FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
----------
For Quarter Ended March 31, 2002 Commission File Number 1-13179
FLOWSERVE CORPORATION
(Exact name of Registrant as specified in its charter)
NEW YORK
(State or other jurisdiction of incorporation or organization)
31-0267900
(I.R.S. Employer Identification Number)
222 W. LAS COLINAS BLVD., SUITE 1500, IRVING, TEXAS 75039
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (972) 443-6500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
SHARES OF COMMON STOCK, $1.25 PAR VALUE,
outstanding as of April 30, 2002 55,143,489
FLOWSERVE CORPORATION
INDEX
<Table>
<Caption>
Page
No.
----
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Operations -
Three Months Ended March 31, 2002 and 2001 (unaudited) 3
Consolidated Statements of Comprehensive Loss -
Three Months Ended March 31, 2002 and 2001 (unaudited) 3
Consolidated Balance Sheets -
March 31, 2002 (unaudited) and December 31, 2001 4
Consolidated Statements of Cash Flows -
Three months Ended March 31, 2002 and 2001 (unaudited) 5
Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS 18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISKS 26
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 27
SIGNATURE 28
</Table>
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FLOWSERVE CORPORATION
(UNAUDITED)
CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<Caption>
(Amounts in thousands, except per share data) Three Months Ended March 31,
-----------------------------
2002 2001
---------- ----------
Sales $ 447,050 $ 444,035
Cost of sales 305,015 306,461
---------- ----------
Gross profit 142,035 137,574
Selling, general and administrative expense 100,156 100,105
Integration expense -- 19,139
---------- ----------
Operating income 41,879 18,330
Net interest expense 21,819 31,810
Other expense (income), net 464 (135)
---------- ----------
Earnings (loss) before income taxes 19,596 (13,345)
Provision (benefit) for income taxes 6,859 (4,805)
---------- ----------
Net earnings (loss) $ 12,737 $ (8,540)
========== ==========
Net earnings (loss) per share (basic and diluted) $ 0.28 $ (0.22)
========== ==========
</Table>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
<Table>
<Caption>
(Amounts in thousands) Three Months Ended March 31,
-----------------------------
2002 2001
---------- ----------
Net earnings (loss) $ 12,737 $ (8,540)
---------- ----------
Other comprehensive income (expense):
Foreign currency translation adjustments (14,826) (39,144)
Cumulative effect of change in accounting principle, net of
tax of $472 (See footnote 5) -- 840
Hedging transactions, net of taxes of $580 in 2002 and
$2,093 in 2001 862 (3,720)
---------- ----------
Other comprehensive expense (13,964) (42,024)
---------- ----------
Comprehensive loss $ (1,227) $ (50,564)
========== ==========
See accompanying notes to consolidated financial statements.
</Table>
3
FLOWSERVE CORPORATION
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
March 31, December 31,
(Amounts in thousands, except per share data) 2002 2001
------------ ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 18,638 $ 21,533
Accounts receivable, net 436,302 455,861
Inventories 354,672 347,591
Current deferred tax asset 35,162 36,316
Prepaid expenses 31,635 36,838
------------ ------------
Total current assets 876,409 898,139
Property, plant and equipment, net 355,263 362,388
Goodwill 533,537 515,175
Other intangible assets, net 110,029 131,079
Other assets 152,283 145,194
------------ ------------
Total assets $ 2,027,521 $ 2,051,975
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 193,804 $ 178,480
Income taxes 3,715 --
Accrued liabilities 176,938 193,768
Long-term debt due within one year 49,960 44,523
------------ ------------
Total current liabilities 424,417 416,771
Long-term debt due after one year 953,101 996,222
Retirement benefits and other liabilities 227,896 227,963
Commitments and contingencies
Shareholders' equity:
Serial preferred stock, $1.00 par value, 1,000 shares authorized,
no shares issued -- --
Common stock, $1.25 par value 60,518 60,518
Shares authorized - 120,000
Shares issued - 48,414
Capital in excess of par value 212,637 211,113
Retained earnings 368,735 355,998
------------ ------------
641,890 627,629
Treasury stock, at cost - 3,147 and 3,622 shares (71,899) (82,718)
Deferred compensation obligation 8,232 8,260
Accumulated other comprehensive loss (156,116) (142,152)
------------ ------------
Total shareholders' equity 422,107 411,019
------------ ------------
Total liabilities and shareholders' equity $ 2,027,521 $ 2,051,975
============ ============
</Table>
See accompanying notes to consolidated financial statements.
4
FLOWSERVE CORPORATION
(Unaudited)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
(Amounts in thousands) Three Months Ended March 31,
-----------------------------
2002 2001
---------- ----------
CASH FLOWS - OPERATING ACTIVITIES:
Net earnings (loss) $ 12,737 $ (8,540)
Adjustments to reconcile net earnings (loss) to net cash provided
(used) by operating activities:
Depreciation 11,637 12,848
Amortization 1,377 6,051
Amortization of prepaid financing fees and discount 1,385 1,699
Net gain on the sale of fixed assets (390) (224)
Change in assets and liabilities:
Accounts receivable 12,880 25,663
Inventories (9,932) (16,038)
Prepaid expenses 4,214 2,972
Other assets (2,949) (8,439)
Accounts payable 11,885 (12,300)
Accrued liabilities (13,547) (60,117)
Income taxes 3,715 (374)
Retirement benefits and other liabilities 1,087 (6,838)
Net deferred taxes (4,609) 1,150
---------- ----------
Net cash flows provided (used) by operating activities 29,490 (62,487)
---------- ----------
CASH FLOWS - INVESTING ACTIVITIES:
Capital expenditures (6,109) (7,460)
Cash received for disposal of assets 1,125 3,946
---------- ----------
Net cash flows used by investing activities (4,984) (3,514)
---------- ----------
CASH FLOWS - FINANCING ACTIVITIES:
Net (repayments) borrowings under revolving credit agreement (28,000) 50,000
Payments of long-term debt (8,411) (5,263)
Proceeds from stock option exercises 10,251 389
Other (163) --
---------- ----------
Net cash flows (used) provided by financing activities (26,323) 45,126
Effect of exchange rate changes (1,078) (2,845)
---------- ----------
Net change in cash and cash equivalents (2,895) (23,720)
Cash and cash equivalents at beginning of year 21,533 42,341
---------- ----------
Cash and cash equivalents at end of period $ 18,638 $ 18,621
========== ==========
Income taxes paid (refunded) $ 784 $ (6,972)
Interest paid $ 28,422 $ 48,296
</Table>
See accompanying notes to consolidated financial statements.
5
FLOWSERVE CORPORATION
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
1. ACCOUNTING POLICIES - BASIS OF PRESENTATION
The accompanying consolidated balance sheet as of March 31, 2002, and
the related consolidated statements of operations, comprehensive loss and cash
flows for the three months ended March 31, 2002 and 2001 are unaudited. In
management's opinion, all adjustments comprising normal recurring adjustments
necessary for a fair presentation of such consolidated financial statements have
been made. The accompanying consolidated financial statements and notes in this
Form 10-Q are presented as permitted by Regulation S-X and do not contain
certain information included in the Company's annual financial statements and
notes to the financial statements. Accordingly, the accompanying consolidated
financial information should be read in conjunction with the Company's 2001
Annual Report. Interim results are not necessarily indicative of results to be
expected for a full year. Certain amounts in 2001 have been reclassified to
conform with the 2002 presentation.
