC under the Securities Exchange Act of 1934. You may read and
copy any document we file at the public reference room maintained by the SEC at
450 Fifth Street, N.W., Judiciary Plaza, Room 1024, Washington, D.C. 20549.
You may obtain information on the operation of the public reference room in
Washington, D.C. by calling the SEC at 1-800-SEC-0330.
We file information electronically with the SEC. Our SEC filings also are
available from the SEC's Internet site at http://www.sec.gov, which contains
reports, proxy and information statements, and other information regarding
issuers that file electronically.
You may also inspect and copy our SEC filings and other information at the
offices of the New York Stock Exchange located at 20 Broad Street, 16th Floor,
New York, New York 10005.
INCORPORATION OF INFORMATION WE FILE WITH THE SEC
The SEC allows us to "incorporate by reference" the information we file
with them, which means that we may disclose important information to you by
referring you to those documents. The information incorporated by reference is
an important part of this prospectus supplement, and information that we file
after the date of this prospectus supplement will automatically update and
supersede this information. We incorporate by reference the documents listed
below and any future filings made with the SEC under Section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934 until all of the securities
described in this prospectus supplement are sold:
- our Annual Report on Form 10-K for the year ended December 31, 2001; and
- our Current Reports on Form 8-K, filed March 22, 2002, March 29, 2002 and
April 3, 2002.
You may request a copy of these filings (other than an exhibit to a filing
unless that exhibit is specifically incorporated by reference into that filing)
at no cost, by writing or telephoning us at the following address:
Flowserve Corporation
222 West Las Colinas Boulevard, Suite 1500
Irving, Texas 75039
Attention: Corporate Secretary
(972) 443-6543
This prospectus supplement is part of a registration statement we filed
with the SEC. This prospectus supplement does not contain all of the information
contained in the registration statement and all of the exhibits and schedules
thereto. For further information about Flowserve, please see the complete
registration statement. Any statement made in this prospectus supplement
concerning the contents of any agreement or other document is only a summary of
the actual document. If we have filed any agreement or other document as an
exhibit to the registration statement, you should read the exhibit for a more
complete understanding of the document or the matter involved. Each statement
regarding an agreement or other document is qualified in its entirety by
reference to the actual document.
S-55
INDEX TO COMBINED FINANCIAL STATEMENTS OF INVENSYS FLOW CONTROL
<Table>
<Caption>
PAGE
----
Report of Independent Auditors.............................. F-2
Audited Combined Financial Statements
Combined Profit and Loss Accounts for the years ended
March 31, 2000 and 2001................................ F-3
Combined Balance Sheets as of March 31, 2000 and 2001..... F-4
Combined Cash Flow Statements for the years ended March
31, 2000 and 2001...................................... F-5
Combined Statements of Total Recognized Gains and Losses
for the years ended March 31, 2000 and 2001............ F-6
Combined Statements of Movements in Invested Capital for
the years ended March 31, 2000 and 2001................ F-7
Notes to Combined Financial Statements.................... F-8
Unaudited Condensed Combined Financial Statements
Condensed Combined Profit and Loss Accounts for the nine
months ended December 30, 2000 and December 29, 2001... F-36
Condensed Combined Balance Sheet as of December 29,
2001................................................... F-37
Condensed Combined Cash Flow Statements for the nine
months ended December 30, 2000 and December 29, 2001... F-38
Condensed Combined Statements of Total Recognized Gains
and Losses for the nine months ended December 30, 2000
and December 29, 2001.................................. F-39
Condensed Combined Statements of Movements in Invested
Capital for the nine months ended December 30, 2000 and
December 29, 2001...................................... F-40
Notes to Condensed Combined Financial Statements.......... F-41
</Table>
F-1
INVENSYS FLOW CONTROL
REPORT OF INDEPENDENT AUDITORS
To The Board of Directors
Invensys plc
We have audited the accompanying combined balance sheets of Invensys Flow
Control as of March 31, 2000 and 2001 and the related combined profit and loss
accounts, combined statements of total recognized gains and losses, movements in
Invested Capital and cash flows for each of the two years in the period ended
March 31, 2001. These combined financial statements are the responsibility of
Invensys plc management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with United Kingdom auditing
standards and United States generally accepted auditing standards. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Invensys
Flow Control at March 31, 2000 and 2001, and the combined results of its
operations and its combined cash flows for each of the two years in the period
ended March 31, 2001, in conformity with accounting principles generally
accepted in the United Kingdom which differ in certain respects from those
generally accepted in the United States (see Note 27 of Notes to the Financial
Statements).
ERNST & YOUNG LLP
London, England
April 3, 2002
F-2
INVENSYS FLOW CONTROL
COMBINED PROFIT AND LOSS ACCOUNTS
<Table>
<Caption>
YEAR ENDED MARCH 31
-------------------
NOTES 2000 2001
----- ------ ------
(L MILLION)
TURNOVER
Continuing operations Ongoing............................. 3 345.2 337.4
===== =====
OPERATING PROFIT BEFORE EXCEPTIONAL ITEMS AND GOODWILL
AMORTIZATION
Continuing operations Ongoing............................. 42.5 37.4
OPERATING EXCEPTIONAL ITEMS
Restructuring costs........................................ 4 (25.5) (18.4)
----- -----
OPERATING PROFIT BEFORE GOODWILL AMORTIZATION.............. 17.0 19.0
Goodwill amortization...................................... (0.3) (0.3)
----- -----
OPERATING PROFIT CONTINUING OPERATIONS..................... 5 16.7 18.7
Share of operating profit of associated undertakings....... 10 1.6 1.7
----- -----
PROFIT ON ORDINARY ACTIVITIES BEFORE INTEREST AND
TAXATION................................................. 18.3 20.4
Net interest payable and similar charges(a)................ 9 (4.3) (4.0)
----- -----
PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION.............. 6 14.0 16.4
Tax on profit on ordinary activities(a).................... 11 (9.4) (5.4)
----- -----
PROFIT ON ORDINARY ACTIVITIES AFTER TAXATION............... 4.6 11.0
Minority interests -- equity............................... (0.1) (0.1)
----- -----
PROFIT FOR THE FINANCIAL YEAR(b)........................... 4.5 10.9
===== =====
</Table>
- ---------------
(a) Net interest payable and similar charges and tax on profit on ordinary
activities reflect the fact that Invensys Flow Control is part of the
Invensys Group's financing and taxation arrangements and consequently these
amounts are not indicative of those that would have arisen had Invensys
Flow Control been a standalone entity, as is described in more detail in
Note 1 of Notes to the Financial Statements.
(b) A summary of the significant adjustments to profit for the financial year
that would be required if United States generally accepted accounting
principles were to be applied instead of those generally accepted in the
United Kingdom is set forth in Note 27 of Notes to the Financial
Statements.
The Notes to the Financial Statements are an integral part of these Financial
Statements.
F-3
INVENSYS FLOW CONTROL
COMBINED BALANCE SHEETS
<Table>
<Caption>
YEAR ENDED MARCH 31
-------------------
NOTES 2000 2001
----- ------- -------
(L MILLION)
FIXED ASSETS
Intangible assets.......................................... 12 5.9 5.2
Tangible assets............................................ 13 113.5 118.3
Investments in associated undertakings..................... 14 5.6 6.3
Other investments.......................................... 14 0.2 0.3
------ ------
125.2 130.1
------ ------
CURRENT ASSETS
Stocks..................................................... 15 75.4 76.0
Debtors: amounts falling due within one year............... 16 67.0 72.4
Invensys Group balances falling due within one year........ 5.2 2.0
Debtors: amounts falling due after more than one year...... 16 1.3 0.5
Invensys Group balances falling due after more than one
year(a).................................................. 113.6 110.2
Cash(a).................................................... 40.6 45.5
------ ------
303.1 306.6
Creditors: amounts falling due within one year
Short-term borrowings(a)................................. 17 (7.0) (2.3)
Other creditors.......................................... 17 (65.5) (69.4)
Invensys Group balances.................................. (6.4) (2.8)
------ ------
NET CURRENT ASSETS......................................... 224.2 232.1
------ ------
TOTAL ASSETS LESS CURRENT LIABILITIES...................... 349.4 362.2
Creditors: amounts falling due after more than one year
Long-term borrowings(a).................................. 18 (10.3) (9.7)
Invensys Group balances(a)............................... (154.6) (152.9)
------ ------
(164.9) (162.6)
------ ------
Provisions for liabilities and charges..................... 21 (58.9) (53.2)
------ ------
NET ASSETS................................................. 125.6 146.4
Minority interests -- equity............................... (0.6) (0.7)
------ ------
125.0 145.7
====== ======
INVESTED CAPITAL(b)........................................ 125.0 145.7
====== ======
</Table>
- ---------------
(a) The level of debt and financing arrangements reflect the treasury policy
operated by Invensys Group. It is not representative of the financing
structure that Invensys Flow Control would have had if it had been a
standalone entity.
(b) A summary of the significant adjustments to invested capital that would be
required if United States generally accepted accounting principles were to
be applied instead of those generally accepted in the United Kingdom is set
forth in Note 27 of Notes to the Financial Statements.
The Notes to the Financial Statements are an integral part of these Financial
Statements.
F-4
INVENSYS FLOW CONTROL
COMBINED CASH FLOW STATEMENTS
<Table>
<Caption>
YEAR ENDED MARCH 31
-------------------
NOTES 2000 2001
----- ----- ------
(L MILLION)
Net cash inflow from operating activities.................. 24 43.1 34.2
Returns on investments and servicing of finance(a)......... 24 (3.6) (3.4)
Taxation(a)................................................ 24 (5.7) (4.2)
Capital expenditure and financial investment............... 24 (9.3) (12.7)
---- -----
Cash inflow before financing............................... 24.5 13.9
Financing:
Capital contributions(a)................................. 3.6 --
Increase/(decrease) in debt(a)........................... 24 5.6 (3.7)
---- -----
INCREASE IN CASH IN YEAR(a)................................ 33.7 10.2
==== =====
</Table>
RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
<Table>
<Caption>
YEAR ENDED MARCH 31
-------------------
NOTES 2000 2001
----- ------ ------
(L MILLION)
Increase in cash in year(a)................................ 33.7 10.2
Cash (inflow)/outflow from (increase)/decrease in
debt(a).................................................. 24 (5.6) 3.7
----- -----
Change in net debt resulting from cash flows............... 24 28.1 13.9
New finance leases......................................... -- (0.2)
Exchange movements......................................... 24 (3.3) (7.6)
Other movements............................................ -- 2.4
----- -----
Movement in net debt in year............................... 24.8 8.5
Net debt at beginning of year(a)........................... 24 (42.5) (17.7)
----- -----
Net debt at end of year(a)................................. 24 (17.7) (9.2)
===== =====
</Table>
- ---------------
(a) Cash flows relating to interest, tax and funding reflect the fact that
Invensys Flow Control is part of the Invensys Group's financing and
taxation arrangements and consequently these amounts are not indicative of
those that would have arisen had Invensys Flow Control been a standalone
entity.
(b) The significant differences between the cash flow statement presented above
and that required under United States generally accepted accounting
principles are described in Note 27 of Notes to the Financial Statements.
The Notes to the Financial Statements are an integral part of these Financial
Statements.
F-5
INVENSYS FLOW CONTROL
COMBINED STATEMENTS OF TOTAL RECOGNIZED GAINS AND LOSSES
<Table>
<Caption>
YEAR ENDED
MARCH 31
------------
2000 2001
----- ----
(L MILLION)
Profit for the financial year............................... 4.5 10.9
Currency translation differences on foreign currency net
investments............................................... (12.8) 12.3
----- ----
TOTAL RECOGNIZED GAINS AND LOSSES FOR THE YEAR.............. (8.3) 23.2
===== ====
</Table>
- ---------------
Comprehensive income as required by United States generally accepted accounting
principles is set forth in Note 27 of Notes to the Financial Statements.
The Notes to the Financial Statements are an integral part of these Financial
Statements.
F-6
INVENSYS FLOW CONTROL
COMBINED STATEMENTS OF MOVEMENTS IN INVESTED CAPITAL
<Table>
<Caption>
YEAR ENDED
MARCH 31
-------------
2000 2001
----- -----
(L MILLION)
Profit for the financial year............................... 4.5 10.9
Currency translation differences on foreign currency net
investments............................................... (12.8) 12.3
Other movements in invested capital......................... 4.9 (2.5)
----- -----
(3.4) 20.7
Opening invested capital(a)................................. 128.4 125.0
----- -----
CLOSING INVESTED CAPITAL(a)................................. 125.0 145.7
===== =====
</Table>
At March 31, 2001, the cumulative amount of goodwill resulting from
acquisitions made prior to April 5, 1998 which has been eliminated against
Invested Capital prior to April 5, 1998 is L90.9 million (2000 L83.9 million).
- ---------------
(a) Invested Capital represents the aggregate capital and reserves of the
companies and businesses of Invensys Flow Control and the net investment in
Invensys Flow Control by Invensys.
The Notes to the Financial Statements are an integral part of these Financial
Statements.
F-7
INVENSYS FLOW CONTROL
NOTES TO THE FINANCIAL STATEMENTS
1. BASIS OF PREPARATION
The businesses and companies which will be sold in accordance with the Sale
& Purchase Agreement to be dated on or around 20 December 2001 (herein defined
as 'Invensys Flow Control') are set out in Note 26 of Notes to the Financial
Statements. They are all 100% owned, except where indicated, within the Invensys
Group.
The combined financial statements have been prepared to show the
performance of Invensys Flow Control for the two years in the period ended March
31, 2001. The combined financial statements do not constitute statutory accounts
as defined in section 240 of the Companies Act 1985.
In respect of the basis of preparation:
(a) Invensys plc was formed from the merger of Siebe plc and BTR plc
on February 4, 1999. The combined financial statements have been prepared
using merger accounting principles as if the companies, businesses and
assets comprising Invensys Flow Control, owned by Invensys throughout the
two years ended March 31, 2001, had been part of Invensys Flow Control for
all periods presented.
(b) Transactions and balances between companies and businesses forming
part of Invensys Flow Control have been eliminated.
(c) Interest income and expense are based on amounts charged or
received in respect of debt balances mainly due to or from Invensys, as
recorded in the historical financial returns. This debt is a combination of
interest free and interest bearing funding. These financial arrangements
were designed and implemented on an Invensys Group basis rather than from
the perspective of the financing needs of Invensys Flow Control. As such,
the historical level of interest income and expense are not necessarily
representative of the historical amounts that would have been charged had
Invensys Flow Control been a stand-alone entity.
(d) In respect of taxation, tax charges, cash flows, assets and
liabilities reflect amounts charged or received as recorded in the
historical financial returns. In the accounting periods under review, there
have been various tax sharing arrangements between Invensys plc, those
subsidiaries that will form part of Invensys Flow Control and other
Invensys subsidiaries. These arrangements have had the effect that tax
charges and cash flows shown in the combined financial statements are not
necessarily representative of tax charges and cash flows that would have
been incurred had Invensys Flow Control been a standalone entity.
(e) Invested Capital represents the aggregate capital and reserves of
the companies and businesses of Invensys Flow Control and the net
investment in Invensys Flow Control by Invensys.
2. ACCOUNTING POLICIES
BASIS OF ACCOUNTING
These combined financial statements are prepared in accordance with the
above basis of preparation and under the historical cost convention and in
accordance with applicable UK accounting standards.
TURNOVER
Turnover represents the invoiced value of goods supplied by Invensys Flow
Control, excluding intra-Invensys Flow Control transactions, sales by associated
undertakings and sales taxes. Turnover relating to the provision of services is
recognized rateably over the period that services are provided. Turnover
relating to long-term contracts represents the current value of work completed
during the year on a percentage of completion basis.
F-8
INVENSYS FLOW CONTROL
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
RESEARCH AND DEVELOPMENT
Research and development expenditure is expensed as incurred.
PENSION COSTS AND OTHER POSTRETIREMENT BENEFITS
The expected costs of providing pensions and other postretirement benefits
are charged to the profit and loss account so as to spread the costs over the
service lives of the participating employees. The costs are assessed in
accordance with the advice of actuaries, and provision is made in the financial
statements along with the associated deferred taxation effect.
GOODWILL
On acquisition, the fair value of net assets is assessed and adjustments
are made to bring the accounting policies of businesses acquired into alignment
with those of Invensys Flow Control. The difference between the price paid for
and the fair value of identifiable net assets acquired is capitalized and
amortized over its economic life, depending on the nature of the acquisition,
for a period not exceeding 20 years. Any costs of integrating the acquired
business are taken to the profit and loss account.
Goodwill relating to acquisitions prior to April 5, 1998, the date that
Financial Reporting Standard No 10: Goodwill and Intangible Assets (FRS 10)
became applicable to Invensys Flow Control, has been eliminated against invested
capital. Goodwill previously eliminated against invested capital is charged to
the profit and loss account in so far as it relates to disposals in the year.
DEPRECIATION OF TANGIBLE FIXED ASSETS
Tangible fixed assets are depreciated to their residual values on a
straight line basis over their estimated useful lives at the following annual
rates applied to original cost.
<Table>
Freehold land............................................... Nil
Freehold buildings.......................................... 2-2.5%
Plant and machinery......................................... 7-10%
Computer software systems................................... 10-25%
</Table>
IMPAIRMENT OF FIXED ASSETS
Impairment reviews are undertaken if there are indications that the
carrying values may not be recoverable. The discount rate used is the Invensys
Group pre-tax weighted average cost of capital, adjusted for Invensys Flow
Control specific risks.
LEASED ASSETS
Assets held under finance leases are capitalized and included in tangible
fixed assets at fair value. Each asset is depreciated over the shorter of the
lease term or its useful life. Obligations related to finance leases, net of
finance charges in respect of future periods, are included as appropriate within
creditors. The interest element of the rental obligation is allocated to
accounting periods during the lease term to reflect a constant rate of interest
on the remaining balance of the obligation for each accounting period. Rentals
under operating leases are charged to the profit and loss account on a
straight-line basis.
STOCKS
Stocks and work in progress are valued at the lower of cost, computed on a
first in first out basis, and estimated net realizable value. Cost comprises the
cost of raw materials and an appropriate proportion of
F-9
INVENSYS FLOW CONTROL
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
labor and overheads. Provision is made for obsolete and slow moving items and
for unrealized profits on items of inter-company manufacture.
The net realizable value of long-term contracts is arrived at having regard
to the estimated cost to completion. A prudent level of profit attributable to
the contract activity is taken up if the final outcome of such contracts can be
reliably assessed. On all contracts, full provision is made for any losses in
the year in which they are first foreseen. Profits are recognized on a
percentage of completion basis on contracts that exceed three months and are
above a minimum value.
CASH AND BORROWINGS
Cash and short-term deposits at the balance sheet date are deducted from
bank loans and overdrafts where formal rights of set-off exist.
