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, 2001 Commission File Number 1-13179 FLOWSERVE CORPORATION (Exact name of Registrant as specified in its charter) NEW YORK (State or other jurisdiction of incorporation or organization) 31-0267900 (I.R.S. Employer Identification Number) 222 W. LAS COLINAS BLVD., SUITE 1500, IRVING, TEXAS 75039 (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code) (972) 443-6500 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- SHARES OF COMMON STOCK, $1.25 PAR VALUE, OUTSTANDING AS OF JULY 25, 2001 37,813,033 2 FLOWSERVE CORPORATION INDEX 2
Page No. ---- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Statements of Income - Three Months Ended June 30, 2001 and 2000 (unaudited) 3 Consolidated Statements of Comprehensive Income - Three Months Ended June 30, 2001 and 2000 (unaudited) 3 Consolidated Statements of Income - Six Months Ended June 30, 2001 and 2000 (unaudited) 4 Consolidated Statements of Comprehensive Income - Six Months Ended June 30, 2001 and 2000 (unaudited) 4 Consolidated Balance Sheets - June 30, 2001 (unaudited) and December 31, 2000 5 Consolidated Statements of Cash Flows - Six Months Ended June 30, 2001 and 2000 (unaudited) 6 Notes to Consolidated Financial Statements 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS 22 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISKS 31 PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 33 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 33 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 33 SIGNATURE 34 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FLOWSERVE CORPORATION (UNAUDITED) CONSOLIDATED STATEMENTS OF INCOME CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands, except per share data) Three Months Ended June 30, --------------------------- 2001 2000 --------- --------- Sales $464,579 $299,153 Cost of sales 308,901 195,990 -------- -------- Gross profit 155,678 103,163 Selling, general and administrative expense 103,572 76,788 Integration expense 16,944 -- -------- -------- Operating income 35,162 26,375 Net interest expense 31,361 6,682 Other (income) expense, net (265) 428 -------- -------- Net earnings before income taxes 4,066 19,265 Provision for income taxes 1,464 6,647 -------- -------- Net earnings $ 2,602 $ 12,618 ======== ======== Net earnings per share (basic and diluted) $ 0.07 $ 0.33 ========= ======== Average shares outstanding - basic 38,058 37,796 Average shares outstanding - diluted 38,796 37,809 See accompanying notes to consolidated financial statements. 3
(Amounts in thousands) Three Months Ended June 30, --------------------------- 2001 2000 -------- -------- Net earnings $ 2,602 $ 12,618 -------- -------- Other comprehensive expense: Foreign currency translation adjustments 14,296 6,952 Fair market adjustment of derivative instruments, net of tax benefit of $308 and other adjustments (See footnote 4) 487 -- -------- -------- Other comprehensive expense 14,783 6,952 -------- -------- Comprehensive (loss) income $(12,181) $ 5,666 ======== ======== 4 FLOWSERVE CORPORATION (UNAUDITED) CONSOLIDATED STATEMENTS OF INCOME CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands, except per share data) Six Months Ended June 30, ------------------------- 2001 2000 -------- -------- Sales $908,614 $584,462 Cost of sales 615,362 382,070 -------- -------- Gross profit 293,252 202,392 Selling, general and administrative expense 203,676 154,573 Integration expense 36,083 -- -------- -------- Operating income 53,493 47,819 Net interest expense 63,172 12,888 Other income, net (400) (2,473) -------- -------- Net (loss) earnings before income taxes (9,279) 37,404 (Benefit) provision for income taxes (3,341) 12,905 -------- -------- Net (loss) earnings $ (5,938) $ 24,499 ======== ======== Net (loss) earnings per share (basic and diluted) $ (0.16) $ 0.65 ======== ======== Average shares outstanding - basic 37,912 37,801 Average shares outstanding - diluted 38,468 37,810 See accompanying notes to consolidated financial statements. 4
(Amounts in thousands) Six Months Ended June 30, ------------------------ 2001 2000 -------- -------- Net (loss) earnings $ (5,938) $ 24,499 -------- -------- Other comprehensive (income) expense: Foreign currency translation adjustments 53,440 16,202 Cumulative effect of change in accounting principle, net of tax of $472 (Adoption of SFAS 133 - See footnote 4) (840) -- Fair market adjustment of derivative instruments, net of tax benefit of $2,401 and other adjustments (See footnote 4) 4,207 -- -------- -------- Other comprehensive expense 56,807 16,202 -------- -------- Comprehensive (loss) income $(62,745) $ 8,297 ======== ======== 5 FLOWSERVE CORPORATION CONSOLIDATED BALANCE SHEETS See accompanying notes to consolidated financial statements. 5
June 30, December 31, (Amounts in thousands, except per share data) 2001 2000 ----------- ----------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents $ 17,150 $ 42,341 Accounts receivable, net 454,826 487,274 Inventories 341,593 305,958 Current deferred tax asset 42,551 39,726 Prepaid expenses 25,579 22,753 ----------- ----------- Total current assets 881,699 898,052 Property, plant and equipment, net 380,923 405,412 Goodwill, net 515,394 514,441 Other intangible assets, net 128,389 131,330 Other assets 161,881 160,908 ----------- ----------- Total assets $ 2,068,286 $ 2,110,143 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 175,324 $ 172,366 Accrued liabilities 209,518 243,553 Long-term debt due within one year 28,668 18,098 ----------- ----------- Total current liabilities 413,510 434,017 Long-term debt due after one year 1,151,366 1,111,108 Post-retirement benefits and deferred items 253,680 260,107 Commitments and contingencies Shareholders' equity: Serial preferred stock, $1.00 par value Shares authorized - 1,000 -- -- Shares issued and outstanding - None Common stock, $1.25 par value Shares authorized - 120,000 Shares issued and outstanding - 41,484 51,856 51,856 Capital in excess of par value 65,585 65,785 Retained earnings 351,557 357,495 ----------- ----------- 468,998 475,136 Treasury stock at cost - 3,725 and 4,048 shares (85,209) (92,545) Deferred compensation obligation 6,972 6,544 Accumulated other comprehensive loss (141,031) (84,224) ----------- ----------- Total shareholders' equity 249,730 304,911 ----------- ----------- Total liabilities and shareholders' equity $ 2,068,286 $ 2,110,143 =========== =========== 6 FLOWSERVE CORPORATION (Unaudited) CONSOLIDATED STATEMENTS OF CASH FLOWS See accompanying notes to consolidated financial statements. 6
(Amounts in thousands) Six Months Ended June 30, -------------------------- 2001 2000 --------- --------- CASH FLOWS - OPERATING ACTIVITIES: Net (loss) earnings $ (5,938) $ 24,499 Adjustments to reconcile net (loss) earnings to net cash used by operating activities: Depreciation 25,154 16,474 Amortization 12,187 3,902 Net gain on the sale of fixed assets (322) (148) Change in assets and liabilities, net of effects of acquisitions and dispositions: Accounts receivable 17,000 (7,773) Inventories (54,942) (19,651) Prepaid expenses (3,915) 9,191 Other assets (3,669) (6,935) Accounts payable (317) (6,537) Accrued liabilities (49,907) (30,946) Income taxes (679) 5,071 Post-retirement benefits and deferred items (5,110) 6,773 Net deferred taxes (2,548) (474) --------- --------- Net cash flows used by operating activities (73,006) (6,554) --------- --------- CASH FLOWS - INVESTING ACTIVITIES: Capital expenditures (22,417) (12,502) Disposal of assets 7,361 68 Payment for acquisitions, net of cash acquired and dispositions -- (21,703) --------- --------- Net cash flows used by investing activities (15,056) (34,137) --------- --------- CASH FLOWS - FINANCING ACTIVITIES: Net repayments of short-term debt -- (3,079) Payments of long-term debt (11,781) (96,405) Proceeds from long-term debt 71,000 125,134 Proceeds from other 7,650 239 --------- --------- Net cash flows provided by financing activities 66,869 25,889 Effect of exchange rate changes (3,998) (1,166) --------- --------- Net change in cash and cash equivalents (25,191) (15,968) Cash and cash equivalents at beginning of year $ 42,341 $ 30,463 --------- --------- Cash and cash equivalents at end of period $ 17,150 $ 14,495 ========= ========= 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, 2001, and the related consolidated statements of income and comprehensive income for the three months and six months ended June 30, 2001 and 2000, and the consolidated statements of cash flows for the six months ended June 30, 2001 and 2000, 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 2000 Annual Report. Interim results are not necessarily indicative of results to be expected for a full year. Certain amounts in 2000 have been reclassified or restated to conform with the 2001 presentation. 2. INVENTORIES Inventories are stated at lower of cost or market. Cost is determined for certain inventories by the last-in, first-out (LIFO) method and for other inventories by the first-in, first-out (FIFO) method. Inventories and the method of determining costs were: 3. RECENT ACCOUNTING DEVELOPMENTS In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for using the purchase method. Additionally, SFAS No. 141 establishes specific criteria for the recognition of intangible assets separately from goodwill. SFAS No. 142 primarily addresses the accounting for goodwill and intangible assets subsequent to their acquisition and is effective for the Company on January 1, 2002. The most significant changes made by SFAS No. 142 require that goodwill and indefinite lived intangible assets no longer be amortized and be tested for impairment at least on an annual basis. Additionally, the amortization period of 7