2. RECENT ACCOUNTING DEVELOPMENTS
In August 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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
the Company on January 1, 2003. The Company is currently assessing the impact of
SFAS No. 143 and has not yet determined the effects, if any, it will have on its
consolidated financial position or results of operations.
3. INVENTORIES
Inventories are stated at lower of cost or market. Cost is determined
for U.S. inventories by the last-in, first-out (LIFO) method and for other
inventories by the first-in, first-out (FIFO) method.
Inventories and the method of determining costs were:
<Table>
<Caption>
March 31, December 31,
2002 2001
------------ ------------
Raw materials $ 67,839 $ 62,818
Work in process 179,250 144,397
Finished goods 252,222 258,856
Less: Progress billings (69,335) (43,655)
Less: Excess and obsolete reserve (41,150) (40,889)
------------ ------------
388,826 381,527
LIFO reserve (34,154) (33,936)
------------ ------------
Net inventory $ 354,672 $ 347,591
============ ============
Percent of inventory accounted for by LIFO 63% 62%
Percent of inventory accounted for by FIFO 37% 38%
</Table>
4. GOODWILL AND OTHER INTANGIBLE ASSETS
On January 1, 2002, the Company adopted SFAS No. 141, "Business
Combinations," and No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141
requires that all business combinations 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. The most significant changes made by SFAS No. 142 require
that goodwill and indefinite lived
6
intangible assets no longer be amortized and be tested for impairment at least
on an annual basis. Additionally, the amortization period of intangible assets
is no longer limited to forty years.
Upon adoption of SFAS No. 141 and No. 142, the Company reclassified
acquired workforce intangible assets with a carrying value of $18.5 million to
goodwill as that asset does not meet the new criteria for recognition apart from
goodwill. The Company also determined that certain acquired trademark intangible
assets have indefinite useful lives and is no longer amortizing these intangible
assets. Under SFAS No. 142, goodwill is no longer amortized and instead is
tested for impairment annually at the reporting unit level. The Company is still
completing the required transitional goodwill impairment test, but does not
expect this test to result in an impairment loss. Amortization of goodwill,
workforce intangible assets reclassified to goodwill and trademark intangible
assets with indefinite useful lives in the first quarter of 2001 totaled $4.7
million.
The following table reflects consolidated results in the first quarter
of 2001 adjusted as though the adoption of SFAS No. 141 and No. 142 occurred on
January 1, 2001:
<Table>
<Caption>
Three Months
Ended
March 31, 2001
--------------
Net income (loss):
As reported $ (8,540)
Goodwill amortization 2,828
Workforce intangible asset amortization 435
Trademark intangible asset amortization 146
--------------
Adjusted net loss $ (5,131)
==============
Net income (loss) per share (basic and diluted):
As reported $ (0.22)
Goodwill amortization 0.08
Workforce intangible asset amortization 0.01
Trademark intangible asset amortization --
--------------
Adjusted net loss per share $ (0.13)
==============
</Table>
7
The following tables provide information about acquired intangible
assets:
<Table>
<Caption>
As of December 31, 2001 As of March 31, 2002
-------------------------------- ---------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------------ ------------ ------------ ------------
Amortized intangible assets:
Drawings $ 63,500 $ (4,267) $ 63,500 $ (5,021)
Distribution network 13,700 (1,051) 13,700 (1,279)
Software 5,900 (833) 5,900 (981)
Other 30,300 (7,230) 6,714 (3,564)
------------ ------------ ------------ ------------
$ 113,400 $ (13,381) $ 89,814 $ (10,845)
============ ============ ============ ============
Unamortized intangible assets-
Trademarks $ 31,060 $ 31,060
============ ============
</Table>
<Table>
Amortization expense:
Actual for three months ended March 31, 2002 $1,271
Estimated for nine months ending December 31, 2002 $3,815
Estimated for year ending December 31, 2003 $5,086
Estimated for year ending December 31, 2004 $5,086
Estimated for year ending December 31, 2005 $4,963
Estimated for year ending December 31, 2006 $4,951
Estimated for year ending December 31, 2007 $4,951
</Table>
The changes in the carrying amount of goodwill for the first quarter
ended March 31, 2002 are as follows:
<Table>
<Caption>
Flowserve Flow Flow
Pump Solutions Control Other Total
--------- --------- --------- --------- ---------
Balance as of December 31, 2001 $ 393,577 $ 67,915 $ 34,214 $ 19,469 $ 515,175
Reclassification of workforce intangible assets 18,501 -- -- -- 18,501
Other reclassifications 10,065 4,784 5,915 (19,469) 1,295
Currency translation (421) (673) (340) -- (1,434)
--------- --------- --------- --------- ---------
BALANCE AS OF MARCH 31, 2002 $ 421,722 $ 72,026 $ 39,789 $ -- $ 533,537
========= ========= ========= ========= =========
</Table>
Other reclassifications include the allocation of previously
unallocated goodwill to the Company's reporting units and other
reclassifications from intangible assets in connection with the adoption of SFAS
No. 142.
8
5. OPTION OF SFAS NO. 133 - ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES
The Company adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," and the corresponding amendments on January
1, 2001. In accordance with the transition provisions of SFAS 133, the Company
recorded a cumulative-effect adjustment in other comprehensive income as of
January 1, 2001 of $0.8 million, net of deferred tax of $0.5 million,
representing the current fair value of hedging instruments. Of the asset amount
of $1.3 million, $3.4 million related to foreign currency forward contracts,
offset by a liability of $2.1 million related to interest rate swap agreements.
6. RESTRUCTURING AND ACQUISITION RELATED CHARGES
In August 2000, in conjunction with the acquisition of
Ingersoll-Dresser Pump Company (IDP), the Company initiated a restructuring
program designed to reduce costs and to eliminate excess capacity by
consolidating facilities. The Company's actions, approved and committed to in
the third quarter of 2000, have resulted in the net reduction of approximately
1,100 positions, which was consistent with the plan. The program includes the
closure of IDP's former headquarters, the closure or significant downsizing of a
number of pump manufacturing facilities, service and repair centers, and
reduction of sales and sales support personnel. The Company established a
restructuring reserve for this program in the third quarter of 2000.
During the first three months of 2001, the Company also incurred $19.1
million in integration costs in conjunction with this program. The Company
substantially completed its integration activities during 2001.
Expenditures charged to the 2000 restructuring reserve were:
<Table>
<Caption>
Other
Exit
Severance Costs Total
---------- ---------- ----------
Balance at August 16, 2000 $ 45,980 $ 14,832 $ 60,812
Cash expenditures (18,645) (2,434) (21,079)
Net non-cash reduction (8,849) -- (8,849)
---------- ---------- ----------
Balance at December 31, 2000 18,486 12,398 30,884
Cash expenditures (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
Cash expenditures (269) (112) (381)
---------- ---------- ----------
Balance at March 31, 2002 $ 2,133 $ 3,007 $ 5,140
========== ========== ==========
</Table>
7. EARNINGS PER SHARE
Basic and diluted earnings per share were calculated as follows:
<Table>
<Caption>
Three Months Three Months
Ended Ended
March 31, 2002 March 31, 2001
-------------- --------------
Net earnings (loss) $ 12,737 $ (8,540)
Denominator for basic earnings per share - weighted 45,176 38,187
average shares
Effect of dilutive securities 629 --
-------------- --------------
Denominator for diluted earnings per share - weighted
average shares adjusted for dilutive securities 45,805 38,187
============== ==============
Earnings (loss) per share - basic $ 0.28 $ (0.22)
- diluted $ 0.28 $ (0.22)
</Table>
Options to purchase 751 shares of common stock were outstanding at
March 31, 2002 that were not included in the computation of diluted EPS for the
three month period ended March 31, 2002 because the options' exercise price was
greater than the average market price of the common stock.
