10-Q 1 e10-q.txt FORM 10-Q FOR QUARTER ENDED JUNE 30, 2000 1 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 June 30, 2000 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 JUNE 30, 2000 37,419,249 2 FLOWSERVE CORPORATION INDEX
Page No. ---- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Statements of Income - Three Months Ended June 30, 2000 and 1999 (unaudited) 3 Consolidated Statements of Comprehensive Income - Three Months Ended June 30, 2000 and 1999 (unaudited) 3 Consolidated Statements of Income - Six Months Ended June 30, 2000 and 1999 (unaudited) 4 Consolidated Statements of Comprehensive Income - Six Months Ended June 30, 2000 and 1999 (unaudited) 4 Consolidated Balance Sheets - June 30, 2000 (unaudited) and December 31, 1999 5 Consolidated Statements of Cash Flows - Six Months Ended June 30, 2000 and 1999 (unaudited) 6 Notes to Consolidated Financial Statements 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISKS 20 PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 20 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 20 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 20 SIGNATURE 21 INDEX TO EXHIBITS 22
3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FLOWSERVE CORPORATION (UNAUDITED) CONSOLIDATED STATEMENTS OF INCOME (Amounts in thousands, except per share data)
Three Months Ended June 30, --------------------------------- 2000 1999 ---------- --------- Sales $ 299,153 $ 275,196 Cost of sales 195,990 181,307 ---------- --------- Gross profit 103,163 93,889 Selling and administrative expense 70,590 66,204 Research, engineering and development expense 6,198 6,327 Merger integration expense -- 4,406 ---------- --------- Operating income 26,375 16,952 Interest expense 7,054 4,120 Other expense, net 56 1 ---------- --------- Earnings before income taxes 19,265 12,831 Provision for income taxes 6,647 4,362 ---------- --------- Net earnings $ 12,618 $ 8,469 ========== ========= Earnings per share (basic and diluted): $ 0.33 $ 0.22 ========== ========= Average shares outstanding 37,809 37,771 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Amounts in thousands)
Three Months Ended June 30, -------------------------------- 2000 1999 --------- --------- Net earnings $ 12,618 $ 8,469 Foreign currency translation adjustments 6,952 3,099 --------- --------- Comprehensive income $ 5,666 $ 5,370 ========= ========= See accompanying notes to consolidated financial statements.
3 4 FLOWSERVE CORPORATION (UNAUDITED) CONSOLIDATED STATEMENTS OF INCOME (Amounts in thousands, except per share data)
Six Months Ended June 30, --------------------------------- 2000 1999 ---------- ---------- Sales $ 584,462 $ 544,583 Cost of sales 382,070 353,903 ---------- ---------- Gross profit 202,392 190,680 Selling and administrative expense 142,220 133,314 Research, engineering and development expense 12,353 13,199 Merger integration expense -- 7,838 ---------- ---------- Operating income 47,819 36,329 Interest expense 13,576 7,203 Other (income) expense, net (3,161) 525 ---------- ---------- Earnings before income taxes 37,404 28,601 Provision for income taxes 12,905 9,724 ---------- ---------- Net earnings $ 24,499 $ 18,877 ========== ========== Earnings per share (basic and diluted): $ 0.65 $ .50 ========== ========== Average shares outstanding 37,810 37,771
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Amounts in thousands)
Six Months Ended June 30, --------------------------------- 2000 1999 ---------- --------- Net earnings $ 24,499 $ 18,877 Foreign currency translation adjustments 16,202 3,878 ---------- --------- Comprehensive income $ 8,297 $ 14,999 ========== =========
See accompanying notes to consolidated financial statements. 4 5 FLOWSERVE CORPORATION CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except per share data)
JUNE 30, December 31, 2000 1999 ----------- ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents $ 14,495 $ 30,463 Accounts receivable, net 246,331 213,625 Inventories 210,617 168,356 Prepaids and other current assets 37,094 41,344 ---------- ------------ Total current assets 508,537 453,788 Property, plant and equipment, net 221,336 209,976 Intangible assets, net 151,352 96,435 Other assets 80,851 77,952 ---------- ------------ Total assets $ 962,076 $ 838,151 ========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 76,802 $ 72,103 Notes payable 531 734 Income taxes 8,904 7,878 Accrued liabilities 96,957 111,820 Long-term debt due within one year 44 3,125 ---------- ------------ Total