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                                    FORM 10-Q

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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                   QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

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       For Quarter Ended September 30, 1999March 31, 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 SEPTEMBER 30, 1999                                  37,323,714MARCH 31, 2000                                      37,422,629



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                              FLOWSERVE CORPORATION
                                      INDEX

Page No. ---- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Statements of Income - Three Months Ended September 30,March 31, 2000 and 1999 and 1998 (unaudited) 3 Consolidated Statements of Comprehensive Income - Three Months Ended September 30,March 31, 2000 and 1999 and 1998 (unaudited) 3 Consolidated Statements of Income - Nine Months Ended September 30, 1999 and 1998 (unaudited) 4 Consolidated Statements of Comprehensive Income - Nine Months Ended September 30, 1999 and 1998 (unaudited) 4 Consolidated Balance Sheets - September 30, 1999March 31, 2000 (unaudited) and December 31, 1998 51999 4 Consolidated Statements of Cash Flows - NineThree Months Ended September 30,March 31, 2000 and 1999 and 1998 (unaudited) 65 Notes to Consolidated Financial Statements 76 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISKS 1816 PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 1816 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 1816 SIGNATURE 1917 INDEX TO EXHIBITS 2018
2 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 September 30, --------------------------------March 31, ------------------------------ 2000 1999 1998 ------------ ------------ Sales $ 253,973285,309 $ 264,776269,387 Cost of sales 165,658 165,196186,080 172,597 ------------ ------------ Gross profit 88,315 99,58099,229 96,790 Selling and administrative expense 69,689 63,07771,628 67,110 Research, engineering and development expense 5,905 6,4316,155 6,872 Merger integration expense 2,984 4,154-- 3,432 ------------ ------------ Operating income 9,737 25,91821,446 19,376 Interest expense 3,940 3,1416,523 3,083 Other income,(income) expense, net (1,564) (173)(3,217) 523 ------------ ------------ Earnings before income taxes 7,361 22,95018,140 15,770 Provision for income taxes 2,503 8,033 ------------ ------------ Earnings before cumulative effect of accounting change 4,858 14,917 Cumulative effect of accounting change -- (1,220)6,258 5,362 ------------ ------------ Net earnings $ 4,85811,882 $ 16,13710,408 ============ ============ Earnings per share (diluted and basic): Before cumulative effect of accounting change $ 0.13 $ 0.37 Cumulative effect of accounting change -- 0.03 ------------ ------------ Net earnings per share (basic and diluted) $ 0.130.31 $ 0.400.28 ============ ============ AverageWeighted average shares outstanding 37,739 40,49737,810 37,591 ============ ============
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Amounts in thousands)
Three Months Ended September 30, ----------------------------------March 31, ----------------------------- 2000 1999 1998 ------------ ------------ Net earnings $ 4,85811,882 $ 16,13710,408 Foreign currency translation adjustments 4,737 4,3419,253 779 ------------ ------------ Comprehensive income $ 1212,629 $ 11,7969,629 ============ ============
See accompanying notes to consolidated financial statements. 3 4 FLOWSERVE CORPORATION (UNAUDITED) CONSOLIDATED STATEMENTS OF INCOME (Amounts in thousands, except per share data)
Nine Months Ended September 30, -------------------------------- 1999 1998 ------------ ------------ Sales $ 798,556 $ 803,821 Cost of sales 519,561 497,051 ------------ ------------ Gross profit 278,995 306,770 Selling and administrative expense 203,002 194,623 Research, engineering and development expense 19,103 18,870 Merger integration expense 10,821 23,705 ------------ ------------ Operating income 46,069 69,572 Interest expense 11,143 9,844 Other income, net (1,036) (2,545) ------------ ------------ Earnings before income taxes 35,962 62,273 Provision for income taxes 12,227 21,796 ------------ ------------ Earnings before cumulative effect of accounting change 23,735 40,477 Cumulative effect of accounting change -- (1,220) ------------ ------------ Net earnings $ 23,735 $ 41,697 ============ ============ Earnings per share (diluted and basic): Before cumulative effect of accounting change $ 0.63 $ 1.00 Cumulative effect of accounting change -- 0.03 ------------ ------------ Net earnings per share $ 0.63 $ 1.03 ============ ============ Average shares outstanding 37,844 40,497
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Amounts in thousands)
Nine Months Ended September 30, ------------------------------- 1999 1998 ------------ ------------ Net earnings $ 23,735 $ 41,697 Foreign currency translation adjustments 8,615 10,234 ------------ ------------ Comprehensive income $ 15,120 $ 31,463 ============ ============
See accompanying notes to consolidated financial statements. 4 5 FLOWSERVE CORPORATION CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except per share data)
SEPTEMBER 30,MARCH 31, December 31, 2000 1999 1998 ------------ ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents $ 17,91723,935 $ 24,92830,463 Accounts receivable, net 231,588 234,191233,364 213,625 Inventories 183,497 199,286208,475 168,356 Prepaids and other current assets 25,163 28,88542,701 41,344 ------------ ------------ Total current assets 458,165 487,290508,475 453,788 Property, plant and equipment, net 214,679 209,032223,450 209,976 Intangible assets, net 97,747 91,384149,719 96,435 Other assets 61,228 82,49183,369 77,952 ------------ ------------ Total assets $ 831,819965,013 $ 870,197838,151 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 73,87378,965 $ 76,74572,103 Notes payable 950 3,4881,459 734 Income taxes 6,137 17,472977 7,878 Accrued liabilities 95,877 107,028107,820 111,820 Long-term debt due within one year 2,588 14,3931,488 3,125 ------------ ------------ Total current liabilities 179,425 219,126190,709 195,660 Long-term debt due after one year 212,758 186,292322,266 198,010 Postretirement benefits and deferred items 101,216 120,015140,946 136,207 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 70,700 70,69867,916 67,963 Retained earnings 361,109 353,249356,136 344,254 ------------ ------------ 483,665 475,803475,908 464,073 Treasury stock at cost - 4,1614,062 and 3,8174,071 shares (95,995) (90,404)(93,212) (93,448) Accumulated other comprehensive expense (49,250) (40,635)(71,604) (62,351) ------------ ------------ Total shareholders' equity 338,420 344,764311,092 308,274 ------------ ------------ Total liabilities and shareholders' equity $ 831,819965,013 $ 870,197838,151 ============ ============