9
For the three months ended March 31, 2001, the effect of options to
purchase 1,328 shares of common stock were excluded from the computation of
diluted net loss per share since the Company incurred a net loss during those
periods. Therefore, the amounts reported for basic and diluted net loss per
ordinary share were the same.
8. GUARANTOR AND NONGUARANTOR FINANCIAL STATEMENTS
In connection with the IDP acquisition and as part of the related
financing, the Company and a newly formed Dutch subsidiary, Flowserve Finance
B.V., issued an aggregate of $375 million of senior subordinated notes (the U.S.
dollar Notes and the Euro Notes). The U.S. dollar Notes and the Euro Notes are
general unsecured obligations of the Company and of Flowserve Finance B.V.,
respectively, subordinated in right of payment to all existing and future senior
indebtedness of the Company and of Flowserve Finance B.V., respectively, and
guaranteed on a full, unconditional, joint and several basis by the Company's
wholly-owned domestic subsidiaries and, in the case of the Euro Notes, by the
Company.
The following consolidating financial information presents:
(1) Consolidating balance sheet as of March 31, 2002 and the related
statements of operations and cash flows for the three months ended
March 31, 2002 and 2001 of (a) Flowserve Corporation, the parent, (b)
Flowserve Finance B.V., (c) the guarantor subsidiaries, (d) the
nonguarantor subsidiaries, and the Company on a consolidated basis, and
(2) Consolidating balance sheet as of December 31, 2001 of (a) Flowserve
Corporation, the parent, (b) Flowserve Finance B.V., (c) the guarantor
subsidiaries, (d) the nonguarantor subsidiaries, and Company on a
consolidated basis, and
(3) Elimination entries necessary to consolidate Flowserve Corporation, the
parent, with Flowserve Finance, B.V., guarantor and nonguarantor
subsidiaries.
Investments in subsidiaries are accounted for by the parent using the
equity method of accounting. The guarantor and nonguarantor subsidiaries are
presented on a combined basis. The principal elimination entries eliminate
investments in subsidiaries and intercompany balances and transactions. Separate
financial statements for the guarantor subsidiaries and the nonguarantor
subsidiaries are not presented because management believes such financial
statements would not be meaningful to investors.
10
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2002
(UNAUDITED)
<Table>
<Caption>
FLOWSERVE GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT FINANCE B.V. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------ ------------ ------------ ------------ ------------
Sales $ -- $ -- $ 277,695 $ 193,613 $ (24,258) $ 447,050
Cost of sales -- -- 197,651 131,622 (24,258) 305,015
------------ ------------ ------------ ------------ ------------ ------------
Gross profit -- -- 80,044 61,991 -- 142,035
Selling, general and
administrative expense -- -- 68,874 31,282 -- 100,156
------------ ------------ ------------ ------------ ------------ ------------
Operating income -- -- 11,170 30,709 -- 41,879
Net interest expense (1,397) (337) 19,882 3,671 -- 21,819
Other expense (income), net -- -- (4,196) 4,660 -- 464
Equity in earnings of
subsidiaries (11,857) -- -- -- 11,857 --
------------ ------------ ------------ ------------ ------------ ------------
Earnings (loss) before income 13,254 337 (4,516) 22,378 (11,857) 19,596
taxes
Provision (benefit) for income
taxes 517 -- (1,671) 8,013 -- 6,859
------------ ------------ ------------ ------------ ------------ ------------
Net earnings (loss) $ 12,737 $ 337 $ (2,845) $ 14,365 $ (11,857) $ 12,737
============ ============ ============ ============ ============ ============
</Table>
11
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2001
(UNAUDITED)
<Table>
<Caption>
FLOWSERVE GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT FINANCE B.V. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------ ------------ ------------ ------------ ------------
Sales $ -- $ -- $ 299,139 $ 170,796 $ (25,900) $ 444,035
Cost of sales -- -- 217,716 114,645 (25,900) 306,461
------------ ------------ ------------ ------------ ------------ ------------
Gross profit -- -- 81,423 56,151 -- 137,574
Selling, general and
administrative expense 7 -- 68,965 31,133 -- 100,105
Integration expense -- -- 15,448 3,691 -- 19,139
------------ ------------ ------------ ------------ ------------ ------------
Operating income (loss) (7) -- (2,990) 21,327 -- 18,330
Net interest expense 6,961 224 21,330 3,900 (605) 31,810
Other expense (income), net -- 3 (4,198) 3,455 605 (135)
Equity in loss of
subsidiaries 6,523 -- -- -- (6,523) --
------------ ------------ ------------ ------------ ------------ ------------
Earnings (loss) before income
taxes (13,491) (227) (20,122) 13,972 6,523 (13,345)
Provision (benefit) for income
taxes (4,951) -- (5,400) 5,546 -- (4,805)
------------ ------------ ------------ ------------ ------------ ------------
Net earnings (loss) $ (8,540) $ (227) $ (14,722) $ 8,426 $ 6,523 $ (8,540)
============ ============ ============ ============ ============ ============
</Table>
12
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS)
CONSOLIDATING BALANCE SHEET
MARCH 31, 2002
(UNAUDITED)
<Table>
<Caption>
FLOWSERVE GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT FINANCE B.V. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------ ------------ ------------ ------------ ------------
Current assets:
Cash and cash equivalents $ -- $ -- $ -- $ 18,638 $ -- $ 18,638
Intercompany receivables 156,925 -- 57,184 53,259 (267,368) --
Accounts receivable, net -- -- 227,679 208,623 -- 436,302
Inventories -- -- 209,255 145,417 -- 354,672
Current deferred tax asset -- -- 33,060 2,102 -- 35,162
Prepaid expenses -- -- 15,915 15,720 -- 31,635
------------ ------------ ------------ ------------ ------------ ------------
Total current assets 156,925 -- 543,093 443,759 (267,368) 876,409
Property, plant and equipment, net -- -- 198,579 156,684 -- 355,263
Investment in subsidiaries 386,553 -- 464,633 -- (851,186) --
Intercompany receivables 827,699 83,905 2,285 59,646 (973,535) --
Goodwill, net -- -- 420,529 113,008 -- 533,537
Other intangible assets, net -- -- 107,807 2,222 -- 110,029
Other assets 24,159 2,523 113,837 11,764 -- 152,283
------------ ------------ ------------ ------------ ------------ ------------
Total assets $ 1,395,336 $ 86,428 $ 1,850,763 $ 787,083 $ (2,092,089) $ 2,027,521
============ ============ ============ ============ ============ ============
Current liabilities:
Accounts payable $ -- $ -- $ 88,121 $ 105,683 $ -- $ 193,804
Intercompany payables 18,516 772 135,167 131,952 (286,407) --
Income taxes (1,257) -- 2,192 2,780 -- 3,715
Accrued liabilities 9,188 866 104,458 62,426 -- 176,938
Long-term debt due within one
year 49,959 -- 1 -- -- 49,960
------------ ------------ ------------ ------------ ------------ ------------
Total current liabilities 76,406 1,638 329,939 302,841 (286,407) 424,417
Long-term debt due after one year 896,823 55,836 420 22 -- 953,101
Intercompany payables -- 36,606 822,340 92,832 (951,778) --
Retirement benefits and other