June 30, December 31, 2001 2000 --------- ------------ Raw materials $ 53,736 $ 51,981 Work in process and finished goods 360,633 330,060 Less: Progress billings (34,700) (38,605) --------- --------- 379,669 343,436 LIFO reserve (38,076) (37,478) --------- --------- Net inventory $ 341,593 $ 305,958 ========= ========= Percent of inventory accounted for by LIFO 69% 67% Percent of inventory accounted for by FIFO 31% 33% 8 intangible assets with finite lives will no longer be limited to forty years. The Company is currently assessing the impact of SFAS 141 and 142 and has not yet determined the effects these statements will have on its consolidated financial position or results of operations. 4. ADOPTION OF SFAS NO. 133 - ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES The Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," and the corresponding amendments on January 1, 2001. In accordance with the transition provisions of SFAS 133, the Company recorded a cumulative-effect adjustment in other comprehensive income as of January 1, 2001 of $0.8 million, net of deferred tax of $0.5 million representing the current fair-value of hedging instruments. Of the gross 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. The Company reclassified the transition adjustment relating to foreign currency forward contracts to earnings during the first quarter of 2001 as those contracts settled. At June 30, 2001, the fair-value of the hedging instruments is a liability of $6.3 million. Hedging related transactions recorded to other comprehensive income during 2001 were: The Company expects that within the next twelve months it will reclassify as expense $1.5 million, net of deferred tax of the amount recorded in accumulated other comprehensive income for contracts that will settle during the period. The Company is party to forward contracts for purposes of hedging certain transactions denominated in foreign currencies. The Company has a risk-management and derivatives policy statement outlining the conditions in which the Company can enter into hedging or forward transactions. As of June 30, 2001, the Company has approximately $75 million of notional amount in outstanding contracts with third parties. The maximum length of the contracts currently in place as of June 30, 2001 is about 19 months. The Company is exposed to credit-related losses in the event of nonperformance by counterparties to financial instruments, but it expects all counterparties to meet their obligations given their high credit ratings. The Company, as part of its risk management program, is party to interest rate swap agreements for the purpose of hedging 8
Other Comprehensive (Income) Loss ------------- Record fair market value of hedges, as of January 1, 2001, net of deferred taxes of $472 $ (840) Reclassify to earnings amount necessary to offset foreign currency gains for six months ended June 30, 2001, net of deferred taxes of $400 (603) Record change in fair market value of swap agreements as of June 30, 2001, net of deferred taxes of $545 928 Record change in fair market value of foreign currency forward contracts as of June 30, 2001, net of deferred taxes of $2,254 3,882 ------- Balance as of June 30, 2001 $ 3,367 ======= 9 its exposure to floating interest rates on certain portions of its debt. As of June 30, 2001, the Company had $150 million of notional amount in outstanding interest rate swaps with third parties. The maximum length of the interest rate swaps currently in place as of June 30, 2001 is approximately 5 1/2 years. All derivatives are recognized on the balance sheet at their fair-value. On the date that the Company enters into a derivative contract, it designates the derivative as (1) a hedge of (a) a forecasted transaction or (b) the variability of cash flows that are to be received or paid in connection with a recognized asset or liability (a "cash flow" hedge); or (2) a foreign-currency fair-value or cash flow hedge (a "foreign currency" hedge). Changes in the fair-value of a derivative that is highly effective as - and that is designated and qualifies as - - a cash flow hedge, to the extent that the hedge is effective, are recorded in other comprehensive income, until earnings are affected by the variability of cash flows of the hedged transaction. Any hedge ineffectiveness (which represents the amount by which the changes in the fair-value of the derivative exceed the variability in the cash flows of the forecasted transaction) is recorded in current-period earnings. Changes in the fair-value of a derivative that is highly effective as - and that is designated and qualifies as - a foreign-currency hedge is recorded in other comprehensive income, since it satisfies the criteria for a cash-flow hedge. As of June 30, 2001, all hedges outstanding were highly effective. The Company formally documents all relationships between hedging instruments and hedge items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as fair-value, cash flow, or foreign-currency hedges to (1) specific assets and liabilities on the balance sheet or (2) specific firm commitments or forecasted transactions. The Company also formally assesses (both at the hedge's inception and on an ongoing basis) whether the derivatives that are used in hedging transactions have been highly effective in offsetting changes in the fair value or cash flows of hedged items and whether those derivatives may be expected to remain highly effective in future periods. When it is determined that a derivative is not (or has ceased to be) highly effective as a hedge, the Company discontinues hedge accounting prospectively, as discussed below. The Company discontinues hedge accounting prospectively when (1) it determines that the derivative is no longer effective in offsetting changes in the fair-value or cash flows of a hedge item (including hedged items such as firm commitments or forecasted transactions); (2) the derivative expires or is sold, terminated, or exercised; (3) it is no longer probable that the forecasted transaction will occur; or (4) management determines that designating the derivative as a hedging instrument is no longer appropriate. When the Company discontinues hedge accounting because it is no longer probable that the forecasted transaction will occur in the originally expected period, the gain or loss on the derivative remaining in accumulated other comprehensive income is reclassified into earnings. In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the Company will carry the derivative at its fair-value on the balance sheet, recognizing changes in the fair-value in current-period earnings. 9 10 5. ACQUISITION In August 2000, the Company completed the acquisition of Ingersoll-Dresser Pump Company (IDP), a leading manufacturer of pumps with a diverse mix of pump products and customers with operations in 30 countries, for $775 million in cash. The transaction, which was accounted for as a purchase, was financed with a combination of senior secured financing and senior subordinated notes. Upon closing of the transaction, the existing Company debt was also refinanced. The purchase price has been allocated to assets acquired and liabilities assumed based on estimated fair market value at the date of the acquisition. These allocations include $137.6 million for intangibles and $385.0 million recorded as goodwill. The purchase price allocation for this acquisition is preliminary and further refinements are likely to be made based on the final determination of the fair-value of the assets acquired and the resolution of remaining contingencies. The operating results of IDP have been included in the consolidated statements of income from the date of acquisition. The table below reflects unaudited pro forma results of the Company and IDP as if the acquisition had taken place at the beginning of fiscal year 2000, including purchase accounting adjustments and estimated financing costs. PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except per share amounts) 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. 6. RESTRUCTURING AND ACQUISITION RELATED CHARGES In August 2000, in conjunction with the acquisition of IDP, the Company initiated a restructuring program designed to reduce costs and to eliminate excess capacity by consolidating facilities. The Company's actions, approved and committed to in the third quarter of 2000, are expected to result in the net reduction of approximately 1,200 positions upon estimated completion before the end of 2001. The program includes the closure of IDP's former headquarters, the closure or significant downsizing of a number of pump manufacturing facilities, service and repair centers, and reduction of sales and sales support personnel. The Company currently estimates that the costs associated with the restructuring portion of the program will be approximately $68 million. The Company had originally estimated these costs to be approximately $61 million. The increase from the original estimate is primarily due to updated actuarial information for post-retirement and pension expense relating to a plant closure. This increase was offset by a non-cash reclassification from the restructuring accrual to post-retirement benefits and pension liabilities which resulted in a net reduction to the accrual of $8.8 million during the fourth quarter of 2000. Approximately $44 million of the total cost relates to the IDP operations acquired and $28 million has been capitalized in goodwill as part of the purchase price of IDP ($44 million of estimated costs less deferred tax effect of $16 million), while the remaining cost of $24 million relates to the Flowserve 10