See accompanying notes to consolidated financial statements.4 5 6 FLOWSERVE CORPORATION (Unaudited) CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands)
NineThree Months Ended September 30, --------------------------------March 31, ------------------------------ 2000 1999 1998 ------------ ------------ CASH FLOWS - OPERATING ACTIVITIES: Net earnings $ 23,73511,882 $ 41,69710,408 Adjustments to reconcile net earnings to net cash providedused by operating activities: Depreciation 23,482 22,5838,041 9,551 Amortization 3,427 3.5982,574 806 Loss on the sale of fixed assets 170 13 Cumulative effect of accounting change -- (1,220)1 539 Change in operating assets and liabilities, net of effects of acquisitions: Accounts receivable 5,485 5,1857,955 (9,095) Inventories 20,206 (20,957)(15,861) 3,808 Prepaid expenses 3,088 1,1121,572 (113) Other assets 10,335 (2,551)(2,916) (2,995) Accounts payable (5,814) (1,623)(2,535) (5,570) Accrued liabilities (17,183) (22,476)(21,568) (5,539) Income taxes (10,092) 564(2,988) (1,748) Postretirement benefits and deferred items (19,909) (11,166)(1,568) (247) Net deferred taxes 3,331 6121,235 (1,543) ------------ ------------ Net cash flows providedused by operating activities 40,261 15,371(14,176) (1,738) CASH FLOWS - INVESTING ACTIVITIES: Capital expenditures, net of disposals (28,402) (23,747)(4,394) (11,504) Payment for acquisitions, net of cash acquired (6,365) (12,190)(22,172) -- ------------ ------------ Net cash flows used by investing activities (34,767) (35,937)(26,566) (11,504) CASH FLOWS - FINANCING ACTIVITIES: Net (repayments) borrowingsrepayments under lines of credit (10,684) 1,564(831) (317) Payments on long-term debt (11,404) (10,543)(1,062) (6,310) Proceeds from long-term debt 32,467 67,557including revolving credit facility 36,798 15,547 Treasury share purchases (5,249) (56,486)-- (3,333) Other stock activity (1,232) (1,787)168 238 Dividends paid (15,877) (16,926)-- (5,290) ------------ ------------ Net cash flows usedprovided by financing activities (11,979) (16,621)35,073 535 Effect of exchange rate changes (526) (606)(859) (881) ------------ ------------ Net change in cash and cash equivalents (7,011) (37,793)(6,528) (13,588) Cash and cash equivalents at beginning of year 30,463 24,928 58,602 ------------ ------------ Cash and cash equivalents at end of period $ 17,91723,935 $ 20,80911,340 ============ ============ Taxes paid $ 23,5639,453 $ 22,2326,772 Interest paid $ 10,9855,751 $ 7,5012,615
See accompanying notes to consolidated financial statements.5 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 September 30, 1999,March 31, 2000, and the related consolidated statements of income, and comprehensive income and cash flows for the three months ended March 31, 2000 and nine months ended September 30, 1999, and 1998, and the statements of cash flows for the nine months ended September 30, 1999 and 1998, 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 19981999 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:
SEPTEMBERMARCH 30, December 31, 2000 1999 1998 ------------ ------------ Raw materials $ 30,76132,050 $ 26,08829,674 Work in process and finished goods 200,343 226,843227,047 182,493 Less: Progress billings (8,402) (15,024)(12,464) (5,746) ------------ ------------ 222,702 237,907246,633 206,421 LIFO reserve (39,205) (38,621)(38,158) (38,065) ------------ ------------ Net inventory $ 183,497208,475 $ 199,286168,356 ============ ============ Percent of inventory accounted for by LIFO 62% 61% 64% Percent of inventory accounted for by FIFO 38% 39% 36%
3. EARNINGS PER SHARE Earnings per share is presented in accordance with SFAS No. 128, "Earnings Per Share." The Company's potentially dilutive common stock equivalents have been immaterial for all periods presented. Accordingly, basic earnings per share is equal to diluted earnings per share and is presented on the same line for income statement presentation. 4. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In 1998,1999, the Financial Accounting Standards Board issued Statement of Position (SOP) No. 98-1, "Accounting for the Costs of Software Developed or Obtained for Internal Use." SOP 98-1 is effective for fiscal periods beginning after December 15, 1998, and establishes guidelines to determine whether software-related costs should be capitalized or expensed. The Company is currently accounting for software costs in accordance with these guidelines. 7 8 In 1998, the Financial Accounting Standards Board also issuedone Statement of Financial Accounting Standard (SFAS) that was applicable to the Company - SFAS No. 137, "Deferral of the Effective Date of SFAS No. 133, "AccountingAccounting for Derivative Instruments and Hedging Activities." This standard was to beSFAS No. 133 is now effective for fiscal years beginning after June 15, 1999; however, the SFAS has recently issued an exposure draft that would delay the effective date by one year. It establishes accounting and reporting standards for derivative instruments and hedging activities and6 7 2000. This standard is not expected to materially impact Flowserve's reported financial position, results of operations or cash flows. 