liabilities -- -- 171,489 56,407 -- 227,896
Shareholders' equity:
Serial preferred stock -- -- -- -- -- --
Common stock 60,518 -- 2 182,331 (182,333) 60,518
Capital in excess of par value 212,637 -- 313,221 72,991 (386,212) 212,637
Retained earnings (deficit) 368,735 (7,861) 234,434 176,606 (403,179) 368,735
------------ ------------ ------------ ------------ ------------ ------------
641,890 (7,861) 547,657 431,928 (971,724) 641,890
Treasury stock at cost (71,899) -- -- -- -- (71,899)
Deferred compensation obligation 8,232 -- -- -- -- 8,232
Accumulated other comprehensive
income (loss) (156,116) 209 (21,082) (96,947) 117,820 (156,116)
------------ ------------ ------------ ------------ ------------ ------------
Total shareholders' equity 422,107 (7,652) 526,575 334,981 (853,904) 422,107
------------ ------------ ------------ ------------ ------------ ------------
Total liabilities and
shareholders' equity $ 1,395,336 $ 86,428 $ 1,850,763 $ 787,083 $ (2,092,089) $ 2,027,521
============ ============ ============ ============ ============ ============
</Table>
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS)
CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2001
<Table>
<Caption>
FLOWSERVE GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT FINANCE B.V. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------ ------------ ------------ ------------ ------------
Current assets:
Cash and cash equivalents $ -- $ -- $ -- $ 21,533 $ -- $ 21,533
Intercompany receivables 82,513 -- 62,875 77,513 (222,901) --
Accounts receivable, net -- -- 231,484 244,377 -- 455,861
Inventories -- -- 201,707 145,884 -- 347,591
Current deferred tax asset -- -- 33,727 2,589 -- 36,316
Prepaid expenses -- -- 22,981 13,857 -- 36,838
------------ ------------ ------------ ------------ ------------ ------------
Total current assets 82,513 -- 552,774 485,753 (222,901) 898,139
Property, plant and equipment, net -- -- 201,595 160,793 -- 362,388
Investment in subsidiaries 399,026 -- 464,633 -- (863,659) --
Intercompany receivables 901,675 85,254 6,198 34,003 (1,027,130) --
Goodwill, net -- -- 414,465 100,710 -- 515,175
Other intangible assets, net -- -- 115,123 15,956 -- 131,079
Other assets 29,094 2,693 100,320 13,087 -- 145,194
------------ ------------ ------------ ------------ ------------ ------------
Total assets $ 1,412,308 $ 87,947 $ 1,855,108 $ 810,302 $ (2,113,690) $ 2,051,975
============ ============ ============ ============ ============ ============
Current liabilities:
Accounts payable $ 145 $ -- $ 85,861 $ 92,474 $ -- $ 178,480
Intercompany payables 4,240 (1,191) 45,004 174,848 (222,901) --
Income taxes (1,257) -- (15,606) 16,863 -- --
Accrued liabilities 15,034 2,665 107,191 68,878 -- 193,768
Long-term debt due within one
year 44,521 -- 2 -- -- 44,523
------------ ------------ ------------ ------------ ------------ ------------
Total current liabilities 62,683 1,474 222,452 353,063 (222,901) 416,771
Long-term debt due after one year 938,606 57,163 420 33 -- 996,222
Intercompany payables -- 37,115 939,245 50,770 (1,027,130) --
Retirement benefits and other
liabilities -- -- 172,483 55,480 -- 227,963
Shareholders' equity:
Serial preferred stock -- -- -- -- -- --
Common stock 60,518 -- 2 182,331 (182,333) 60,518
Capital in excess of par value 211,113 -- 313,221 72,991 (386,212) 211,113
Retained earnings (deficit) 355,998 (8,198) 237,279 162,241 (391,322) 355,998
------------ ------------ ------------ ------------ ------------ ------------
627,629 (8,198) 550,502 417,563 (959,867) 627,629
Treasury stock at cost (82,718) -- -- -- -- (82,718)
Deferred compensation obligation 8,260 -- -- -- -- 8,260
Accumulated other comprehensive
(loss) income (142,152) 393 (29,994) (66,607) 96,208 (142,152)
------------ ------------ ------------ ------------ ------------ ------------
Total shareholders' equity 411,019 (7,805) 520,508 350,956 (863,659) 411,019
------------ ------------ ------------ ------------ ------------ ------------
Total liabilities
and shareholders' equity $ 1,412,308 $ 87,947 $ 1,855,108 $ 810,302 $ (2,113,690) $ 2,051,975
============ ============ ============ ============ ============ ============
</Table>
14
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2002
(UNAUDITED)
<Table>
<Caption>
FLOWSERVE GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT FINANCE B.V. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------ ------------ ------------ ------------ ------------
CASH FLOWS - OPERATING
ACTIVITIES:
Net earnings (loss) $ 12,737 $ 337 $ (2,845) $ 14,365 $ (11,857) $ 12,737
Adjustments to
reconcile net earnings
(loss) to cash (used)
provided by operating
activities:
Depreciation -- -- 6,860 4,777 -- 11,637
Amortization -- -- 1,180 197 -- 1,377
Amortization of prepaid
financing fees and discount 1,289 96 -- -- -- 1,385
Net (gain) loss on sale of
fixed assets -- -- (410) 20 -- (390)
Change in operating assets
and liabilities:
Accounts receivable -- -- 3,753 9,127 -- 12,880
Inventories -- -- (7,587) (2,345) -- (9,932)
Intercompany receivable
and payable 13,811 1,666 (10,283) (36,325) 31,131 --
Prepaid expenses -- -- 6,641 (2,427) -- 4,214
Other assets 8 10 (4,067) 1,100 -- (2,949)
Accounts payable (145) -- 2,282 9,748 -- 11,885
Accrued liabilities (5,846) (1,819) (6,558) 676 -- (13,547)
Income taxes -- -- 17,820 (14,105) -- 3,715
Retirement benefits and
other liabilities 745 -- (994) 1,336 -- 1,087
Net deferred taxes 3,724 -- (4,742) (3,591) -- (4,609)
------------ ------------ ------------ ------------ ------------ ------------
Net cash (used) provided
by operating activities 26,323 290 1,050 (17,447) 19,274 29,490
------------ ------------ ------------ ------------ ------------ ------------
CASH FLOWS - INVESTING
ACTIVITIES:
Capital expenditures -- -- (2,971) (3,138) -- (6,109)
Disposal of assets -- -- 1,125 -- -- 1,125
Change in investments in
subsidiaries -- -- -- 41,407 (41,407) --
------------ ------------ ------------ ------------ ------------ ------------
Net cash flows used by
investing activities -- -- (1,846) 38,269 (41,407) (4,984)
------------ ------------ ------------ ------------ ------------ ------------
CASH FLOWS - FINANCING
ACTIVITIES:
Net repayments under
revolving credit agreement (28,000) -- -- -- -- (28,000)
Payments of long-term debt (8,411) -- -- -- -- (8,411)
Proceeds from stock option
exercises 10,251 -- -- -- -- 10,251
Other (163) (290) 803 (10,790) 10,277 (163)
------------ ------------ ------------ ------------ ------------ ------------
Net cash flows provided (used)
by financing activities (26,323) (290) 803 (10,790) 10,277 (26,323)
Effect of exchange rate
changes on cash -- -- (7) (1,071) -- (1,078)
------------ ------------ ------------ ------------ ------------ ------------
Net change in cash and cash
equivalents -- -- -- 8,961 (11,856) (2,895)
Cash and cash equivalents at
beginning of year -- -- -- 21,533 -- 21,533
------------ ------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at
end of period $ -- $ -- $ -- $ 30,494 $ (11,856) $ 18,638
============ ============ ============ ============ ============ ============
</Table>
15
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2001