DEFERRED TAXATION
FRS19 "Deferred Tax" has been adopted in preparing these combined financial
statements. Under FRS19, deferred tax is recognised in respect of all timing
differences that have originated but not reserved at the balance sheet date
where transactions or events have occurred at the date that will result in an
obligation to pay more, or right to pay less or to receive more tax, with the
following exceptions:
- Provision is made for tax on gains arising from the revaluation (and
similar fair value adjustments) of fixed assets, or gains on disposal of
fixed assets, only to the extent that, at the balance sheet date, there
is a binding agreement to dispose of the assets concerned. However, no
provision is made where, on the basis of all available evidence at the
balance sheet date, it is more likely than not that the taxable gain will
be rolled over into replacement assets.
- Provision is made for gains which have been rolled over into replacement
assets only to the extent that, at the balance sheet date, there is a
commitment to dispose of the replacement assets.
- Provision is made for deferred tax that would arise on remittance of the
retained earnings of overseas subsidiaries, associates and joint-ventures
only to the extent at the balance sheet date, dividends have been accrued
as receivable.
- Deferred tax assets are recognised only to the extent that it is
considered that it is more likely than not that there will be suitable
taxable profits from which the underlying timing differences can be
deducted.
Deferred tax is measured on an undiscounted basis at the tax rates that are
expected to apply in the periods in which timing differences reverse, based on
tax rates and laws enacted or substantively enacted at the balance sheet date.
DERIVATIVE INSTRUMENTS
Invensys Flow Control primarily uses forward foreign currency contracts to
manage its exposures to fluctuations in foreign exchange. These instruments are
accounted for as hedges when designated as hedges at the inception of contracts.
As a result, gains and losses on foreign exchange contracts are off-set against
the foreign exchange gains and losses on the related financial assets and
liabilities. Where the instrument is used to hedge against future transactions,
gains and losses are not recognized until the transaction occurs.
F-10
INVENSYS FLOW CONTROL
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
FOREIGN CURRENCIES
The trading results of overseas companies and businesses are translated
into sterling at average rates of exchange ruling during the year. The
retranslation of the retained earnings of overseas companies and businesses to
closing rates is dealt with as a movement in Invested Capital.
Assets and liabilities of overseas companies and businesses, including
goodwill, are translated into sterling at the rates of exchange ruling at the
balance sheet date and any exchange differences are taken to Invested Capital.
Currency differences arising from the translation at closing rate of the
investment in overseas companies and businesses are taken to invested capital,
together with exchange gains and losses arising on foreign currency borrowings
which finance a proportion of foreign currency investments.
All other exchange differences are included in the profit and loss account
for the year.
3. SEGMENTAL ANALYSIS
TURNOVER
Invensys Flow Control operates in one business sector, the manufacture and
sale of valves, actuators and associated flow control products.
The amount of turnover with Invensys Group is given in Note 25 of Notes to
the Financial Statements.
Geographical analysis by destination
<Table>
<Caption>
YEAR ENDED
MARCH 31
-------------
2000 2001
----- -----
(L MILLION)
United Kingdom.............................................. 23.1 20.9
Germany..................................................... 51.0 45.7
Rest of Europe.............................................. 98.4 84.7
North America............................................... 131.5 147.8
Rest of World............................................... 41.2 38.3
----- -----
345.2 337.4
===== =====
</Table>
4. OPERATING EXCEPTIONAL ITEMS
RESTRUCTURING COSTS
Restructuring costs of L18.4 million (2000 L25.5 million) include Lnil
(2000 L23.9 million) relating to Invensys Flow Control operations, arising on
the merger of Siebe and BTR and L18.4 million (2000 L1.6 million) in respect of
other restructuring.
These restructuring costs include L4.2 million (2000 L19.6 million) of
redundancy and severance costs.
F-11
INVENSYS FLOW CONTROL
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
5. OPERATING PROFIT
<Table>
<Caption>
YEAR ENDED
MARCH 31
---------------
2000 2001
------ ------
(L MILLION)
Turnover.................................................... 345.2 337.4
Cost of sales............................................... (203.3) (205.7)
------ ------
Gross profit................................................ 141.9 131.7
Distribution costs.......................................... (10.4) (9.9)
Administrative costs........................................ (89.0) (84.4)
------ ------
Operating profit before exceptional items and goodwill
amortization.............................................. 42.5 37.4
Restructuring costs......................................... (25.5) (18.4)
Goodwill amortization....................................... (0.3) (0.3)
------ ------
Operating profit............................................ 16.7 18.7
====== ======
</Table>
Restructuring costs and goodwill amortization are classified as
administrative costs. Total administrative costs are L103.7 million (2000 L115.4
million).
6. PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION
Profit on ordinary activities before taxation is stated after charging the
following:
<Table>
<Caption>
YEAR ENDED
MARCH 31
-----------
2000 2001
---- ----
(L MILLION)
Depreciation of tangible fixed assets
Owned..................................................... 15.3 17.2
Leased.................................................... 0.4 0.4
Amortization of goodwill.................................... 0.3 0.3
Operating lease rentals
Hire of plant and machinery............................... 1.8 1.5
Other..................................................... 2.9 3.2
Research and development.................................... 2.8 3.0
</Table>
FEES PAID TO ERNST & YOUNG
Ernst & Young were paid L0.2 million (2000 L0.2 million) in respect of
their audit of Invensys Flow Control operations for the Invensys Group statutory
audit. In addition, Ernst & Young were paid L0.1 million (2000 L0.1 million) in
respect of other services. These include fees paid for local statutory audits,
taxation advice and due diligence on acquisitions.
F-12
INVENSYS FLOW CONTROL
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
7. STAFF NUMBERS AND COSTS
The average number of persons employed by Invensys Flow Control was:
<Table>
<Caption>
YEAR ENDED
MARCH 31
-------------
2000 2001
----- -----
(NUMBER)
Marketing and distribution.................................. 879 813
Production.................................................. 2,086 1,813
Technical................................................... 208 214
Finance and administration.................................. 351 283
----- -----
3,524 3,123
===== =====
</Table>
The aggregate payroll costs of these persons were as follows:
<Table>
<Caption>
YEAR ENDED
MARCH 31
-------------
2000 2001
----- -----
(L MILLION)
Wages and salaries.......................................... 79.7 81.3
Social security costs....................................... 13.9 12.1
Pension and other payroll costs............................. 9.1 8.0
----- -----
102.7 101.4
===== =====
</Table>
8. PENSIONS
The expected costs of providing pension benefits are charged to the profit
and loss account so as to spread the costs over the service lives of the
participating employees. The costs are assessed in accordance with the advice of
actuaries and provision is made in the combined financial statements along with
the associated deferred taxation effect.
Invensys Flow Control operates many defined contribution, funded and
unfunded defined benefit pension schemes and participates in several Invensys
Group arrangements. Contributions to the defined benefit schemes are made in
accordance with the recommendations of the independent actuary of the relevant
scheme. Complete disclosure of all pension scheme details is not practicable
within these financial statements.
Pension costs for Invensys Flow Control in the year were L4.5 million (2000
L4.5 million).
The principal pension plans are in the United Kingdom, Germany and the
United States. Combined pension costs for these three countries in 2001 were
L3.8 million (2000 L3.9 million), based on normal costs for 2001 of L2.7 million
(2000 L2.6 million) and an actuarial variation for 2001 of L1.1 million (2000
L1.3 million).
UK
The pension charge for the UK Invensys Flow Control section of the Invensys
Pension Scheme for the year ending March 31, 2001 was L0.6 million. The
principal assumption used to measure the Invensys Pension Scheme's liabilities
at this date was a discount rate of 5.75% per annum.
The notional apportionment to Invensys Flow Control of the market value of
the assets of the Invensys Pension Scheme, excluding members' additional
voluntary contributions, was L19.2 million and
F-13
INVENSYS FLOW CONTROL
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
was sufficient to cover 112% of the benefits that had accrued to members, after
allowing for future increases in salaries.
GERMANY
The German Invensys Flow Control pension arrangements are unfunded with a
provision held to cover the liability that is principally in respect of pensions
in payment. The total pension charge for the year ending March 31, 2001 was L1.8
million and was primarily interest cost.
USA
The USA Invensys Flow Control pension arrangements include a union plan and
the Invensys Flow Control section of the Invensys Pension Scheme. The charge for
the year ended March 31, 2001 was L1.4 million. The principal assumption used to
measure the Invensys Pension Scheme's liabilities at this date was a discount
rate of 7.75% per annum. The notional apportionment to Invensys Flow Control of
the market value of the assets of the Invensys Pension Scheme was L12.4 million
and was sufficient to cover 97% if the benefits that had accrued to members,
after allowing for future increases in salaries.
OTHER
There are numerous other pension arrangements operated by other overseas
subsidiaries. Of these, the defined benefit schemes are normally assessed by
independent actuaries in accordance with local practice. Where the requirements
of Statement of Standard Accounting Practice No. 24: Pension Costs (SSAP 24)
could be fulfilled, the appropriate cost has been recognized, otherwise local
practice has been adopted.
9. NET INTEREST PAYABLE AND SIMILAR CHARGES
<Table>
<Caption>
YEAR ENDED
MARCH 31
-----------
2000 2001
---- ----
(L MILLION)
Interest payable on bank loans, overdrafts and other loans
Invensys Group............................................ 4.6 6.2
Third party............................................... 3.2 1.2
--- ---
7.8 7.4
Finance lease interest payable.............................. 0.6 0.5
--- ---
8.4 7.9
--- ---
Interest receivable
Invensys Group............................................ 2.7 3.1
Third party............................................... 1.4 0.8
--- ---
4.1 3.9
--- ---
Net interest payable and similar charges.................... 4.3 4.0
=== ===
</Table>
As noted in Note 1 of Notes to the Financial Statements, finance charges
are not representative of charges that would have been incurred by Invensys Flow
Control had it been a stand-alone entity.
F-14
INVENSYS FLOW CONTROL
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
10. SHARE OF PROFITS OF ASSOCIATED UNDERTAKINGS
<Table>
<Caption>
YEAR ENDED
MARCH 31
-----------
2000 2001
---- ----
(L MILLION)
Attributable to Invensys Flow Control's interest
Profit before taxation.................................... 1.6 1.7
Taxation.................................................. (0.5) (0.6)
---- ----
1.1 1.1
==== ====
</Table>
11. TAX ON PROFIT ON ORDINARY ACTIVITIES
ANALYSIS OF TAX CHARGE IN THE YEAR
<Table>
<Caption>
YEAR ENDED
MARCH 31
-----------
2000 2001
---- ----
(L MILLION)
United Kingdom corporation tax
Current tax on income for the period...................... 0.4 --
---- ----
Foreign tax
Current tax on income for the period...................... (5.8) (6.5)
Adjustments in respect of prior periods................... 0.1 3.1
---- ----
(5.7) (3.4)
---- ----
Deferred tax................................................ (3.6) (1.4)
---- ----
Tax on profit on ordinary activities........................ (8.9) (4.8)
Tax on profit of associated companies....................... (0.5) (0.6)
---- ----
Total tax on profit on ordinary activities and associated
companies................................................. (9.4) (5.4)
==== ====
</Table>
FACTORS AFFECTING THE TAX CHARGE IN THE YEAR
<Table>
<Caption>
YEAR ENDED
MARCH 31
-------------
2000 2001
----- -----
(L MILLION)
Profit on ordinary activities before tax.................... 14.0 16.4
----- -----
% %
Tax on ordinary activities at 30.0%......................... 30.0 30.0
Permanent differences....................................... 5.0 4.7
Overseas tax rate differences............................... 13.6 7.3
Capital allowances in excess of depreciation................ (0.7) (14.0)
Utilization of tax losses................................... (27.9) (15.9)
Adjustments in respect of previous periods.................. (0.7) (18.9)
Cost of losses not recognized............................... 18.6 27.4
----- -----
Total current tax........................................... 37.9 20.6
===== =====
</Table>
F-15
INVENSYS FLOW CONTROL
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
As noted in Note 1 of Notes to the Financial Statements, the taxation
charge is not representative of the charges that would have been incurred by
Invensys Flow Control had it been a standalone entity.
12. INTANGIBLE FIXED ASSETS
<Table>
<Caption>
GOODWILL
-----------
(L MILLION)
COST
AT APRIL 1, 1999............................................ 6.7
Exchange adjustments........................................ (0.2)
----
AT MARCH 31, 2000........................................... 6.5
Exchange adjustments........................................ (0.4)
----
AT MARCH 31, 2001........................................... 6.1
====
AMORTIZATION
AT APRIL 1, 1999............................................ 0.3
Charge for the year......................................... 0.3
----
AT MARCH 31, 2000........................................... 0.6
Charge for the year......................................... 0.3
----
AT MARCH 31, 2001........................................... 0.9
====
NET BOOK VALUE
AT MARCH 31, 2001........................................... 5.2
====
AT MARCH 31, 2000........................................... 5.9
====
</Table>
Goodwill on acquisitions made since April 5, 1998 has been capitalized in
accordance with FRS 10 and is amortized over its useful economic life of 20
years.
13. TANGIBLE FIXED ASSETS
<Table>
<Caption>
LAND AND PLANT AND
BUILDINGS EQUIPMENT TOTAL
--------- --------- -----
(L MILLION)
COST
AT APRIL 1, 1999............................................ 41.2 227.9 269.1
Additions................................................... 0.2 14.1 14.3
Disposals................................................... (0.8) (31.4) (32.2)
Exchange adjustments........................................ 0.3 (6.3) (6.0)
---- ----- -----
AT MARCH 31, 2000........................................... 40.9 204.3 245.2
Additions................................................... 1.3 13.0 14.3
Disposals................................................... (0.4) (4.5) (4.9)
Exchange adjustments........................................ 1.3 10.6 11.9
---- ----- -----
AT MARCH 31, 2001........................................... 43.1 223.4 266.5
==== ===== =====
</Table>
F-16
INVENSYS FLOW CONTROL
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
LAND AND PLANT AND
BUILDINGS EQUIPMENT TOTAL
--------- --------- -----
(L MILLION)
DEPRECIATION
AT APRIL 1, 1999............................................ 7.7 137.3 145.0
Charge for the year......................................... 1.3 14.4 15.7
Disposals................................................... (0.3) (26.3) (26.6)
Exchange adjustments........................................ (0.1) (2.3) (2.4)
---- ----- -----
AT MARCH 31, 2000........................................... 8.6 123.1 131.7
Charge for the year......................................... 1.4 16.2 17.6
Disposals................................................... (0.2) (3.0) (3.2)
Exchange adjustments........................................ -- 2.1 2.1
---- ----- -----
AT MARCH 31, 2001........................................... 9.8 138.4 148.2
==== ===== =====
NET BOOK VALUE
AT MARCH 31, 2001........................................... 33.3 85.0 118.3
==== ===== =====
AT MARCH 31, 2000........................................... 32.3 81.2 113.5
==== ===== =====
</Table>
Additions include transfers from Invensys Group companies of Lnil (2000
L0.9 million). Disposals includes transfers to Invensys Group companies of Lnil
(2000 L0.1 million).
Amounts included in respect of tangible fixed assets held under finance
leases are:
<Table>
<Caption>
LAND AND PLANT AND
BUILDINGS EQUIPMENT TOTAL
--------- --------- -----
(L MILLION)
NET BOOK VALUE
At March 31, 2001......................................... 6.9 -- 6.9
=== === ===
At March 31, 2000......................................... 6.9 0.1 7.0
=== === ===
DEPRECIATION
At March 31, 2001......................................... 0.3 0.1 0.4
=== === ===
At March 31, 2000......................................... 0.3 0.1 0.4
=== === ===
</Table>
The net book value of land and buildings comprises:
<Table>
<Caption>
MARCH 31
-----------
2000 2001
---- ----
(L MILLION)
Freehold.................................................... 28.6 29.4
Short leasehold............................................. 3.7 3.9
---- ----
32.3 33.3
==== ====
</Table>
F-17
INVENSYS FLOW CONTROL
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
14. INVESTMENTS
<Table>
<Caption>
ASSOCIATED
UNDERTAKINGS
------------
(L MILLION)
SHARE OF POST ACQUISITION RESERVES
AT APRIL 1, 1999............................................ 5.3
Share of profit in the year................................. 1.1
Less: dividends receivable.................................. (0.7)
Exchange adjustments........................................ (0.1)
----
AT MARCH 31, 2000........................................... 5.6
Share of profit in the year................................. 1.1
Less: dividends receivable.................................. (0.7)
Exchange adjustments........................................ 0.3
----
AT MARCH 31, 2001........................................... 6.3
====
NET BOOK VALUE
AT MARCH 31, 2001........................................... 6.3
====
AT MARCH 31, 2000........................................... 5.6
====
</Table>
The associated undertaking is not listed.
<Table>
<Caption>
OTHER FIXED
ASSET
INVESTMENTS
-----------
(L MILLION)
COST
AT APRIL 1, 1999............................................ 0.6
Disposals................................................... (0.4)
----
AT MARCH 31, 2000........................................... 0.2
Exchange adjustments........................................ 0.1
----
AT MARCH 31, 2001........................................... 0.3
====
NET BOOK VALUE
AT MARCH 31, 2001........................................... 0.3
====
AT MARCH 31, 2000........................................... 0.2
====
</Table>
Other fixed asset investments are listed and have a market value of L0.3
million (2000 L0.2 million).
F-18
INVENSYS FLOW CONTROL
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
15. STOCKS
<Table>
<Caption>
MARCH 31
-----------
2000 2001
---- ----
(L MILLION)
Raw materials and consumables............................... 37.7 37.9
Other work in progress...................................... 15.0 13.3
Finished goods.............................................. 22.7 24.8
---- ----
75.4 76.0
==== ====
</Table>
The current replacement cost of stocks does not materially differ from the
historical cost stated above.
16. DEBTORS
<Table>
<Caption>
MARCH 31
-----------
2000 2001
---- ----
(L MILLION)
Amounts falling due within one year
Trade debtors............................................. 55.0 51.8
Amounts recoverable on long-term contracts................ 3.7 5.8
Corporation tax recoverable............................... 1.0 7.5
Other debtors............................................. 4.7 4.9
Prepayments and accrued income............................ 2.6 2.4
---- ----
67.0 72.4
==== ====
Amounts falling due after more than one year
Other debtors............................................. 1.3 0.5
==== ====
</Table>
17. CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
<Table>
<Caption>
MARCH 31
-----------
2000 2001
---- ----
(L MILLION)
Bank overdrafts............................................. 6.3 1.5
Finance Leases (note 20).................................... 0.7 0.8
---- ----
Short-term borrowings....................................... 7.0 2.3
==== ====
Trade creditors............................................. 38.1 39.8
Corporation tax............................................. 5.0 11.1
Sales, social security and payroll taxes.................... 1.7 2.3
Other creditors............................................. 7.6 4.7
Accruals and deferred income................................ 13.1 11.5
---- ----
Other creditors............................................. 65.5 69.4
==== ====
</Table>
Bank overdrafts are all at variable rates and attract interest based on the
relevant local, national LIBOR equivalent.