5. MERGER On July 22, 1997, shareholders of Durco International Inc. (Durco) and BW/IP, Inc. (BW/IP) voted to approve a merger of the companies in a stock-for-stock merger of equals that was accounted for as a pooling of interests transaction (the merger). As part of the merger agreement, the Company changed its name from Durco to Flowserve Corporation. The Company issued approximately 16,914,000 shares of common stock in connection with the merger. BW/IP shareholders received 0.6968 shares of the Company's common stock for each previously owned share of BW/IP stock. In 1997, the Company developed a merger integration program that included facility rationalizations in North America and Europe, organizational realignments at the corporate and divisional levels, procurement initiatives, investments in training and support for service operations.RESTRUCTURING In the fourth quarter of 1997,1999, the Company recognizedinitiated a restructuring program that included a one-time restructuring charge of $32,600 related to this program. During the first six months of 1999, remaining severance costs of $2,700 were paid and charged against the$15,860 recorded as restructuring reserve.expense. The Company paid severance to approximately 331 employees. As of June 30, 1999, the restructuring portion of the merger integration had been completed. Since the inception of the merger integration program, the Company has incurred costscharge 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 $56,130. Of this amount, $2,984approximately 300 employees at a cost of $12,900. In addition, exit costs associated with the facilities closings are estimated at $2,960. As of March 31, 2000, the program had resulted in a net reduction of 111 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 ============ ============ ============
6. 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 incurred duringaccounted for under the third quarterpurchase method of 1999, compared with $4,154 duringaccounting and was financed by utilizing funds from the third quarterCompany's working capital. The results of 1998. Effectiveoperations 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 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 preliminary estimated fair value of net identifiable assets acquired exceeded the purchase price by $4.3 million which resulted in net additional goodwill of $48.6 million at the time of the purchase. The final allocation of the purchase price will be determined in a reasonable time and will be based on a complete evaluation of assets acquired and the liabilities assumed. Accordingly, the information presented herein may differ from the final purchase price allocation. The following unaudited pro forma information presents the consolidated results of operations as if the acquisition occurred on 7 8 January 1, 1999, merger integration costs relate solelyafter 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 Company's business process improvement program, "Flowserver." The Company's Board of Directors approved a $120 million investment in Flowserver. This business process improvement program has costsacquisition, (January 1, 2000 to January 12, 2000), are not material. PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 1999 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Historical ----------------------------- Innovative Pro Forma Flowserve Valve Pro Forma Combined Corp. Technologies Adjustments Company ------------ ------------ ------------ ------------ Net Sales $ 269,387 $ 43,931 $ -- $ 313,318 Cost of Sales 172,597 30,803 -- 203,400 ------------ ------------ ------------ ------------ Gross Profit 96,790 13,128 -- 109,918 Selling and administrative expense 67,110 11,005 (14)(a) 78,101 Research, engineering and development expense 6,872 -- -- 6,872 Merger integration expense 3,432 -- -- 3,432 ------------ ------------ ------------ ------------ Operating Income 19,376 2,123 14 21,513 Interest expense 3,083 1,932 (1,732)(b) 3,283 Other expense (income), net 523 (38) -- 485 ------------ ------------ ------------ ------------ Earnings before income taxes 15,770 229 1,746 17,745 Provision for income taxes 5,362 271 489(c) 6,122 ------------ ------------ ------------ ------------ Net income (loss) $ 10,408 $ (42) $ 1,257 $ 11,623 ============ ============ ============ ============ Earnings per share (basic and diluted) $ 0.28 $ -- $ -- $ 0.31 Weighted average shares outstanding (basic and diluted) 37,591 9,665 -- 37,591
Pro Forma Adjustments Selling and benefits incremental to the initial merger integration program. Flowserver includes the standardization of the Company's processes and the implementation of a global information system to facilitate common best practices. The Company is in the process of re-evaluating its implementation plan for Flowserver. As a result, the Company expects to reduce its Year 2000 investment in Flowserver. The overall duration of the program also may extend beyond its originally planned five years. During the first nine months of 1999, the Company incurred costs associated with this project of $10,821 recorded as merger integration expense. During 1999, it is estimated that the expense associated with this program will be approximately $13 million. In addition, about $10 million of related capital is expected to be incurred in 1999. Since the inception of the Flowserver initiative, the Company has capitalized costs totaling $7,682 relating to this program. 6.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. (14) Interest expense: (b) Represents reduction in consolidated interest expense related to debt financing prior to the acquisition date (1,732) Provision for income taxes: (c) Represents income tax adjust required to arrive at a combined company pro forma effective tax rate of 34.5% 489
8 9 7. 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 Office of the Chief 8 9 Executive Officer, and a Division Controller. For decision-making purposes, the Chief Executive Officer, Chief Operating 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 HeadquarterHeadquarters costs and other minor entities that are not considered separate segments. The Company evaluates segment performance and allocates resources based on operatingprofit or loss excluding merger integration, interest expense, other income or loss before special itemsexpense 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 FLOW CONSOLIDATED NINETHREE MONTHS ENDED SEPTEMBER 30, 1999MARCH 31, 2000 EQUIPMENT CONTROL SOLUTIONS ALL OTHER TOTAL - ---------------------------------------------- -------------- -------------- -------------- ------------- ------------------------------------------------ ---------- ------------ ---------- ---------- ------------ SALES TO EXTERNAL CUSTOMERS $267,945 $212,442 $312,910 $ 5,259 $798,55672,588 $ 65,261 $ 145,922 $ 1,538 $ 285,309 INTERSEGMENT SALES 4,497 10,207 11,361 (26,065)845 2,508 2,958 (6,311) -- SEGMENT OPERATING INCOME (BEFORE 16,484 20,671 42,032 (22,297) 56,890 SPECIAL ITEMS)3,932 7,775 16,651 (6,912) 21,446 IDENTIFIABLE ASSETS $243,723 $211,894 $297,213 $ 78,989 $831,819223,655 $ 210,303 $ 434,173 $ 96,882 $ 965,013