current liabilities 183,238 195,660 Long-term debt due after one year 315,348 198,010 Postretirement benefits and deferred items 146,963 136,207 Commitments and contingencies Shareholders' equity: Serial preferred stock, $1.00 par value Shares authorized - 1,000 -- -- Shares issued and outstanding - None Common stock, $1.25 par value Shares authorized - 120,000 Shares issued and outstanding - 41,484 51,856 51,856 Capital in excess of par value 67,697 67,963 Retained earnings 368,754 344,254 --------- ------------ 488,307 464,073 Treasury stock at cost - 4,065 and 4,071 shares (93,226) (93,448) Accumulated other comprehensive expense (78,554) (62,351) --------- ------------ Total shareholders' equity 316,527 308,274 --------- ------------ Total liabilities and shareholders' equity $ 962,076 $ 838,151 ========= ============
See accompanying notes to consolidated financial statements. 5 6 FLOWSERVE CORPORATION (Unaudited) CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands)
Six Months Ended June 30, --------------------------------- 2000 1999 --------- --------- CASH FLOWS - OPERATING ACTIVITIES: Net earnings $ 24,499 $ 18,877 Adjustments to reconcile net earnings to net cash (used) provided by operating activities: Depreciation 16,474 19,187 Amortization 3,902 2,008 Net (Gain) Loss on the sale of fixed assets (148) 55 Change in assets and liabilities, net of effects of acquisitions: Accounts receivable (7,773) 757 Inventories (19,651) 12,570 Prepaid expenses 9,191 925 Other assets (6,935) (1,148) Accounts payable (6,537) (7,485) Accrued liabilities (30,946) (12,140) Income taxes 5,071 (7,794) Postretirement benefits and deferred items 6,773 (3,636) Net deferred taxes (474) (31) --------- --------- Net cash flows (used) provided by operating activities (6,554) 22,145 CASH FLOWS - INVESTING ACTIVITIES: Capital expenditures, net of disposals (12,434) (20,201) Payment for acquisitions, net of cash acquired (21,703) -- --------- --------- Net cash flows used by investing activities (34,137) (20,201) CASH FLOWS - FINANCING ACTIVITIES: Net (repayments) borrowings under short-term debt (3,079) 729 Payments on long-term debt including revolving credit facility (96,405) (9,256) Proceeds from long-term debt including revolving credit facility 125,134 11,890 Treasury share purchases -- (3,333) Other stock activity 239 (679) Dividends paid -- (10,575) --------- --------- Net cash flows provided (used) by financing activities 25,889 (11,224) Effect of exchange rate changes (1,166) (952) --------- --------- Net change in cash and cash equivalents (15,968) (10,232) Cash and cash equivalents at beginning of year 30,463 24,928 --------- --------- Cash and cash equivalents at end of period $ 14,495 $ 14,696 ========= ========= Taxes paid $ 8,205 $ 17,905 Interest paid $ 12,107 $ 8,276
See accompanying notes to consolidated financial statements. 6 7 FLOWSERVE CORPORATION (UNAUDITED) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in thousands, except per share data) 1. ACCOUNTING POLICIES - BASIS OF PRESENTATION The accompanying consolidated balance sheet as of June 30, 2000, and the related consolidated statements of income and comprehensive income for the three months and six months ended June 30, 2000 and 1999, and the statements of cash flows for the six months ended June 30, 2000 and 1999, are unaudited. In management's opinion, all adjustments comprising normal recurring adjustments necessary for a fair presentation of such financial statements have been made. The accompanying consolidated financial statements and notes in this Form 10-Q are presented as permitted by Regulation S-X and do not contain certain information included in the Company's annual financial statements and notes to the financial statements. Accordingly, the accompanying consolidated financial information should be read in conjunction with the Company's 1999 Annual Report. Interim results are not necessarily indicative of results to be expected for a full year. 2. INVENTORIES Inventories are stated at lower of cost or market. Cost is determined for certain inventories by the last-in, first-out (LIFO) method and for other inventories by the first-in, first-out (FIFO) method. Inventories and the method of determining costs were:
JUNE 30, December 31, 2000 1999 -------- ----------- Raw materials $ 31,839 $ 29,674 Work in process and finished goods 230,810 182,493 Less: Progress billings (14,213) (5,746) -------- ----------- 248,436 206,421 LIFO reserve (37,819) (38,065) -------- ----------- Net inventory 210,617 $168,356 ======== =========== Percent of inventory accounted for by LIFO 62% 64% Percent of inventory accounted for by FIFO 38% 36%
3. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In 1999, the Financial Accounting Standards Board issued one Statement of Financial Accounting Standard (SFAS) that was applicable to the Company - SFAS No. 137, "Deferral of the Effective Date of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 is now effective for fiscal years beginning after June 15, 2000. In June 2000, in conjunction with this standard, the Board also issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities". SFAS No. 138 amends the accounting and reporting standards of SFAS No. 133 for certain derivative instruments and certain hedging activities which have caused implementation difficulties. These standards are not expected to materially impact Flowserve's reported financial position, results of operations or cash flows. 7 8 In addition, in December 1999, the Securities and Exchange Commission staff issued Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements. This SAB does not change any of the existing rules on revenue recognition. Rather, the SAB provides additional guidance for transactions not addressed by existing rules. The Company is required to review its revenue recognition policies by the fourth quarter of fiscal year 2000 to determine that its recognition criteria is in compliance with the SAB interpretations. Any change in accounting principle required in order to comply with the SAB may be reported as a cumulative catch-up adjustment at that time. The Company is currently reviewing its revenue recognition policies and does not feel that any change in accounting required would have a material impact Flowserve's reported financial position, results of operations or cash flows. 4. RESTRUCTURING In the fourth quarter of 1999, the Company initiated a restructuring program that included a one-time charge of $15,860 recorded as restructuring expense. The restructuring charge related to the planned closure of 10 facilities and a corresponding reduction in workforce at those locations, as well as at other locations that are part of the restructuring. The restructuring program is expected to result in a net reduction of approximately 300 employees at a cost of $12,900. In addition, exit costs associated with the facilities closings are estimated at $2,960. As of June 30, 2000, the program had resulted in a net reduction of 149 employees. Expenditures charged to the 1999 restructuring reserve were:
Other Exit Severance Costs Total ---------------------------- ---------- -------- --------- Balance at December 24, 1999 $12,900 $2,960 $15,860 Cash expenditures (102) -- (102) ---------- -------- --------- Balance at December 31, 1999 12,798 2,960 15,758 Cash expenditures (1,693) (583) (2,276) ---------- -------- --------- Balance at March 31, 2000 11,105 2,377 13,482 CASH EXPENDITURES (1,311) (1,013) (2,324) ---------- -------- --------- BALANCE AT JUNE 30, 2000 $ 9,794 $1,364 $11,158 ========== ======== =========
5. ACQUISITION On January 13, 2000, the Company acquired Innovative Valve Technologies, Inc. (Invatec), a company which is 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 funds from the Company's working capital. The results of operations for Invatec are included in the Company's condensed consolidated financial statements from the date of acquisition. The purchase price 8 9 was approximately $18.3 million in cash. Liabilities of $94.9 million were simultaneously paid off through borrowings under Flowserve's revolving credit agreement. The purchase price has been allocated to the net assets acquired based primarily on information furnished by management of the acquired company. The following unaudited pro forma information presents the consolidated results of operations as if the acquisition occurred on January 1, 1999, after giving effect to certain adjustments, including, goodwill amortization, interest and related income tax effects. The pro forma information does not purport to represent what the Company's results of operations actually would have been had such transactions or events occurred on the dates specified, or to project the Company's results of operations for any future period. Pro forma information has not been presented for 2000 as results prior to the acquisition, (January 1, 2000 to January 12, 2000), are not material. 