EXHIBIT 99.2
UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS
The following unaudited pro forma consolidated financial statements are based
on Flowserve Corporation's (the "Company") consolidated financial statements
and the historical combined financial statements of the Flow Control Division
of Invensys plc ("IFC"), adjusted to give effect to the acquisition of IFC
(the "Acquisition"), the financing for the Acquisition described in the
Current Report on Form 8-K to which this Exhibit relates (the "Financing"),
the refinancing of the Company's existing tranche B term loan facility
described in the Current Report on Form 8-K to which this Exhibit relates (the
"Refinancing") and the application of the net proceeds of the Financing and
the Refinancing, including the repayment of a portion of the outstanding
indebtedness under the Company's existing senior credit facilities
(collectively, with the Acquisition, the Financing and the Refinancing, the
"Transactions"). The unaudited pro forma consolidated statement of operations
for the year ended December 31, 2001 gives effect to the Transactions, 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 Transactions as if
each had occurred on December 31, 2001.
The unaudited pro forma consolidated financial statements reflect pro forma
adjustments that are described in the accompanying notes and are based on
available information. In the Company's 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 the Company's results of operations or financial position would
actually have been if the Transactions had occurred on such dates or to
project the Company's results of operations or financial position for any
future date or period. The unaudited pro forma consolidated statements reflect
the Company's preliminary estimates of the allocation of the purchase price
for the Acquisition and are subject to change. The unaudited pro forma
consolidated financial statements do not reflect any operating efficiencies
and cost savings that the Company 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 accounting principles generally accepted in the
United States of America ("US GAAP") and U.S. dollars. The Company 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 (pound)1.00 = $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 (pound)1.00 =
$1.4560.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31, 2001
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 4,657 (b) 122,729
(4,332)(c)
Other income, net............................. (1,547) (2,743) -- (4,290)
---------- ---------- -------- -----------
Earnings before income taxes and
extraordinary items............................. 25,629 51,112 4,526 81,267
Provision for income taxes......................... 9,275 21,802 1,833 (d) 32,910
---------- ---------- -------- -----------
Earnings before extraordinary items................ $ 16,354 $ 29,310 $ 2,693 $ 48,357
========== ========== ======== ===========
Earnings per share before extraordinary items
(basic and diluted)................................ $ 1.00
===========
Weighted average shares outstanding................ 39,330 9,200 (e) 48,530
See accompanying notes to unaudited pro forma consolidated financial statements.
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UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
December 31, 2001
Pro Forma
Flowserve IFC Adjustments Pro Forma
----------- ----------- ------------- ------------
(In thousands, except per share data)
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 4,953 (j) 154,587
(9,672)(k)
4,211 (l)
------------ --------- ---------- ------------
Total assets............................. $ 2,051,975 $ 868,213 $ (225,111) $ 2,695,077
============ ========= ========== ============
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) 56,997
12,474 (m)
------------ --------- ---------- ------------
Total current liabilities........... 416,771 108,472 (39,359) 485,884
Long-term debt due after one year........ 996,222 12,958 (12,958)(f) 1,256,591
260,369 (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..................... 411,019 474,220 275,836 (e) 680,668
(6,187)(l)
(474,220)(n)
------------ --------- ---------- ------------
Total liabilities and shareholders'
equity................................ $ 2,051,975 $ 868,213 $(225,111) $ 2,695,077
============ ========= ========== ============
See accompanying notes to unaudited pro forma consolidated financial statements.
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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 the
Company's estimated allocation of the purchase price for the acquisition
of IFC. The Company will base the final allocation on appraisals that
have not yet been completed.