Six Months Ended June 30, 2000 ---------------- Net sales $ 947,871 Operating income 53,041 Net loss (4,745) Net loss per share (basic and diluted) $ (0.13) 11 operations and was recorded as restructuring expense in 2000. During the first six months of 2001, the Company incurred $36.1 million in integration costs in conjunction with this program. As of June 30, 2001, the program had resulted in a net reduction of 1,139 employees. Expenditures charged to the 2000 restructuring reserve were: In the fourth quarter of 1999, the Company initiated a restructuring program that included a one-time charge of $15.9 million recorded as restructuring expense. The restructuring charge related to the planned closure of 10 facilities and a reduction in workforce at those and other locations. The 1999 restructuring program is expected to result in a net reduction of approximately 288 employees at a cost of $12.9 million upon estimated completion during the third quarter of 2001. In addition, exit costs associated with the facilities closings were $3.0 million. As of June 30, 2001, the program has resulted in a net reduction of 261 employees. Expenditures charged to the 1999 restructuring reserve were:
Other Exit Severance Costs Total --------- -------- -------- Balance at August 16, 2000 $ 45,980 $ 14,832 $ 60,812 Cash expenditures (18,645) (2,434) (21,079) Net non-cash reduction (8,849) -- (8,849) -------- -------- -------- Balance at December 31, 2000 $ 18,486 $ 12,398 $ 30,884 Cash expenditures (5,729) (4,029) (9,758) -------- -------- -------- Balance at March 31, 2001 $ 12,757 $ 8,369 $ 21,126 Cash expenditures (3,277) (2,505) (5,782) -------- -------- -------- Balance at June 30, 2001 $ 9,480 $ 5,864 $ 15,344 ======== ======== ======== 7. ASSETS HELD FOR SALE The Company is in the process of selling certain facilities, machinery and equipment and other fixed assets as part of its plan to eliminate excess capacity by consolidating facilities. The Company is in the process of negotiating the sale of these facilities and fixed assets and expects the sale of such items to be completed by the end of 2002. The remaining assets not yet sold, totaling $1.3 million, have been identified separately within property, plant and equipment as Assets Held for Sale and have been recorded at their estimated net realizable value. 11
Other Exit Severance Costs Total --------- -------- -------- Balance at December 24, 1999 $ 12,900 $ 2,960 $ 15,860 Cash expenditures (102) -- (102) --------- -------- -------- Balance at December 31, 1999 $ 12,798 $ 2,960 $ 15,758 Cash expenditures (6,766) (1,932) (8,698) Non-cash reduction (4,364) (1,028) (5,392) --------- -------- -------- Balance at December 31, 2000 $ 1,668 $ -- $ 1,668 Cash expenditures (495) -- (495) --------- -------- -------- Balance at March 31, 2001 $ 1,173 $ -- $ 1,173 Cash expenditures (682) -- (682) --------- -------- -------- Balance at June 30, 2001 $ 491 $ -- $ 491 ========= ======== ======== 12 8. EARNINGS PER SHARE Basic and diluted earnings per share were calculated as follows:
Three Months Three Months Ended Ended June 30, 2001 June 30, 2000 ------------- ------------- Net earnings $ 2,602 $ 12,618 -------- -------- Denominator for basic earnings per share - weighted average shares 38,058 37,796 Effect of diluted securities - employee stock options 738 13 -------- -------- Denominator for diluted earnings per share - weighted average shares adjusted for dilutive securities 38,796 37,809 -------- -------- Earnings per share - basic $ 0.07 $ 0.33 Earnings per share - diluted $ 0.07 $ 0.33 ======== ======== Options to purchase 435,849 and 3,225,684 shares of common stock were outstanding at June 30, 2001 and June 30, 2000, respectively, but were not included in the computation of diluted EPS for the three month periods ended June 30, 2001 and June 30, 2000 because the options' exercise price was greater than the average market price of the common stock. For the six months ended June 30, 2001, the computation of diluted net loss per ordinary share was antidilutive, and therefore, the amounts reported for basic and diluted net loss per ordinary share were the same. Options to purchase 3,381,517 shares of common stock were outstanding at June 30, 2000 but were not included in the computation of diluted EPS for the six month period ended June 30, 2000 because the options' exercise price was greater than the average market price of the common stock. 12
Six Months Six Months Ended Ended June 30, 2001 June 30, 2000 ------------- ------------- Net (loss) earnings $ (5,938) $ 24,499 -------- -------- Denominator for basic earnings per share - weighted average shares 37,912 37,801 Effect of diluted securities - employee stock options 557 9 -------- -------- Denominator for diluted earnings per share - weighted average shares adjusted for dilutive securities 38,468 37,810 -------- -------- (Loss) earnings per share - basic $ (0.16) $ 0.65 (Loss) earnings per share - diluted $ (0.16) $ 0.65 ======== ======== 13 9. GUARANTOR AND NONGUARANTOR FINANCIAL STATEMENTS In connection with the IDP acquisition and as part of the related financing, the Company and newly formed Dutch subsidiary, Flowserve Finance B.V., issued an aggregate of $375 million of U.S. dollar-denominated senior subordinated notes (the U.S. dollar Notes and the Euro Notes), in private placements pursuant to Rule 144A and Regulation S. The U.S. dollar Notes and the Euro Notes are general unsecured obligations of the Company and Flowserve Finance B.V., respectively, subordinated in right of payment to all existing and future senior indebtedness of the Company and Flowserve Finance B.V., respectively, and guaranteed on a full, unconditional, joint and several basis by the Company's wholly owned domestic subsidiaries and, in the case of the Euro Notes, by the Company. The following consolidating financial information presents: (1) Consolidating balance sheet as of June 30, 2001 and the related statements of income and cash flows for the six months ended June 30, 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, 2000 and the related statements of income and cash flows for the six months ended June 30, 2000, of (a) Flowserve Corporation, the parent, (b) the guarantor subsidiaries, (c) the non-guarantor subsidiaries, and the Company on a consolidated basis, and (3) Elimination entries necessary to consolidate Flowserve Corporation, the parent, with Flowserve Finance, B.V., guarantor and non-guarantor subsidiaries. Investments in subsidiaries are accounted for by the parent using the equity method of accounting. The guarantor and non-guarantor subsidiaries are presented on a combined basis. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions. Separate financial statements for the guarantor subsidiaries and the nonguarantor subsidiaries are not presented because management believes such financial statements would not be meaningful to investors. Effective January 1, 2001, the Company effected a domestic legal reorganization. This primarily resulted in a reclassification between the Parent and Guarantor Subsidiaries. 13 14 FLOWSERVE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) CONSOLIDATING STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 2001 14
FLOWSERVE GUARANTOR NONGUARANTOR CONSOLIDATED PARENT FINANCE B.V. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL --------- ------------ ------------ ------------ ------------ ------------ Sales $ -- $ -- $ 588,121 $ 376,581 $ (56,088) $ 908,614 Cost of sales -- -- 414,591 256,859 (56,088) 615,362 --------- --------- --------- --------- --------- --------- Gross profit -- -- 173,530 119,722 -- 293,252 Selling, general and administrative expense -- -- 141,539 62,137 -- 203,676 Integration expense -- -- 28,968 7,115 -- 36,083 --------- --------- --------- --------- --------- --------- Operating income -- -- 3,023 50,470 -- 53,493 Net interest expense 12,012 435 44,486 6,310 (71) 63,172 Other (income) expense, net (273) 3 (13,971) 13,770 71 (400) Equity in loss of subsidiaries 5 -- -- -- (5) -- --------- --------- --------- --------- --------- --------- Net (loss) earnings before income taxes (11,744) (438) (27,492) 30,390 5 (9,279) (Benefit) provision for income taxes (5,806) -- (12,786) 15,251 -- (3,341) --------- --------- --------- --------- --------- --------- Net (loss) earnings $ (5,938) $ (438) $ (14,706) $ 15,139 $ 5 $ (5,938) ========= ========= ========= ========= ========= ========= 15 FLOWSERVE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) CONSOLIDATING STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 2000 15
GUARANTOR NONGUARANTOR CONSOLIDATED PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL --------- ------------ ------------ ------------ ------------ Sales $ 83,031 $ 336,255 $ 207,945 $ (42,769) $ 584,462 Cost of sales 53,698 234,367 136,774 (42,769) 382,070 --------- --------- --------- --------- --------- Gross profit 29,333 101,888 71,171 -- 202,392 Selling, general and administrative expense 27,017 81,908 45,648 -- 154,573 --------- --------- --------- --------- --------- Operating income 2,316 19,980 25,523 -- 47,819 Net interest expense (income) (943) 12,411 1,326 94 12,888 Other (income) expense, net (2,545) (4,340) 4,506 (94) (2,473) Equity in earnings of subsidiaries (20,181) -- -- 20,181 -- --------- --------- --------- --------- --------- Net earnings before income taxes 25,985 11,909 19,691 (20,181) 37,404 Provision for income taxes 1,486 4,716 6,703 -- 12,905 --------- --------- --------- --------- --------- Net earnings $ 24,499 $ 7,193 $ 12,988 $ (20,181) $ 24,499 ========= ========= ========= ========= ========= 16 FLOWSERVE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATING BALANCE SHEET JUNE 30, 2001 16