(UNAUDITED)
<Table>
<Caption>
FLOWSERVE GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT FINANCE B.V. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------ ------------ ------------ ------------ ------------
CASH FLOWS - OPERATING
ACTIVITIES:
Net earnings (loss) $ (8,540) $ (227) $ (14,722) $ 8,426 $ 6,523 $ (8,540)
Adjustments to reconcile net
earnings (loss) to cash
provided (used) by operating
activities:
Depreciation 7 -- 7,432 5,409 -- 12,848
Amortization -- -- 5,180 871 -- 6,051
Amortization of prepaid
financing fees and discount 1,543 156 -- -- -- 1,699
Net (gain) loss on sale of
fixed assets -- -- 54 (278) -- (224)
Change in operating assets and
liabilities:
Accounts receivable (212) -- 9,349 16,526 -- 25,663
Inventories (5,758) -- 440 (10,720) -- (16,038)
Intercompany receivable and
payable (28,287) 25 296,036 21,498 (289,272) --
Prepaid expenses 876 -- 1,530 566 -- 2,972
Other assets (1,686) (33) 2,797 (9,517) -- (8,439)
Accounts payable 4,284 -- 15,603 (24,457) (7,730) (12,300)
Accrued liabilities (6,921) 70 (12,683) (40,583) -- (60,117)
Income taxes -- -- -- (374) -- (374)
Retirement benefits and
other liabilities (65) -- (226) (6,547) -- (6,838)
Net deferred taxes (61) -- (4,528) 5,739 -- 1,150
------------ ------------ ------------ ------------ ------------ ------------
Net cash (used) provided by
operating activities (44,820) (9) 306,262 (33,441) (290,479) (62,487)
------------ ------------ ------------ ------------ ------------ ------------
CASH FLOWS - INVESTING
ACTIVITIES:
Capital expenditures (306) -- (6,030) (1,124) -- (7,460)
Disposal of assets -- -- 3,946 -- -- 3,946
------------ ------------ ------------ ------------ ------------ ------------
Net cash flows used in
investing activities (306) -- (2,084) (1,124) -- (3,514)
------------ ------------ ------------ ------------ ------------ ------------
CASH FLOWS - FINANCING
ACTIVITIES:
Payments on long-term debt (5,263) -- -- -- -- (5,263)
Net borrowings under
revolving credit agreement 50,000 -- -- -- -- 50,000
Other activity 389 9 (304,178) 22,382 281,787 389
------------ ------------ ------------ ------------ ------------ ------------
Net cash flows provided (used)
by financing activities 45,126 9 (304,178) 22,382 281,787 45,126
Effect of exchange rate changes
on cash -- -- -- (2,845) -- (2,845)
------------ ------------ ------------ ------------ ------------ ------------
Net change in cash and cash
equivalents -- -- -- (15,028) (8,692) (23,720)
Cash and cash equivalents at
beginning of year -- -- -- 50,239 (7,898) 42,341
------------ ------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at
end of period $ -- $ -- $ -- $ 35,211 $ (16,590) $ 18,621
============ ============ ============ ============ ============ ============
</Table>
16
9. SEGMENT INFORMATION
The Company has three divisions, each of which constitutes a business
segment. Each division manufactures different products and is defined by the
type of products and services provided. Each division has a President, who
reports directly to the Chief Executive Officer, and a Division Controller. For
decision-making purposes, the Chief Executive Officer and other members of upper
management use financial information generated and reported at the division
level. The Company also has a corporate headquarters that does not constitute a
separate division or business segment.
Amounts classified as All Other include Corporate Headquarters costs
and other minor entities that are not considered separate segments. The Company
evaluates segment performance and allocates resources based on profit or loss
excluding integration expenses, interest expense, other income or expense,
income taxes and extraordinary items. Intersegment sales and transfers are
recorded at cost plus a profit margin. Several valve distribution centers were
transferred from Flow Solutions Division to Flow Control Division during the
first quarter of 2002. Amounts reported for these distribution centers in the
first quarter of 2001 have been reclassified to conform to the current business
configuration.
Three months ended March 31, 2002
<Table>
<Caption>
Flowserve Flow Flow Consolidated
Pump Solutions Control All Other Total
------------ ------------ ------------ ------------ ------------
Sales to external customers $ 231,719 $ 141,954 $ 71,675 $ 1,702 $ 447,050
Intersegment sales 1,629 5,142 1,789 (8,560) --
Segment operating income 26,061 16,980 5,223 (6,385) 41,879
Identifiable assets $ 1,276,695 $ 432,594 $ 237,359 $ 77,158 $ 2,023,806
</Table>
Three months ended March 31, 2001
<Table>
<Caption>
Flowserve Flow Flow Consolidated
Pump Solutions Control All Other Total
------------ ------------ ------------ ------------ ------------
Sales to external customers $ 223,497 $ 143,043 $ 76,489 $ 1,006 $ 444,035
Intersegment sales 1,201 4,758 2,151 (8,110) --
Segment operating income (before
integration expense) 18,116 16,977 9,459 (7,083) 37,469
Identifiable assets $ 1,662,265 $ 434,948 $ 230,059 $ (289,251) $ 2,038,021
</Table>
A reconciliation of total segment operating income before integration expense to
consolidated earnings before income taxes follows:
<Table>
<Caption>
Three Months Ended March 31,
----------------------------
2002 2001
----------- -----------
Total segment operating income (before integration expense) $ 48,264 $ 44,552
Corporate expenses and other 6,385 7,083
Integration expense -- 19,139
Net interest expense 21,819 31,810
Other expense (income) 464 (135)
----------- -----------
Earnings (loss) before income taxes $ 19,596 $ (13,345)
=========== ===========
</Table>
17
10. SUBSEQUENT EVENTS
On May 2, 2002, the Company completed its acquisition of Invensys plc's
flow control division (IFC) for an aggregate purchase price of $535 million,
subject to adjustment pursuant to the terms of the purchase and sale agreement.
IFC is a manufacturer of valves, actuators and associated flow control products.
The Company financed the acquisition and associated transaction costs by issuing
9.2 million shares of common stock for net proceeds of approximately $277
million in April 2002 and borrowing the remainder through its senior secured
credit facility. The Company used approximately $40 million of the new equity
financing to reduce amounts outstanding under the Company's revolving credit
facility.
The Company obtained the incremental new borrowings under its senior
credit facilities by amending the agreement to borrow $700.0 million under a new
tranche C term loan, borrow $95.3 million under a new tranche A term loan, repay
$11.3 million of the existing tranche A term loan and repay all $468.8 million
of the existing tranche B term loan. Certain other terms of the senior credit
facility were changed. These changes include a maturity in 2009 rather than 2008
for the tranche C term loan, a lower interest rate and modified covenants. As a
result of repaying the tranche B term notes on May 2, 2002, the Company incurred
pre-tax extraordinary expense of approximately $10 million primarily from
writing off the unamortized balance of the existing tranche B term loan facility
prepaid financing fees.