F-19
INVENSYS FLOW CONTROL
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
18. CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
<Table>
<Caption>
MARCH 31
-----------
2000 2001
---- ----
(L MILLION)
Bank and other loans (note 19).............................. 2.4 2.1
Finance leases (note 20).................................... 7.9 7.6
---- ---
Long-term borrowings........................................ 10.3 9.7
==== ===
</Table>
19. BANK AND OTHER LOANS FALLING DUE AFTER MORE THAN ONE YEAR
<Table>
<Caption>
MARCH 31
-----------
2000 2001
---- ----
(L MILLION)
Repayable otherwise than by installments
Repayable wholly within five years (over three and under
five years)............................................ 2.4 2.1
--- ---
2.4 2.1
=== ===
</Table>
As at March 31, 2001 bank and other loans falling due after more than one
year, consist of the following:
<Table>
<Caption>
STERLING
CURRENCY AMOUNT EQUIVALENT
- -------- --------- -----------
(L MILLION)
US
dollars.. 3,000,000 2.1
---
2.1
===
</Table>
These borrowings are unsecured and at variable rates.
20. FINANCE LEASE COMMITMENTS
Future minimum payments under finance leases and similar hire purchase
arrangements are as follows:
<Table>
<Caption>
MARCH 31
-----------
2000 2001
---- ----
(L MILLION)
Payable within one year..................................... 0.7 0.8
Payable between two and five years........................ 3.2 3.4
Payable after five years.................................. 4.7 4.2
--- ---
8.6 8.4
=== ===
</Table>
F-20
INVENSYS FLOW CONTROL
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
21. PROVISIONS FOR LIABILITIES AND CHARGES
<Table>
<Caption>
POST-
RETIREMENT DEFERRED
PENSIONS BENEFITS WARRANTIES RESTRUCTURING TAXATION TOTAL
-------- ---------- ---------- ------------- -------- -----
(L MILLION)
AT APRIL 1, 1999.................. 26.5 1.2 0.7 20.4 13.1 61.9
Provided in year.................. 3.4 -- 0.1 25.5 3.6 32.6
Released in year.................. (0.8) -- (0.4) -- -- (1.2)
Utilized in year.................. (1.8) -- -- (30.9) -- (32.7)
Exchange adjustments.............. (2.4) -- -- (0.1) 0.8 (1.7)
---- --- ---- ----- ---- -----
AT MARCH 31, 2000................. 24.9 1.2 0.4 14.9 17.5 58.9
Provided in year.................. 3.3 0.1 0.4 18.4 1.4 23.6
Released in year.................. -- -- (0.2) -- -- (0.2)
Utilized in year.................. (2.5) -- (0.3) (28.1) -- (30.9)
Exchange adjustments.............. 0.1 0.2 -- 0.4 1.1 1.8
---- --- ---- ----- ---- -----
AT MARCH 31, 2001................. 25.8 1.5 0.3 5.6 20.0 53.2
==== === ==== ===== ==== =====
</Table>
Pensions largely represent unfunded liabilities on pension schemes in
Continental Europe. Invensys Flow Control's main pension schemes based in the
United Kingdom and the United States are held in separately administered funds
and are described in Note 8 of Notes to the Financial Statements.
Warranties are provided in the normal course of business based on an
assessment of future claims with reference to past claims. Such costs are
generally incurred over one to two years.
Restructuring utilization comprises L9.3 million (2000 L30.6 million)
relating to costs arising from the merger of Siebe and BTR and L18.8 million
(2000 L0.3 million) for other restructuring costs.
The deferred taxation liability position of L20.0 million (2000 L17.5
million) is described below.
DEFERRED TAXATION
<Table>
<Caption>
MARCH 31
-----------
2000 2001
---- ----
(L MILLION)
Accelerated capital allowances.............................. 13.4 13.8
Postretirement benefits..................................... (0.9) (1.0)
Other timing differences.................................... 5.0 7.2
---- ----
17.5 20.0
==== ====
</Table>
As noted in Note 1 of Notes to the Financial Statements, the deferred tax
position will not be representative of the position of Invensys Flow Control had
Invensys Flow Control been a standalone entity.
22. COMMITMENTS
CAPITAL EXPENDITURE
Capital expenditure contracted at the balance sheet date but for which no
provision has been made in the combined financial statements amounted to L1.4
million (2000 L0.4 million).
F-21
INVENSYS FLOW CONTROL
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
OPERATING LEASES
Annual commitments under non-cancellable operating leases are as follows:
<Table>
<Caption>
LEASES EXPIRING
------------------------------------------
BETWEEN MORE
WITHIN TWO TO THAN
ONE YEAR FIVE YEARS FIVE YEARS TOTAL
-------- ---------- ---------- -----
MARCH 31, 2000
Land and buildings.............................. 0.3 0.4 0.3 1.0
Other........................................... 0.4 1.2 -- 1.6
--- --- --- ---
0.7 1.6 0.3 2.6
=== === === ===
MARCH 31, 2001
Land and buildings.............................. -- 1.9 0.5 2.4
Other........................................... 0.4 1.1 -- 1.5
--- --- --- ---
0.4 3.0 0.5 3.9
=== === === ===
</Table>
23. CONTINGENT LIABILITIES
Invensys Flow Control has contingent liabilities arising in the ordinary
course of business from which it is anticipated that the likelihood of any
material liabilities arising is remote.
F-22
INVENSYS FLOW CONTROL
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
24. CASH FLOW STATEMENT
<Table>
<Caption>
MARCH 31
-------------
2000 2001
----- -----
(L MILLION)
RECONCILIATION OF OPERATING PROFIT BEFORE INTEREST AND TAX
TO NET CASH INFLOW FROM OPERATING ACTIVITIES
Total operating profit...................................... 18.3 20.4
Depreciation charges, impairment charge and amortization of
goodwill.................................................. 16.0 17.9
Share of profit of associated undertakings.................. (1.6) (1.7)
Decrease in stock........................................... 3.5 6.1
Decrease in debtors......................................... 18.2 11.1
Decrease in creditors and provisions........................ (11.3) (19.6)
----- -----
NET CASH INFLOW FROM OPERATING ACTIVITIES................... 43.1 34.2
===== =====
ANALYSIS OF CASH FLOWS FOR HEADINGS NETTED IN THE CASH FLOW
STATEMENT
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
Interest received........................................... 4.1 3.9
Interest paid............................................... (7.8) (7.4)
Interest element of finance lease rental payments........... (0.6) (0.5)
Dividends from associated undertakings...................... 0.7 0.6
----- -----
NET CASH OUTFLOW FOR RETURNS ON INVESTMENTS AND SERVICING OF
FINANCE................................................... (3.6) (3.4)
===== =====
TAXATION
Overseas tax paid........................................... (5.7) (4.2)
----- -----
NET CASH OUTFLOW FOR TAX PAID............................... (5.7) (4.2)
===== =====
CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT
Purchase of tangible fixed assets........................... (14.3) (14.3)
Sales of tangible fixed assets.............................. 5.0 1.6
----- -----
NET CASH OUTFLOW FOR CAPITAL EXPENDITURE AND FINANCIAL
INVESTMENT................................................ (9.3) (12.7)
===== =====
FINANCING
Net funding movements with Invensys Group companies......... 5.8 (2.5)
Debt due beyond one year
Increase in borrowings................................. 0.5 --
Repayment of other borrowings.......................... -- (0.5)
Capital element of finance lease rental payments............ (0.7) (0.7)
----- -----
NET CASH INFLOW/(OUTFLOW) FROM FINANCING.................... 5.6 (3.7)
===== =====
</Table>
F-23
INVENSYS FLOW CONTROL
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
AT AT
APRIL 1, CASH EXCHANGE MARCH 31,
1999 FLOW MOVEMENT 2000
-------- ---- -------- ---------
(L MILLION)
ANALYSIS OF CHANGES TO NET DEBT
Cash at bank and in hand................................ 25.2 17.9 (2.5) 40.6
Overdrafts.............................................. (21.7) 15.8 (0.4) (6.3)
Debt due after one year
External.............................................. (1.9) (0.5) -- (2.4)
Net amount due to Invensys Group companies............ (33.7) (5.8) (1.5) (41.0)
Finance Leases.......................................... (10.4) 0.7 1.1 (8.6)
----- ---- ---- -----
TOTAL................................................... (42.5) 28.1 (3.3) (17.7)
===== ==== ==== =====
</Table>
<Table>
<Caption>
AT AT
APRIL 1, CASH OTHER EXCHANGE MARCH 31,
2000 FLOW MOVEMENTS MOVEMENT 2001
-------- ---- --------- -------- ---------
(L MILLION)
ANALYSIS OF CHANGES TO NET DEBT
Cash at bank and in hand....................... 40.6 5.7 -- (0.8) 45.5
Overdrafts..................................... (6.3) 4.5 -- 0.3 (1.5)
Debt due after one year
External..................................... (2.4) 0.5 -- (0.2) (2.1)
Net amount due to Invensys Group companies... (41.0) 2.5 2.4 (6.6) (42.7)
Finance leases................................. (8.6) 0.7 (0.2) (0.3) (8.4)
----- ---- ---- ---- -----
TOTAL.......................................... (17.7) 13.9 2.2 (7.6) (9.2)
===== ==== ==== ==== =====
</Table>
25. RELATED PARTY TRANSACTIONS
During the periods under review, Invensys Flow Control entities have
entered into transactions with non-Invensys Flow Control operations of Invensys
as follows:
- Sales amounting to L4.1 million (2000 L6.3 million) have been included in
external sales.
- Interest receivable and payable is disclosed in Note 9 of Notes to the
Financial Statements.
- Transfers of assets to and from non-Invensys Flow Control entities are
disclosed in Note 13 of Notes to the Financial Statements.
There are no other related party transactions.
F-24
INVENSYS FLOW CONTROL
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
26. LIST OF COMPANIES AND BUSINESSES
The following companies and businesses are included within these combined
financial statements.
<Table>
Nordstrom Audco Inc Gestra GmbH (94.18%)
Invensys Flow Control SAS Italgestra SpA
Gestra Espanola SA Gestra Portuguesa Valvulas LDA
P&W Service GmbH Gestra Polonia Spolkia z.o.o.
NAF AB NAF Industries AB
Audco Italiana Srl (12.5%) NAF Industries OY
NAF OY Naval OY
Edward Valves Service Co Audco India Limited (50%)
Schmidt Armaturen GmbH Edward Vogt Valve Company
FCV (US) (a division of Invensys Systems Worcester Controls Corporation (including
Inc.) Worcester North America Inc and Worcester
Controls Licensco Inc.)
Worcester Controls Ltd Valvulas Worcester do Brazil Ltda
Worcester Controls France Sarl Palmstiernas Svenska AB
Invensys Flow Control (UK) (a division of BTR Flow Control SA Pty Ltd (a division
BTR Industries Ltd) of Invensys South Africa Ltd)
Limitorque Corporation Argus GmbH
Limitorque Asia Pte Ltd (60%) Invensys Flow Control Benelux BV
Invensys Flow Control GmbH PMV GmbH
Palmstierna International AB Palmstiernas Instrument AB
PMV-USA Inc. Fabromatic BV
Invensys Flow Control Benelux SA BTR Valves SA
Invensys Flow Control Australasia Pty Ltd Invensys Flow Control Asia Pte Ltd
PMV Controls Limited Audco Limited
</Table>
All of the above are 100% owned except where noted.
Valvulas Worcester do Brazil Ltda was 80% owned until March 2001, when the
remaining 20% was purchased. For the purpose of these financial statements it is
treated as 100% owned in 2000.
The minority interest in Gestra GmbH accounted for in these financial
statements is the non-Invensys holding of 0.34%. The remaining 5.48% is held by
Invensys Deutschland GmbH.
Gestra GmbH has contributed 95% of the capital to a limited partnership,
LSB Grundstueckverwaltung GmbH & Co. "Object 2 Nr 2" KG. Gestra GmbH is a
limited partner and has only 8% of the voting rights. As a consequence, this
shareholding is treated as an investment at cost in these financial statements.
The companies below have become dormant since March 31, 2001. During the
period covered by these financial statements their trade and business has been
transferred to other Invensys Flow Control companies and businesses. Given this,
the results of these companies for 2000 and 2001 are included within these
financial statements:
Gestra UK Gestra SA BTR Flow Control do Brazil Ltda.
F-25
INVENSYS FLOW CONTROL
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
27. DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
Invensys Flow Control combined financial statements are prepared in
accordance with accounting principles generally accepted in the United Kingdom
(UK GAAP) which differ from United States generally accepted accounting
principles (US GAAP). The significant differences applicable to Invensys Flow
Control are summarized below.
ACCOUNTING FOR THE MERGER BETWEEN SIEBE AND BTR
Under UK GAAP, the merger between Siebe and BTR (as described in Note 1 of
Notes to the Financial Statements) on February 4, 1999 was accounted for as a
merger in accordance with FRS 6. Under merger accounting, the results and cash
flows of both entities were combined from the beginning of the financial year in
which the merger occurred and for all prior periods.
Under US GAAP, the merger between Siebe and BTR does not qualify to be
accounted for as a pooling of interests. Consequently, the transaction must be
accounted for using purchase accounting principles, with Siebe plc being the
acquirer on February 4, 1999. Accordingly, for the purposes of the
reconciliations below, the Invensys Flow Control related BTR entities are deemed
to have been acquired by Siebe on February 4, 1999 which gives rise to a new
basis of accounting on that date. This gives rise to a number of differences as
follows:
Intangible fixed assets
Goodwill has been calculated under US GAAP principles by comparing the fair
value of the identifiable net assets of the Invensys Flow Control related BTR
entities with the fair value of the consideration, including associated
transaction costs. Such goodwill is being amortized over its estimated useful
economic life of 40 years for the purposes of the reconciliation below. Other
intangible fixed assets identified at the time of the acquisition, which
predominantly comprise patents, are being amortized over their estimated useful
economic life of 10 years for the purposes of the reconciliation below.
Pensions
Under purchase accounting principles, a fair value under Statement of
Financial Accounting Standards 87: Employers' Accounting for Pensions (SFAS 87)
has been assigned to the pension assets and liabilities of the BTR entities
which relate to Invensys Flow Control and included on the balance sheet.
Restructuring provisions in connection with the acquisition
At the time of the merger, Siebe contemplated that it would reorganize
certain of the BTR operations. The costs of such restructuring, which
predominantly comprise redundancies, have been charged to the profit and loss
account under UK GAAP. Under US GAAP, these costs would have been recognized as
a liability at the date of acquisition.
PENSION COSTS
The expected costs of providing pensions are charged to the income
statement under UK GAAP so as to spread the costs over the service lives of the
participating employees. The costs are assessed in accordance with the advice of
actuaries, and provision is made in the financial statements along with the
associated deferred taxation effect. US GAAP require that the projected benefit
obligation be matched against the fair value of the plan's assets and be
adjusted to reflect any unrecognized obligations or assets in determining the
pension cost or credit for the year.
F-26
INVENSYS FLOW CONTROL
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
For the purpose of the reconciliations below, Invensys Flow Control has
adopted the provisions of SFAS 87 with respect to Invensys Flow Control's major
defined benefit pension plans in the United Kingdom and United States from
January 1, 1997. On the date of the merger, February 4, 1999 the assets
associated with Invensys Flow Control's defined benefit pension plans were
restated at fair value in accordance with purchase accounting principles.
INTANGIBLE FIXED ASSETS
Goodwill on acquisitions after April 5, 1998
Under both UK GAAP and US GAAP, goodwill arising on acquisitions (as
determined under UK GAAP) after April 5, 1998 (the date Invensys Flow Control
implemented FRS 10) is capitalized and amortized over its economic life,
depending on the nature of the acquisition, for a period not exceeding 20 years.
Under US GAAP, the goodwill arising before the merger was eliminated on February
4, 1999 in accordance with purchase accounting principles.
Goodwill on acquisitions before April 5, 1998
Under UK GAAP, goodwill arising on acquisitions prior to April 5, 1998 was
eliminated against reserves. Goodwill previously eliminated against reserves is
charged to the profit and loss account in so far as it relates to disposals in
the year, along with any associated foreign currency differences arising on the
retranslation of the goodwill.
Under US GAAP, goodwill (as determined under US GAAP) is capitalized and
amortized over its estimated useful life, a period not exceeding 40 years. For
the purposes of the reconciliations below, a maximum economic life of 40 years
has been used. On the sale of an associated company the unamortized balance of
the related goodwill is taken into account in determining the gain or loss on
sale. Under US GAAP, the goodwill arising before the merger was eliminated on
February 4, 1999 in accordance with purchase accounting principles.
Other intangibles
Under UK GAAP, other identifiable intangible fixed assets, such as patents,
licenses and trademarks are valued on acquisition and amortized over their
economic lives, for a period not exceeding 20 years. To the extent that they are
not separately identifiable, such assets are subsumed within goodwill. Under US
GAAP, other intangible fixed assets are capitalized and amortized over their
estimated useful lives, a period not exceeding 40 years.
PROVISIONS FOR RESTRUCTURING, CLOSURES AND LOSSES ON DISPOSAL
Under UK GAAP, Invensys Flow Control has established provisions for
restructuring and integration. The provisions are established at the time the
project is committed, when Invensys Flow Control cannot realistically withdraw
from it. The provisions include redundancy and other restructuring costs,
necessarily entailed by the project and not associated with the on-going
activities of Invensys Flow Control.
Under US GAAP, some of these amounts would have been charged to net income
as incurred.
ACQUISITION REORGANIZATION PROVISIONS
Under UK GAAP, Invensys Flow Control charges to net income the costs of
integrating newly acquired businesses at the date of acquisition. Such costs
include redundancies.
Under US GAAP, these costs may be charged to goodwill to the extent that
the restructuring was contemplated at the time of the acquisition.
F-27
INVENSYS FLOW CONTROL
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
EMPLOYEE OPTIONS
Under UK GAAP, Invensys Group charges to net income the cost of shares
acquired to settle awards under certain incentive schemes. The charge is based
on an apportionment of the cost of the shares over the period of the scheme. The
cost of options, with the exception of those relating to approved SAYE schemes,
is determined as the difference between share price at the date of granting of
the option and the amount to be contributed by the employee. Any cost is accrued
over the period from the date the option is granted to the date it becomes
exercisable.
For US GAAP purposes, Invensys Group has elected to follow the intrinsic
value method set out in Accounting Principles Board Opinion 25: Accounting for
Stock Issued to Employees (APB 25). Under this method, the charge in respect of
the Invensys Group's compensatory fixed plans would be based on the intrinsic
value of the options using the share price at the date of grant of the options.
Invensys Group's fixed plans do not result in any compensation charge being made
under US GAAP. The compensation charge on its variable plans is based on the
intrinsic value of the options at the measurement date, being the earlier of the
balance sheet date or date of vesting.
Invensys Flow Control employees participate in Invensys shares plans and
the charge therefore represents the appropriate element of the Invensys Group
charge in respect of these employees.
COMPENSATED ABSENCES
An accrual is made under UK GAAP in respect of certain employees for
vacation earned but not taken at the year end. Under US GAAP, this accrual must
be extended to cover all relevant employees within Invensys Flow Control.
GROUP CHARGES
Group charges represent the fees charged to Invensys Flow Control by
Invensys and the Automation Systems Division for administrative services,
accounting and legal services, officer salaries, advertising and other costs of
doing business. The financial results as calculated under UK GAAP do not include
the expense associated with these group charges.