Rotating Flow Flow Consolidated Nine months ended September 30, 1998Three Months Ended March 31, 1999 Equipment Control Solutions All Other Total - ---------------------------------------------- -------------- -------------- -------------- ------------- ------------------------------------------------ ---------- ------------ ---------- ---------- ------------ Sales to external customers $271,890 $219,318 $307,258 $ 5,355 $803,82190,099 $ 71,471 $ 105,741 $ 2,076 $ 269,387 Intersegment sales 4,853 10,651 12,195 (27,699)1,442 4,102 2,956 (8,500) -- Segment operating income (before 27,059 31,866 47,775 (13,423) 93,277 special items) 6,587 7,938 14,823 (6,540) 22,808 Identifiable assets $301,821 $233,703 $259,022 $ 67,682 $862,228258,046 $ 222,855 $ 286,040 $ 96,856 $ 863,797
Reconciliation of the total segment operating income before special items (merger-related expenses) to consolidated earnings before income taxes follows:
NineThree Months Ended September 30, --------------------------------March 31, 2000 1999 1998 ------------ ------------ Total segment operating income (before special items and corporate expenses)items) $ 79,18728,358 $ 106,70029,348 Corporate expenses and other 22,297 13,4236,912 6,540 Merger integration expense 10,821 23,705-- 3,432 Interest expense 11,143 9,8446,523 3,083 Other (income) expense (income) (1,036) (2,545)(3,217) 523 ------------ ------------ Earnings before income taxes $ 35,96218,140 $ 62,27315,770 ============ ============
9 10 7. SHARE REPURCHASE PROGRAM During the second quarter of 1998,8. SUBSEQUENT EVENT On February 10, 2000, the Company initiatedannounced that it had signed a $100 million share repurchase program. In 1998, the Company spent approximately $64.5 million to repurchase approximately 2.8 million, or 7.1% of its outstanding shares. During the nine months ended September 30, 1999, the Company spent about $5.3 million to repurchase an additional 325,300 shares. During the third quarter, 118,600 of the shares were repurchased at a price of $1.9 million. The Company generally used credit facilities to fund the purchases. 8. ACQUISITION During September 1999, the Company agreeddefinitive agreement to acquire certain assetsIngersoll-Dresser Pumps (IDP) for $775 million in cash. The transaction, which will be accounted for as a purchase, will be financed with a combination of bank financing and liabilitiessenior subordinated notes. Upon closing the transaction, the existing Flowserve debt must be repaid. Flowserve has received $1,425 million of Honeywell's industrial control-valve product linecommitted financing to pay for the acquisition and production equipment located near Frankfurt, Germany.pay off existing debt as well as provide for $300 million revolving credit facility in connection with the acquisition. The Company expects to complete the phased move of this operation to its existing control-valve manufacturing facilities in Europetransaction is contingent on regulatory approvals and management believes it will close by the middleend of June 2000. This business generated revenues of about $10 million in 1998. ---------------------------------------------------- 10 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1999MARCH 31,2000 In general, results for the thirdfirst quarter of 19992000 were lowerhigher than the corresponding period in the previous year due to weaker market conditionsthe 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 a resultant increasingly competitive environment.Capital Resources section of this Management Discussion and Analysis. Sales decreased 4.1%increased 5.9% to $254.0$285.3 million for the three months ended September 30, 1999,March 31, 2000, compared with $264.8$269.4 million for the same period in 1998.1999. Sales for the quarter would have been $244.8 million without the acquisition of Invatec, 9.1% below the first 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 51%45% during the thirdfirst quarter of 1999,2000, compared with 50%52% during the thirdfirst quarter of 1998.1999. The lower 2000 percentage is due to Invatec's markets being principally U.S. Bookings (incoming orders for which there are purchase commitments) were $259.0$310.7 million, 2.1%23.0% higher than the thirdfirst quarter of 19981999 when bookings were $253.8$252.6 million. Excluding Invatec, bookings also showed year-on-year improvement of 5.9%. BUSINESS SEGMENTS Flowserve manages its operations through three business segments: Rotating Equipment Division (RED) for petroleum, nuclear and chemical process centrifugalengineered 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. Each business segment has been negatively impacted, to a greater or lesser degree, by unfavorable market conditions for the Company's chemical and petroleum customers. The unfavorable market conditions have resulted in a highly competitive environment in which flow control companies' customers pursue a more limited amount of spending. This has lowered selling prices that have reduced margins. Margins are also lower year-over-year due to an unfavorable product mix and reduced volumes in certain operations. Sales and operating income before special items (merger-related expenses) for each of the three business segments are:
ROTATING EQUIPMENT DIVISION ---------------------------------------------------- Three Months Ended September 30, ---------------------------March 31, ------------------------- (In millions of dollars) 2000 1999 1998 - ------------------------------------------------------------------------------- ---------- ---------- Sales $ 82.773.4 $ 90.191.5 Operating income 4.9 8.43.9 6.6
The sales decrease in 19992000 was generally due to a reduced opening backlog and lower chemical process pump bookings.of highly engineered pumps. Unfavorable currency translation also reduced sales by about 3%. Operating income before special items, as a percentage of sales, declined to approximately 5.9%5.3% in 19992000 from about 9.3%7.2% in the prior-year period. The segment's results were negatively affected by unfavorable mix, lower volumes and reduced selling prices, all of which were only partially offset by a reduction in operating expenses. Theincome margin declined despite an improved gross margin due to an improved product mix between standard chemical-process and petroleum pumps continuesa 10% reduction of operating expenses due to be unfavorable, and partsthe lower sales were lower than the comparable prior-year period.base.