FLOWSERVE GUARANTOR NONGUARANTOR CONSOLIDATED PARENT FINANCE B.V. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL ----------- ------------ ------------ ------------ ------------ ------------ Current assets: Cash and cash equivalents $ -- $ -- $ -- $ 30,252 $ (13,102) $ 17,150 Intercompany receivables 54,559 -- 53,528 79,230 (187,317) -- Accounts receivable, net -- -- 253,500 201,326 -- 454,826 Inventories -- -- 220,265 121,328 -- 341,593 Current deferred tax asset -- -- 39,914 2,637 -- 42,551 Prepaid expenses -- -- 16,895 8,684 -- 25,579 ----------- ----------- ----------- ----------- ----------- ----------- Total current assets 54,559 -- 584,102 443,457 (200,419) 881,699 Property, plant and equipment, net (14) -- 214,197 166,740 -- 380,923 Investment in subsidiaries 415,708 -- 500,822 -- (916,530) -- Intercompany receivables 861,982 81,313 12,375 30,399 (986,069) -- Goodwill, net -- -- 455,542 59,852 -- 515,394 Other intangible assets, net -- -- 109,694 18,695 -- 128,389 Other assets 36,585 4,162 115,555 5,579 -- 161,881 ----------- ----------- ----------- ----------- ----------- ----------- Total assets $ 1,368,820 $ 85,475 $ 1,992,287 $ 724,722 $(2,103,018) $ 2,068,286 =========== =========== =========== =========== =========== =========== Current liabilities: Accounts payable $ 2,277 $ -- $ 103,569 $ 82,580 $ (13,102) $ 175,324 Intercompany payables 3,529 2,059 139,767 41,962 (187,317) -- Income taxes (638) -- (803) 1,441 -- -- Accrued liabilities 17,856 229 107,993 83,440 -- 209,518 Long-term debt due within one year 28,701 -- (33) -- -- 28,668 ----------- ----------- ----------- ----------- ----------- ----------- Total current liabilities 51,725 2,288 350,493 209,423 (200,419) 413,510 Long-term debt due after one year 1,067,365 83,942 1 58 -- 1,151,366 Intercompany payables -- -- 844,316 141,753 (986,069) -- Post-retirement benefits and deferred items -- -- 198,224 55,456 -- 253,680 Shareholders' equity: Serial preferred stock, $1.00 par value -- -- -- -- -- -- Common shares, $1.25 par value 51,856 -- 2 182,330 (182,332) 51,856 Capital in excess of par value 65,585 -- 349,411 72,990 (422,401) 65,585 Retained earnings 351,557 (780) 245,925 132,212 (377,357) 351,557 ----------- ----------- ----------- ----------- ----------- ----------- 468,998 (780) 595,338 387,532 (982,090) 468,998 Treasury stock at cost (85,209) -- -- -- -- (85,209) Deferred compensation obligation -- -- 6,972 -- -- 6,972 Accumulated other comprehensive (loss) income (134,059) 25 (3,057) (69,500) 65,560 (141,031) ----------- ----------- ----------- ----------- ----------- ----------- Total shareholders' equity 249,730 (755) 599,253 318,032 (916,530) 249,730 ----------- ----------- ----------- ----------- ----------- ----------- Total liabilities and shareholders' equity $ 1,368,820 $ 85,475 $ 1,992,287 $ 724,722 $(2,103,018) $ 2,068,286 =========== =========== =========== =========== =========== =========== 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATING BALANCE SHEET DECEMBER 31, 2000 17
FLOWSERVE FINANCE GUARANTOR NONGUARANTOR CONSOLIDATED PARENT B.V. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL ----------- ----------- ------------ ------------ ------------ ------------- Current assets: Cash and cash equivalents $ -- $ -- $ -- $ 50,239 $ (7,898) $ 42,341 Intercompany receivables 23,530 -- 33,252 104,836 (161,618) -- Accounts receivable, net 20,767 -- 224,746 241,761 -- 487,274 Inventories 10,432 -- 181,258 114,268 -- 305,958 Current deferred tax asset -- -- 38,765 961 -- 39,726 Prepaid expenses 6,261 -- 12,216 4,276 -- 22,753 ----------- ----------- ----------- ----------- ----------- ----------- Total current assets 60,990 -- 490,237 516,341 (169,516) 898,052 Property, plant and equipment, net 34,332 -- 189,978 181,102 -- 405,412 Investment in subsidiaries 791,437 -- 443,092 -- (1,234,529) -- Intercompany receivables 501,286 90,112 10,849 21,598 (623,845) -- Goodwill, net 7,814 -- 459,983 46,644 -- 514,441 Other intangible assets, net -- -- 114,129 17,201 -- 131,330 Other assets 52,991 4,865 97,861 5,191 -- 160,908 ----------- ----------- ----------- ----------- ----------- ----------- Total assets $ 1,448,850 $ 94,977 $ 1,806,129 $ 788,077 $(2,027,890) $ 2,110,143 =========== =========== =========== =========== =========== =========== Current liabilities: Accounts payable $ 5,588 $ 1 $ 76,910 $ 97,766 $ (7,899) $ 172,366 Intercompany payables 33,973 2,279 20,704 104,658 (161,614) -- Income taxes 4,679 -- 2,928 (7,607) -- -- Accrued liabilities 13,443 111 120,729 110,202 (932) 243,553 Long-term debt due within one year 18,000 -- 90 8 -- 18,098 ----------- ----------- ----------- ----------- ----------- ----------- Total current liabilities 75,683 2,391 221,361 305,027 (170,445) 434,017 Long-term debt due after one year 1,018,063 92,958 2 85 -- 1,111,108 Intercompany payables 131 -- 468,840 154,873 (623,844) -- Post-retirement benefits and deferred items 50,062 -- 166,187 42,926 932 260,107 Shareholders' equity: Serial preferred stock, $1.00 par value -- -- -- -- -- -- Common shares, $1.25 par value 51,856 -- 2 197,582 (197,584) 51,856 Capital in excess of par value 65,785 -- 676,035 89,489 (765,524) 65,785 Retained earnings 357,495 (343) 285,998 138,332 (423,987) 357,495 ----------- ----------- ----------- ----------- ----------- ----------- 475,136 (343) 962,035 425,403 (1,387,095) 475,136 Treasury stock at cost (92,545) -- (613) 2,246 (1,633) (92,545) Deferred compensation obligation -- -- 6,544 -- -- 6,544 Accumulated other comprehensive (loss) income (77,680) (29) (18,227) (142,483) 154,195 (84,224) ----------- ----------- ----------- ----------- ----------- ----------- Total shareholders' equity 304,911 (372) 949,739 285,166 (1,234,533) 304,911 ----------- ----------- ----------- ----------- ----------- ----------- Total liabilities and shareholders' equity $ 1,448,850 $ 94,977 $ 1,806,129 $ 788,077 $(2,027,890) $ 2,110,143 =========== =========== =========== =========== =========== =========== 18 FLOWSERVE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2001 18
FLOWSERVE FINANCE GUARANTOR NONGUARANTOR CONSOLIDATED PARENT B.V. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL -------- --------- ------------- ------------ ------------ ----------- CASH FLOWS-OPERATING ACTIVITIES: Net (loss) earnings $ (5,938) $(438) $(14,706) $ 15,139 $ 5 $ (5,938) Adjustments to reconcile net earnings to cash provided (used) by operating activities: Depreciation 14 -- 15,046 10,094 -- 25,154 Amortization -- -- 10,400 1,787 -- 12,187 Net (gain) loss on sale of fixed assets -- -- (101) (221) -- (322) Change in operating assets and liabilities: Accounts receivable (200) -- (9,368) 26,568 -- 17,000 Inventories (5,759) -- (21,844) (27,339) -- (54,942) Intercompany receivable and payable 34,216 (218) 64,468 (98,456) (10) -- Prepaid expenses 877 -- (813) (3,979) -- (3,915) Other assets 6,042 240 (12,032) 2,081 -- (3,669) Accounts payable 4,376 -- 17,648 (18,100) (4,241) (317) Accrued liabilities 10,936 135 (26,156) (34,822) -- (49,907) Income taxes (5,619) -- (1,673) 6,613 -- (679) Post-retirement benefits and deferred items (16,982) -- (2,503) 14,375 -- (5,110) Net deferred taxes (238) -- (2,969) 659 -- (2,548) -------- ----- -------- --------- -------- -------- Net cash (used) provided by operating activities 21,725 (281) 15,397 (105,601) (4,246) (73,006) -------- ----- -------- --------- -------- -------- CASH FLOWS-INVESTING ACTIVITIES: Capital expenditures (266) -- (12,355) (9,796) -- (22,417) Disposal of assets -- -- 5,854 1,507 -- 7,361 -------- ----- -------- --------- -------- -------- Net cash flows used by investing activities (266) -- (6,501) (8,289) -- (15,056) -------- ----- -------- --------- -------- -------- CASH FLOWS-FINANCING ACTIVITIES: Payments on long-term debt (11,781) -- (123) 123 -- (11,781) Proceeds from long-term debt 71,681 -- (2) (679) -- 71,000 Other activity (81,359) 281 (8,771) 98,457 (958) 7,650 -------- ----- -------- --------- -------- -------- Net cash flows provided (used) by financing activities (21,459) 281 (8,896) 97,901 (958) 66,869 Effect of exchange rate changes -- -- -- (3,998) -- (3,998) -------- ----- -------- --------- -------- -------- Net change in cash and cash equivalents -- -- -- (19,987) (5,204) (25,191) Cash and cash equivalents at beginning of year $ -- $ -- $ -- $ 50,239 $ (7,898) $ 42,341 -------- ----- -------- --------- -------- -------- Cash and cash equivalents at end of period $ -- $ -- $ -- $ 30,252 $(13,102) $ 17,150 ======== ====== ======== ========= ======== ======== 19 FLOWSERVE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2000 19