Under US GAAP, the expenses associated with the group charges that are
clearly applicable to Invensys Flow Control have been included within the
financial results.
ASSET IMPAIRMENT
Under US GAAP, the carrying amounts of long-lived assets are reviewed if
facts and circumstances suggest that they may be impaired. If this review
indicates that the carrying amounts of the long-lived assets will not be
recoverable, as determined based on the estimated undiscounted cash flows of the
entity over the remaining amortization period, the carrying amounts of the
assets are reduced by the estimated shortfall of cash flows. In addition,
long-lived assets associated with assets acquired in a purchase business
combination are included in impairment evaluations when events and circumstances
exist that indicate the carrying amount of those assets may not be recoverable.
In association with the restructuring projects, Invensys Flow Control
recognized impairment charges of L1.2 million during fiscal 2001 (2000 Lnil).
The impairment charges reflect the net realizable value of assets, which have
become excess as a result of plant reorganizations. As these impairment charges
arise from restructuring projects, they have been included within the
restructuring expense in net income under US GAAP.
F-28
INVENSYS FLOW CONTROL
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
NON-INTEREST BEARING INTERCOMPANY BALANCES
Invensys Flow Control has non-interest bearing balances with Invensys Group
companies. Under UK GAAP, no interest is imputed on these balances.
Under US GAAP, interest has been imputed based on market interest rates.
FOREIGN CURRENCY HEDGES
Under UK GAAP, gains and losses on these hedges can be deferred until the
hedged transaction actually occurs.
Under US GAAP, hedging of foreign currency transactions with forward
exchange contracts is only allowable for transactions, which are firm
commitments. Some of Invensys Flow Control's foreign currency contracts hedge
forecast or budgeted transactions, which do not meet the definition of a firm
commitment; gains or losses on these contracts cannot be deferred but must be
recognized in net income.
TAXATION
Under US GAAP, tax must be computed on a standalone basis.
NET INCOME
The following is a summary of the significant adjustments to net income
which would be required if US GAAP were to be applied instead of UK GAAP:
<Table>
<Caption>
YEAR ENDED
MARCH 31
-----------
2000 2001
---- ----
(L MILLION)
Profit for the financial year as reported in the combined
profit and loss account under UK GAAP..................... 4.5 10.9
Adjustments arising from change in basis of accounting for
BTR/Siebe merger
Amortization of goodwill and intangibles.................. (4.8) (5.1)
Inclusion of liabilities in connection with the
purchase............................................... 12.3 --
Depreciation of land and buildings........................ 0.1 0.1
Other..................................................... (0.2) --
Adjustment arising from other acquisitions
Amortization of intangibles............................... (0.3) (0.3)
Pension expense............................................. 0.4 0.2
Employee options............................................ -- 0.2
Interest on non-interest bearing Invensys Group company
loans..................................................... (1.5) (0.9)
Invensys group charges...................................... (0.7) (0.7)
Other adjustment............................................ -- (0.1)
Taxation -- standalone adjustment........................... (1.7) (2.0)
Deferred taxation -- on above adjustments................. (3.6) 0.7
---- ----
NET INCOME AS ADJUSTED TO ACCORD WITH US GAAP............... 4.5 3.0
==== ====
</Table>
F-29
INVENSYS FLOW CONTROL
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED COMBINED STATEMENT OF INCOME
The following condensed combined statement of income is prepared under US
GAAP and reflects all the reconciling items discussed above:
<Table>
<Caption>
YEAR ENDED
MARCH 31
-------------
2000 2001
----- -----
(L MILLION)
Net sales................................................... 345.2 337.4
Costs of product sold....................................... 204.3 206.6
----- -----
Gross Profit................................................ 140.9 130.8
Operating expenses:
Selling and administrative, including depreciation and
amortization of L23.2 million (2000 -- L21.1
million)............................................... 101.4 96.4
Research and development.................................. 2.8 3.0
Costs of restructuring.................................... 13.2 18.4
----- -----
Operating income............................................ 23.5 13.0
Interest.................................................... (5.8) (4.9)
Other income................................................ 1.6 1.7
----- -----
Income before income taxes.................................. 19.3 9.8
Income taxes................................................ (14.7) (6.7)
----- -----
Income before minority interests............................ 4.6 3.1
Minority interests.......................................... (0.1) (0.1)
----- -----
Net income.................................................. 4.5 3.0
===== =====
</Table>
COMPREHENSIVE (LOSS)/INCOME
Comprehensive (loss)/income under US GAAP is as follows:
<Table>
<Caption>
YEAR ENDED
MARCH 31
------------
2000 2001
----- ----
(L MILLION)
Net income as adjusted to accord with US GAAP............... 4.5 3.0
Other comprehensive income, net of tax
Foreign currency translation adjustments.................. (16.3) 26.0
----- ----
Total other comprehensive (loss)/income................... (16.3) 26.0
----- ----
Comprehensive (loss)/income in accordance with US GAAP...... (11.8) 29.0
===== ====
</Table>
F-30
INVENSYS FLOW CONTROL
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
INVESTED CAPITAL
The following is a summary of the significant adjustments to Invested
Capital, which would be required if US GAAP were to be applied instead of UK
GAAP:
<Table>
<Caption>
MARCH 31
-------------
2000 2001
----- -----
(L MILLION)
Invested capital as reported in the combined balance sheet
under UK GAAP............................................. 125.0 145.7
ADJUSTMENTS
INTANGIBLE FIXED ASSETS
Cost: goodwill -- purchase accounting for BTR Invensys
Flow Control entities............................... 176.4 190.4
goodwill -- other................................... (2.3) (2.1)
other intangible assets............................. 14.1 14.0
Accumulated amortization.................................... (8.1) (13.6)
----- -----
Net intangible fixed assets................................. 180.1 188.7
----- -----
TANGIBLE FIXED ASSETS
Cost: purchase accounting for BTR Invensys Flow Control
entities.................................................. (1.9) (1.9)
Impairment.................................................. (0.2) (0.1)
Accumulated depreciation.................................... -- 0.1
----- -----
Net tangible fixed assets................................... (2.1) (1.9)
----- -----
CURRENT ASSETS
Other....................................................... 0.1 --
----- -----
0.1 --
----- -----
CURRENT LIABILITIES
Interest on non-interest bearing loans...................... (1.5) (2.4)
Compensated absences........................................ (0.9) (0.9)
Group charges............................................... (1.0) (1.7)
Income taxes -- stand alone basis........................... (1.7) (3.7)
----- -----
(5.1) (8.7)
----- -----
PROVISIONS FOR LIABILITIES AND CHARGES
Reorganization, closure and loss on disposal provisions..... 0.2 0.1
Other pension adjustments................................... (2.6) (3.1)
Deferred taxation -- on above adjustments................... (0.6) 0.4
----- -----
(3.0) (2.6)
----- -----
Minority interest........................................... -- --
----- -----
INVESTED CAPITAL AS ADJUSTED TO ACCORD WITH US GAAP......... 295.0 321.2
===== =====
</Table>
F-31
INVENSYS FLOW CONTROL
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED COMBINED BALANCE SHEET
The following condensed combined balance sheet is prepared under US GAAP
and reflects all the reconciling items discussed above:
<Table>
<Caption>
MARCH 31,
---------------
2000 2001
------ ------
(L MILLION)
ASSETS
Current assets:
Cash and cash equivalents................................. 40.6 45.5
Accounts receivable....................................... 63.9 59.6
Inventories
Finished goods......................................... 22.7 24.8
Work in process........................................ 15.0 13.3
Raw materials and supplies............................. 37.7 37.9
------ ------
75.4 76.0
Prepaid expenses and other debtors.......................... 8.4 14.8
------ ------
Total current assets........................................ 188.3 195.9
Property, plant and equipment
Land & buildings.......................................... 39.0 41.2
Machinery and equipment................................... 204.1 223.3
------ ------
243.1 264.5
Accumulated depreciation and amortization................... (131.7) (148.1)
------ ------
111.4 116.4
Intangibles
Goodwill.................................................. 180.6 194.4
Other..................................................... 14.1 14.0
------ ------
194.7 208.4
Accumulated amortization.................................... (8.8) (14.5)
------ ------
185.9 193.9
Other assets:
Equity investees.......................................... 5.9 6.5
Invensys Group balances falling due after more than one
year................................................... 113.6 110.2
Other assets.............................................. 1.3 0.5
------ ------
120.8 117.2
------ ------
Total assets................................................ 606.4 623.4
====== ======
</Table>
F-32
INVENSYS FLOW CONTROL
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
MARCH 31,
---------------
2000 2001
------ ------
(L MILLION)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses..................... 57.6 54.1
Note payable to banks..................................... 6.3 1.5
Employee compensation..................................... 0.9 0.9
Income taxes payable...................................... 6.7 14.8
Current portion of capital lease obligations.............. 0.7 0.8
Other liabilities......................................... 11.8 11.0
------ ------
Total current liabilities................................... 84.0 83.1
Long-term liabilities
Long-term debt, less current portion...................... 2.4 2.1
Capital lease obligations, less current portion........... 7.9 7.6
Accumulated postretirement benefit obligation............. 1.3 1.5
Accrued pension cost...................................... 27.4 29.0
Provisions and other long-term creditors.................. 169.7 158.6
Deferred income taxes..................................... 18.1 19.6
------ ------
Total long term liabilities................................. 226.8 218.4
Minority interests.......................................... 0.6 0.7
Invested capital............................................ 295.0 321.2
------ ------
Total liabilities and invested capital...................... 606.4 623.4
====== ======
</Table>
COMBINED STATEMENTS OF CASH FLOWS
The combined cash flow statements prepared under UK GAAP present
substantially the same information as that required under US GAAP but it differs
with regard to the classification of items within them and as regards the
definition of cash under UK GAAP and cash and cash equivalents under US GAAP.
For UK GAAP purposes, cash comprises cash in hand and deposits repayable on
demand, less overdrafts repayable on demand. Deposits are repayable on demand if
they can be withdrawn without notice and without penalty or if a maturity or
period of notice of not more than 24 hours or one working day has been agreed.
For US GAAP purposes, cash and cash equivalents comprise cash and short-term
highly liquid investments with original maturities of three months or less.
Under UK GAAP, cash flows are presented separately for operating
activities, returns on investments and servicing of finance, taxation, capital
expenditure and financial investment, acquisitions, dividends paid, management
of liquid resources and financing. US GAAP requires only three categories of
cash flow activity to be reported, operating, investing and financing. Cash
flows from taxation and returns on investments and servicing shown under UK GAAP
would be included within operating activities under US GAAP. Capital
expenditure, financial investment and acquisitions are included within investing
activities under US GAAP.
F-33
INVENSYS FLOW CONTROL
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
The categories of cash flows under US GAAP can be summarized as follows:
<Table>
<Caption>
YEAR ENDED
MARCH 31
------------
2000 2001
---- -----
(L MILLION)
Cash inflow from operating activities....................... 33.8 26.6
Cash outflow from investing activities...................... (9.3) (12.7)
Cash outflow from financing activities...................... (6.5) (8.2)
---- -----
Increase in cash and cash equivalents....................... 18.0 5.7
Effect of foreign exchange rate changes..................... (2.5) (0.8)
Cash and cash equivalents
At beginning of year...................................... 25.1 40.6
---- -----
AT END OF YEAR............................................ 40.6 45.5
==== =====
</Table>
<Table>
<Caption>
YEAR ENDED
MARCH 31
------------
2000 2001
----- ----
(L MILLION)
NON-CASH FINANCING AND INVESTING ACTIVITIES UNDER US GAAP
New finance leases.......................................... -- 0.2
===== ===
</Table>
NEW ACCOUNTING STANDARDS
United States
FAS 133 -- ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Invensys Flow Control has not adopted the requirements of FAS 133, which
will be effective for Invensys Flow Control's fiscal year 2002 financial
statements. The standard requires all derivative instruments to be recognized as
either assets or liabilities on the balance sheet at their fair values. It also
prescribes the accounting to be followed for changes in the fair values of
derivatives depending on their intended use. In order to determine the impact of
this statement on Invensys Flow Control's financial position and results an
assessment was performed for the portfolio of derivative instruments held at
March 31, 2001. Based on the portfolio held at March 31, 2001, the
implementation of the statement would result in a charge to Invensys Flow
Control's profit and loss account of less than L0.1 million.
FAS 141 -- BUSINESS COMBINATIONS
FAS 141 is applicable to all business combinations initiated after June 30,
2001. This statement eliminates the use of the pooling method of accounting for
business combinations and requires that they be accounted for under the purchase
method of accounting. FAS 141 has no impact on the financial information
presented.
FAS 142 -- GOODWILL AND OTHER INTANGIBLE ASSETS
FAS 142 is first applicable to the Invensys Flow Control's financial
statements for the year ending March 31, 2003, unless it is implemented earlier
in the financial statements for the year ending March 31, 2002. It requires that
goodwill and other intangible assets with an indefinite useful life are tested
at least annually for impairment, rather than amortized periodically. On initial
adoption of FAS 142, Invensys Flow Control is required to test the existing
goodwill for impairment. Invensys Flow Control is currently
F-34
INVENSYS FLOW CONTROL
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
determining the impact of the standard, its transitional impairment test and
whether or not to implement the standard early for the financial year ending
March 31, 2002.
FAS 143 -- ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS
FAS 143 is first applicable to Invensys Flow Control's financial statements
for the year ending March 31, 2004, unless it is early implemented. It requires
entities to record the fair value of a liability for an asset retirement
obligation in the period in which it is incurred if a reasonable estimate of
fair value can be made. The associated asset retirement costs are capitalized as
part of the carrying amount of the long-lived asset. Invensys Flow Control is
currently determining the impact of the standard and whether or not to implement
the standard early for the financial year ending March 31, 2003.
United Kingdom
FRS 17 -- RETIREMENT BENEFITS
During November 2000, the Accounting Standards Board (ASB) issued FRS 17 on
the treatment of pensions and other retirement benefits in the employer's
accounts. The new standard, which is effective for accounting periods ending on
or after June 22, 2003 (with phased transitional disclosure requirements for
accounting periods ending on or after June 22, 2001), will replace the existing
standard, SSAP 24: Accounting for Pension Costs. The requirements for defined
contribution (money purchase) schemes remain unchanged but there are significant
changes to the treatment of defined benefit schemes (schemes where the employees
are promised a specific benefit regardless of the investment performance of the
scheme). At present, under SSAP 24, both the assets and the liabilities in a
defined benefit pension scheme are valued on an actuarial basis. The objective
is to arrive at a regular pension cost each year that is a substantially level
percentage of the pensionable payroll. Any variations from the regular cost are
spread forward and recognized gradually over the average remaining service lives
of the employees.
FRS 17 abandons the use of actuarial values for assets in a pension scheme
in favor of a market value based approach. Invensys Flow Control has not yet
quantified the impact of adopting FRS 17 on its UK GAAP financial statements.
FRS 18 -- ACCOUNTING POLICIES
During December 2000, the ASB issued FRS 18 which deals primarily with the
selection, application and disclosure of accounting policies.
FRS 18 supersedes SSAP 2: Disclosure of Accounting Policies. The FRS leaves
the requirements for accounting policies essentially unchanged in many respects,
but it updates the discussion of going concern, accruals, consistency and
prudence -- described as "fundamental accounting concepts' in SSAP 2 -- to be
consistent with the ASB's Statement of Principles for Financial Reporting.
Invensys Flow Control is already in compliance with FRS 18.
F-35
INVENSYS FLOW CONTROL
CONDENSED COMBINED PROFIT AND LOSS ACCOUNT
(UNAUDITED)
<Table>
<Caption>
NINE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 30, 2000 DECEMBER 29, 2001
----------------- -----------------
(L MILLION)
TURNOVER
Continuing operations...................................... 243.1 269.1
===== =====
OPERATING PROFIT BEFORE EXCEPTIONAL ITEMS AND GOODWILL
AMORTIZATION
Continuing operations...................................... 22.4 32.7
OPERATING EXCEPTIONAL ITEMS
Restructuring costs........................................ (16.4) (3.1)
----- -----
OPERATING PROFIT BEFORE GOODWILL AMORTIZATION.............. 6.0 29.6
Goodwill amortization...................................... (0.2) (0.2)
----- -----
OPERATING PROFIT........................................... 5.8 29.4
Share of operating profit of associated undertakings....... 1.1 1.4
----- -----
PROFIT ON ORDINARY ACTIVITIES BEFORE INTEREST AND
TAXATION................................................. 6.9 30.8
Net interest payable and similar charges(a)................ (3.6) (2.5)
----- -----
PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION.............. 3.3 28.3
Tax on profit on ordinary activities(a).................... (2.7) (10.4)
----- -----
PROFIT ON ORDINARY ACTIVITIES AFTER TAXATION............... 0.6 17.9
Minority interests -- equity............................... -- (0.1)
----- -----
PROFIT FOR THE FINANCIAL PERIOD(b)......................... 0.6 17.8
===== =====
</Table>
- ---------------
(a) Net interest payable and similar charges and tax on profit on ordinary
activities reflect the fact that Invensys Flow Control is part of the
Invensys Group's financing and taxation arrangements and consequently these
amounts are not indicative of those that would have arisen had Invensys
Flow Control been a stand-alone entity or that may arise in the future.
(b) A summary of the significant adjustments to profit for the financial period
that would be required if United States generally accepted accounting
principles were to be applied instead of those generally accepted in the
United Kingdom is set forth in Note 3 of Notes to the Condensed Combined
Financial Statements.
The Notes to the Condensed Combined Financial Statements are an integral part of
these Financial Statements.
F-36
INVENSYS FLOW CONTROL
CONDENSED COMBINED BALANCE SHEET
(UNAUDITED)
<Table>
<Caption>
DECEMBER 29,
2001
------------
(L MILLION)
FIXED ASSETS
Intangible assets........................................... 4.7
Tangible assets............................................. 108.5
Investments in associated undertakings...................... 6.5
Other investments........................................... 0.3
------
120.0
------
CURRENT ASSETS
Stocks...................................................... 70.7
Debtors..................................................... 60.8
Invensys Group balances falling due within one year......... 4.8
Invensys Group balances falling due after one year(a)....... 117.5
Cash(a)..................................................... 43.0
------
296.8
------
Creditors: amounts falling due within one year
Short-term borrowings(a).................................. (2.5)
Other creditors........................................... (58.0)
Invensys Group balances................................... (2.7)
------
NET CURRENT ASSETS.......................................... 233.6
------
TOTAL ASSETS LESS CURRENT LIABILITIES....................... 353.6
Creditors: amounts falling due after more than one year
Long-term borrowings(a)................................... (8.9)
Invensys Group balances(a)................................ (134.5)
------
(143.4)
------
Provisions for liabilities and charges...................... (50.7)
------
Net assets.................................................. 159.5
Minority interests.......................................... (0.8)
------
158.7
======
Invested capital(b)......................................... 158.7
======
</Table>
- ---------------
(a) The level of debt and financing arrangements reflect the treasury policy
operated by Invensys Group. It is not representative of the financing
structure that will be put in place by Invensys Flow Control following the
transaction and are not representative of what it would have been had
Invensys Flow Control been a stand alone entity.