FLOW CONTROL DIVISION ---------------------------------------------------- Three Months Ended September 30, ---------------------------March 31, ------------------------- (In millions of dollars) 2000 1999 1998 - ------------------------------------------------------------------------------- ---------- ---------- Sales $ 71.067.8 $ 77.075.6 Operating income 5.6 9.27.8 7.9
The decrease in sales was due to reduced backlog at the beginning of the quarter and lower book-to-build volume during the quarter. 11 12Unfavorable currency translation also reduced sales by about 1%. Operating income before special items, as a percentage of sales, was 7.9%11.5% in the thirdfirst quarter of 1999,2000, compared with 11.9%10.5% in 1998.1999. The declineimproved operating margin in 19992000 was generally due to lower selling prices, an unfavorable product miximproved gross margins and lower volumes.11 12 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 September 30, ---------------------------March 31, ------------------------- (In millions of dollars) 2000 1999 1998 - ------------------------------------------------------------------------------- ---------- ---------- Sales $ 106.4148.9 $ 104.7108.7 Operating Income 14.116.7 14.8
Sales were slightly higher than the prior-year period generally due to acquisitions made since the third quarteracquisition of 1998.Invatec. The increase in sales was offset slightly by an unfavorable currency translation which reduced sales by about 2%. Operating income before special items, as a percentage of sales, decreased to 13.3%11.2% from 14.1%13.6% in 1998.1999. The lower margins were generally due to reduced selling prices,the acquisition of Invatec, as Invatec's gross margins are historically lower "same store" service center volumesthan the balance of FSD operations, and unfavorable mix.period integration expenses relating to the Company's 1999 restructuring program. CONSOLIDATED RESULTS The gross profit margin was 34.8% for the three months ended September 30, 1999,March 31, 2000, compared with 37.6%35.9% for the same period in 1998.1999. The decrease was due to the lower selling prices and unfavorable product and market mix, as well as reduced business in volume-sensitive operations.margins associated with Invatec. Excluding Invatec, margins are comparable to the prior year. Excluding period costs of $1.4 million related to the 1999 restructuring program, the gross margin excluding Invatec was the highest since the fourth quarter of 1998. Selling and administrative expense as a percentage of net sales was 27.4%25.1% for the three-month period ended September 30, 1999,March 31, 2000, compared with 23.8%24.9% for the corresponding 19981999 period. The slight increase was generally due to expenses related toperiod costs incurred as a result of the implementation of a consolidated benefitCompany's 1999 restructuring program and other personnel-relatedInvatec integration costs of $0.7 million and costs associated with Flowserver, the Company's global business process improvement initiative, which totaled $1.3 million in 1999.the first quarter of 2000. In addition, the comparable period in 1998 was unusually low due to lower sales commissions, lower accruals for performance incentives1999, Flowserver expenses were $3.4 million and other cost control initiatives.were identified and disclosed separately as merger integration expense. Research, engineering and development expense was $5.9$6.2 million for the thirdfirst quarter of 1999,2000, compared with $6.4$6.9 million during the same period last year. The lower level of spending was generally the result of cost control initiatives.initiatives and the reallocation of resources to assist in project engineering. Interest expense during the thirdfirst quarter of 19992000 was $3.9$6.5 million, up $0.8$3.4 million from the same period in 19981999 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 in the first quarter of 2000, primarily as a result of two factors. Income of $1.8 million was realized due to the share repurchase program. Tax savings initiatives that were partquarterly mark-to-market adjustment 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 merger integration tax planning project reduced theCompany 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 quarter of 2000 was 34.5% compared to 34.0% duringin the thirdfirst quarter of 1999, compared with 35.0% during1999. The increase was due to the same period in 1998. Earnings before special itemsacquisition of Invatec. 12 13 Net earnings for the thirdfirst quarter of 19992000 were $6.8$11.9 million or $0.18$0.31 per share. This was 58.5% below14.4% above net earnings before special items of $17.6$10.4 million, or $0.44$0.28 per share, for the same period in 1998. The reduction was generally due to a lower gross margin and higher selling and administrative expenses. Net earnings after1999. Excluding special items, were $4.9 million, or $0.13 per share, for the three months ended September 30, 1999, compared with $16.1 million, or $0.40 per share, for the same period in 1998. Special items were lower due to the completion of the initial phase of the merger integration program with current spending limited to Flowserver. RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1999 In general, resultsnet earnings for the first nine monthsquarter of 1999 were lower than$12.7 million or $0.34 per share. RESTRUCTURING In the corresponding period in the previous year due to weaker market conditions and an increasingly competitive environment. Sales decreased slightly to $798.6 million for the nine months ended September 30, 1999, 12 13 compared with $803.8 million for the same period in 1998. 