9 10 PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Historical ---------------------------- Innovative Pro Forma Flowserve Valve Pro Forma Combined Corp. Technologies Adjustments Company --------- ------------ ----------- --------- Net Sales $ 544,583 $ 87,103 $ -- $ 631,686 Cost of Sales 353,903 60,902 -- 414,805 --------- ------------ ----------- --------- Gross Profit 190,680 26,201 -- 216,881 Selling and administrative expense 133,314 22,062 (28)(a) 155,348 Research, engineering and development expense 13,199 -- -- 13,199 Merger integration expense 7,838 -- -- 7,838 --------- ------------ ----------- --------- Operating Income 36,329 4,139 28 40,496 Interest expense 7,203 6,197 (3,464)(b) 9,936 Loss on assets held for sale -- 3,810 3,810 Other expense (income), net 525 (60) -- 465 --------- ------------ ----------- --------- Earnings before income taxes 28,601 (5,808) 3,492 26,285 Provision for income taxes 9,724 (547) (109)(c) 9,068 --------- ------------ ----------- --------- Net income (loss) $ 18,877 $ (5,261) $ 3,601 $ 17,217 ========= ============ =========== ========= Earnings per share (basic and diluted) $ 0.50 $ -- $ -- $ 0.46 Weighted average shares outstanding (basic and diluted) 37,771 9,665 -- 37,771
Pro Forma Adjustments Selling and administrative expense: (a) Represents incremental decrease in annual goodwill amortization based on decrease of $4,279 in estimated goodwill originating from the acquisition and the reduction of the amortization period from 40 to 20 years. (28) Interest expense: (b) Represents reduction in consolidated interest expense related to debt financing prior to the acquisition date (3,464) Provision for income taxes: (c) Represents income tax adjustment required to arrive at a combined company pro forma effective tax rate of 34.5% (109)
10 11 6 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, Chief Financial 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 merger integration, interest expense, other income or expense and income taxes. Intersegment sales and transfers are recorded at cost plus a profit margin. Minor reclassifications have been made to certain previously reported information to conform to the current business configuration.
ROTATING FLOW CONSOLIDATED SIX MONTHS ENDED JUNE 30, 2000 EQUIPMENT FLOW CONTROL SOLUTIONS ALL OTHER TOTAL ---------------------------------------------- --------- ------------- --------- --------- ------------ SALES TO EXTERNAL CUSTOMERS $152,854 $129,754 $298,732 $ 3,122 $584,462 INTERSEGMENT SALES 2,891 5,448 9,700 (18,039) -- SEGMENT OPERATING INCOME 10,108 16,195 35,350 (13,834) 47,819 IDENTIFIABLE ASSETS $238,745 $210,143 $428,899 $84,289 $962,076
Rotating Flow Consolidated Six months ended June 30, 1999 Equipment Flow Control Solutions All Other Total ----------------------------------------------- --------- ------------ --------- --------- ------------ Sales to external customers $187,077 $143,694 $210,341 $ 3,471 $544,583 Intersegment sales 2,632 7,998 7,573 (18,203) -- Segment operating income (before special items) 11,548 15,094 27,945 (10,420) 44,167 Identifiable assets $248,850 $212,684 $271,506 $111,968 $845,008
Reconciliation of the total segment operating income before special items to consolidated earnings before income taxes follows:
Six Months Ended June 30, 2000 1999 ------- ------- Total segment operating income (before special items) $ 61,653 $ 54,587 Corporate expenses and other 13,834 10,420 Merger integration expense -- 7,838 Interest expense 13,576 7,203 Other (income) expense (3,161) 525 -------- -------- Earnings before income taxes $ 37,404 $ 28,601 ======== ========
11 12 7 SUBSEQUENT EVENT On February 10, 2000, the Company announced that it had signed a definitive agreement to acquire Ingersoll-Dresser Pumps (IDP) from the Ingersoll-Rand Company for $775 million in cash. On August 8, 2000, the Company announced the completion of the acquisition. The transaction, which was accounted for as a purchase, was financed with a combination of bank financing and senior subordinated notes. Upon closing of the transaction, the existing Flowserve debt was repaid. Flowserve has received $1,425 million of financing to pay for the acquisition and pay off existing debt as well as provide for a $300 million revolving credit facility in connection with the acquisition. The financing consists of approximately $375 million of 12.25% Senior Subordinated Notes and $1.05 billion of senior credit facilities. The credit facilities consist of a $275 million term loan with a final maturity of six years and an initial interest rate of LIBOR