The revised scheduled principal payments of the term loans after giving
effect to borrowings for the acquisition of IFC are summarized as follows: $43.7
million in the remainder of 2002, $78.7 million in 2003, $84.0 million in 2004,
$89.3 million in 2005, $56.0 million in 2006, $100.0 million in 2007, $388.0
million in 2008, and $194.0 million in 2009.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion and analysis are provided to increase
understanding of, and should be read in conjunction with, the accompanying
consolidated financial statements and notes.
Flowserve produces engineered and industrial pumps, automated and
manual quarter-turn valves, control valves, valve actuators and precision
mechanical seals, and provides a range of related flow management services
worldwide, primarily for the process industries. Equipment manufactured and
serviced by the Company is predominately used in industries that deal with
difficult-to-handle and often corrosive fluids in environments with extreme
temperature, pressure, horsepower and speed. Flowserve's businesses are affected
by economic conditions in the United States and other countries where its
products are sold and serviced, the cyclical nature of the petroleum, chemical,
power and other industries served, by the relationship of the U.S. dollar to
other currencies, and by the demand for and pricing of customers' products. The
Company believes the impact of these conditions is somewhat mitigated by the
strength and diversity of Flowserve's product lines, geographic coverage and
significant installed base, which provides potential for an annuity stream of
revenue from parts and services.
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2002
Sales increased about 1.0% to $447.1 million for the three months ended
March 31, 2002, compared with $444.0 million for the same period in 2001. Sales
were positively impacted by improved business activity in the petroleum and
water markets. However, sales were negatively impacted by an unfavorable
currency translation of approximately 3.0% and continued weakness in the
chemical and general industrial sectors. The
18
change in sales is discussed further in the following section on Business
Segments. Net sales to international customers, including export sales from the
U.S., were 47% of sales, similar to the first quarter of 2001.
Bookings, or incoming orders for which there are purchase commitments,
were $473.8 million, 4.5% lower than the first quarter of 2001 when bookings
were $496.3 million. Excluding negative currency translation, bookings were
about flat compared with last year's first quarter. Sequentially, first quarter
2002 bookings were up 5.0% over fourth quarter 2001 bookings. The improvement
reflects strength in the petroleum, power and water markets during the quarter.
Bookings activity in the chemical and general industrial markets of the business
was soft throughout the quarter compared with the first quarter of the previous
year. At March 31, 2002, backlog was $683.4 million, a decrease of 1.0% compared
with the first quarter of 2001 and an increase of 3.0% compared to year end
2001.
BUSINESS SEGMENTS
Flowserve manages its operations through three business segments:
Flowserve Pump Division (FPD) for engineered and industrial pumps; Flow
Solutions Division (FSD) for precision mechanical seals and flow management
services; and Flow Control Division (FCD) for automated and manual quarter-turn
valves, control valves, nuclear valves and valve actuators. Several valve
distribution centers were transferred from FSD to FCD during the first quarter
of 2002. Amounts reported for these distribution centers in the first quarter of
2001 have been reclassified to conform to the current business configuration.
Sales and operating income before integration expense for each of the three
business segments follows:
<Table>
<Caption>
FLOWSERVE PUMP DIVISION
-------------------------
Three Months Ended
March 31,
-------------------------
(In millions of dollars) 2002 2001
---------- ----------
Sales $ 233.3 $ 224.7
Operating income (before integration expense) 26.1 18.1
</Table>
The sales increase in the first quarter of 2002 compared with the first
quarter of 2001 was largely due to improved business activity in the petroleum
and water markets. These improvements were partially offset by weakness in the
chemical and general industrial markets and unfavorable currency translation of
about 3.0%.
Operating income, before integration expense, increased 44.0% to $26.1
million from the prior period of $18.1 million. Operating income, before
integration expense, as a percentage of sales increased to 11.2% in the first
quarter of 2002 from 8.1% in the prior year period. Operating income, before
integration expense, increased 22.0% from prior period operating income, before
integration expense, of $21.4 million on a pro forma basis excluding
amortization of goodwill and intangible assets with indefinite useful lives. The
increase primarily resulted from the synergy savings realized from the
integration of Ingersoll-Dresser Pump Company (IDP), acquired in August 2000.
The savings were partially offset by unfavorable currency translation which
negatively impacted operating income by 7.3%.
19
<Table>
<Caption>
FLOW SOLUTIONS DIVISION
-------------------------
Three Months Ended
March 31,
-------------------------
(In millions of dollars) 2002 2001
---------- ----------
Sales $ 147.1 $ 147.8
Operating income (before
integration expense) 17.0 17.0
</Table>
Sales for the three months ended March 31, 2002 of $147.1 million were
similar to sales for the three months ended March 31, 2001. Improvements in the
seal business were offset by weakness in the service business and unfavorable
currency translation of about 3.0%.
Operating income before integration expense of $17.0 million was
unchanged from the prior year. Operating income before integration expense, as a
percentage of sales, was unchanged at 11.6%. Operating income, before
integration expense, decreased 5.0% from prior period operating income of $17.9
million on a pro forma basis excluding amortization of goodwill. The decrease is
primarily due to unfavorable translation which negatively impacted operating
income by 5.6%.
<Table>
<Caption>
FLOW CONTROL DIVISION
-------------------------
Three Months Ended
March 31,
-------------------------
(In millions of dollars) 2002 2001
---------- ----------
Sales $ 73.5 $ 78.6
Operating income (before
integration expense) 5.2 9.5
</Table>
Sales were impacted by a slowdown in quick turnaround business,
weakness in the chemical sector and unfavorable currency translation of about
2.0%.
Operating income, before integration expense, was $5.2 million in the
first quarter of 2002 compared with $9.5 million in the prior year period.
Operating income, before integration expense, as a percentage of sales was 7.1%
in the first quarter of 2002, compared with 12.1% in 2001. Operating income,
before integration expense, decreased 48.0% from prior period operating income,
before integration expense, of $10.0 million on a pro forma basis excluding
amortization of goodwill. The decline in profitability reflects a mix shift
toward original equipment, lower absorption of manufacturing costs due to lower
production to reduce finished goods inventory and unfavorable currency
translation of 2.5%.
CONSOLIDATED RESULTS
Gross profit of $142.0 million increased 3.2% compared with the prior
year period despite relatively flat sales. The gross profit margin was 31.8% for
the three months ended March 31, 2002, compared with 31.0% for the same period
in 2001. This improvement primarily resulted from manufacturing integration
synergies related to the IDP acquisition. This improvement was partially offset
by the overall effort to reduce inventory which lowered the absorption of
manufacturing costs and a less profitable product mix consisting of a lower mix
of chemical process pumps and valves. The impact of no longer amortizing
intangible assets with indefinite useful lives on gross profit was not
significant.
Inventories are stated at the lower of cost or market. Cost is
determined for U.S. inventories by the last-in, first-out (LIFO) method and for
other inventories by the first-in, first-out (FIFO) method. The Company's LIFO
reserve for U.S. inventories of $34.2 million at March 31, 2002 was essentially
unchanged from $33.9 million at December 31, 2001.