GUARANTOR NONGUARANTOR CONSOLIDATED PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL -------- ------------ ------------ ------------ ------------ CASH FLOWS - OPERATING ACTIVITIES: Net earnings $ 24,499 $ 7,193 $ 12,988 $(20,181) $ 24,499 Adjustments to reconcile net earnings to cash provided (used) by operating activities: Depreciation 3,193 8,669 4,612 -- 16,474 Amortization 220 2,536 1,146 -- 3,902 Net (gain) loss on sale of fixed assets -- 4 (152) -- (148) Change in operating assets and liabilities, net of effects of acquisitions and dispositions: Accounts receivable (6,102) 2,656 (4,327) -- (7,773) Inventories 3,891 (22,846) (696) -- (19,651) Intercompany receivable and payable 6,956 (30,011) 48,655 (25,600) -- Prepaid expenses (12,594) 22,974 3,839 (5,028) 9,191 Other assets 5,309 133 (12,377) -- (6,935) Accounts payable (7,650) 5,084 2,790 (6,761) (6,537) Accrued liabilities 1,595 (28,844) (3,697) -- (30,946) Income taxes (3,573) 4,643 2,782 1,219 5,071 Post-retirement benefits and deferred items 12,705 (5,357) (575) -- 6,773 Net deferred taxes -- (973) 499 -- (474) -------- --------- -------- -------- --------- Net cash (used) provided by operating activities 28,449 (34,139) 55,487 (56,351) (6,554) -------- --------- -------- -------- --------- CASH FLOWS - INVESTING ACTIVITIES: Capital expenditures (5,651) (2,976) (3,875) -- (12,502) Disposal of assets -- 68 -- -- 68 Payments for acquisitions, net of cash acquired and dispositions (21,703) -- -- -- (21,703) -------- --------- -------- -------- --------- Net cash flows used in investing activities (27,354) (2,908) (3,875) -- (34,137) -------- --------- -------- -------- --------- CASH FLOWS-FINANCING ACTIVITIES: Net repayments of short-term debt (1,589) 86 (1,576) -- (3,079) Payment on long-term debt (4,520) (88,716) (3,169) -- (96,405) Proceeds from long-term debt -- 123,009 2,125 -- 125,134 Other stock activity 239 2,370 (2,370) -- 239 Dividends Paid -- 286 (286) -- -- Other activity (13,063) (11,905) (20,813) 45,781 -- -------- --------- -------- -------- --------- Net cash flows provided (used) by financing activities (18,933) 25,130 (26,089) 45,781 25,889 Effect of exchange rate changes on cash 17,838 11,028 (30,032) -- (1,166) -------- --------- -------- -------- --------- Net change in cash and cash equivalents -- (889) (4,509) (10,570) (15,968) Cash and cash equivalents at beginning of year -- 889 29,966 (392) 30,463 -------- --------- -------- -------- --------- Cash and cash equivalents at end of period $ -- $ -- $ 25,457 $(10,962) $ 14,495 ======== ========= ======== ======== ========= 20 10. SEGMENT INFORMATION The Company has three divisions, each of which constitutes a business segment. Each division manufactures different products and is defined by the type of products and services provided. Each division has a President, who reports directly to the Chief Executive Officer, and a Division Controller. For decision-making purposes, the Chief Executive Officer and other members of upper management use financial information generated and reported at the division level. The Company also has a corporate headquarters that does not constitute a separate division or business segment. Amounts classified as All Other include Corporate Headquarters costs and other minor entities that are not considered separate segments. The results for IDP are included in the Flowserve Pump Division and a portion of its service business in Flow Solutions Division from the date of acquisition. The Company evaluates segment performance and allocates resources based on profit or loss excluding integration expense, interest expense, other income or expense and income taxes. Intersegment sales and transfers are recorded at cost plus a profit margin. Minor reclassifications have been made to certain previously reported information to conform to the current business configuration.
Flowserve Flow Flow Consolidated Three months ended June 30, 2001 Pump Solutions Control All Other Total --------- --------- -------- --------- ------------ Sales to external customers $237,107 $159,859 $ 66,097 $ 1,516 $464,579 Intersegment sales 1,528 5,581 2,430 (9,539) -- Segment operating income (before integration expense) 29,856 22,655 8,489 (8,894) 52,106 Reconciliation of the total segment operating income before integration expense to consolidated earnings before income taxes follows:
Flowserve Flow Flow Consolidated Three months ended June 30, 2000 Pump Solutions Control All Other Total --------- --------- ------- --------- ------------ Sales to external customers $80,266 $ 152,810 $64,493 $ 1,584 $ 299,153 Intersegment sales 2,046 6,742 2,940 (11,728) -- Segment operating income 6,176 18,699 8,420 (6,920) 26,375 20
Three Months Ended June 30, 2001 2000 -------- -------- Total segment operating income (before integration expense) $ 61,000 $ 33,295 Corporate expenses and other 8,894 6,920 Integration expense 16,944 -- Net interest expense 31,361 6,682 Other (income) expense (265) 428 -------- -------- Net earnings before income taxes $ 4,066 $ 19,265 ======== ======== 21
Flowserve Flow Flow Consolidated Six months ended June 30, 2001 Pump Solutions Control All Other Total ---------- ---------- ------------ --------- ------------ Sales to external customers $ 460,604 $ 311,740 $ 133,748 $ 2,522 $ 908,614 Intersegment sales 2,729 10,639 4,151 (17,519) -- Segment operating income (before integration expense) 47,972 40,706 16,874 (15,976) 89,576 Identifiable assets $1,292,897 $ 447,927 $ 204,180 $ 123,282 $2,068,286 Reconciliation of the total segment operating income before integration expense to consolidated earnings before income taxes follows:
Flowserve Flow Flow Consolidated Six months ended June 30, 2000 Pump Solutions Control All Other Total ---------- ---------- ------------ --------- ------------ Sales to external customers $ 152,854 $ 298,732 $ 129,754 $ 3,122 $ 584,462 Intersegment sales 2,891 9,700 5,448 (18,039) -- Segment operating income 10,108 35,350 16,195 (13,834) 47,819 Identifiable assets $ 238,745 $ 428,899 $ 210,143 $ 84,289 $ 962,076 21
Six Months Ended June 30, 2001 2000 --------- --------- Total segment operating income (before integration expense) $ 105,552 $ 61,653 Corporate expenses and other 15,976 13,834 Integration expense 36,083 -- Net interest expense 63,172 12,888 Other income (400) (2,473) --------- --------- Net (loss) earnings before income taxes $ (9,279) $ 37,404 ========= ========= 22 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2001 In general, results for the second quarter of 2001 were higher than the corresponding period in the previous year due to the Company's acquisition of Ingersoll-Dresser Pump Company (IDP), on August 8, 2000. This acquisition is discussed in further detail in the Liquidity and Capital Resources section of this Management Discussion and Analysis. Sales increased 55.3% to $464.6 million for the three months ended June 30, 2001, compared with $299.2 million for the same period in 2000. Pro forma sales in the second quarter of 2000, including the results of IDP, were $487.6 million. Sales for the quarter compared with last year on a pro forma basis were adversely affected by an unfavorable currency translation of approximately 3%, temporary inefficiencies resulting from the integration of IDP, the divestiture of product lines in 2000 to comply with the Department of Justice consent decree to acquire IDP and the closure or sale of several service operations. 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 similar to the second quarter of 2000 at 45%. Bookings, or incoming orders for which there are purchase commitments, were $540.8 million, 74.8% higher than the second quarter of 2000 when bookings were $309.4 million. Excluding negative currency translation, bookings increased approximately 4% compared with last year's second quarter pro forma of $533.7 million. Second quarter 2001 bookings also increased 9.0% over first quarter 2001. Bookings were relatively strong in the petroleum, power and water markets and reflect increasing project activity. Bookings activity was mixed-to-slightly weaker in chemicals. At June 30, 2001, backlog was $738.7 million, up 7.0% compared with the first quarter and up 12.0% compared to year end 2000. BUSINESS SEGMENTS Flowserve manages its operations through three business segments: Flowserve Pump Division (FPD), for engineered and industrial pumps; Flow Solutions Division (FSD) for precision mechanical seals and flow management services; and Flow Control Division (FCD) for automated and manual quarter-turn valves, control valves, nuclear valves and valve actuators. Sales and operating income before integration expense for each of the three business segments are: The sales increase in 2001 was due to the acquisition of IDP. On a pro forma basis, revenues were $254.9 million in the second quarter of 2000. The sales decrease on a pro forma basis resulted from unfavorable currency translation which reduced sales by about 4% quarter-over-quarter, temporary inefficiencies associated with the integration of IDP, and divestiture of product lines in late 2000 to comply with the Department of Justice consent decree. 22
Flowserve Pump Division ----------------------- Three Months Ended June 30, ----------------------- (In millions of dollars) 2001 2000 -------- -------- Sales $ 238.6 $ 82.3 Operating income (before integration expense) 29.9 6.2 23 Operating income before integration expense, increased 382% from prior period of $6.2 million and 299% from pro forma results of $7.5 million. Operating income as a percentage of sales increased to 12.5% in 2001 from about 7.5% in the prior-year period and 2.9% in 2000 on a pro forma basis. The increase primarily resulted from the synergy savings realized from the IDP integration activities. Sales were higher than the prior-year period primarily due to the inclusion of a portion of IDP's service repair business in 2001. Pro forma sales were $175.5 million in the second quarter of 2000. The decrease from pro forma sales was due to unfavorable currency translation and the closure or sale of several service operations. Operating income before integration expense of $22.7 million increased 21.4% compared with prior year and 5.6% compared with pro forma results. Operating income before integration expense, as a percentage of sales, increased to 13.7% from 11.7% in 2000 on an as reported basis and 12.3% on a pro forma basis. This improvement reflects the benefits of the integration of service operations and the consolidation of the North American seal business.