plus 2.75%, a $475 million term loan with a final maturity of eight years and an initial interest rate of LIBOR plus 3.50%, and a $300 million revolving credit facility with a term of six years and an initial interest rate of LIBOR plus 2.75% ---------- 12 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2000 In general, results for the second quarter of 2000 were higher than the corresponding period in the previous year due to the Company's acquisition of Innovative Valve Technologies, Inc. (Invatec) on January 12, 2000. The acquisition of Invatec is discussed in further detail in the Liquidity and Capital Resources section of this Management Discussion and Analysis. Sales increased 8.7% to $299.2 million for the three months ended June 30, 2000, compared with $275.2 million for the same period in 1999. Sales for the quarter would have been $256.4 million without the acquisition of Invatec, 6.8% below the second quarter of 1999. The change in sales is discussed further in the following section on Business Segments. Net sales to international customers, including export sales from the U.S., were approximately 44% during the second quarter of 2000, compared with 55% during the second quarter of 1999. The lower 2000 percentage is due to Invatec's markets being principally U.S. Bookings (incoming orders for which there are purchase commitments) were $309.4 million, 23.0% higher than the second quarter of 1999 when bookings were $251.6 million. Excluding Invatec, bookings also showed year-on-year improvement of 4.7%. BUSINESS SEGMENTS Flowserve manages its operations through three business segments: Rotating Equipment Division (RED) for engineered pumps; Flow Control Division (FCD) for automated and manual quarter-turn valves, control valves and nuclear valves and valve actuators; and Flow Solutions Division (FSD) for precision mechanical seals and flow management services. Sales and operating income before special items (merger-related expenses) for each of the three business segments are:
ROTATING EQUIPMENT DIVISION ------------------ Three Months Ended June 30, ------------------ (In millions of dollars) 2000 1999 ------------------------ ------- ------ Sales $82.3 $ 98.2 Operating income 6.2 5.0
The sales decrease in 2000 was generally due to a lower shipable beginning backlog of highly engineered pumps. Unfavorable currency translation also reduced sales by about 4%. Operating income before special items, as a percentage of sales, increased to approximately 7.5% in 2000 from about 5.1% in the prior-year period. The operating income margin increased as a result of an improved gross margin due to an improved product mix including parts, and ongoing cost reduction efforts.
FLOW CONTROL DIVISION ------------------------ Three Months Ended June 30, ------------------------ (In millions of dollars) 2000 1999 -------------------------- -------- -------- Sales $ 67.4 $ 76.1 Operating income 8.4 7.2
The decrease in sales was due to reduced backlog at the beginning of the quarter and lower book-to-build volume during the quarter. Unfavorable currency translation also reduced sales by about 4%. Operating income before special items, as a percentage of sales, was 12.5% in the second 13 14 quarter of 2000, compared with 9.4% in 1999. The improved operating margin in 2000 was generally due to improved gross margins and lower operating expenses. These improvements were generally due to reduced costs principally related to the Company's restructuring program initiated in the fourth quarter of 1999.
FLOW SOLUTIONS DIVISION ----------------------- Three Months Ended June 30, ----------------------- (In millions of dollars) 2000 1999 ------------------------ ------- ------- Sales $ 159.6 $ 109.2 Operating Income 18.7 13.1
Sales were higher than the prior-year period generally due to the acquisition of Invatec. The increase in sales was offset slightly by an unfavorable currency translation which reduced sales by about 3%. Operating income before special items, as a percentage of sales, decreased to 11.7% from 12.0% in 1999. The lower margins were generally due to the acquisition of Invatec, as Invatec's gross margins are historically lower than the balance of FSD operations, and period integration expenses relating to the Company's 1999 restructuring program. CONSOLIDATED RESULTS The gross profit margin was 34.5% for the three months ended June 30, 2000, compared with 34.1% for the same period in 1999. The increase was due to cost reductions and a more favorable parts mix in