(b) A summary of the significant adjustments to Invested Capital that would be
required if United States generally accepted accounting principles were to
be applied instead of those generally accepted in the United Kingdom is set
forth in Note 3 of Notes to the Condensed Combined Financial Statements.
The Notes to the Condensed Combined Financial Statements are an integral part of
these Financial Statements.
F-37
INVENSYS FLOW CONTROL
CONDENSED COMBINED CASH FLOW STATEMENTS
(UNAUDITED)
<Table>
<Caption>
NINE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 30, DECEMBER 29,
2000 2001
----------------- -----------------
(L MILLION)
Net cash (outflow)/inflow from operating activities........ (3.3) 34.0
Returns on investments and servicing of finance............ (3.0) (1.9)
Taxation................................................... (2.3) (2.8)
Capital expenditure and financial investment............... (7.6) (5.4)
----- -----
Cash (outflow)/inflow before financing..................... (16.2) 23.9
Financing
Increase/(decrease) in debt(a)............................. 27.8 (26.0)
----- -----
Increase/(decrease) in cash in period(a)................... 11.6 (2.1)
===== =====
</Table>
RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET (DEBT)/FUNDS (UNAUDITED)
<Table>
<Caption>
NINE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 30, DECEMBER 29,
2000 2001
----------------- -----------------
(L MILLION)
Increase/(decrease) in cash in period(a)................... 11.6 (2.1)
Cash (inflow)/outflow from decrease in debt(a)............. (27.8) 26.0
----- -----
Change in net debt resulting from cash flows............... (16.2) 23.9
Exchange movements......................................... (5.0) (0.1)
Other movements............................................ 3.6 --
----- -----
Movement in net debt in period............................. (17.6) 23.8
Net debt at beginning of period(a)......................... (17.8) (9.2)
----- -----
Net (debt)/funds at end of period.......................... (35.4) 14.6
===== =====
</Table>
- ---------------
(a) Cash flows related to interest, tax and funding reflect the fact that
Invensys Flow Control is part of Invensys Group's financing and taxation
arrangements and consequently these amounts are not indicative of those
that would have arisen had Invensys Flow Control been a standalone entity.
(b) The significant differences between the cash flow statement presented above
and that required under United States generally accepted accounting
principles are described in Note 3 of Notes to the Condensed Combined
Financial Statements.
The Notes to the Condensed Combined Financial Statements are an integral part of
these Financial Statements.
F-38
INVENSYS FLOW CONTROL
CONDENSED COMBINED STATEMENTS OF TOTAL RECOGNIZED GAINS AND LOSSES
(UNAUDITED)
<Table>
<Caption>
NINE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 30, DECEMBER 29,
2000 2001
----------------- -----------------
(L MILLION)
Profit for the financial period............................ 0.6 17.8
Currency translation differences on foreign currency net
investments.............................................. 15.0 (4.2)
----- -----
Total recognized gains for the financial period............ 15.6 13.6
===== =====
</Table>
- ---------------
Comprehensive income as required under United States generally accepted
accounting principles is set forth in Note 3 of Notes to the Condensed Combined
Financial Statements.
The Notes to the Condensed Combined Financial Statements are an integral part of
these Financial Statements.
F-39
INVENSYS FLOW CONTROL
CONDENSED COMBINED STATEMENTS OF MOVEMENTS IN INVESTED CAPITAL
(UNAUDITED)
<Table>
<Caption>
NINE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 30, DECEMBER 29,
2000 2001
----------------- -----------------
(L MILLION)
Profit for the financial period............................ 0.6 17.8
Currency translation differences on foreign currency net
investments, net of tax.................................. 15.0 (4.2)
Other movements in Invested Capital........................ (1.5) (0.6)
----- -----
14.1 13.0
Opening invested capital(a)................................ 125.0 145.7
----- -----
Closing invested capital(a)................................ 139.1 158.7
===== =====
</Table>
- ---------------
(a) Invested Capital represents the aggregate capital and reserves of the
companies and businesses of Invensys Flow Control and the net investments
in Invensys Flow Control by Invensys.
The Notes to the Condensed Combined Financial Statements are an integral part of
these Financial Statements.
F-40
INVENSYS FLOW CONTROL
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PREPARATION
These condensed combined financial statements, which are unaudited, have
been prepared in accordance with the basis of preparation and accounting
policies described in Notes 1 and 2 of Notes to the Financial Statements of
Invensys Flow Control. In the opinion of management, all adjustments (consisting
only of normal recurring adjustments) considered necessary for a fair
presentation have been included. The operating results for the nine months ended
December 29, 2001 are not necessarily indicative of the results that may be
expected for the year ending March 31, 2002.
2. CONTINGENT LIABILITIES
Invensys Flow Control has contingent liabilities arising in the ordinary
course of business from which it is anticipated that the likelihood of any
material liabilities arising is remote.
3. DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
Invensys Flow Control's condensed combined financial statements are
prepared in accordance with accounting principles generally accepted in the
United Kingdom (UK GAAP) which differ from United States generally accepted
accounting principles (US GAAP) as described in Note 27 of Notes to the
Financial Statements of Invensys Flow Control.
NET INCOME
The following is a summary of the significant adjustments to net income
which would be required if US GAAP were to be applied instead of UK GAAP:
<Table>
<Caption>
NINE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 30, DECEMBER 29,
2000 2001
----------------- -----------------
(L MILLION)
Profit for the financial period as reported in the
condensed combined profit and loss account under
UK GAAP.......................................... 0.6 17.8
Adjustments arising from change in basis of
accounting for BTR/Siebe merger
Amortization of goodwill and intangibles......... (3.7) (3.9)
Adjustments arising from other acquisitions
Amortization of intangibles...................... (0.2) (0.1)
Pension expense.................................... 0.1 0.2
Employee options................................... 0.2 --
Compensated absences............................... -- 0.2
Interest on non-interest bearing Invensys Group
company loans.................................... (1.6) (0.7)
Invensys group charges............................. (0.5) (0.7)
Taxation -- standalone adjustment.................. (1.1) (1.3)
Deferred taxation on above adjustments............. 0.9 0.5
---- ----
NET (LOSS)/INCOME AS ADJUSTED TO ACCORD WITH US
GAAP............................................. (5.3) 12.0
==== ====
</Table>
F-41
INVENSYS FLOW CONTROL
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED COMBINED STATEMENT OF INCOME
The following condensed combined statement of income is prepared under US
GAAP and reflects all the reconciling items discussed above:
<Table>
<Caption>
NINE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 30, DECEMBER 29,
2000 2001
----------------- -----------------
(L MILLION)
Net sales.......................................... 243.1 269.1
Costs of product sold.............................. 154.2 169.7
----- -----
Gross profit....................................... 88.9 99.4
Operating expenses:
Selling and administrative, including
depreciation and amortization of L16.2 million
in 2000 and L16.2 million in 2001............. 68.4 69.0
Research and development......................... 2.3 2.0
Costs of restructuring........................... 16.4 3.1
----- -----
Operating income................................... 1.8 25.3
Interest........................................... (5.2) (3.3)
Other income....................................... 1.0 1.4
----- -----
(Loss)/income before income taxes.................. (2.4) 23.4
Income taxes....................................... (2.9) (11.3)
----- -----
(Loss)/income before minority interests............ (5.3) 12.1
Minority interests................................. -- (0.1)
----- -----
Net (loss)/income.................................. (5.3) 12.0
===== =====
</Table>
COMPREHENSIVE INCOME
Comprehensive income under US GAAP is as follows:
<Table>
<Caption>
NINE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 30, DECEMBER 29,
2000 2001
----------------- -----------------
(L MILLION)
Net (loss)/income as adjusted to accord with US
GAAP............................................. (5.3) 12.0
Other comprehensive income/(loss), net of tax
Foreign currency translation adjustments......... 23.4 (8.1)
---- ----
Total other comprehensive income/(loss).......... 23.4 (8.1)
---- ----
Comprehensive income in accordance with US GAAP.... 18.1 3.9
==== ====
</Table>
F-42
INVENSYS FLOW CONTROL
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
INVESTED CAPITAL
The following is a summary of the significant adjustments to Invested
Capital, which would be required if US GAAP were to be applied instead of UK
GAAP:
<Table>
<Caption>
DECEMBER 29,
2001
------------
(L MILLION)
Invested capital as reported in the condensed combined
balance sheet under UK GAAP............................... 158.7
ADJUSTMENTS:
INTANGIBLE FIXED ASSETS
Cost: goodwill -- purchase accounting for BTR............... 187.2
goodwill -- other...................................... (2.0)
other intangible assets................................ 13.6
Accumulated amortization.................................... (17.5)
-----
Net intangible fixed assets................................. 181.3
-----
TANGIBLE FIXED ASSETS
Cost: purchase accounting for BTR entities.................. (1.9)
impairment............................................. (0.1)
Accumulated depreciation.................................... 0.1
-----
Net tangible fixed assets................................... (1.9)
-----
CURRENT LIABILITIES
Interest on non-interest bearing loans...................... (3.1)
Compensated absences........................................ (0.7)
Group charges............................................... (2.3)
Income taxes -- standalone basis............................ (4.9)
-----
(11.0)
-----
PROVISIONS FOR LIABILITIES AND CHARGES
Reorganization, closure and loss on disposal provisions..... 0.1
Other pension adjustments................................... (1.9)
Deferred taxation on above adjustments...................... 0.4
-----
(1.4)
-----
Minority interest........................................... --
-----
INVESTED CAPITAL AS ADJUSTED TO ACCORD WITH US GAAP......... 325.7
=====
</Table>
F-43
INVENSYS FLOW CONTROL
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED COMBINED BALANCE SHEET
The following condensed combined balance sheet is prepared under US GAAP
and reflects all the reconciling items discussed above:
<Table>
<Caption>
DECEMBER 29,
2001
------------
(L MILLION)
ASSETS
Current assets:
Cash and cash equivalents................................. 43.0
Accounts receivable....................................... 49.9
Inventories............................................... 70.7
Prepaid expenses and other debtors........................ 15.8
------
Total current assets........................................ 179.4
Property, plant and equipment
Land and buildings........................................ 40.6
Machinery and equipment................................... 226.7
------
267.3
Accumulated depreciation and amortization................. (160.7)
------
106.6
Intangibles
Goodwill.................................................. 189.8
Other..................................................... 13.4
------
203.2
Accumulated amortization.................................. (17.2)
------
186.0
Other assets:
Equity investees.......................................... 6.8
Invensys Group balances falling due after more than one
year................................................... 117.5
------
124.3
------
Total Assets................................................ 596.3
======
</Table>
F-44
INVENSYS FLOW CONTROL
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
DECEMBER 29,
2001
------------
(L MILLION)
LIABILITIES AND INVESTED CAPITAL
Current liabilities:
Accounts payable and accrued expenses..................... 32.8
Note payable to bank...................................... 1.7
Employee compensation..................................... 0.7
Income taxes.............................................. 21.6
Current portion of capital lease obligations.............. 0.8
Other liabilities......................................... 16.9
------
Total current liabilities................................... 74.5
Long-term liabilities:
Capital lease obligations, less current portion............. 6.8
Long term debt.............................................. 2.1
Accumulated postretirement benefit obligation............... 1.8
Accrued pension cost........................................ 28.3
Provisions and other long-term creditors.................... 138.3
Deferred income taxes....................................... 18.0
------
Total long-term liabilities................................. 195.3
Minority interests.......................................... 0.8
Invested capital............................................ 325.7
------
Total liabilities and invested capital...................... 596.3
======
</Table>
CONDENSED COMBINED SUMMARY OF CASH FLOWS
The categories of cash flows under US GAAP can be summarized as follows:
<Table>
<Caption>
NINE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 30, DECEMBER 29,
2000 2001
----------------- -----------------
(L MILLION)
Cash (outflow)/inflow from operating activities..... (8.6) 29.3
Cash outflow from investing activities.............. (7.6) (5.4)
Cash inflow/(outflow) from financing activities..... 23.9 (25.7)
---- -----
Increase/(decrease) in cash and cash equivalents.... 7.7 (1.8)
Effect of foreign exchange rate changes............. (0.8) (0.7)
Cash and cash equivalents
At beginning of period............................ 40.6 45.5
---- -----
AT END OF PERIOD.................................. 47.5 43.0
==== =====
</Table>
F-45
PROSPECTUS
$500,000,000
FLOWSERVE CORPORATION
We may sell, from time to time, any of the following securities:
- Common stock
- Preferred stock
- Debt securities
Our common stock is listed on the New York Stock Exchange under the symbol
"FLS."
The debt securities of Flowserve Corporation may be fully, unconditionally
and irrevocably guaranteed by one or more of Flowserve US Inc., Flowserve
International, Inc., Flowserve Holdings, Inc., BW/IP-New Mexico, Inc.,
Ingersoll-Dresser Pump Company, Flowserve International L.L.C., Flowserve
Management Company, CFM-V.R. Tesco Inc., Flowserve International Limited and
Flowserve Finance B.V.
We will provide the specific terms of these securities in one or more
prospectus supplements to this prospectus. You should read this prospectus and
any applicable prospectus supplement carefully before you invest.
The securities offered by this prospectus may be issued in one or more
series or issuances and will be limited to $500,000,000 in aggregate public
offering price (or its equivalent, based on the applicable exchange rate, to the
extent debt securities are issued for one or more foreign currencies or currency
units). The securities may be sold for U.S. dollars, or any foreign currency or
currencies or currency units, and the principal of, any premium on, and any
interest on, the debt securities may be payable in U.S. dollars, or any foreign
currency or currencies or currency units.
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN MATTERS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
We may offer these securities to or through underwriters, through dealers
or agents, directly to you or through a combination of these methods. You can
find additional information about our plan of distribution for the securities
under the heading "Plan of Distribution" in this prospectus. We also may
describe the plan of distribution for any particular offering of these
securities in any applicable prospectus supplement. This prospectus may not be
used to sell our securities unless it is accompanied by a prospectus supplement.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION ("SEC") NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES OR
DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this prospectus is July 2, 2001.
TABLE OF CONTENTS
<Table>
ABOUT THIS PROSPECTUS....................................... 2
WHERE YOU CAN FIND MORE INFORMATION......................... 3
INCORPORATION OF INFORMATION WE FILE WITH THE SEC........... 3
FORWARD-LOOKING STATEMENTS.................................. 4
ABOUT FLOWSERVE CORPORATION................................. 5
RISK FACTORS................................................ 6
USE OF PROCEEDS............................................. 10
RATIO OF EARNINGS TO FIXED CHARGES.......................... 10
DESCRIPTION OF DEBT SECURITIES AND GUARANTEES............... 11
DESCRIPTION OF CAPITAL STOCK................................ 19
PLAN OF DISTRIBUTION........................................ 22
VALIDITY OF SECURITIES...................................... 24
EXPERTS..................................................... 24
</Table>
---------------------
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with the
SEC utilizing a "shelf" registration process, which allows us to offer and sell
any combination of the securities described in this prospectus in one or more
offerings. Using this prospectus, we may offer up to a total dollar amount of
$500,000,000 of securities.
This prospectus provides you with a general description of the securities
we may offer. Each time we sell securities, we will provide a prospectus
supplement that will describe the specific terms of the securities we are
offering. Each supplement will also contain specific information about the terms
of the offering it describes. The prospectus supplement may also add to, update
or change the information contained in this prospectus. In addition, as we
describe in the section entitled "Where You Can Find More Information,"
Flowserve Corporation has filed and plans to continue to file other documents
with the SEC that contain information about it and the business conducted by it
and its subsidiaries. Before you decide whether to invest in any of the
securities offered by this prospectus, you should read this prospectus, the
prospectus supplement that further describes the offering of those securities
and the information Flowserve Corporation otherwise files with SEC.
---------------------
You should rely only on the information contained or incorporated by
reference in this prospectus. We have not authorized any other person to provide
you with different information. We will not make an offer to sell these
securities in any jurisdiction where the offer or sale is not permitted. You
should assume that the information appearing in this prospectus is accurate only
as of the date on the cover page.
In this prospectus, references to "Company," "we," "us" and "our," refer to
Flowserve Corporation and its subsidiaries, unless the context otherwise
requires. References to "Flowserve" refer to Flowserve Corporation. The phrase
"this prospectus" refers to this prospectus and any applicable prospectus
supplement, unless the context otherwise requires. References to "securities"
refer collectively to the common stock, preferred stock, debt securities and
guarantees of debt securities offered by this prospectus.
2
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with SEC under the Securities Exchange Act of 1934. You may read and
copy any document we file at the following SEC public reference rooms:
<Table>
450 Fifth Street, N.W. Seven World Trade Center Citicorp Center
Judiciary Plaza Suite 1300 500 West Madison Street
Room 1024 New York, NY 10048 Suite 1400
Washington, D.C. 20549 Chicago, IL 60661
</Table>
You may also inspect and copy our SEC filings, the complete registration
statement and other information at the offices of the New York Stock Exchange
located at 20 Broad Street, 16th Floor, New York, New York 10005.
You may obtain information on the operation of the public reference room in
Washington, D.C. by calling the SEC at 1-800-SEC-0330.
We file information electronically with the SEC. Our SEC filings also are
available from the SEC's Internet site at http://www.sec.gov, which contains
reports, proxy and information statements, and other information regarding
issuers that file electronically.
INCORPORATION OF INFORMATION WE FILE WITH THE SEC
The SEC allows us to "incorporate by reference" the information we file
with them, which means that we may disclose important information to you by
referring you to those documents. The information incorporated by reference is
an important part of this prospectus, and information that we file after the
date of this prospectus will automatically update and supersede this
information. We incorporate by reference the documents listed below and any
future filings made with the SEC under Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934 until all of the securities described in this
prospectus are sold:
- The audited financial statements of Ingersoll-Dresser Pump Company,
contained on pages F-70 through F-99 in our Registration Statement on
Form S-4, as amended (File No. 333-46760), filed on September 27, 2000;
- Our Annual Report on Form 10-K for the year ended December 31, 2000;
- Our Quarterly Report on Form 10-Q for the quarter ended March 31, 2001;
and
- Our Current Report on Form 8-K, filed May 31, 2001.
You may request a copy of these filings (other than an exhibit to a filing
unless that exhibit is specifically incorporated by reference into that filing)
at no cost, by writing or telephoning us at the following address:
Flowserve Corporation
222 West Las Colinas Boulevard, Suite 1500
Irving, Texas 75039
Attention: Corporate Secretary
972-443-6543
This prospectus is part of a registration statement we filed with the SEC.
This prospectus does not contain all of the information contained in the
registration statement and all of the exhibits and schedules thereto. For
further information about Flowserve, please see the complete registration
statement. Any statement made in this prospectus concerning the contents of any
agreement or other document is only a summary of the actual document. If we have
filed any agreement or other document as an exhibit to the registration
statement, you should read the exhibit for a more complete understanding of the
document or the matter involved. Each statement regarding an agreement or other
document is qualified in its entirety by reference to the actual document.