Flow Solutions Division ----------------------- Three Months Ended June 30, ----------------------- (In millions of dollars) 2001 2000 -------- --------- Sales $ 165.4 $ 159.6 Operating income (before integration expense) 22.7 18.7 Sales increased slightly over the prior year despite an unfavorable currency translation which reduced sales by about 3%. Operating income of $8.5 million improved slightly from the prior year. Operating income as a percentage of sales was 12.4% in the second quarter of 2001, virtually unchanged when compared with 12.5% in 2000. CONSOLIDATED RESULTS The gross profit margin was 33.5% for the three months ended June 30, 2001, compared with 34.5% for the same period in 2000. The decrease was primarily due to the acquisition of IDP as IDP's margins historically are lower than the balance of the Company. The Company's margin increased 300 basis points when compared to the second quarter 2000 pro forma margin of 30.5%. This improvement primarily resulted from manufacturing integration synergies. Selling, general and administrative expense as a percentage of net sales was 22.3% for the quarter ended June 30, 2001, compared with 25.7% in the prior-year period and 24.2% in 2000 on a pro forma basis. The decrease from the prior year percentages was generally due to IDP integration savings. Operating income before integration expense of $52.1 million increased 97.3% over reported and 70.8% over pro forma quarterly comparisons. The improvement principally reflects synergy benefits related to the acquisition and integration of IDP. Net interest expense during the second quarter of 2001 was $31.4 million, compared with $6.7 million in the same period in 2000 due to the increased borrowing levels required to acquire IDP and the amortization of deferred financing fees related to the new debt. The Company's effective tax rate for the second quarter of 2001 was 36.0% compared with 34.5% in the second quarter of 2000. The increase was due to the IDP acquisition. 23
Flow Control Division ----------------------- Three Months Ended June 30, ----------------------- (In millions of dollars) 2001 2000 --------- --------- Sales $ 68.5 $ 67.4 Operating income (before integration expense) 8.5 8.4 24 Earnings before integration expense for the second quarter of 2001 were $13.4 million or $0.35 per share compared to a loss of $0.8 million or $0.02 per share in the second quarter of 2000 on a pro forma basis. During the second quarter of 2001, integration expense of $16.9 million related to period costs associated with the integration of the IDP acquisition. Net earnings for the second quarter of 2001 were $2.6 million or $0.07 per share, compared to income of $12.6 million or $0.33 per share for the same period in 2000. RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2001 In general, results for the first-half of 2001 were higher than the corresponding period in the previous year due to the Company's acquisition of IDP, on August 8, 2000. This acquisition is discussed in further detail in the Liquidity and Capital Resources section of this Management Discussion and Analysis. Sales increased 55.4% to $908.6 million for the six months ended June 30, 2001, compared with $584.5 million for the same period in 2000. Pro forma sales in 2000, including the results of IDP, were $947.9 million. Sales for the year compared to last year on a pro forma basis were adversely affected by an unfavorable currency translation of approximately 3%, temporary inefficiencies resulting from the integration of IDP, the divestiture of product lines in 2000 to comply with the Department of Justice consent decree to acquire IDP and the closure or sale of several service operations. 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 similar to the prior year at 45%. Bookings, or incoming orders for which there are purchase commitments, were $1,037.1 million, 67.2% higher than the prior year when bookings were $620.1 million. Pro forma bookings in the prior year were $1,073.4 million. The decline in bookings from prior year pro forma reflects unfavorable currency translation impacts of approximately 3%. Year-to-date bookings were relatively strong in the petroleum, power and water markets and reflect increasing project activity. Bookings activity was mixed-to-slightly weaker in chemicals. Backlog was $738.7 million at June 30, 2001, up 12.0% compared to year end 2000. BUSINESS SEGMENTS Flowserve manages its operations through three business segments: Flowserve Pump Division (FPD), for engineered and industrial pumps; Flow Solutions Division (FSD) for precision mechanical seals and flow management services; and Flow Control Division (FCD) for automated and manual quarter-turn valves, control valves, nuclear valves and valve actuators. Sales and operating income before integration expense for each of the three business segments are: The sales increase in 2001 was due to the acquisition of IDP. On a pro forma basis, revenues were $488.3 million in 2000. The sales decrease on a pro forma basis resulted from unfavorable currency translation which reduced sales by about 3% year-over-year, temporary inefficiencies associated with the integration of IDP and divestiture of product lines in late 2000 to comply with the Department of Justice consent decree. Operating income before integration expense, increased 375% from prior period of $10.1 million and 353% from pro forma results of $10.6 million. Operating income as a percentage 24
Flowserve Pump Division ----------------------- Six Months Ended June 30, ----------------------- (In millions of dollars) 2001 2000 ------- ------- Sales $ 463.3 $ 155.7 Operating income (before integration expense) 48.0 10.1 25 of sales increased to approximately 10.4% in 2001 from about 6.5% in the prior-year period and 2.2% in 2000 on a pro forma basis. The increase primarily resulted from the synergy savings realized from the IDP integration activities. Sales were higher than the prior-year period primarily due to the inclusion of a portion of IDP's service repair business in 2001. Pro forma sales were $339.2 million in 2000. The decrease from pro forma sales was due to unfavorable currency translation, the closure or sale of several service operations and temporary integration dissynergies. Operating income before integration expense of $40.7 million was 15.0% above prior year and 1.5% above pro forma results. Operating income before integration expense, as a percentage of sales, increased to 12.6% from 11.5% in 2000 on an as reported basis and 11.8% on a pro forma basis. The improvement in the operating margin reflects the benefits of the integration of the service operations and the consolidation of the North American seal business. Partially offsetting the improvements were integration inefficiencies at the service operations and period costs related to the previously announced restructure of the seal business.