pumps. Excluding period costs of $0.7 million related to the 1999 restructuring program, the adjusted gross margin excluding Invatec was the highest since the fourth quarter of 1998. Selling and administrative expense as a percentage of net sales was 23.6% for the three- month period ended June 30, 2000, compared with 24.1% for the corresponding 1999 period. The decrease was due to the Company's cost reduction initiatives. Research, engineering and development expense was $6.2 million for the second quarter of 2000, compared with $6.3 million during the same period last year. Interest expense during the second quarter of 2000 was $7.1 million, up $2.9 million from the same period in 1999 due to higher interest rates and the increased borrowing levels required to acquire Invatec stock and retire debt obtained in the acquisition. The Company's effective tax rate for the second quarter of 2000 was 34.5% compared to 34.0% in the second quarter of 1999. The increase was due to the acquisition of Invatec. Net earnings for the second quarter of 2000 were $12.6 million or $0.33 per share. This was 49.0% above net earnings of $8.5 million, or $0.22 per share, for the same period in 1999. Excluding special items, net earnings for the second quarter of 1999 were $11.4 million or $0.30 per share. RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2000 In general, results for the first half of 2000 were higher than the corresponding period in the previous year due to the Company's acquisition of Invatec on January 12, 2000. The acquisition of Invatec is discussed in further detail in the Liquidity and Capital Resources section of this Management Discussion and Analysis. Sales increased 7.3% to $584.5 million for the six months ended June 30, 2000, compared with $544.6 million for the same period in 1999. Sales for the period would have been $501.2 million 14 15 without the acquisition of Invatec, 8.0% below the same period of 1999. The change in sales is discussed further in the following section on business segments. Net sales to international customers, including export sales from the U.S., were approximately 44% during the first half of 2000, compared with 55% during the first half of 1999. The lower 2000 percentage is primarily due to Invatec's markets being principally U.S. Bookings (incoming orders for which there are purchase commitments) were $620.1 million, 23.0% higher than the first half of 1999 when bookings were $504.2 million. Excluding Invatec, bookings also showed year-on-year improvement of 5.3%. BUSINESS SEGMENTS Flowserve manages its operations through three business segments: Rotating Equipment Division (RED) for engineered pumps; Flow Control Division (FCD) for automated and manual quarter-turn valves, control valves and nuclear valves and valve actuators; and Flow Solutions Division (FSD) for precision mechanical seals and flow management services. Sales and operating income before special items (merger-related expenses) for each of the three business segments are:
ROTATING EQUIPMENT DIVISION ------------------- Six Months Ended June 30, ------------------- (In millions of dollars) 2000 1999 ------------------------ ------ ------ Sales $155.7 $189.7 Operating income 10.1 11.5
The sales decrease in 2000 was generally due to a reduced opening backlog of highly engineered pumps. Unfavorable currency translation also reduced sales by about 3%. Operating income before special items, as a percentage of sales, increased to approximately 6.5% in 2000 from about 6.1% in the prior-year period. The operating income margin increased due to an improved gross margin resulting from an improved product mix and ongoing cost reduction efforts.
FLOW CONTROL DIVISION ----------------------- Six Months Ended June 30, ----------------------- (In millions of dollars) 2000 1999 ------------------------ ------- ------- Sales $ 135.2 $ 151.7 Operating income 16.2 15.1
The decrease in sales was due to reduced backlog at the beginning of the year and lower book-to-build volume during the period. Unfavorable currency translation also reduced sales by about 4%. Operating income before special items, as a percentage of sales, was 12.0% in the first half of 2000, compared with 10.0% in 1999. The improved operating margin in 2000 was generally due to improved gross margins and lower operating expenses. These improvements were generally due to a favorable product mix and reduced costs principally related to the Company's restructuring program initiated in the fourth quarter of 1999.