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 52% during the first nine monthsfourth quarter of 1999, compared with 50% during the first nine monthsCompany initiated a restructuring program designed to streamline the Company for better value and improve asset utilization. This $26.7 million program consisted of 1998. Bookings (incoming orders for which therea 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 purchase commitments) were $763.2 million, 6.4% lower thanpart of the first nine months of 1998 when bookings were $815.5 million. BUSINESS SEGMENTS Each business segment has been negatively impacted,restructuring. The other special items related to inventory impairments, a greater or lesser degree, by unfavorable market conditions for the Company's chemicalfixed asset impairment, and petroleum customers. This has resulted in a highly competitive environment in which flow control companies' customers pursue a more limited amount of spending. This has lowered selling prices which have reduced margins. Margins are also lower year-over-year dueexecutive separation contracts and certain costs related to unfavorable product mix and reduced volumes in certain operations. Sales andfourth-quarter 1999 facility closures. The Company currently expects to realize ongoing annual operating income before special items (merger-related expenses) for eachbenefits of the three business segments are:
ROTATING EQUIPMENT DIVISION --------------------------- Nine Months Ended September 30, --------------------------- (In millions of dollars) 1999 1998 - ------------------------------------------------------- Sales $ 272.4 $ 276.7 Operating income 16.5 27.1
Salesapproximately $20 million per year effective in 1999 were slightly below the prior year period. Lower volumes2001 from this program. Approximately $10 million of chemical process pumps and parts were partially offset by reduced backlog. Operating income before special items, as a percentage of sales, declinedsavings is expected to approximately 6.1% in 1999 from about 9.8% in the prior-year period. The decline was due to reduced sales and lower margins resulting from an unfavorable product and market mix and lower selling prices.
FLOW CONTROL DIVISION ------------------------ Nine Months Ended September 30, ------------------------ (In millions of dollars) 1999 1998 --------------------------------------------------- Sales $ 222.6 $ 230.0 Operating income 20.7 31.9
The decrease in sales was due to lower bookings and sales volumes. Operating income before special items, as a percentage of sales, was 9.3% in the first nine months of 1999, compared with 13.9% in 1998. The decline in 1999 was generally due to lower volumes, reduced selling prices, an unfavorable product mix--including a decline in replacement-parts business--and a slight increasebe realized in selling and administrative expense, primarily due towhile the Valtek Engineering acquisition. FLOW SOLUTIONS DIVISION ------------------------- Nine Months Ended September 30, ------------------------- (In millionsremainder is expected in costs of dollars) 1999 1998 - -------------------------- ------------ ------------ Sales $ 324.3 $ 319.5 Operating Income 42.0 47.8 Sales increased generally due to a fourth quarter 1998 acquisition. Operating income before special items, as a percentage of sales, decreased to 13.0% from 15.0% in 1998. The lower margins were generally due an unfavorable mix, lower selling prices, and higher selling and administrative expenses related to additional personnel to support the growth of service operations. CONSOLIDATED RESULTS The gross profit margin was 34.9% for the nine months ended September 30, 1999, 13 14 compared with 38.2% for the samesales. In 2000, period in 1998. The decrease was due to lower selling prices, unfavorable product and market mix and lower volumes. Selling and administrative expense as a percentage of net sales was 25.4% for the nine-month period ended September 30, 1999, compared with 24.2% for the corresponding 1998 period. The increase in selling and administrative expenses was primarily due to 1998 acquisitions, increased expenses associated with some organizational changes and additional investments in personnel to support the growth of service operations. These factors were mitigated somewhat by cost-containment measures and merger benefits that reduced selling and administrative expense year-over-year by about $2.6 million. Research, engineering and development expense was $19.1 million for the first nine months of 1999, compared with $18.9 million during the same period last year. Interest expense during the first nine months of 1999 was $11.1 million, an increase of $1.3 million over the prior-year period, primarily the result of higher interest rates and increased borrowing levels due to the share repurchase program. Tax savings initiatives that were part of the merger integration tax planning project reduced the effective tax rate to 34.0% during the first nine months of 1999, compared with 35.0% during the same period in 1998. Earnings before special items for the first nine months of 1999 were $30.9 million, or $0.82 per share. This was 44.8% below earnings before special items of $55.9 million, or $1.38 per share, for the same period in 1998. The reduction was generally due to the lower gross margin. Net earnings after special items were $23.7 million, or $0.63 per share, for the nine months ended September 30, 1999, compared with $41.7 million, or $1.03 per share, for the same period in 1998. Special items were lower due to the completion of the initial phase of the merger integration program with current spending limited to Flowserver. MERGER INTEGRATION PROGRAM In 1997, the Company developed a program designed to achieve the synergies planned for the merger of BW/IP and Durco. The program included facility rationalizations in North America and Europe, organizational realignments at the corporate and divisional levels, procurement initiatives, investments in training and support for service operations. In the fourth quarter of 1997, the Company recognized a one-time restructuring charge of $32,600 related to this program. As of June 30, 1999, the restructuring portion of the merger integration had been completed. Since the inception of the program, the Company has incurred costs related to the program of $56,130. Of this amount, $2,984 was incurred during the third quarter of 1999, compared with $4,154 during the third quarter of 1998. Effective January 1, 1999, merger integration costs relate solely to the Company's business process improvement program "Flowserver." The Company's Board of Directors approved a $120 million investment in Flowserver. This business process improvement program has costs and benefits incremental to the initial merger integration