3
FORWARD-LOOKING STATEMENTS
This prospectus contains various forward-looking statements and includes
assumptions about future market conditions, operations and results. Any
statement that is not historical fact is a forward-looking statement. 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:
- changes in the already competitive environment for our products or
competitors' responses to our strategies;
- the health of the petroleum, chemical, water treatment and power
generation industries and general industrial markets;
- economic conditions and the extent of economic growth in areas outside
and inside the United States;
- political risks or trade embargoes affecting important country markets;
- our ability to successfully complete the integration of the acquisition
of Ingersoll-Dresser Pump Company ("IDP") into our management and
operations and fully realize anticipated synergies and cost savings;
- the recognition of remaining expenses associated with adjustments to
realign our combined Flowserve and IDP facilities and other capabilities
with our strategic objectives and business conditions including, without
limitation, expenses incurred in restructuring and integrating our
operations to incorporate IDP's facilities;
- our ability to meet the financial covenants and other requirements of our
financing agreements;
- technological developments in our products as compared to those of our
competitors;
- changes in prevailing interest rates and the effective interest cost
which we bear; and
- adverse changes in the regulatory climate and other legal obligations
imposed on Flowserve.
Accordingly, you should not rely on the accuracy of predictions contained
in forward-looking statements. Further, we undertake no obligation to publicly
update or revise any forward-looking statement as a result of new information,
future events or otherwise.
4
ABOUT FLOWSERVE CORPORATION
We are among the largest manufacturers and aftermarket service providers of
comprehensive flow control systems in the world. We have been in the flow
control industry for over 125 years. We develop and manufacture
precision-engineered flow control equipment for critical service applications
where high reliability is required. The flow control system components we
produce include pumps, valves and mechanical seals. Our products and services
are used in several industries, including petroleum, chemical, power generation
and water treatment.
We conduct our operations through three divisions that encompass our
primary product types: (1) Pump Division, (2) Flow Solutions Division and (3)
Flow Control Division. Our Pump Division supplies engineered and industrial
pumps. Through our Flow Solutions Division, we provide mechanical seals and
aftermarket services. Our Flow Control Division supplies valves and related
products. Through each of our segments, we provide aftermarket replacement
parts.
Through our Pump Division ("Pump"), we design, manufacture and distribute
engineered and industrial pumps and pump systems, replacement parts and related
equipment principally to industrial markets. Pump's products and services are
primarily used by companies that operate in the petroleum, chemical processing,
power generating, water treatment and general industrial markets. Following the
completion of the facilities rationalization in connection with the acquisition
of IDP, we will manufacture our pump systems and components at eight plants in
the United States, one in Canada, three in Latin America, ten in Europe and the
Middle East and one in Asia. We also manufacture a small portion of our pumps
through several foreign joint ventures. We market our pump products, which are
primarily sold to end users and engineering and construction companies, through
our worldwide sales force, regional service and repair centers, independent
distributors and sales representatives.
Through our Flow Solutions Division ("FSD"), we design, manufacture and
distribute mechanical seals and sealing systems and provide parts, repair and
services for flow control equipment used in process industries. Flow control
products require mechanical seals to be replaced throughout the products' useful
lives as the function of a seal is to prevent leakage of a fluid. The
replacement of mechanical seals is an integral part of aftermarket services. Our
mechanical seals are used on a variety of pumps, mixers, compressors, steam
turbines and specialty equipment, primarily in the petroleum, chemical
processing, power generation, water treatment industries and general industrial
end-markets. We manufacture mechanical seals through two plants in the United
States, three in Europe and the Middle East, two in Latin America and three in
Asia. Through FSD's global network of service and quick response centers, we
provide service, repair and diagnostic services for maintaining flow control
systems components.
Through our Flow Control Division ("FCD"), we design, manufacture and
distribute valves, actuators and related equipment. FCD's valve products are an
integral part of a flow control system and are used to control the flow of
liquids and gases. Substantially all of FCD's valves are specialized and
engineered to perform specific functions within a flow control system. FCD's
products are primarily used by companies that operate in the petroleum, chemical
and power generation industries. We manufacture valves and actuators through
four plants in the United States, six in Europe and three in other regions. We
also manufacture a small portion of our valves through a foreign joint venture.
Manual valve products and valve actuators are distributed through our sales
force personnel and a network of distributors. Automatic control valves are
marketed through sales engineers and service and repair centers or, on a
commission basis, through sales representatives in our principal markets.
Our executive offices are located at 222 West Las Colinas Boulevard, Suite
1500, Irving, Texas 75039 and our telephone number is (972) 443-6500.
5
RISK FACTORS
You should carefully consider the risks described below in addition to the
other information set forth or incorporated by reference in this prospectus
before making an investment in the securities.
ECONOMIC, POLITICAL AND OTHER RISKS ASSOCIATED WITH INTERNATIONAL SALES AND
OPERATIONS COULD ADVERSELY AFFECT OUR BUSINESS.
Since we sell our products worldwide, our business is subject to risks
associated with doing business internationally. Our sales originating outside
the United States, as a percentage of our total sales, were 42% in 1999 and 38%
in 2000. On a pro forma basis, (which includes IDP for the full year) our sales
originating outside the United States, as a percentage of total sales, were 40%
in 2000. Accordingly, our future results could be harmed by a variety of
factors, including:
- changes in foreign currency exchange rates;
- changes in a specific country's or region's political or economic
conditions, particularly in emerging markets;
- trade protection measures and import or export licensing requirements;
- potentially negative consequences from changes in tax laws;
- difficulty in staffing and managing widespread operations;
- differing labor regulations;
- differing protection of intellectual property; and
- unexpected changes in regulatory requirements.
OUR OPERATING RESULTS COULD BE HARMED DURING ECONOMIC DOWNTURNS.
The businesses of most of our industrial customers, particularly
refineries, chemical companies and power plants, are, to varying degrees,
cyclical and have historically experienced periodic downturns. Margins in those
industries are highly sensitive to demand cycles, and our customers in those
industries historically have tended to delay large capital projects, including
expensive maintenance and upgrades, during economic downturns. For example, due
to the simultaneous decline in oil and chemical prices in 1998 and 1999, many of
our key customers significantly reduced their capital spending, which resulted
in declines in our revenues and net earnings during those years. These industry
downturns have been characterized by diminished product demand, excess
manufacturing capacity and subsequent accelerated erosion of average selling
prices in the flow control industry. Therefore, any significant downturn in our
customers' markets or in general economic conditions could result in a reduction
in demand for our products and services and could harm our business.
WE FACE INTENSE COMPETITION.
We encounter intense competition in all areas of our business.
Additionally, customers for our products are attempting to reduce the number of
vendors from which they purchase in order to reduce the size and diversity of
their inventory. To remain competitive, we will need to invest continuously in
manufacturing, marketing, customer service and support and our distribution
networks. We anticipate that we may have to adjust the prices of some of our
products to stay competitive. We cannot assure you that we will have sufficient
resources to continue to make such investments or that we will maintain our
competitive position.
ENVIRONMENTAL COMPLIANCE COSTS AND LIABILITIES COULD ADVERSELY AFFECT OUR
FINANCIAL CONDITION.
Our operations and properties are subject to increasingly stringent laws
and regulations relating to environmental protection, including laws and
regulations governing air emissions, water discharges, waste management and
workplace safety. Such laws and regulations can impose substantial fines and
sanctions for violations and require the installation of costly pollution
control equipment or operational changes to limit
6
pollution emissions and/or decrease the likelihood of accidental hazardous
substance releases. We must conform our operations and properties to these laws,
and adapt to regulatory requirements in all countries as these requirements
change. In connection with the IDP acquisition, we believe that we may be
required to incur costs to bring the former IDP properties into compliance with
applicable requirements.
We use and generate hazardous substances and wastes in our manufacturing
and foundry operations. In addition, many of our current and former properties
are or have been used for industrial purposes. Accordingly, we are conducting
investigation and remediation activities at several on-site and off-site
locations. We also may be subject to potentially material liabilities relating
to the investigation and clean-up of contaminated properties and to claims
alleging personal injury.
We have experienced, and expect to continue to experience, operating costs
to comply with environmental laws and regulations. In addition, new laws and
regulations, stricter enforcement of existing laws and regulations, the
discovery of previously unknown contamination or the imposition of new clean-up
requirements could require us to incur costs or become the basis for new or
increased liabilities that could have a material adverse effect on our business,
financial condition or results of operations.
OUR BUSINESS COULD SUFFER IF WE ARE UNSUCCESSFUL IN NEGOTIATING NEW COLLECTIVE
BARGAINING AGREEMENTS.
As of December 31, 2000, we had approximately 10,000 employees. Our
operations in the following countries are unionized: Argentina, Austria,
Belgium, Brazil, Canada, France, Germany, Italy, Mexico, The Netherlands, Spain
and the United Kingdom. We also have five unionized plants in the U.S.
Approximately 8% of our 6,000 U.S. employees are represented by unions. Although
we believe that our relations with our employees are good and we have not
experienced any recent strikes or work stoppages, we cannot assure you that we
will be successful in negotiating new collective bargaining agreements, that
such negotiations will not result in significant increases in the cost of labor
or that a breakdown in such negotiations will not result in the disruption of
our operations. In addition, our closures of certain facilities may create the
risk of strikes or work stoppages at those and other facilities.
THIRD PARTIES MAY INFRINGE OUR INTELLECTUAL PROPERTY, AND WE MAY EXPEND
SIGNIFICANT RESOURCES ENFORCING OUR RIGHTS OR SUFFER COMPETITIVE INJURY.
Our success depends in part on our proprietary technology. We rely on a
combination of patents, copyrights, trademarks, trade secrets, confidentiality
provisions and licensing arrangements to establish and protect our proprietary
rights. If we fail to successfully enforce our intellectual property rights, our
competitive position could suffer, which could harm our operating results. We
may be required to spend significant resources to monitor and police our
intellectual property rights.
OUR SUCCESS WILL CONTINUE TO DEPEND TO A SIGNIFICANT EXTENT ON OUR EXECUTIVES
AND OTHER KEY PERSONNEL.
Our future success depends to a significant degree on the skills,
experience and efforts of our senior management and other key personnel. The
loss of the services of any of these individuals could adversely affect our
results of operations and our ability to implement our business strategy.
WE ARE DEPENDENT ON THE AVAILABILITY OF RAW MATERIALS AND ELECTRIC POWER.
We require substantial amounts of raw materials and electric power.
Substantially all raw materials and all electric power we require are purchased
from outside sources. The availability and prices of raw materials and electric
power may be subject to curtailment or change due to, among other things, new
laws or regulations, suppliers' allocations to other purchasers, interruptions
in production by suppliers, changes in exchange rates and prevailing price
levels. Any change in the supply of, or price for, these raw materials or
electric power could materially affect our operating results.
7
WE ARE SUBJECT TO THE EFFECTS OF FLUCTUATIONS IN FOREIGN EXCHANGE RATES.
We are exposed to fluctuations in foreign currencies as a significant
portion of our revenue, and certain of our costs, assets and liabilities, are
denominated in currencies other than U.S. dollars. Our ability to pay interest
and principal on dollar-denominated indebtedness when due is dependent on the
then current exchange rates between U.S. dollars, on the one hand, and the euro
and other European as well as Asian currencies, on the other hand, which rates
are and will be subject to fluctuation. During 2000, approximately 38% of our
actual revenue and 40% of our pro forma revenue (which includes IDP for the full
year) were from sales originating outside the United States. Our share of
revenue in non-dollar denominated currencies may continue to increase in future
periods. We can offer no assurance, however, that exchange rate fluctuations
will not have a material adverse effect on our results of operations and
financial condition and therefore on our ability to make principal and interest
payments on our indebtedness, including any dollar-denominated debt securities
we may issue, when due.
OUR LEVERAGE COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH, MAKE US VULNERABLE TO
ADVERSE ECONOMIC AND INDUSTRY CONDITIONS AND PREVENT US FROM FULFILLING OUR
OBLIGATIONS UNDER DEBT SECURITIES CURRENTLY OUTSTANDING OR ISSUED PURSUANT TO
THIS PROSPECTUS.
We have incurred significant indebtedness that is substantial in relation
to shareholder's equity. As of March 31, 2001, we had approximately $1,168.1
million outstanding consolidated debt. Total net debt (total debt less cash and
equivalents) was 81.9% of our capital structure as of March 31, 2001.
Our substantial indebtedness could have important consequences to you. For
example, it could:
- make it more difficult for us to satisfy our obligations with respect to
any additional debt securities;
- increase our vulnerability to general adverse economic and industry
conditions;
- require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, thereby reducing the
availability of our cash flow to fund working capital, capital
expenditures, research and development efforts and other general
corporate purposes;
- limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate;
- place us at a competitive disadvantage relative to our competitors that
have less debt; and
- limit, along with the financial and other restrictive covenants in our
indebtedness, our ability to borrow additional funds, among other things.
Subject to the restrictions in our debt agreements, we may also borrow more
money from time to time, which could further exacerbate the effect of any of the
consequences described above. Furthermore, failing to comply with those
covenants could result in an event of default which, if not cured or waived,
could have a material adverse effect on our business, financial condition and
results of operations.
THE SENIOR CREDIT FACILITIES AND THE INDENTURES GOVERNING OUR OUTSTANDING DEBT
SECURITIES CONTAIN VARIOUS COVENANTS WHICH LIMIT MANAGEMENT'S DISCRETION IN THE
OPERATION OF OUR BUSINESS.
The senior credit facilities and the indentures governing our current
outstanding debt contain various provisions that limit management's discretion
in operating our businesses by restricting their ability, among other things,
to:
- incur additional debt;
- pay dividends and make other distributions;
- prepay subordinated debt, make investments and other restricted payments;
- enter into sale and leaseback transactions;
- create liens;
8
- sell assets; and
- enter into transactions with affiliates.
WE MAY NOT BE ABLE TO FULLY INTEGRATE THE BUSINESS OF IDP TO ACHIEVE ALL
EXPECTED SYNERGIES.
Our future success will depend in part on our ability to successfully
complete the integration of the businesses of IDP into Flowserve's operations.
The combination of Flowserve and IDP involves the integration of companies that
had previously operated independently. The remaining integration process may be
disruptive to the businesses and may cause an interruption of, or a loss of
momentum in, the businesses as a result of a number of obstacles such as:
- loss of key employees or customers;
- failure to maintain the quality of customer service that such companies
have historically provided;
- the need to coordinate geographically diverse organizations;
- retooling and reprogramming of equipment; and
- the resulting diversion of management's attention from our day-to-day
business and the need to hire additional management personnel to address
integration obstacles.
If we are not able to successfully complete this combination, if the
combination takes longer than anticipated, or if our integrated product and
service offering fails to achieve market acceptance, our business could be
adversely affected.
WE MAY NOT BE ABLE TO FULLY REALIZE THE ANTICIPATED COST SAVINGS, SYNERGIES OR
REVENUE ENHANCEMENTS FROM COMBINING FLOWSERVE AND IDP, ALTHOUGH WE HAVE INCURRED
SIGNIFICANT CASH INTEGRATION COSTS TO ACHIEVE THESE COST SAVINGS AND WE
ANTICIPATE INCURRING ADDITIONAL COSTS.
Even if we are able to complete the integration of the operations of IDP
into Flowserve successfully, we cannot assure you that we will fully realize the
cost savings, synergies or revenue enhancements that we anticipate from such
integration or that we will fully realize such benefits within the time frame
that we currently expect.
- Whether we can effectively eliminate all redundant administrative
overhead and overlapping sales personnel, rationalize manufacturing
capacity and shift production to more economic facilities is difficult to
predict. Accordingly, the amount and timing of the remaining available
cost savings are inherently difficult to estimate.
- Any remaining cost savings and other synergies from the transactions may
be offset by remaining costs incurred in integrating the companies.
- The remaining cost savings, or any cost savings achieved to date, and
other synergies may also be offset by increases in other expenses, by
operating losses or by problems unrelated to the IDP integration.
- Labor cost savings depend on the ability of the personnel at our
remaining plants to handle their increased workloads at planned
efficiency levels.
- We will still incur significant cash integration costs to fully achieve
these cost savings, in addition to our reported integration costs to
date.
In addition, the Company's existing senior credit facilities require us to
maintain certain financial performance ratios, which will become more
restrictive over time.
If we fail to comply with the restrictions contained in these senior credit
facilities or our existing indentures, the indentures governing any debt
securities issued under this prospectus or any other subsequent financing
agreements, a default may occur. This default may allow some creditors, if their
respective agreements so provide, to accelerate payments owed on such debt as
well as any other indebtedness as to which a cross-acceleration or cross-default
provision applies. In addition, our lenders may be able to terminate any
commitments they had made to supply us with further funds. See "Description of
the Debt Securities and Guarantees."
9
USE OF PROCEEDS
We intend to use the net proceeds from the sale of the securities offered
by this prospectus for general corporate purposes, which may include repaying
indebtedness, funding future acquisitions or for any other purposes as may be
described in an accompanying prospectus supplement.
RATIO OF EARNINGS TO FIXED CHARGES
The Company was in compliance with all specified financial covenants as
defined in its Credit Agreements at March 31, 2001 and December 31, 2000. These
financial covenants include a fixed charge coverage ratio, an interest coverage
ratio and a leverage ratio.
The following table shows our ratio of earnings to fixed charges for the
periods indicated:
<Table>
<Caption>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED
-------------------------------- MARCH 31,
1996 1997 1998 1999 2000 2001
---- ---- ---- ---- ---- ------------
Ratio of Earnings to Fixed Charges....... 7.3 5.9 5.2 1.8 1.3 --
</Table>
We computed these ratios by dividing fixed charges into the sum of earnings
from continuing operations before income taxes and fixed charges. Fixed charges
consist of interest expense on all indebtedness, amortization of deferred
financing fees and the estimated interest portion of rental expense.
The Company's debt increased in 2000 primarily as the result of financing
the acquisitions of IDP and Innovative Valve Technologies, Inc. and related
integration costs. The ratio of earnings to fixed charges for the year ended
December 31, 2000, was 2.0 excluding integration and restructuring expenses
related to the acquisition of IDP.
The ratio of earnings to fixed charges was adversely impacted in the first
quarter of 2001 by the normal seasonal softness in the engineered pump business
and integration costs associated with the acquisition of IDP. For the three
months ended March 31, 2001, additional earnings of $13.3 million would have
been required to provide a one-to-one coverage ratio during the period. The
ratio of earnings to fixed charges was 1.2, excluding IDP integration expenses,
for the three months ended March 31, 2001.
Because we do not have any preferred stock outstanding, our ratio of
earnings to fixed charges and preferred stock dividends was the same as our
ratio of earnings to fixed charges.
10
DESCRIPTION OF DEBT SECURITIES AND GUARANTEES
The following is a summary of certain general terms and provisions of the
indenture and is not complete. The particular terms of any series of debt
securities we may offer, including the extent to which the general terms and
provisions may apply to that series of debt securities, will be described in a
prospectus supplement relating to those debt securities.