FLOW SOLUTIONS DIVISION ----------------------- Six Months Ended June 30, ----------------------- (In millions of dollars) 2000 1999 ------------------------ ------- ------- Sales $ 308.4 $ 217.9 Operating Income 35.4 27.9
Sales were higher than the prior-year period generally due to the acquisition of Invatec. The increase in sales was offset slightly by an unfavorable currency translation which reduced sales by about 2%. 15 16 Operating income before special items, as a percentage of sales, decreased to 11.5% from 12.8% in 1999. The lower margins were generally due to the acquisition of Invatec, as Invatec's gross margins are historically lower than the balance of FSD operations, and period integration expenses relating to the Company's 1999 restructuring program. CONSOLIDATED RESULTS The gross profit margin was 34.6% for the six months ended June 30, 2000, compared with 35.0% for the same period in 1999. The slight decrease was due to the lower margins associated with Invatec. Excluding Invatec, margins are 0.7 percentage points above the prior year. Selling and administrative expense as a percentage of net sales was 24.3% for the six-month period ended June 30, 2000, compared with 24.5% for the corresponding 1999 period. The slight decrease was due to the Company's cost reduction initiatives which more than offset period costs incurred as a result of the Company's 1999 restructuring program and costs associated with Flowserver, the Company's global business process improvement initiative. Flowserver expenses totaled $2.5 million in the first half of 2000. In 1999, Flowserver expenses were $7.8 million and were identified and disclosed separately as merger integration expense. Research, engineering and development expense was $12.4 million for the first six months of 2000, compared with $13.2 million during the same period last year. The lower level of spending was generally the result of cost control initiatives and the reallocation of resources to assist in project engineering. Interest expense during the first half of 2000 was $13.6 million, up $6.4 million from the same period in 1999 due to higher interest rates and the increased borrowing levels required to acquire Invatec stock and retire debt obtained in the acquisition. The Company recorded other income of $3.2 million during the six months ended June 30, 2000 primarily as a result of two factors. Income of $1.1 million was realized due to the quarterly mark-to-market adjustments requirement under the provisions of EITF No. 97-14 "Accounting for Deferred Compensation Agreements Where Amounts Earned are Held in a Rabbi Trust and Invested". In addition, $1.0 million of income was recorded as a result of the Company reaching an agreement and receiving payment on an outstanding promissory note which had previously been fully reserved. The Company's effective tax rate for the first half of 2000 was 34.5% compared to 34.0% in the first half of 1999. The increase was due to the acquisition of Invatec. Net earnings for the first half of 2000 were $24.5 million or $0.65 per share. This was 30.0% above net earnings of $18.9 million, or $0.50 per share, for the same period in 1999. Excluding special items, net earnings for the first half of 1999 were $24.1 million or $0.64 per share. RESTRUCTURING In the fourth quarter of 1999, the Company initiated a restructuring program designed to streamline the Company for better value and improve asset utilization. This $26.7 million program consisted of a one-time charge of $15.9 million recorded as restructuring expense and $10.8 million of other special items. The restructuring charge related to the planned closure of 10 facilities and a corresponding reduction in workforce at those locations, as well as at other locations that are part of the restructuring. The other special items related to 16 17 inventory impairments, a fixed asset impairment, and executive separation contracts and certain costs related to fourth-quarter 1999 facility closures. The Company currently expects to realize ongoing annual operating income benefits of approximately $20 million per year effective in 2001 from this program. Approximately $10 million of savings are expected to be realized in selling and administrative expense, while the remainder is expected in costs of sales. In 2000, period integration costs related to the implementation of the program are expected to offset a majority of the potential benefit. Current estimates are that planned savings of approximately $10 million will be offset by period integration costs. Additionally, in 2000, a majority of the costs associated with the restructuring program will be incurred and charged against the restructuring reserve. The restructuring program is expected to result in a net reduction of approximately 300 employees. As of June 30, 2000, the program had resulted in a net reduction of 149 employees. Expenditures charged to the 1999 restructuring reserve were:
Other Exit Severance Costs Total ---------------------------- --------- ---------- ------- Balance at December 24, 1999 $12,900 $2,960 $15,860 Cash expenditures (102) -- (102) -------- -------- ------- Balance at December 31, 1999 12,798 2,960 15,758 Cash expenditures (1,693) (583) (2,276) -------- -------- ------- Balance at March 31, 2000 11,105 2,377 13,482 CASH EXPENDITURES (1,311) (1,013) (2,324) -------- -------- ------- BALANCE AT JUNE 30, 2000 $9,794 $1,364 $11,158 ======== ======== =======