(b) Reflects the following interest on the borrowings necessary to finance a
portion of the acquisition of IFC:
in thousands)
Interest on the Incremental Tranche A Term Loan
($95,227 at 4.75%).............................................. $ 4,523
Interest on New Tranche C Term Loan ($696,552 at
5.25%).......................................................... 36,569
Elimination of historical interest expense on the Company's
existing tranche B term loan facility........................... (32,552)
Elimination of historical interest expense for the repaid
portion of the Company's revolving credit facility.............. (2,295)
Elimination of historical interest expense for the repaid
portion of the Company's existing tranche A term loan facility.. (724)
----------
Cash interest expense adjustment................................ 5,521
Amortization of estimated financing and amendment
fees totaling $4,953............................................ 708
Elimination of amortization of prepaid financing fees
for existing tranche B term loan facility....................... (1,572)
----------
Total adjustment................................................ $ 4,657
==========
For purposes of determining the adjustment to interest expense in the pro
forma statement of operations, the current LIBOR rate was used with a
credit spread of 2.75% for loans made under the additional $95.2 million
aggregate principal amount of loans made available under the Company's
Tranche A term loan facility by the amendment to the Company's bank
senior credit facility (the "Incremental Tranche A Term Loan"), which is
similar to the credit spread that is applicable to the Company's existing
tranche A term loan, and a credit spread of 3.25% for loans made under
the the Company's new tranche C term loan facility in an aggregate
principal amount of $696.6 million (the "New Tranche C Term Loan"),
which is the credit spread applicable under the terms of the amended
senior credit facilities.
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 $0.9 million, respectively.
(c) Reflects the elimination of interest expense incurred by IFC on long-term
debt that will not be assumed by the Company in the acquisition of IFC.
(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 proceeds from the Company's equity sale of 9.2 million of
its common shares at $31.50 per share, net of offering costs totaling
approximately $14.0 million.
(f) Reflects the elimination of assets and liabilities the Company did not
acquire 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.
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(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 the Company's estimated allocation of the purchase
price for the acquisition of IFC. The Company 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:
(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)
==========
This reflects the Company's estimates of the purchase price allocation
for the acquisition of IFC, which may change upon completion of
appraisals. Further, the Company 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 the
Company's anticipated restructuring activities in connection with the
acquisition of IFC. The Company has 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 the Company's accounting
policies.
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The adjusted pro forma balance of IFC's goodwill and other intangible
assets is estimated to be comprised of the following:
(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
==========
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 since the business combination was consummated after
June 30, 2001. The Company has not eliminated amortization, totaling
approximately $19 million, of the Company's goodwill and other intangible
assets with indefinite useful lives from its historical financial
statements for the year ended December 31, 2001.
The purchase price payable by the Company in the acquisition of IFC is
subject to upward or downward adjustment based on the net amount of
intercompany payables and receivables owed by or to IFC as of April 30,
2002. 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, 2002, 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 financing fees and a portion of the amendment fees and other
costs that were incurred to amend the Company's existing senior credit
facilities and to enter into the New Tranche C Term Loan. These prepaid
financing and amendment fees will be amortized over the term of the
amended senior credit facilities of approximately seven years.
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(k) Reflects the write-off of the unamortized balance of existing tranche B
term loan facility prepaid financing fees as a result of refinancing the
Company's existing tranche B term loan facility with a portion of the New
Tranche C Term Loan (such portion, the "Refinancing Loan").
(l) Reflects the extraordinary loss of $10.4 million arising from the
refinancing of the Company's existing tranche B term loan facility with
the Refinancing Loan and a portion of the fees to amend the Company's
existing senior credit facilities, net of $4.2 million of income taxes.
The estimated income tax effects are based on the combined effective
income tax rate for Flowserve and IFC of 40.5%.
(m) Reflects issuance of the Incremental Tranche A Term Loan and the portion
of the New Tranche C Term Loan Facility used to finance the acquisition
of IFC, as detailed in Note (b), to finance the acquisition of IFC, net
of repayment of a portion of the borrowings under our revolving credit
facility and the Company's existing tranche A term loan facility.
Transaction costs and expenses not covered by the Company's additional
borrowings under the amended senior credit facilities will be paid
through additional borrowings under the Company's revolving credit
facility.
(n) Reflects the elimination of IFC's historical combined equity.