Selling, general and administrative expense of $100.2 million was flat
with the prior year period. Selling, general and administrative expense, as a
percentage of net sales, of 22.4% for the quarter ended March 31, 2002 was flat
with the prior year period. The reduction from no longer amortizing goodwill and
other intangible assets with indefinite useful lives was partially offset by
period costs associated with certain headcount reductions.
20
Operating income increased more than 128 percent to $41.9 million in
the first quarter of 2002 compared with $18.3 million in the year ago period.
Operating income, before integration expense, increased 11.8% over the prior
year quarter. Operating income, before integration expense, was similar to the
first quarter of 2001 on a pro forma basis excluding amortization of goodwill
and intangible assets with indefinite useful lives. Synergy benefits related to
the acquisition and integration of IDP were offset by unfavorable currency
translation.
Net interest expense during the first quarter of 2002 was $21.8
million, compared with $31.8 million in the same period in 2001 due to lower
interest rates and a lower debt balance as a result of early extinguishment of
senior subordinated notes in November 2001 with proceeds from a sale of the
Company's common shares.
The Company's effective tax rate for the first quarter of 2002 was
35.0% compared with 36.0% in the first quarter of 2001 primarily due to the
elimination of goodwill amortization not deductible for income tax purposes.
Net earnings increased in the first quarter of 2002 to $12.7 million,
or $0.28 per share, compared with earnings, before integration expense, of $3.7
million, or $0.10 per share, in the first quarter of 2001. Net earnings, before
integration expense, for the first quarter of 2001 were $7.1 million, or $0.19
per share, excluding amortization of goodwill and other intangible assets with
indefinite useful lives. Net earnings for the first quarter of 2002 of $12.7
million, or $0.28 per share, compared with a loss of $8.5 million, or $0.22 per
share, for the same period in 2001 and a pro forma loss of $5.1 million, or
$0.13 per share, in the same period excluding amortization of goodwill and other
intangible assets with indefinite useful lives.
RESTRUCTURING
In August 2000, in conjunction with the acquisition of
Ingersoll-Dresser Pump Company (IDP), the Company initiated a restructuring
program designed to reduce costs and to eliminate excess capacity by
consolidating facilities. The Company's actions, approved and committed to in
the third quarter of 2000, have resulted in the net reduction of approximately
1,100 positions, which was consistent with the plan. The program includes the
closure of IDP's former headquarters, the closure or significant downsizing of a
number of pump manufacturing facilities, service and repair centers, and
reduction of sales and sales support personnel. The Company established a
restructuring reserve for this program in the third quarter of 2000.
During the first three months of 2001, the Company also incurred $19.1
million in integration costs in conjunction with this program. The Company
substantially completed its integration activities during 2001.
Expenditures charged to the 2000 restructuring reserve were:
<Table>
<Caption>
Other Exit
Severance Costs Total
---------- ---------- ----------
Balance at August 16, 2000 $ 45,980 $ 14,832 $ 60,812
Cash expenditures (18,645) (2,434) (21,079)
Net non-cash reduction (8,849) -- (8,849)
---------- ---------- ----------
Balance at December 31, 2000 18,486 12,398 30,884
Cash expenditures (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
Cash expenditures (269) (112) (381)
---------- ---------- ----------
Balance at March 31, 2002 $ 2,133 $ 3,007 $ 5,140
========== ========== ==========
</Table>
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operations and borrowings available under the Company's
existing senior credit agreement are its primary sources of short-term
liquidity. Cash flows provided by operating activities in the first quarter of
2002 were $29.5 million, compared with a use of $62.5 million in 2001. Cash
flows from
21
operating activities for 2002 were significantly above 2001 cash flows,
generally due to payments in 2001 associated with the IDP integration program,
including restructuring and integration payments, lower interest expense in 2002
and decreases in working capital in 2002. The Company believes improved cash
flows from operating activities combined with availability under its existing
credit agreement will be sufficient to enable the Company to meet its cash flow
needs for the next 12 months. 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.
Capital expenditures were $6.1 million during the first three months of
2002, compared with $7.4 million in the first three months of 2001. Capital
expenditures were funded primarily by operating cash flows. For each period,
capital expenditures were invested in new and replacement machinery and
equipment, information technology and, in 2001, integration activities including
structures and equipment required at receiving facilities.
FINANCING
During the third quarter of 2000, in connection with the acquisition of
IDP, the Company entered into a Senior Secured Credit Facility (the Credit
Facility) which included a $275 million term loan (Tranche A) due June 2006, a
$475 million term loan (Tranche B) due June 2008, and a $300 million revolving
credit facility with a final maturity of June 2006. The Credit Facility is
secured by substantially all domestic assets of the Company and a pledge of 65%
of the stock of the 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 the option of the Company. The credit spread can increase or decrease
based on the Company's leverage ratio as defined. At March 31, 2002 the interest
rates on the term loans were 4.6250%, 4.6875% and 4.8125% relating to Tranche A
and 5.3750% and 5.4375% relating to Tranche B. As of March 31, 2002, $42.0
million of the revolving credit was drawn and $718.5 million of the term loans
were outstanding.
The term loans require scheduled principal payments which began June
30, 2001. At March 31, 2002, the Company had repaid $31.5 million of the term
loans. The scheduled principal payments of the term loans outstanding at March
31, 2002 are summarized as follows: $36.1 million in the remainder of 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. The Company
is required to use a percentage of excess cash from operations, as defined in
the Credit Facility and the indenture, 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 the Company to issue up to $200
million in letters of credit. As of March 31, 2002, $41.5 million of letters of
credit had been issued under the facility. As letters of credit issued under the
facility reduce availability, the Company had $216.5 million remaining in unused
borrowing capacity at March 31, 2002 under the revolving credit facility.
In connection with the acquisition of IDP, the Company also 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 EUR 98.6
million from the Euro tranche, equivalent to $89.2 million, were also used in
completing the IDP acquisition. The balance of the dollar tranche and Euro
tranche was $186.3 million and $55.8 million, respectively, at March 31,
22
2002. 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 the Company 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. About one-third of these notes
were called at a premium in December 2001 utilizing the proceeds of an equity
offering according to the redemption provisions of the indenture.
The Company has significant indebtedness in relation to shareholders'
equity. The Company's indebtedness increases its vulnerability to adverse
economic and industry conditions, requires it to dedicate a substantial portion
of cash flow from operating activities to payments on the indebtedness and could
limit its ability to borrow additional funds and/or raise additional capital.
The increase in its outstanding indebtedness as a result of the financing for
the acquisition of IFC increases the Company's exposure to these factors.
The provisions of the Company's senior credit facilities existing prior
to the acquisition of IFC required the Company to meet or exceed specified
financial covenants that are defined in the senior credit facility. The terms of
the senior credit facility amended and restated for the acquisition of IFC also
contain similar financial covenants. These covenants include a leverage ratio,
an interest coverage ratio, and a fixed charge coverage ratio. Further, the
provisions of the senior credit facilities and the senior subordinated notes
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 March
31, 2002, the Company was in compliance with these covenant and, while the
Company expects to comply with such covenants in the future, there can be no
assurance that it will do so.
At March 31, 2002, net debt was 70% of the Company's capital structure
compared with 71.3% at December 31, 2001. The ratio decreased due to the
repayments of term loans and a reduction in the revolving credit borrowings. On
a pro forma basis including financing for the acquisition of IFC, net debt was
64.4% of the Company's capital structure at March 31, 2002.