program. Flowserver includes the standardization of the Company's processes and the implementation of a global information system to facilitate common best practices. The Company is in the process of re-evaluating its implementation plan for Flowserver. As a result, the Company expects to reduce its Year 2000 investment in Flowserver. The overall duration 14 15 of the program also may extend beyond its originallyare expected to offset a majority of the potential benefit. Current estimates are that planned five years. During 1999, it is estimated that expensesavings of approximately $10 million will be offset by period integration costs. Additionally, in 2000, a majority of the costs associated with thisthe restructuring program will be incurred and charged against the restructuring reserve. The restructuring program is expected to result in a net reduction of approximately $13 million.300 employees. As of March 31, 2000, the program had resulted in a net reduction of 111 employees. Expenditures charged to the restructuring reserve as of March 31, 2000 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 ============ ============ ============
LIQUIDITY AND CAPITAL RESOURCES Cash flows from operating activities for the first ninethree months of 1999 of $40.3 million2000 were significantly above the $15.4 million duringbelow the same period in 1998.1999. The increasedecrease in cash flows in 19992000 was primarily due to a lower level of incentive payoutspayments relating to the restructuring program and reduced merger related payments.Invatec acquisition. Capital expenditures, net of disposals, were $28.4$4.4 million during the first ninethree months of 1999,2000, compared with $23.7$11.5 million in the first ninethree months of 1998.1999. The reduction reflects a concerted effort by the Company to reduce capital spending. Capital expenditures were funded primarily by operating cash flows. Capital expenditures in 1999 included about $6.1 million related to Flowserver. During the second quarter of 1998,On January 13, 2000, the Company initiatedacquired Invatec, a $100company which is principally engaged in providing comprehensive maintenance, repair, replacement and value-added distribution 13 14 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 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 share repurchase program. In 1998,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. The preliminary estimated fair value of net identifiable assets acquired exceeded the purchase price by $4.3 million, which resulted in net additional goodwill of $48.6 million at the time of the purchase. The final allocation of the purchase price will be determined in a reasonable time and will be based on a complete evaluation of assets acquired and the liabilities assumed. Accordingly, the information presented herein may differ from the final purchase price allocation. On February 10, 2000, the Company spent approximately $64.5announced it had reached a definitive agreement to acquire Ingersoll-Dresser Pumps (IDP) from Ingersoll-Rand for $775 million in cash. The acquisition is expected to repurchase approximately 2.8 million, or 7.1%close by the end of its outstanding shares. The Company generally used credit facilities to fundJune 2000. In connection with the purchases. The timing of future repurchases depends on market conditions, the market price of Flowserve's common stock and management's assessmentacquisition, all of the Company's liquidityexisting debt is expected to be refinanced. The Company has signed a commitment letter from Credit Suisse/First Boston and Bank of America for $1,425 million of financing to acquire IDP. The Company also announced it was suspending the payment of its cash flow needs. Duringdividend, which is required by the first nine months of 1999,proposed financing. The Company believes that internally generated funds, including synergies from the Company spent about $5.3 millionIDP acquisition, will be adequate to repurchase an additional 325,300 shares. Duringservice the third quarter, 118,600 of the shares were repurchased at a price of $1.9 million.debt. At September 30, 1999,March 31, 2000, total debt was 39.0%51.1% of the Company's capital structure, compared with 37.2%39.6% at December 31, 1998.1999. The interest coverage ratio of the Company's indebtedness was 6.65.4 times interest at September 30, 1999,March 31, 2000, compared with 9.54.3 times interest at December 31, 1998. Effective October 7, 1999, the Company entered into new revolving credit facilities that provide borrowing capabilities up to $460 million with the ability to increase borrowings to $600 million in the future. The Company believes that internally generated funds, together with access to external capital resources, will be sufficient to satisfy existing commitments and plans and will provide adequate financial flexibility to take advantage of potential strategic business opportunities should they arise.1999. YEAR 2000 COSTSISSUES Flowserve Corporation began preparing for the Year 2000 almost two years ago. The Company assessed how it might be impacted by the Year 2000 issue, and formulated and substantially completed implementation of a comprehensive plan to address all known concerns. The plan has not changed significantly since the end of the most recent fiscal year. To the best of the Company's knowledge, all mission criticalmission-critical business and non-ITnon-information technology systems will now support its ability to provide products and services into the next21st century. The Year 2000 issue is briefly described below and is more fully described in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer systems that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary 15 16 inability to process transactions, send invoices or engage in normal business activities. With regard to information systems, production and other equipment and products, the Company is 100% complete with the assessmentcompleted all remediation and plan development phase. Planned remediation efforts, testing and implementation are also 100% complete and the Company is not currently aware of any current material system issues that remain unresolved. The Company will continue its diligent efforts to identify and remedy potential Year 2000 issues throughbefore the end of the year.1999. The Company is also working with its vendors