LIQUIDITY AND CAPITAL RESOURCES Cash flows from operating activities for the first six months of 2000 were significantly below the same period in 1999. The decrease in cash flows in 2000 was primarily due to payments relating to the restructuring program and Invatec acquisition. Capital expenditures, net of disposals, were $12.4 million during the first six months of 2000, compared with $20.2 million in the first six months of 1999. The reduction reflects a concerted effort by the Company to reduce capital spending. Capital expenditures were funded primarily by operating cash flows. On January 13, 2000, the Company acquired Invatec, a company which is 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. 17 18 The transaction was accounted for under the purchase method of accounting and was financed through borrowings under the revolving credit facility. The results of operations for Invatec are included in the Company's condensed consolidated financial statements from the date of acquisition. The purchase price was approximately $18.3 million in cash. Liabilities of $94.9 million were simultaneously paid through borrowing under Flowserve's revolving credit agreement. The purchase price has been allocated to the net assets acquired based primarily on information furnished by management of the acquired company. On February 10, 2000, the Company announced it had reached a definitive agreement to acquire Ingersoll-Dresser Pumps (IDP) from Ingersoll-Rand Company for $775 million in cash. On August 8, 2000, the Company announced the completion of the acquisition. The transaction, which was accounted for as a purchase, was financed with a combination of bank financing and senior subordinated notes. Upon closing of the transaction, the existing Flowserve debt was repaid. Flowserve has received $1,425 million of financing to pay for the acquisition and pay off existing debt as well as provide for a $300 million revolving credit facility in connection with the acquisition. The financing consists of approximately $375 million of 12.25% Senior Subordinated Notes and $1.05 billion of senior credit facilities. The credit facilities consist of a $275 million term loan with a final maturity of six years and an initial interest rate of LIBOR plus 2.75%, a $475 million term loan with a final maturity of eight years and an initial interest rate of LIBOR plus 3.50%, and a $300 million revolving credit facility with a term of six years and an initial interest rate of LIBOR plus 2.75%. During the first quarter of 2000, the Company also announced it was suspending the payment of its cash dividend which is required by the financing. The Company believes that internally generated funds, including synergies from the IDP acquisition, will be adequate to service the debt. At June 30, 2000, total debt was 50.0% of the Company's capital structure, compared with 39.6% at December 31, 1999. The interest coverage ratio of the Company's indebtedness was 5.3 times interest at June 30, 2000, compared with 4.3 times interest at December 31, 1999. 18 19 FORWARDING-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY This Report on Form 10-Q and other written reports and oral statements made from time to time by the Company contain various forward-looking statements and include assumptions about Flowserve's future market conditions, operations and results. These statements are based on current expectations and are subject to significant risks and uncertainties. They are made pursuant to safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Among the many factors that could cause actual results to differ materially from the forward-looking statements are: further changes in the already competitive environment for the Company's products or competitors' responses to Flowserve's strategies; the Company's ability to integrate IDP and Invatec into its management and operations; political risks or trade embargoes affecting important country markets; the health of the petroleum, chemical and power industries; economic turmoil in areas outside the United States; continued economic growth within the United States; unanticipated difficulties or costs or reduction in benefits associated with the implementation of the Company's "Flowserver" business process improvement initiative, including software; and the recognition of significant expenses associated with adjustments to realign the combined Company's facilities and other capabilities with its strategic and business conditions including, without limitation, expenses incurred in restructuring the Company's operations to incorporate IDP facilities, and the cost of financing to be assumed in acquiring IDP. The Company undertakes no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise. 19 20 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK There have been no material changes in reported market risk since the end of 1999. PART II OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (c) During the second quarter of 2000, the Company issued 24,645 shares of restricted common stock pursuant to an exemption from registration under Section 4(2) of the Securities Act of 1933. Shares were issued for the benefit of directors, one officer and certain employees, subject to restrictions on transfer and vesting. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The Annual Meeting of Shareholders of the Company was held on April 20, 2000. (c) (b) A proposal to approve re-election of three Directors to the Board of Directors, in each case for a term of three years, was approved as follows with respect to each nominee for office:
Votes For Votes Withheld ---------- -------------- C. Scott Greer 30,729,759 2,302,279 Diane C. Harris 32,416,056 615,982 James O. Rollans 32,407,438 624,600
The other directors, whose terms continued after the Annual Meeting, were Hugh K. Coble, George T. Haymaker, Michael F. Johnston, Charles M. Rampacek, Williams C. Rusnack and Kevin E. Sheehan. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit - 27. Financial Data Schedule. (b) Reports on Form 8-K None 20 21 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: August 11, 2000 21 22 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------- ----------- 27 Financial Data Schedule
22