Flow Solutions Division ----------------------- Six Months Ended June 30, ----------------------- (In millions of dollars) 2001 2000 -------- -------- Sales $ 322.4 $ 308.4 Operating income (before integration expense) 40.7 35.4 Sales increased slightly over the prior year despite an unfavorable currency translation which reduced sales by about 3%. Operating income of $16.9 million increased 4.3% compared with the prior year. Operating income as a percentage of sales was 12.2% in the first-half of 2001, compared with 12.0% in 2000. The improved operating margin in 2001 was primarily due to efficiency improvements. CONSOLIDATED RESULTS The gross profit margin was 32.3% for the six months ended June 30, 2001, compared with 34.6% for the same period in 2000. The decrease was primarily due to the acquisition of IDP as IDP's margins historically are lower than the balance of the Company. The Company's margin increased 220 basis points when compared to the 2000 pro forma margin of 30.1%. This improvement primarily resulted from manufacturing integration synergies. Selling, general and administrative expense as a percentage of net sales was 22.4% for the six months ended June 30, 2001, compared with 26.4% in the prior-year period and 24.5% in 2000 on a pro forma basis. The decrease from the prior year percentages was due to IDP integration savings, productivity improvements and other cost reduction initiatives. Operating income before integration expense of $89.6 million increased 87.4% over reported and 69.1% over pro forma yearly comparisons. The improvement generally reflects synergy benefits related to the acquisition and integration of IDP. Net interest expense during the first six months of 2001 was $63.2 million, compared with $12.9 million in the same period in 2000 due to the increased borrowing levels required to acquire IDP and the amortization of deferred financing fees related to the new debt. Other income was $0.4 million in the first six months of 2001 compared with $2.5 million of income in the same period in 2000. The 2000 25
Flow Control Division --------------------- Six Months Ended June 30, --------------------- (In millions of dollars) 2001 2000 ---- ---- Sales $137.9 $135.2 Operating income (before integration expense) 16.9 16.2 26 amounts resulted primarily from the quarterly mark-to-market adjustment required at the time under the provisions of EITF No. 97-14 "Accounting for Deferred Compensation Agreements Where Amounts Earned are Held in a Rabbi Trust and Invested". Due to an amendment the Company made in the deferred compensation plans during the fourth quarter of 2000, this adjustment is no longer applicable. The Company's effective tax rate for the first six months of 2001 was 36.0% compared with 34.5% in the prior year of 2000. The increase was due to the IDP acquisition. Earnings before integration expense for the first six months of 2001 were $17.2 million or $0.45 per share compared to a loss of $4.7 million or $0.13 per share in the same period of 2000 on a pro forma basis. Integration expense of $36.1 million in 2001 related to period costs associated with the integration of the IDP acquisition. Net earnings for the first-half of 2001 were a loss of $5.9 million or $0.16 per share, compared to income of $24.5 million or $0.65 per share for the same period in 2000. RESTRUCTURING In August 2000, in conjunction with the acquisition of IDP, the Company initiated a restructuring program designed to reduce costs and to eliminate excess capacity by consolidating facilities. The Company's actions, approved and committed to in the third quarter of 2000, are expected to result in the net reduction of approximately 1,200 positions and are expected to result in at least $75 million in annual synergy savings upon estimated completion before the end of 2001. The Company expects the cost of achieving these synergies will be no more than $150 million. The program includes the closure of IDP's former headquarters, the closure or significant downsizing of a number of pump manufacturing facilities, service and repair centers, and reduction of sales and sales support personnel. The Company currently estimates that the costs associated with the restructuring portion of the program will be approximately $68 million. The Company had originally estimated these costs to be approximately $61 million. The increase from the original estimate is primarily due to updated actuarial information for post-retirement and pension expense relating to a plant closure. This increase was offset by a non-cash reclassification from the restructuring accrual to post-retirement benefits and pension liabilities which resulted in a net reduction to the accrual of $8.8 million during the fourth quarter of 2000. Approximately $44 million of the total cost relates to the IDP operations acquired and $28 million has been capitalized in goodwill as part of the purchase price of IDP ($44 million of estimated costs less deferred tax effect of $16 million), while the remaining cost of $24 million relates to the Flowserve operations and was recorded as restructuring expense in 2000. The balance of the $150 million in costs will be recorded as integration expense as incurred. During the first six months of 2001, the Company incurred $36.1 million in integration costs in conjunction with this program. As of June 30, 2001, the program had resulted in a net reduction of 1,139 employees. Expenditures charged to the 2000 restructuring reserve were: 26
Other Exit Severance Costs Total --------- -------- -------- Balance at August 16, 2000 $ 45,980 $ 14,832 $ 60,812 Cash expenditures (18,645) (2,434) (21,079) Net non-cash reduction (8,849) -- (8,849) --------- -------- -------- Balance at December 31, 2000 $ 18,486 $ 12,398 $ 30,884 Cash expenditures (5,729) (4,029) (9,758) --------- -------- -------- Balance at March 31, 2001 $ 12,757 $ 8,369 $ 21,126 Cash expenditures (3,277) (2,505) (5,782) --------- -------- -------- Balance at June 30, 2001 $ 9,480 $ 5,864 $ 15,344 ======== ======== ======== 27 In the fourth quarter of 1999, the Company initiated a restructuring program that included a one-time charge of $15.9 million recorded as restructuring expense. The restructuring charge related to the planned closure of 10 facilities and a reduction in workforce at those and other locations. The 1999 restructuring program is expected to result in a net reduction of approximately 288 employees at a cost of $12.9 million upon estimated completion during the third quarter of 2001. In addition, exit costs associated with the facilities closings were $3.0 million. As of June 30, 2001, the program has resulted in a net reduction of 261 employees. Expenditures charged to the 1999 restructuring reserve were: LIQUIDITY AND CAPITAL RESOURCES Cash flows from operating activities for the first six months of 2001 were significantly below the same period in 2000. The decrease in overall cash flows in 2001 was primarily due to the payment of accrued interest, scheduled principal payments on the term loans, payments relating to the IDP restructuring and integration programs and an increase in inventory in support of shipments for the second-half of 2001. Capital expenditures were $22.4 million during the first six months of 2001, compared with $12.5 million in the first six months of 2000. The spending was primarily related to integration activities and product development. Capital expenditures were funded by operating cash flows and external borrowings. Cash proceeds on the disposal of assets associated with the IDP integration activities were $7.4 million for the first six months of 2001. On July 5, 2001, the Company's Form S-3 Registration Statement with the SEC utilizing a shelf registration process went effective for the offering and sale of up to $500 million of common stock, preferred stock, debt securities or guarantees of debt securities. When an offering is made under the shelf, the Company expects to use the net proceeds for general corporate purposes, which may include repaying indebtedness and funding future acquisitions. The amount and timing of the sales will depend on market conditions and the availability of other funds to the Company. ACQUISITION In August 2000, the Company completed the acquisition of IDP, a leading manufacturer of pumps with a diverse mix of pump products and customers with operations in 30 countries, for $775 million in cash. As part of the purchase, the Company acquired $25 million in cash. The seller also agreed to provide for severance for certain employees and costs related to the accelerated closure of several U.S. facilities which the Company estimated at $52 million. The transaction, which was accounted for as a purchase, was financed with a combination of senior secured financing and senior subordinated notes. Upon closing of the transaction, the existing Company debt was also refinanced. FINANCING During the third quarter of 2000, in connection with the acquisition of IDP, the Company entered into a credit agreement for senior secured credit facilities which included a $275 million term loan due June 2006, a $475 million term loan due June 2008, and a 27
Other Exit Severance Costs Total --------- -------- -------- Balance at December 24, 1999 $ 12,900 $ 2,960 $ 15,860 Cash expenditures (102) -- (102) -------- -------- -------- Balance at December 31, 1999 $ 12,798 $ 2,960 $ 15,758 Cash expenditures (6,766) (1,932) (8,698) Non-cash reduction (4,364) (1,028) (5,392) -------- -------- -------- Balance at December 31, 2000 $ 1,668 $ -- $ 1,668 Cash expenditures (495) -- (495) -------- -------- -------- Balance at March 31, 2001 $ 1,173 $ -- $ 1,173 Cash expenditures (682) -- (682) -------- -------- -------- Balance at June 30, 2001 $ 491 $ -- $ 491 ======== ======== ======== 28 $300 million revolving credit facility with a final maturity of June 2006. The term loans bear floating interest rates based on LIBOR plus a credit spread, or the Prime Rate plus a credit spread, at the option of the Company. At June 30, 2001, the interest rate(s) on the term loans were 6.8125%, 6.75% and 6.50% relating to the Tranche A loan and 7.5625% and 7.25% relating to the Tranche B loan. The term loans scheduled principal payments began June 30, 2001. The scheduled payments, made by the Company in June 2001, totaled $5.9 million. The senior secured credit facilities are secured by the domestic assets of the Company and a pledge of 65% of the stock of the foreign subsidiaries. As of June 30, 2001, $71.0 million of the revolving credit was drawn and $738.8 million of the term loans were outstanding. The scheduled principal payments of the term loans outstanding at June 30, 2001 are summarized as follows: $11.9 million in 2001, $44.5 million in 2002, $59.4 million in 2003, $63.3 million in 2004, $67.3 million in 2005, $105.9 million in 2006, $257.5 million in 2007 and $129.1 million in 2008. Beginning in 2002, the Company is required to use a percentage of excess cash from operations, as defined in the credit agreement, to reduce the outstanding principal of the term loans. The revolving credit facility allows the Company to issue up to $200 million in letters of credit. As of June 30, 2001, $29.6 million of letters of credit had been issued under the facility. This, coupled with the $71.0 million in borrowings under the facility, left the Company with $199.4 million remaining in unused borrowing capacity under the revolving credit facility. The Company also issued 10 year, senior subordinated notes on August 8, 2000 in a U.S. dollar tranche and a Euro tranche, that are non-callable for 5 years. Proceeds of $285.9 million from the dollar tranche, and EUR 98.6 million from the Euro tranche equivalent to $89.2 million, were also used in completing the IDP acquisition. The notes, issued at a fixed rate of 12.25%, were originally priced at a discount to yield 12.50%, and have no scheduled principal payment prior to maturity in August 2010. At August 2005, the notes become callable at a redemption price of 106.125%. At August of each subsequent year, the notes are callable at 104.083%, 102.042% and 100.000% for 2006, 2007 and 2008 and thereafter, respectively. Interest on the notes is payable semi-annually, with the first payment having occurred in February 2001. The provisions of the credit agreement require the Company to meet or exceed specified financial covenants that are defined in the credit agreement. These covenants include a leverage ratio, an interest coverage ratio, and a fixed charge coverage ratio. Further, the provisions of the credit agreement and the senior subordinated notes require limitations or restrictions relating to new indebtedness, prepayment of subordinated debt, liens, sale and leaseback transactions, disposition of assets, payment of dividends or other distributions, and capital expenditures, among other things. As of June 30, 2001, the Company is in full compliance with these covenants. The Company believes that internally generated funds, including synergies from the IDP acquisition, will be adequate to service the debt. At June 30, 2001, total net debt was 82.3% of the Company's capital structure, compared with 78.1% at December 31, 2000. The interest coverage ratio of the Company's indebtedness was 1.4 times interest at June 30, 2001, compared with 2.0 times interest at December 31, 2000. RECENT ACCOUNTING DEVELOPMENTS In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and 28 29 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 is effective for the Company on January 1, 2002. The most significant changes made by SFAS No. 142 require that goodwill and indefinite lived intangible assets no longer be amortized and be tested for impairment at least on an annual basis. Additionally, the amortization period of intangible assets with finite lives will no longer be limited to forty years. The Company is currently assessing the impact of SFAS 141 and 142 and has not yet determined the effects these statements will have on its consolidated financial position or results of operations. 