We may issue debt securities from time to time in one or more series. Any
series of debt securities offered by us may be offered together with the
unconditional guarantee of one or more of Flowserve US Inc., Flowserve
International, Inc., Flowserve Holdings, Inc., BW/IP-New Mexico, Inc.,
Ingersoll-Dresser Pump Company, Flowserve International L.L.C., Flowserve
Management Company, CFM-V.R. Tesco Inc., Flowserve International Limited and
Flowserve Finance B.V. (collectively, the "guarantors").
Debt securities may be issued under one or more indentures between
Flowserve, the guarantors and one or more trustees named in the prospectus
supplement (collectively, the "Trustee"). A copy of the form of the indenture is
filed as an exhibit to the registration statement. You should read all of the
provisions of the indenture, including the definitions contained in the
indenture which are not otherwise defined in this prospectus, and the applicable
prospectus supplement. Wherever we refer to particular provisions or defined
terms of the indenture, these provisions or defined terms are incorporated in
this prospectus by reference.
GENERAL
The debt securities will be our general obligations and may be subordinated
to "senior indebtedness" we have or may incur. The prospectus supplement will
define senior indebtedness and describe the terms of any subordination. Any, or
all of, the guarantors may unconditionally guarantee the payment of the
principal, premium, if any, and interest on the debt securities when due and
payable, whether by acceleration, required repurchase, call for redemption or
otherwise. See "-- Guarantees." The prospectus supplement will define the
relative priority of any guarantees. The indenture does not limit the aggregate
principal amount of debt securities which may be issued under it. Debt
securities may be issued under the indenture from time to time in one or more
series. Unless the applicable prospectus supplement relating to the original
offering of a particular series of debt securities indicates otherwise, the
issuer of that series of debt securities will have the ability to reopen the
previous issue of that series of debt securities and issue additional debt
securities of that series pursuant to an indenture supplement.
The applicable prospectus supplement will describe, among other things, the
following terms, to the extent they are applicable to that series of debt
securities:
- title and denominations in which that series of debt securities will be
issued;
- price or prices at which that series of debt securities will be issued;
- aggregate principal amount and, if applicable, the terms on which the
principal amount of the series may be increased by a subsequent offering
of additional debt securities of the same series;
- the interest rate, the date or dates from which interest, if any, will
accrue and the circumstances, if any, in which the issuer may defer
interest payments;
- any special provisions for the payment of any additional amounts with
respect to the debt securities;
- the date or dates on which principal and premium, if any, are payable or
the method of determining those dates;
- the dates and times at which interest, if any, will be payable, the
record date for any interest payment and the person to whom interest will
be payable if other than the person in whose name the debt security is
registered at the close of business on the record date for the interest
payment; the place or places where principal of, premium, if any, and
interest, if any, will be payable;
11
- the terms applicable to any "original issue discount" (as defined in the
Internal Revenue Code of 1986, as amended, and the related regulations),
including the rate or rates at which the original issue discount will
accrue;
- our right or obligation, if any, to redeem or purchase debt securities
under any sinking fund or analogous provisions or at the option of a
holder of debt securities, or otherwise, the conditions, if any, giving
rise to the right or obligation and the period or periods within which,
and the price or prices at which and the terms and conditions upon which,
debt securities will be redeemed or purchased, in whole or in part, and
any provisions for the marketing of the debt securities;
- if the amount of payments of principal, premium, if any, and interest, if
any, is to be determined by reference to an index, formula or other
method, the manner in which these amounts are to be determined and the
calculation agent, if any, with respect to the payments;
- if other than the principal amount of the debt securities, the portion of
the principal amount of the debt securities which will be payable upon
declaration or of acceleration of the stated maturity of the debt
securities pursuant to an event of default, as defined in the applicable
indenture;
- whether the debt securities will be issued in registered or bearer form
and the terms of these forms;
- whether the debt securities will be issue in certificated or book-entry
form and, if applicable, the identity of the depositary;
- any provision for electronic issuance or issuances in uncertificated
form;
- any listing of the debt securities on a securities exchange;
- any events of default or covenants in addition to or in place of those
described in this prospectus;
- whether and upon what terms the debt securities may be defeased or
discharged;
- the currency or currencies, including composite currencies, in which
payment of the principal of, premium, if any, and interest on the offered
debt securities of the series will be payable (if other than the currency
of the United States of America), which unless otherwise specified will
be the currency of the United States of America as at the time of payment
is the legal tender for payment of public or private debts;
- the names of any guarantors, if any, and the terms of the guarantees;
- with respect to the offered debt securities of the series, any deletions
from, modifications of or additions to the events of default or any
covenants, whether or not such events of default or covenants are
consistent with the events of default or covenants set forth in the
indenture;
- any U.S. Federal income tax consequences applicable to the offered debt
securities; and
- any other material terms of that series of debt securities.
Debt securities of a series may be issued in registered form or bearer form
or both as specified in the terms of the series, may be issued in whole or in
part in the form of one or more global securities and may be issued as
book-entry securities that will be deposited with, or on behalf of a depositary
named by us and identified in a prospectus supplement with respect to such
series. The prospectus supplement will specify whether the offered debt
securities will be registered, bearer, global or book-entry form.
GUARANTEES
In connection with an offering of a particular series of debt securities,
the prospectus supplement relating to such debt securities will specify whether
any guarantors are providing guarantees with respect to such series of debt
securities. In such event, each of the guarantors that are providing guarantees,
as primary obligors and not merely as sureties, will fully, irrevocably and
unconditionally guarantee to each holder of debt securities of such series, and
to the trustee on behalf of the holders, (i) the due and punctual payment of
principal of, premium, if any, on and interest on the debt securities when due
and payable, whether by acceleration,
12
required repurchase, redemption or otherwise, the due and punctual payment of
interest on the overdue principal of and interest, if any, on the debt
securities, to the extent lawful, and the due and punctual performance of all
other obligations of Flowserve to the holders and the trustee, in accordance
with the terms of the debt securities of such series and the indenture and (ii)
in the case of any extension of time of payment or renewal of any debt security
of such series or any of such other obligations, that the same will be promptly
paid in full when due or performed in accordance with the terms of the extension
or renewal, by acceleration, required repurchase, redemption or otherwise.
The obligations of any guarantor under its guarantee may be limited as
necessary to prevent that guarantee from constituting a fraudulent conveyance
under applicable law.
Unless otherwise specified in the applicable prospectus supplement, the
guarantee of a guarantor will be released:
(1) upon the sale or other disposition (including by way of
consolidation or merger) of a guarantor; or
(2) upon the sale or disposition of all or substantially all the
assets of a guarantor; other than to Flowserve or a subsidiary of Flowserve
and as permitted by the indenture.
GLOBAL SECURITIES
The debt securities of a series may be issued in whole or in part in the
form of one or more global debt securities. A global security is a security,
typically held by a depositary, that represents and is denominated in an amount
equal to the aggregate principal amount of all outstanding debt securities of a
series or any portion thereof, in either case having the same original issue
date, date or dates on which principal and interest are due, and interest rate
or method of determining interest. Any global debt securities will be deposited
with, or on behalf of, a depositary or its nominee, which will be identified in
the applicable prospectus supplement. Global securities may be issued in either
registered or bearer form and in either temporary or definitive form.
Unless and until a global security is exchanged in whole or in part for the
individual debt securities represented thereby, a global security may not be
transferred except as a whole:
- by the depositary for the global security to a nominee for the
depository;
- by a nominee of the depositary to the depositary or to another nominee of
the depositary; or
- by the depositary or its nominee to a successor depositary or a nominee
of a successor depositary.
The prospectus supplement relating to a particular series of debt
securities which may be so issued hereunder, will describe the specific terms of
the depositary arrangement with respect to a series of debt securities. We
anticipate that the following provisions will generally apply to all depositary
arrangements for debt securities:
- ownership of beneficial interests in a global security will be limited to
persons that have accounts with the depositary for the global security
(each a "participant" and, collectively, the "participants") or persons
holding interests through the participants;
- after the issuer of a series of debt securities issues the registered
global security for the series, the depositary will credit, on its
book-entry registration and transfer system, the participants' accounts
in an amount equal to the respective principal amounts of the debt
securities of that series represented by the global security beneficially
owned by the participants;
- the underwriters, agents or dealers participating in the distribution of
the debt securities will designate the accounts to be credited unless
such debt securities are offered by us or through our agents, in which
case we will designate the accounts to be credited;
- only a participant or a person that may hold an interest through a
participant may be the beneficial owner of a global security; and
13
- ownership of beneficial interests in the global security will be shown
on, and the transfer of that ownership interest will be effected only
through, records maintained by the depositary for the global security for
interests of the participants, and on the records of the participants for
interests of persons holding through the participants.
The laws of some states may require that specified purchasers of securities
take physical delivery of the securities in definitive form. These laws may
limit the ability of those persons to own, transfer or pledge beneficial
interests in global securities.
So long as the depositary for a global security, or its nominee, is the
registered owner of the global security, the depositary or its nominee, as the
case may be, will be considered the sole owner or holder of the debt securities
represented by the global security for all purposes under the indenture. Except
as stated below, owners of beneficial interests in a global security:
- will not be entitled to have the debt securities represented by a
registered global security registered in their names;
- will not receive or be entitled to receive physical delivery of the debt
securities in definitive form; and
- will not be considered the owners or holders of the debt securities under
the indenture.
Accordingly, each person owning a beneficial interest in a registered
global security must rely on the procedures of the depositary for the registered
global security and, if the person is not a participant, on the procedures of
the participant through which the person owns its interests, to exercise any
rights of a holder under the indenture applicable to the registered global
security.
We understand that, under existing industry practices, if we request any
action of holders, or if an owner of a beneficial interest in a registered
global security desires to give or take any action which a holder is entitled to
give or take under the indenture, the depositary for the registered global
security would authorize the participants holding the relevant beneficial
interests to give or take the action, and the participants would authorize
beneficial owners owning through the participants to give or take the action or
would otherwise act upon the instructions of beneficial owners holding through
them.
Subject to the restrictions applicable to bearer securities described in
the applicable prospectus supplement (See "-- Limitations on Issuance of Bearer
Securities"), principal, premium, if any, and interest payments on individual
debt securities represented by a global security will be made to the depositary
or its nominee, as the case may be, as the registered owner or holder of such
global security. Neither we, the trustee, or any registrar or paying agent nor
any other agent of any of us will be responsible or liable for any aspect of the
records relating to, or payments made on account of, beneficial ownership
interests in the global security for the series or for maintaining, supervising
or reviewing any records relating to the beneficial ownership interests.
We expect that the depositary for any such debt securities represented by a
global security, upon receipt of any payment of principal, premium, if any, or
interest in respect of the global security, will immediately credit participants
accounts with payments in amounts proportionate to their respective beneficial
interests in the principal amount of the global security as shown on the
depositary's records. We also expect that payments by participants to owners of
beneficial interests in a global security held through the participants will be
governed by standing customer instructions and customary practices, as is now
the case with the securities held for the accounts of customers and registered
in "street name." Such payments will be the responsibility of the participants.
Receipt by owners of beneficial interests in a temporary global security of
payments of principal, premium or interest with respect thereto will be subject
to the restrictions described in an applicable prospectus supplement (see
"-- Limitations on Issuance of Bearer Securities" below).
If the depositary for any debt securities represented by a global security
is at any time unwilling or unable to continue as depositary or ceases to be a
clearing agency registered under the Securities Exchange Act of 1934, we will
appoint an eligible successor depositary. If we fail to appoint an eligible
successor depositary within 90 days, individual debt securities of such series
will be issued in exchange for the global security. In addition, we may at any
time and in our sole discretion determine not to have any debt securities of a
series
14
represented by one or more global securities. In that event, individual debt
securities of such series will be issued in exchange for the global security
representing such series debt securities. Furthermore, if we so specify with
respect to the debt securities of a series, an owner of a beneficial interest in
a global security representing debt securities of such series may, on terms
acceptable to us, the trustee, and the depositary for such global security,
receive individual debt securities of such series in exchange for such
beneficial interests, subject to any limitations described in the prospectus
supplement relating to such debt securities. In any such instance, an owner of a
beneficial interest in a global security will be entitled to physical delivery
of individual debt securities of the series represented by such global security
equal in principal amount to such beneficial interest and to have such debt
securities registered in its name (if the debt securities are issuable as
registered securities). Individual debt securities of such series so issued will
be issued (a) as registered securities in denominations, unless otherwise
specified by us, of $1,000 and integral multiples thereof if the debt securities
are issuable as registered securities, (b) as bearer securities in the
denomination or denominations specified by us if the debt securities are
issuable as bearer securities or (c) as either registered securities or bearer
securities as described above if the debt securities are issuable in either
form.
LIMITATIONS ON ISSUANCE OF BEARER SECURITIES
The debt securities of a series may be issued as registered securities
(which will be registered as to principal and interest in the register
maintained by the registrar for such debt securities) or bearer securities
(which will be transferable only by delivery). If such debt securities are
issuable as bearer securities, the applicable prospectus supplement will
describe certain special limitations and considerations that will apply to such
debt securities.
COVENANTS
If debt securities are issued, the indenture, as supplemented for a
particular series of debt securities, will contain certain covenants for the
benefit of the holders of such series of debt securities, which will be
applicable (unless waived or amended) so long as any of the debt securities of
such series are outstanding, unless stated otherwise in the prospectus
supplement. The specific terms of the covenants, and summaries thereof, will be
set forth in the prospectus supplement relating to such series of debt
securities.
MERGERS AND SALES OF ASSETS
The indenture provides that Flowserve may not consolidate with or merge
into any other person or convey, transfer or lease all or substantially all of
its properties and assets to another person, unless among other items: (i) the
resulting, surviving or transferee person (if other than the relevant issuer) is
organized and existing under the laws of the United States, any state thereof or
the District of Columbia and such person expressly assumes, by supplemental
indenture, all obligations of the relevant issuer under the indenture and either
the debt securities or the guarantees, as the case may be; (ii) Flowserve or
such successor person shall not immediately thereafter be in default under the
indenture and either the debt securities or the guarantees, as the case may be;
and (iii) Flowserve shall have provided the trustee with an opinion of counsel
and officer's certificate confirming compliance with the indenture. Upon the
assumption of the obligations of Flowserve by such a person in such
circumstances, subject to certain exceptions, Flowserve shall be discharged from
all obligations under all debt securities and the indenture (except in the case
of a lease).
SUBORDINATION
Debt securities of a series, and any guarantees, may be subordinated
("subordinated debt securities") to senior indebtedness (as defined in the
applicable prospectus supplement) to the extent set forth in the prospectus
supplement relating thereto. We conduct substantially all of our operations
through subsidiaries, and the holders of debt securities (whether or not
subordinated debt securities) will be structurally subordinated to the creditors
of our subsidiaries except to the extent such subsidiary is a guarantor of such
series of debt securities.
15
EVENTS OF DEFAULT
Each of the following constitutes an event of default under the form of
indenture with respect to any series of debt securities which may be issued,
except as may be specified in the prospectus supplement:
1. default for 30 days in the payment of interest when due on the debt
securities;
2. default in the payment of principal or premium, if any, when due on
the debt securities;
3. our failure to comply with the obligations described under
"-- Mergers and Sales of Assets" above;
4. our failure to comply for 30 days after notice with any of the
obligations in the covenants set forth in the prospectus supplement;
5. our failure or failure of any guarantor to comply for 60 days after
notice with other agreements contained in the indenture or any supplemental
indenture relating to that series of debt securities;
6. indebtedness (as defined) of us, a guarantor or any significant
subsidiary (as defined), is not paid within the applicable grace period
after final maturity or is accelerated by the holders of such indebtedness
because of a default and the total amount of such indebtedness unpaid or
accelerated exceeds $10.0 million;
7. certain events of bankruptcy, insolvency or reorganization
affecting us;
8. any judgment for the payment of money the uninsured amount of which
is in excess of $10.0 million is entered against us, a guarantor or a
significant subsidiary (as defined) and remains outstanding for a period of
60 days;
9. a guarantee ceases to be in full force and effect in any material
respect (other than in accordance with the terms of the applicable
indenture) or a guarantor denies or disaffirms its obligations under its
guarantee; and
10. any other event of default provided with respect to that series of
debt securities.
A prospectus supplement may omit, modify or add to the foregoing events of
default.
However, a default under clauses (4), (5) and (8) will not constitute an
event of default until the trustee or the holders of 25% in principal amount of
the outstanding debt securities notify us of the default and we do not cure such
default within the time specified after receipt of such notice.
If an event of default (other than certain events of bankruptcy, insolvency
or reorganization) occurs and is continuing, the trustee or the holders of at
least 25% in aggregate principal amount of the outstanding applicable series of
debt securities may declare the principal of and accrued but unpaid interest on
all the applicable debt securities to be due and payable. Upon such a
declaration, such principal of (or, in the case of original issue discount debt
securities, the portion thereby specified in the terms thereof), premium, if
any, and accrued interest shall be due and payable immediately. In the case that
certain events of bankruptcy, insolvency or reorganization occur and are
continuing, the principal of (or, in the case of original issue discount debt
securities, the portion thereby specified in the terms thereof), premium, if
any, and accrued interest on all the applicable debt securities will
automatically become and be immediately due and payable without any declaration
or other act on the part of the trustee or any holders of such debt securities.
Subject to the provisions of the indenture relating to the duties of the
trustee, in case an event of default occurs and be continuing, the trustee is
under no obligation to exercise any of the rights or powers under the indenture
at the request or direction of any of the holders of the applicable debt
securities unless such holders have offered to the trustee reasonable indemnity
or security against any loss, liability or expense. Except to enforce the right
to receive payment of principal, premium, if any, or interest when due, no
holder of a debt security may pursue any remedy with respect to the indenture or
debt securities unless:
1. such holder has previously given the trustee written notice that an
event of default is continuing with respect to such series of debt
securities;
16
2. holders of at least 25% in aggregate principal amount of the
outstanding debt securities of the applicable series have made a written
request to the trustee to pursue the remedy;
3. such holders have offered the trustee reasonable security or
indemnity against any loss, liability or expense;
4. the trustee has not complied with such request within 60 days after
the receipt thereof and the offer of security or indemnity; and
5. holders of a majority in aggregate principal amount of the
outstanding debt securities of such series have not given the trustee a
direction inconsistent with such request within such 60-day period.
Subject to certain restrictions, the holders of a majority in principal
amount of the outstanding debt securities of such series are given the right
under the indenture to direct the time, method and place of conducting any
proceeding for any remedy available to the trustee or of exercising any trust or
power conferred on the trustee. The trustee, however, may refuse to follow any
direction that conflicts with law or the indenture or that the trustee
determines is unduly prejudicial to the rights of any other holder of such
series of debt securities or that would involve the trustee in personal
liability.
If a default with respect to a series of debt securities occurs, is
continuing and is known to the trustee, such trustee must mail to each holder of
such debt securities notice of the default within 90 days after it occurs.
Except in the case of a default in the payment of principal, premium, if any, or
interest on any debt security, the trustee may withhold notice if and so long as
a committee of its trust officers in good faith determines that withholding
notice is in the interests of the holders of the debt securities. In addition,
we are required to deliver to each trustee, within 120 days after the end of
each fiscal year, a certificate indicating whether the signers thereof know of
any default under the related indenture that occurred during the previous year.