PAYMENTS FOR ACQUISITIONS
On May 2, 2002, the Company completed its acquisition of Invensys plc's
flow control division (IFC) for an aggregate purchase price of $535 million,
subject to adjustment pursuant to the terms of the purchase and sale agreement.
IFC is one of the world's foremost manufacturers of valves, actuators and
associated flow control products. With this acquisition, Flowserve becomes the
second largest manufacturer of valves. The Company financed the acquisition and
associated transaction costs by issuing 9.2 million shares of common stock for
net proceeds of approximately $277 million in April 2002 and through new
borrowing under its senior secured credit facilities. The Company used
approximately $40 million of the new equity financing to reduce amounts
outstanding under the Company's revolving credit facility.
The Company obtained the incremental new borrowings under its senior
credit facilities by amending the agreement to borrow $700 million under a new
tranche C term loan, borrow $95.3 million under a new tranche A term loan, repay
$11.3 million of the existing tranche A term loan and repay all $468.8 million
of the existing tranche B term loan. Certain other terms of the senior credit
facility
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were changed. These changes include a maturity in 2009 rather than 2008 for the
tranche C term loan, a lower interest rate, and modified covenants. As a result
of repaying the tranche B term notes on May 2, 2002, the Company incurred
pre-tax extraordinary expense of approximately $10 million primarily from
writing off the unamortized balance of existing tranche B term loan facility
prepaid financing fees.
The revised scheduled principal payments of the term loans after giving
effect to borrowings for the acquisition of IFC are summarized as follows: $43.7
million in the remainder of 2002, $78.7 million in 2003, $84.0 million in 2004,
$89.3 million in 2005, $56.0 million in 2006, $100.0 million in 2007, $388.0
million in 2008, and $194.0 million in 2009.
The Company regularly evaluates acquisition opportunities of various
sizes. Its ability to raise additional capital through debt or equity financing
is a critical consideration in any such evaluation.
RECENT ACCOUNTING DEVELOPMENTS
On January 1, 2002, the Company adopted SFAS No. 141, "Business
Combinations," and No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141
requires that all business combinations 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. 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 of intangible assets is no longer limited to forty years.
Upon adoption of SFAS No. 141 and No. 142, the Company reclassified
acquired workforce intangible assets with a carrying value of approximately
$18.5 million to goodwill that do not meet the new criteria for recognition
apart from goodwill. The Company also determined that certain acquired trademark
intangible assets have indefinite useful lives and is no longer amortizing these
intangible assets. Under SFAS No. 142, goodwill is no longer amortized and
instead is tested for impairment annually at the reporting unit level. The
Company is still completing the required transitional goodwill impairment test,
but does not expect this test to result in an impairment loss.
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
the Company on January 1, 2003. The Company is currently assessing the impact of
SFAS No. 143 and has not yet determined the effects, if any, it will have on its
consolidated financial position or results of operations.
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FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY
This Report on Form 10-Q and other written reports and oral statements
made from time-to-time by the Company contain various forward-looking statements
and include assumptions about Flowserve's future market conditions, operations
and results. These statements are based on current expectations and are subject
to significant risks and uncertainties. They are made pursuant to safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Among the
many factors that could cause actual results to differ materially from the
forward-looking statements are: changes in the financial markets and the
availability of capital; changes in the already competitive environment for the
Company's products or competitors' responses to Flowserve's strategies; the
Company's ability to integrate past and future acquisitions into its management
and operations; political risks or trade embargoes affecting important country
markets; the health of the petroleum, chemical and power industries; economic
conditions and the extent of economic growth in areas inside and outside the
United States; unanticipated difficulties or costs associated with the
implementation of systems, including software; the Company's ability to meet the
financial covenants and other requirements of its financing agreements;
repercussions from the terrorist attacks of September 11, 2001, and the response
to the United States to those attacks, technological developments in the
Company's products as compared to those of its competitors; changes in
prevailing interest rates and the effective interest costs which the Company
bears; and adverse changes in the regulatory climate and other legal obligations
imposed on the Company. The Company undertakes no obligation to publicly update
or revise any forward-looking statement as a result of new information, future
events or otherwise.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISKS
The Company has market risk exposure arising from changes in interest
rates and foreign currency exchange rate movements.
The Company's earnings are impacted by changes in short-term interest
rates as a result of borrowings under its Credit Facility, which bear interest
based on floating rates. At March 31, 2002, after the effect of interest rate
swaps held by the Company, the Company had approximately $635.5 million of
variable-rate debt obligations outstanding with a weighted average interest rate
of 5.1335%. A hypothetical change of 100-basis points in the interest rate for
these borrowings, assuming debt levels at March 31, 2002, would change interest
expense by approximately $1.6 million for the quarter ended March 31, 2002.
The Company, as part of its risk management program, is party to
interest rate swap agreements for the purpose of hedging its exposure to
floating interest rates on certain portions of its debt. The Company is exposed
to credit-related losses in the event of non-performance by counterparties to
financial instruments, but it expects all counterparties to meet their
obligations given their creditworthiness. As of March 31, 2002, the Company had
$125.0 million of notional amount in outstanding interest rate swaps with third
parties with maturities of up to 4 years 8 months.
The Company employs a foreign currency hedging strategy to minimize
potential losses in earnings or cash flows from unfavorable foreign currency
exchange rate movements. Foreign currency exposures arise from transactions,
including firm commitments and anticipated transactions, denominated in a
currency other than an entity's functional currency and from foreign-denominated
revenues and profits translated back into U.S. dollars. Based on the sensitivity
analysis at March 31, 2002, a 10% adverse change in the foreign currency
exchange rates could impact the Company's results of operation by $0.6 million.
The primary currencies to which the Company has exposure are the Euro, British
pound, Canadian dollar, Mexican peso, Japanese yen, Singapore dollar, Brazilian
real, Australian dollar, Argentine peso and Venezuelan bolivar.
Exposures are hedged primarily with foreign currency forward contracts
that generally have maturity dates less than one year. Company policy allows
foreign currency coverage only for identifiable foreign currency exposures and,
therefore, the Company does not enter into foreign currency contracts for
trading purposes where the objective is to generate profits. As of March 31,
2002, the Company had an U.S. dollar equivalent of $67.6 million in outstanding
forward contracts with third parties.
Generally, the Company views its investments in foreign subsidiaries
from a long-term perspective, and therefore, does not hedge these investments.
The Company uses capital structuring techniques to manage its investment in
foreign subsidiaries as deemed necessary.
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PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
The following Current Reports on Form 8-K were filed with the Securities
and Exchange Commission during the quarterly period covered by this
report:
Current Report on Form 8-K filed on March 22, 2002, pursuant to Item 5
(Other Events) announcing the acquisition of the Flow Control Division of
Invensys plc.
Current Report on Form 8-K filed on March 29, 2002, pursuant to Item 5
(Other Events) and Item 7 (Financial Statements, Pro Forma Financial
Information and Exhibits) to file and incorporate by reference the
Purchase and Sale Agreement between the Company and Invensys plc for the
Company's acquisition of the Flow Control Division of Invensys plc.
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SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FLOWSERVE CORPORATION
(Registrant)
/s/ Renee J. Hornbaker
--------------------------------------------
Renee J. Hornbaker
Vice President and Chief Financial Officer
Date: May 15, 2002
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