29 30 - -------------------------------------------------------------------------------- FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY This Report on Form 10-Q and other written reports and oral statements made from time to time by the Company contain various forward-looking statements and include assumptions about Flowserve's future market conditions, operations and results. These statements are based on current expectations and are subject to significant risks and uncertainties. They are made pursuant to safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Among the many factors that could cause actual results to differ materially from the forward-looking statements are: further changes in the already competitive environment for the Company's products or competitors' responses to Flowserve's strategies; the Company's ability to integrate past and future acquisitions into its management and operations; political risks or trade embargoes affecting important country markets; the health of the petroleum, chemical and power industries; economic turmoil in areas outside the United States; changes in the rate of economic growth within the United States; unanticipated difficulties or costs associated with the implementation of systems, including software; currency fluctuations among the U.S. dollar and other currencies; 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 Company's ability to meet the financial covenants and other requirements of its financing agreements. The Company undertakes no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise. - -------------------------------------------------------------------------------- 30 31 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 affected by changes in short-term interest rates as a result of borrowings under its senior secured credit facilities which bear interest based on floating rates. At June 30, 2001, after the effect of interest rate swaps held by the Company, the Company had approximately $659.8 million of variable-rate debt obligations outstanding with a weighted average interest rate of 7.145%. A hypothetical increase of 100-basis points in the interest rate for these borrowings, assuming debt levels at June 30, 2001, would change interest expense by approximately $3.3 million for the six months ended June 30, 2001. The Company employs a foreign currency hedging strategy to minimize potential losses in earnings or cash flows from unfavorable foreign currency exchange rate movements. Foreign currency exposures arise from transactions, including firm commitments and anticipated transactions, denominated in a currency other than an entity's functional currency and from foreign-denominated revenues and profits translated back into U.S. dollars. Based on the sensitivity analysis at June 30, 2001, a 10% adverse change in the foreign currency exchange rates would impact the Company's year-to-date results of operation by $1.1 million. The primary currencies to which the Company has exposure are the Euro currencies, the British pound, the Brazilian real, the Canadian dollar, the Mexican peso, the Japanese yen, the Singapore dollar, and the Australian dollar. The Company adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and corresponding amendments on January 1, 2001. In accordance with the transition provisions of SFAS 133, the Company recorded a cumulative-effect adjustment in other comprehensive income as of January 1, 2001 of $0.8 million, net of deferred tax of $0.5 million representing the current fair-value of hedging instruments. Of this gross 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. The Company reclassified the transition adjustment relating to foreign currency forward contracts to earnings during the first quarter of 2001 as those contracts settled. At June 30, 2001, the fair-value of the hedging instruments is a liability of $6.3 million. Hedging related transactions recorded to other comprehensive income during 2001 were: The Company expects that within the next twelve months it will reclassify as expense $1.5 million, net of deferred tax, of this amount recorded in accumulated other 31
Other Comprehensive (Income) Loss ------------- Record fair market value of hedges, as of< January 1, 2001, net of deferred taxes of $472 $ (840) Reclassify to earnings amount necessary to offset foreign currency gains for six months ended June 30, 2001, net of deferred taxes of $400 (603) Record change in fair market value of swap agreements as of June 30, 2001, net of deferred taxes of $545 928 Record change in fair market value of foreign currency forward contracts as of June 30, 2001, net of deferred taxes of $2,254 3,882 ------- BALANCE AS OF JUNE 30, 2001 $ 3,367 ======= 32 comprehensive income for contracts that will settle during the period. The Company is party to forward contracts for purposes of hedging certain transactions denominated in foreign currencies. The Company has a risk-management and derivatives policy statement outlining the conditions in which the Company can enter into hedging or forward transactions. As of June 30, 2001, the Company has approximately $75 million of notional amount in outstanding contracts with third parties. The maximum length of the contracts currently in place as of June 30, 2001 is approximately 19 months. The Company is exposed to credit-related losses in the event of nonperformance by counterparties to financial instruments, but it expects all counterparties to meet their obligations given their high credit ratings. The Company, as part of its risk management program, is party to interest rate swap agreements for the purpose of hedging its exposure to floating interest rates on certain portions of its debt. As of June 30, 2001, the Company had $150 million of notional amount in outstanding interest rate swaps with third parties. The maximum length of the interest rate swaps currently in place as of June 30, 2001 is approximately 5 1/2 years. All derivatives are recognized on the balance sheet at their fair-value. On the date that the Company enters into a derivative contract, it designates the derivative as (1) a hedge of (a) a forecasted transaction or (b) the variability of cash flows that are to be received or paid in connection with a recognized asset or liability (a "cash flow" hedge); or (2) a foreign-currency fair-value or cash flow hedge (a "foreign currency" hedge). Changes in the fair-value of a derivative that is highly effective as - and that is designated and qualifies as - - a cash flow hedge, to the extent that the hedge is effective, are recorded in other comprehensive income, until earnings are affected by the variability of cash flows of the hedged transaction. Any hedge ineffectiveness (which represents the amount by which the changes in the fair-value of the derivative exceed the variability in the cash flows of the forecasted transaction) is recorded in current-period earnings. Changes in the fair-value of a derivative that is highly effective as - and that is designated and qualifies as - a foreign-currency hedge is recorded in other comprehensive income, since it satisfies the criteria for a cash-flow hedge. As of June 30, 2001, all hedges outstanding were highly effective. The Company formally documents all relationships between hedging instruments and hedge items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as fair-value, cash flow, or foreign-currency hedges to (1) specific assets and liabilities on the balance sheet or (2) specific firm commitments or forecasted transactions. The Company also formally assesses (both at the hedge's inception and on an ongoing basis) whether the derivatives that are used in hedging transactions have been highly effective in offsetting changes in the fair value or cash flows of hedged items and whether those derivatives may be expected to remain highly effective in future periods. When it is determined that a derivative is not (or has ceased to be) highly effective as a hedge, the Company discontinues hedge accounting prospectively, as discussed below. 32 33 The Company discontinues hedge accounting prospectively when (1) it determines that the derivative is no longer effective in offsetting changes in the fair-value or cash flows of a hedge item (including hedged items such as firm commitments or forecasted transactions); (2) the derivative expires or is sold, terminated, or exercised; (3) it is no longer probable that the forecasted transaction will occur; or (4) management determines that designating the derivative as a hedging instrument is no longer appropriate. When the Company discontinues hedge accounting because it is no longer probable that the forecasted transaction will occur in the originally expected period, the gain or loss on the derivative remaining in accumulated other comprehensive income is reclassified into earnings. In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the Company will carry the derivative at its fair-value on the balance sheet, recognizing changes in the fair-value in current-period earnings. PART II OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (c) During the second quarter of 2001, the Company issued 9,700 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 outside directors and three key 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 19, 2001. (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: The other directors, whose terms continue after the Annual Meeting, were C. Scott Greer, Diane C. Harris, Michael F. Johnston, Charles M. Rampacek, James O. Rollans and Kevin E. Sheehan. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 Amendment No. 4 to Flowserve Corporation 1998 Restricted Stock Plan. (b) Reports on Form 8-K A. Current report on Form 8-K, dated May 31, 2001, filed pursuant to Item 5 (Other Events) to furnish pro forma financial information pursuant to Item 7(b) for the acquisition of Ingersoll-Dresser Pump Company. 33
Votes Votes For Withheld ---------- -------- Hugh K. Coble 34,998,706 398,913 George T. Haymaker, Jr. 35,000,624 396,995 William C. Rusnack 35,011,262 386,358 34 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 14, 2001 ----------------------- 34 35 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- ------------ 10.1 Amendment No. 4 to Flowserve Corporation 1998 Restricted Stock Plan.
1 EXHIBIT 10.1 AMENDMENT NO. 4 TO FLOWSERVE CORPORATION 1998 RESTRICTED STOCK PLAN Effective January 1, 2001, Paragraph (b) of Section 1 Forms of Deferral is hereby amended to read in its entirety: (b) An Eligible Participant may defer the receipt of Restricted Shares issuable pursuant to the Plan by filing an appropriate notice with the Secretary of the Company. An election to defer Shares shall be effective upon such acceptance and shall apply only to Shares which either (i) have not yet been granted or awarded or (ii) which vest thereafter, provided, in the case of this clause (ii), such election is made and accepted in conformance with applicable IRS requirements, in the opinion of the Company's tax advisors. This election to defer to Restricted Shares (which shall be called "Deferred Shares" hereafter upon such election) shall remain in effect until terminated or changed as provided in this Plan. The remainder of the Plan shall remain unchanged and in full force and effect. FLOWSERVE CORPORATION By: /s/ Ronald F. Shuff ----------------------------- Ronald F. Shuff Vice President, Secretary and General Counsel