MODIFICATION OF THE INDENTURE
We and the trustee may enter into supplemental indentures without the
consent of the holders of debt securities for one or more of the following
purposes:
(a) to evidence the succession of another person to us pursuant to the
provisions of the indenture relating to consolidations, mergers and sales
of assets and the assumption by such successor of our covenants, agreements
and obligations in the indenture and in the debt securities;
(b) to surrender any right or power conferred upon us by the
indenture, to add to our covenants such further covenants, restrictions,
conditions or provisions for the protection of the holders of all or any
series of debt securities as our board of directors shall consider to be
for the protection of the holders of such debt securities, and to make the
occurrence, or the occurrence and continuance, of a default in any of such
additional covenants, restrictions, conditions or provisions a default or
an event of default under the indenture (provided, however, that with
respect to any such additional covenant, restriction, condition or
provision, such supplemental indenture may provide for a period of grace
after default, which may be shorter or longer than that allowed in the case
of other defaults, may provide for an immediate enforcement upon such
default, may limit the remedies available to the trustee upon such default
or may limit the right of holders of a majority in aggregate principal
amount of any or all series of debt securities to waive such default);
(c) to cure any ambiguity or correct or supplement any provision
contained in the indenture, in any supplemental indenture or in any debt
securities that may be effective or inconsistent with any other provision
contained therein, to convey, transfer, assign, mortgage or pledge any
property to or with the trustee, or to make such other provisions in regard
to matters or questions arising under the indenture as shall not adversely
affect the interests of any holders of debt securities of any series;
(d) to modify or amend the indenture in such a manner as to permit the
qualification of the indenture or any supplemental indenture under the
Trust Indenture Act as then in effect;
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(e) to add or change any of the provisions of the indenture to provide
that bearer securities may be registerable as to principal, to change or
eliminate any restrictions on the payment of principal or premium with
respect to registered securities or of principal, premium or interest with
respect to bearer securities, or to permit registered securities to be
exchanged for bearer securities, so as to not adversely affect the
interests of the holders of debt securities or any coupons of any series in
any material respect or permit or facilitate the issuance of debt
securities of any series in uncertificated form;
(f) to comply with the provisions of the indenture relating to
consolidations, mergers and sales of assets;
(g) in the case of subordinated debt securities, to make any change in
the provisions of the indenture relating to subordination that would limit
or terminate the benefits available to any holder of senior indebtedness
under such provision (but only if each such holder of senior indebtedness
consents to such change);
(h) to add guarantees with respect to the debt securities or to secure
the debt securities;
(i) to make any change that does not adversely affect the rights of
any holder;
(j) to add to, change, or eliminate any of the provisions of the
indenture with respect to one or more series of debt securities, so long as
any such addition, change or elimination not otherwise permitted under the
indenture shall (1) neither apply to any debt security of any series
created prior to the execution of such supplemental indenture and entitled
to the benefit of such provision nor modify the rights of the holders of
any such debt security with respect to such provision or (2) become
effective only when there is no such debt security outstanding;
(k) to evidence and provide for the acceptance of appointment by a
successor or separate trustee with respect to the debt securities of one or
more series and to add to or change any of the provisions of the indenture
as shall be necessary to provide for or facilitate the administration of
the indenture by more than one trustee; and
(l) to establish the form or terms of debt securities and coupons of
any series, as described under "-- General" above.
With the consent of the holders of a majority in aggregate principal amount
of the outstanding debt securities of each series affected thereby, we and the
trustee may from time to time and at any time enter into a supplemental
indenture for the purpose of adding any provisions to, changing in any manner or
eliminating any of the provisions of the indenture or of any supplemental
indenture or modifying in any manner the rights of the holder of the debt
securities of such series; provided, however, that without the consent of the
holders of each debt security so affected, no such supplemental indenture shall
(a) reduce the percentage in principal amount of debt securities of any series
whose holders must consent to an amendment, (b) reduce the rate of or extend the
time for payment of interest on any debt security or coupon or reduce the amount
of any payment to be made with respect to any coupon, (c) reduce the principal
of or extend the stated maturity of any debt security, (d) reduce the premium
payable upon the redemption of any debt security or change the time at which any
debt security may or shall be redeemed, (e) make any debt security payable in a
currency other than that stated in the debt security, (f) in the case of any
subordinated debt security or coupons appertaining thereto, make any change in
the provisions of the indenture relating to subordination that adversely affects
the rights of any holder under such provision, (g) release any security that may
have been granted with respect to the debt securities, (h) make any change in
the provisions of the indenture relating to waivers of defaults or amendments
that require unanimous consent, (i) change any obligation of ours provided for
in the indenture to pay additional interest with respect to bearer securities or
(j) limit our obligation to maintain a paying agency outside the United States
for payment on bearer securities or limit our obligation to redeem certain
bearer securities.
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SATISFACTION AND DISCHARGE OF THE INDENTURE; DEFEASANCE
Unless otherwise provided in the prospectus supplement, the indenture shall
cease to be of any further effect with respect to a series of debt securities if
(a) we have delivered to the trustee for cancellation all debt securities of
such series (with certain limited exceptions) or (b) all debt securities of such
series not theretofore delivered to the trustee for cancellation shall have
become due and payable, or are by their terms to become due and payable within
one year or are to be called for redemption within one year, and we shall have
deposited with the trustee as trust funds the entire amount sufficient to pay at
maturity or upon redemption all such debt securities and coupons (and if, in
either case, we shall also pay or cause to be paid all other sums payable under
the indenture by us).
In addition, we shall have a "legal defeasance option" (pursuant to which
we may terminate, with respect to the debt securities of a particular series,
all of our obligations under such debt securities, the indenture and the
applicable indenture supplement with respect to such debt securities) and a
"covenant defeasance option" (pursuant to which we may terminate, with respect
to the debt securities of a particular series, our obligations with respect to
such debt securities under certain specified covenants contained in the
indenture). If we exercise our legal defeasance option with respect to a series
of debt securities, payment of such debt securities may not be accelerated
because of an event of default. If we exercise our covenant defeasance option
with respect to a series of debt securities, payment of such debt securities may
not be accelerated because of an event of default related to the specified
covenants.
The applicable prospectus supplement will describe the procedures we must
follow in order to exercise our defeasance options.
REGARDING THE TRUSTEE
The indenture provides that, except during the continuance of an event of
default, the trustee will perform only such duties as are specifically set forth
in the indenture. During the existence of an event of default, the trustee will
exercise such rights and powers vested in it under the indenture the use the
same degree of care and skill in its exercise as a prudent person would exercise
under the circumstances in the conduct of such person's own affairs.
The indenture and provisions of the Trust Indenture Act that are
incorporated by reference therein contain limitations on the rights of the
trustee, should it become one of our creditors, to obtain payment of claims in
certain cases or to realize on certain property received by it in respect of any
such claim as security or otherwise. The trustee is permitted to engage in other
transactions with us or any of our affiliates; provided, however, that if it
acquires any conflicting interest (as defined in the indenture or in the Trust
Indenture Act), it must eliminate such conflict or resign.
GOVERNING LAW
The indenture, the debt securities and the guarantees will be governed by
the laws of the State of New York.
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 120,000,000 shares of common
stock, par value $1.25 per share, and 1,000,000 shares of preferred stock, par
value $1.00 per share. As of May 1, 2001, we had outstanding 37,967,468 shares
of common stock and no shares of preferred stock. Our common stock is listed on
the New York Stock Exchange under the symbol "FLS."
COMMON STOCK
Subject to any special voting rights of any preferred stock that we may
issue in the future, each share of common stock has one vote on all matters
voted on by our stockholders, including election of our directors. No share of
common stock affords any cumulative voting or preemptive rights. Holders of
common stock will be
19
entitled to dividends in the amounts and at the times declared by our board of
directors, after payment of any dividends on any outstanding preferred stock and
subject to limitations for dividends contained in certain of Flowserve's
outstanding debt instruments. No dividends are currently paid to holders of the
common stock.
Holders of common stock will share equally in our assets on liquidation
after payment or provision for all liabilities and any preferential liquidation
rights of any preferred stock then outstanding. All issued and outstanding
shares of common stock are fully paid and non-assessable and are not subject to
redemption or conversion and have no conversion rights.
The transfer agent for our common stock is National City Bank, in
Cleveland, Ohio.
PREFERRED STOCK
At the direction of our board of directors, we may issue shares of
preferred stock from time to time. Our board of directors may, without any
action by holders of the common stock, adopt resolutions to issue preferred
stock in one or more series and establish or change the rights of the holders of
any series of preferred stock.
The rights of any series of preferred stock may include:
- voting rights;
- liquidation preferences;
- dividend rights;
- redemption rights;
- conversion or exchange rights; and
- sinking funds.
The issuance of such preferred stock could, among other things:
- adversely affect the voting, dividend, and liquidation rights with
respect to the common stock;
- discourage an unsolicited proposal to acquire us; or
- facilitate a particular business combination involving us.
Any of these actions, plus those which follow in the remainder of this
"Description of Capital Stock" section, could discourage a transaction that some
or a majority of our stockholders might believe to be in their best interests or
in which our stockholders might receive a premium for their stock over its then
market price.
FLOWSERVE RIGHTS PLAN; SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
In August 1986, Flowserve's board of directors adopted a rights agreement.
Under this agreement, one preferred stock purchase right was distributed in
August 1986 with respect to each outstanding share of Flowserve common stock.
The rights agreement provides that, unless the rights have been redeemed, one
right will be granted for each additional share of Flowserve common stock issued
after August 1986 and prior to the earlier of the time the rights become
exercisable or August 13, 2006, the termination date of the rights agreement.
The rights are not currently exercisable and trade in tandem with the
common stock. The rights become exercisable and trade separately from the common
stock ten days after a person or group acquires 20% or more of the outstanding
shares of common stock or commences a tender offer which would result in the
ownership of 30% or more of the outstanding shares of common stock. Upon their
becoming exercisable, each right entitles the registered holder to purchase a
fraction of a share of Series A Junior Participating Preferred Stock. Generally,
each share of Series A Junior Participating Preferred Stock carries voting,
dividend and liquidation rights equal to 100 shares of common stock. The rights
provide that if Flowserve were to be acquired in a merger or business
combination after the rights become exercisable, each right may be exercised to
purchase
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common stock of the acquiring company at a 50% discount. In addition, if a 20%
shareholder (determined as provided in the rights agreement) either acquires by
means of a reverse merger in which Flowserve survives or engages in certain
other transactions with Flowserve, each right (other than rights held by the 20%
shareholder) may be exercised to purchase shares of Series A Junior
Participating Preferred Stock at a price equal to 50% of the market value of the
shares. The rights are redeemable by Flowserve at any time prior to becoming
exercisable and will expire on August 13, 2006.
The summary description of the rights set forth above does not purport to
be complete and is qualified in its entirety by reference to the rights
agreement.
CERTAIN ANTI-TAKEOVER PROVISIONS
Under the Certificate of Incorporation of Flowserve, as amended, the board
of directors is divided into three classes of directors serving staggered terms
of three years each. Each class is to be as nearly equal in number as possible,
with one class being elected each year. The Certificate of Incorporation, as
amended, also provides that:
- directors may be removed from office only for cause and only with the
affirmative vote of two-thirds of the voting power of the voting stock;
- any vacancy on the board of directors or any newly created directorship
will be filled by the remaining directors then in office, though less
than a quorum; and
- advance notice of not less than fifty days of shareholder nominations for
the elections of directors must be given in the manner provided by the
By-Laws of Flowserve.
Under the New York Business Corporation Law (NYBCL), the "merger
moratorium" statute would prohibit any business combination with an "interested
shareholder" (as defined in the statute) for a five year period, unless the
combination is approved by the Flowserve board of directors. In addition,
amendments which make changes relating to the capital stock by increasing or
decreasing the par value or the aggregate number of authorized shares of a
class, or otherwise adversely affecting the rights of such class, must be
approved by the majority vote of each class or series of stock affected, even if
such stock would not otherwise have such voting rights. The Flowserve
Certificate of Incorporation additionally requires (i) a four-fifths vote of the
outstanding stock of Flowserve entitled to vote thereon to amend certain
provisions in the Flowserve Certificate restricting transactions with a Related
Corporation (as defined therein) and (ii) a two-thirds vote to amend certain
provisions in the Flowserve Certificate and Flowserve Corporation By-laws
relating to the Flowserve Corporation board of directors.
The noted merger moratorium statute and the noted required supermajority
shareholder vote necessary to alter, amend or repeal these provisions of the
Flowserve Certificate of Incorporation, as amended, the related amendments to
the By-laws and all other provisions of the By-laws, or to adopt any provisions
relating to the classification of the board of directors and the other matters
described above may make it more difficult to change the composition of the
board of directors of Flowserve and may discourage or make difficult any attempt
by a person or group to obtain control of Flowserve.
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PLAN OF DISTRIBUTION
The securities may be distributed under this prospectus from time to time
in one or more transactions:
- at a fixed price or prices, which may be changed;
- at market prices prevailing at the time of sale;
- at prices related to prevailing market prices; or
- at negotiated prices.
Each time we sell securities, we will describe the method of distribution
of the securities in the prospectus supplement relating to the transaction.
We may offer and sell securities to which this prospectus relates in any
one or more of the following ways:
- through underwriters or dealers;
- through agents;
- directly to purchasers; or
- through a combination of such methods of sale.
Each time we sell securities, we will provide a prospectus supplement that
will name any underwriter, dealer or agent involved in the offer and sale of the
securities. The prospectus supplement will also set forth the terms of the
offering, including the purchase price of the securities and the proceeds we
will receive from the sale of the securities, any underwriting discounts and
other items constituting underwriters' compensation, public offering or purchase
price and any discounts or commissions allowed or paid to dealers, any
commissions allowed or paid to agents and any securities exchanges on which the
securities may be listed.
If underwriters or dealers are used in the sale, the securities will be
acquired by the underwriters or dealers for their own account and may be resold
from time to time in one or more transactions, at a fixed price or prices, which
may be changed, or at market prices prevailing at the time of sale, or at prices
related to such prevailing market prices, or at negotiated prices. The
securities may be offered to the public either through underwriting syndicates
represented by one or more managing underwriters or directly by one or more of
such firms. Unless otherwise set forth in the prospectus supplement, the
obligations of underwriters or dealers to purchase the securities offered will
be subject to certain conditions precedent and the underwriters or dealers will
be obligated to purchase all the offered securities if any are purchased. Any
public offering price and any discounts or concessions allowed or reallowed or
paid by underwriters or dealers to other dealers may be changed from time to
time.
The securities may be sold directly by us or through agents designated by
us from time to time. Any agent involved in the offer or sale of the securities
in respect of which this prospectus is delivered will be named, and any
commissions payable by us to such agent will be set forth in the prospectus
supplement. Unless otherwise indicated in the prospectus supplement, any such
agent will be acting on a best efforts basis for the period of its appointment.
Offers to purchase the securities offered by this prospectus may be
solicited, and sales of the securities may be made, by us of those securities
directly to institutional investors or others, who may be deemed to be
underwriters within the meaning of the Securities Act of 1933 with respect to
any resales of the securities. The terms of any offer made in this manner will
be included in the prospectus supplement relating to the offer.
If indicated in the applicable prospectus supplement, we will authorize
underwriters, dealers or agents to solicit offers by certain institutional
investors to purchase securities from us pursuant to contracts providing for
payment and delivery at a future date. Institutional investors with which these
contracts may be made include, among others:
- commercial and savings banks;
- insurance companies;
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- pension funds;
- investment companies; and
- educational and charitable institutions.
In all cases, these purchasers must be approved by us. Unless otherwise set
forth in the applicable prospectus supplement, the obligations of any purchaser
under any of these contracts will not be subject to any conditions except that
(a) the purchase of the securities must not at the time of delivery be
prohibited under the laws of any jurisdiction to which that purchaser is subject
and (b) if the securities are also being sold to underwriters, we must have sold
to these underwriters the securities not subject to delayed delivery.
Underwriters and other agents will not have any responsibility in respect of the
validity or performance of these contracts.
Some of the underwriters, dealers or agents used by us in any offering of
securities under this prospectus may be customers of, engage in transactions
with, and perform services for us in the ordinary course of business.
Underwriters, dealers, agents and other persons may be entitled under agreements
which may be entered into with us to indemnification against and contribution
toward certain civil liabilities, including liabilities under the Securities Act
of 1933 and to be reimbursed by us for certain expenses.
Subject to any restrictions relating to debt securities in bearer form, any
securities initially sold outside the United States may be resold in the United
States through underwriters, dealers or otherwise.
Each series of securities other than common stock will be new issue of
securities with no established trading market. Any underwriters to whom offered
securities are sold by us for public offering and sale may make a market in such
securities, but such underwriters will not be obligated to do so and may
discontinue any market making at any time.
The anticipated date of delivery of the securities offered by this
prospectus will be described in the applicable prospectus supplement relating to
the offering. The securities offered by this prospectus may or may not be listed
on a national securities exchange or a foreign securities exchange. No assurance
can be given as to the liquidity or activity of any trading in the offered
securities.
If more than 10% of the net proceeds of any offering of securities made
under this prospectus will be received by NASD members participating in the
offering or affiliates or associated persons of such NASD members, the offering
will be conducted in accordance with NASD Conduct Rule 2710(c)(8).
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VALIDITY OF SECURITIES
The validity of the common stock and the preferred stock offered by this
prospectus will be passed upon by Ronald F. Shuff, Vice President, Secretary and
General Counsel of Flowserve Corporation. The validity of the debt securities
offered by this prospectus will be passed upon by Cravath, Swaine & Moore, New
York, New York. Mr. Shuff owns beneficially approximately 63,991 shares of
Flowserve's common stock. He holds options to purchase 69,740 additional shares
of Flowserve's common stock that were granted to him pursuant to Flowserve's
1989, 1997 and 1999 stock option plans.
EXPERTS
The consolidated financial statements incorporated in this Prospectus by
reference to the Annual Report on Form 10-K for the year ended December 31,
2000, have been so incorporated in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants given on the authority of
said firm as experts in auditing and accounting.
The financial statements of Ingersoll-Dresser Pump Company as of December
31, 1999 and for each of the two years in the period ended December 31, 1999,
incorporated in this Prospectus by reference to the Registration Statement on
Form S-4 (File No. 333-46760) have been so incorporated in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The consolidated balance sheet of Flowserve Corporation and subsidiaries as
of December 31, 1999 and the related consolidated statements of income,
comprehensive (loss) income, shareholders' equity and cash flows for each of the
two years in the period then ended, incorporated by reference in Flowserve
Corporation's Annual Report (Form 10-K) for the year ended December 31, 2000,
and the related financial statement schedule included in the Annual Report (Form
10-K) for the year ended December 31, 2000, have been audited by Ernst & Young
LLP, independent auditors, as set forth in their reports thereon included or
incorporated by reference therein and incorporated herein by reference. Such
consolidated financial statements and schedule are incorporated herein by
reference in reliance upon such reports given on the authority of such firm as
experts in accounting and auditing.
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