and customers to ensure Year 2000 compliance throughout its supply chain. An important component of Year 2000 activities has been to survey suppliers regarding compliance and to communicate with them on an on-going basis to do everything feasible to ensure that production and delivery plans can be achieved. In addition, the Company has prepared a standard letter outlining the importance of and commitment to resolving the Year 2000 issue in a timely manner, and this letter is used to respond to inquiries from customers. Although the review is continuing, the Company is not currently aware of any vendor or customer circumstances that may have a material adverse impact on the Company. The Company can provide no assurance that Year 2000 compliance plans will be successfully completed by suppliers and customers in a timely manner. The Company believes it has no significant exposure to contingencies related to the Year 2000 issue for the products it has sold. The Company's estimate of the total cost for Year 2000 compliance was originally approximately $7.0 million. To date, approximately $6.1 million has been incurred and no major additional significant expenditures are expected. Costs are being funded through operating cash flows. Virtually all of the amounts spent to date relate to the cost to repair or replace software and associated hardware. The Company's cost estimates include the amount specifically related to addressing Year 2000 issues, as well as costs for improved systems that are Year 2000 compliant. These systems would have been acquired in the ordinary course of business, but their acquisition was accelerated to ensure compliance by the Year 2000. Incremental spending in addition to the $6.1 million is not expected to be material because most Year 2000 compliance costs include items that are part of the standard procurement and maintenance of the Company's information systems and production and facilities equipment. Other non-Year 2000 efforts have not been materially delayed or impacted by the Company's Year 2000 initiatives. The Company continues to investigate and analyze potential operational problems and related costs that would likely result from the failure by the Company and certain third parties to complete efforts necessary to achieve Year 2000 compliance on a timely basis. In addition, the Company continues to monitor particular risks including non-delivery of goods and services from suppliers and vendors and the potential unavailability of utilities in international locations where the Company manufactures products. The Company believes that its most reasonably likely worst case scenario would relate to problems with the systems of third parties, rather than with the Company's internal operating systems. To mitigate potential non-compliance by vendors or customers, the Company is poised to seek alternative suppliers and purchase additional inventory prior to the end of the current year where circumstances warrant. If the lack of utilities or other adverse operational issues occur at any facility, the 16 17 Company believes it would be able to transfer the manufacturing of its products to a functioning facility. The Company currently believes that the Year 2000 issue willdid not pose significant operational problems for the Company but will continue to evaluatemonitor the situation closely. There can be no assurance that the Year 2000 issues of other entities will not have a material adverse impact on the Company's systems or results of operations. As the Year 2000 approaches, the Company will continue to monitor the situation closely internally and externally and take the necessary course of action to insure minimal disruption to its operations. The Company expectsbelieves that its early and thorough preparation will enablehas enabled it to meet the needs of its customers and stakeholders without significant interruption on and after January 1, 2000. - -------------------------------------------------------------------------------into the new century. 14 15 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 includesinclude 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; the impact of the "Year 2000" computer issue; 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.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. - ------------------------------------------------------------------------------- 1715 1816 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK There have been no material changes in reported market risk since the end of 1998.1999. PART II OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (c) During the thirdfirst quarter of 1999,2000, the Company issued 167,5008,000 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 certain officers.one officer and one other employee, subject to restrictions on transfer and vesting. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 10.1 Loan agreement between2.1 Purchase Agreement among Flowserve Corporation, Flowserve RED Corporation, IDP Acquisition, LLC and C. Scott Greer. (b) Exhibit 10.2 Flowserve Corporation Executive Equity Incentive Plan amended and restated effective July 21, 1999. (c)Ingersoll-Rand Company, dated as of February 9, 2000. Exhibit - 27. Financial Data Schedule. (d) There were no reports(b) Reports on Form 8-K filed duringForm 8-K dated January 13, 2000, Item 2, Acquisition of Assets-Relating to the quarter ended September 30, 1999. ----------------------------------- 18Purchase of Innovative Valve Technologies, Inc. This Form 8-K was amended on March 21, 2000 to include Item 7(a), Financial Statements of Business Acquired and Item 7(b), Pro Forma Financial Information. Form 8-K dated February 9, 2000, Item 5, Other Events, Purchase Agreement with Ingersoll-Rand Company. ------------------------------------------------- 16 1917 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: NovemberMay 12, 19992000 - ------------------------- 19------------------ 17 2018 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.1 Loan2.1 Purchase Agreement betweenAmong Flowserve Corporation, Flowserve RED Corporation, IDP Acquisition, LLC and C. Scott Greer 10.2 Flowserve Corporation Executive Equity Incentive Plan amended and restated effective July 21, 1999Ingersoll-Rand Company, dated as of February 9, 2000 27 Financial Data Schedule
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