Flowserve Earns 28 Cents a Share in First Quarter

26.04.2002

Up 5 Percent from Fourth Quarter of 2001; Cash Flow Improves --- DALLAS - April 22, 2002 - Flowserve Corp. (NYSE: FLS) today reported improved financial results for the first quarter ended March 31, 2002, as compared with the prior year period.

First Quarter Highlights (Comparisons are versus first quarter 2001 and exclude integration expenses in 2001, unless noted.)

  • EPS - Up 180 percent, or 47 percent if the effects of non-amortization of goodwill are included in both periods.
  • Operating income - Up 12 percent compared with 2001.
  • Sales - Flat.
  • Bookings - Flat, excluding currency translation; Up 5 percent compared with fourth quarter of 2001.
  • Net interest expense - Down 31 percent.
  • Net debt-to-capital ratio - Improved to 70 percent.
  • Cash flow from operations - Improved to $29.5 million, compared with a use of $62.5 million, including integration expenses.

First Quarter Results

First quarter 2002 net income was $12.7 million, or 28 cents a share, an increase of 180 percent compared with the prior year quarter, before integration expenses. First quarter 2001 net income was $3.7 million, or 10 cents a share, before integration expenses. Including integration expenses, the company reported a net loss of $8.5 million, or 22 cents a share, in the first quarter of 2001.

Operating income increased 12 percent to $41.9 million in the first quarter of 2002 compared with $37.5 million, before integration expenses, in the prior year period. First quarter 2002 operating margin increased 100 basis points to 9.4 percent compared with 8.4 percent, before integration expenses, in the prior year period. These increases primarily reflect the continuing capture of synergy savings from the company’s acquisition of Ingersoll-Dresser Pump Co. (IDP) in 2002 and the effects of SFAS 141 and 142. These improvements were partly offset by unfavorable currency translation of about 7 percent, unfavorable sales mix, expenses related to personnel reductions at various facilities, and unfavorable absorption at several manufacturing facilities resulting from reductions of finished goods inventories to improve working capital.

First quarter 2002 earnings before interest, taxes, depreciation and amortization (EBITDA) were $54.4 million, about flat with the year ago period, excluding unfavorable currency translation. EBITDA was $56.5 million, excluding integration expenses, in the first quarter of 2001.

Results for 2002 include a pre-tax benefit of $4.7 million from the non-amortization of goodwill and certain other intangible assets related to compliance with SFAS 141 and 142. Under these new standards, earnings per share, before integration expenses, would have been 19 cents in the first quarter of 2001.

First quarter 2002 sales were $447.1 million, up slightly from $444.0 million in the year ago period. Excluding unfavorable currency translation, first quarter 2002 sales increased 4 percent compared with the first quarter of 2001.

First quarter 2002 bookings were $473.8 million, an increase of 5 percent compared with the fourth quarter of 2001. Excluding unfavorable currency translation, first quarter 2002 bookings were about flat compared with the prior year period. First quarter 2001 bookings were $496.3 million.

“Flowserve posted solid results in the first quarter of 2002,” said Chairman, President and Chief Executive Officer C. Scott Greer. “I am pleased with our growth in earnings despite relatively flat sales. I am also gratified by how these results confirm that we have put the IDP integration costs behind us and that we are realizing the IDP synergy benefits. Moreover, I am encouraged by the sequential quarterly increase in bookings. This increase in bookings supports our view that activity in some of our key markets is improving following the slowdown related to Sept.11. With this as a backdrop, and following our successful equity offering, we are eager to complete our pending acquisition of Invensys plc’s Flow Control Division (IFC) in early May and take advantage of the many benefits it should provide our customers and shareholders.”

Net Interest Expense Drops Sharply as Debt Falls

First quarter 2002 net interest expense fell 31 percent to $21.8 million compared with $31.8 million in the year ago quarter. This improvement reflects the decline in market interest rates and debt reductions between periods. Debt repayments were $36.4 million in the first quarter of 2002 and $154.6 million in the fourth quarter of 2001.

Outstanding debt declined 4 percent to $1.00 billion at the end of the first quarter of 2002 compared with $1.04 billion at the end of 2001. As a result, the net debt-to-capital ratio improved to 70.0 percent from 71.3 percent at year end 2001. In addition, the ratio of debt to EBITDA for the last four quarters, excluding integration expense in 2001, declined to 3.6-times from 3.7-times at year end 2001.

Significant Improvement in Cash Flow

Cash flow provided by operating activities improved to $29.5 million in the first quarter of 2002 compared with a use of $62.5 million in the first quarter of the prior year, including integration expense. The significant improvement primarily reflects higher net earnings, including the benefit of lower interest expense and the absence in 2002 of expenses related to the integration of IDP, which was completed at the end of 2001. “As we have previously said, the absence of IDP integration expenses in 2002 should significantly improve cash flow and we will now be free to focus on debt reduction,” Greer said.

Working Capital Improves

Working capital declined $20.0 million in the first quarter of 2002 compared with the fourth quarter of 2001. This improvement reflects a $19.6 million reduction in accounts receivable, although days sales outstanding increased from year end due to the seasonal impact of revenues in the fourth quarter of 2001.

FPD Operating Income Up 44 Percent

The Flowserve Pump Division (FPD) reported first quarter 2002 operating income of $26.1 million, an increase of 44 percent compared with $18.1 million, before integration expenses, in the prior year period. First quarter 2001 operating income would have been $21.4 million under the new SFAS 141 and 142 accounting standards. First quarter 2002 sales increased 4 percent to $233.3 million compared with $224.7 million in the year ago quarter. Operating margin improved 310 basis points to 11.2 percent compared with the prior year quarter.

“FPD’s improved first quarter 2002 results reflect incremental synergy savings and the effects of SFAS 141 and 142,” Greer said. “These were somewhat offset by unfavorable currency translation and an unfavorable mix due to the softness in the chemical and general industrial sectors.”

FSD Results Stable

The Flow Solutions Division (FSD) reported first quarter 2002 operating income of $17.0 million, unchanged compared with the year ago period excluding integration expenses. First quarter 2001 operating income would have been $17.9 million under the SFAS 141 and 142 accounting standards. First quarter 2002 sales were $147.1 million, essentially flat compared with $147.8 million in last year’s first quarter.

Operating income and sales increased in the Seals Group, reflecting improving maintenance, repair and overhaul (MRO) activity. These improvements were offset by unfavorable currency translation and declines in the services area, which is still experiencing some post-Sept. 11 softness.

FCD Impacted by Softness in Chemical Sector

The Flow Control Division (FCD) reported first quarter 2002 operating income of $5.2 million on sales of $73.5 million. These compare with operating income of $9.5 million on sales of $78.7 million in the prior year period. First quarter 2001 operating income would have been $10.0 million under the SFAS 141 and 142 accounting standards.

Results for 2002 were primarily impacted by soft conditions in the chemical sector compared with the first half of 2001, a higher proportion of original equipment business, expenses related to U.S. headcount reductions and unfavorable currency translation. In addition, 2002 results were affected by the adverse impact on margins caused by lower production throughput as finished goods inventories were reduced to improve working capital. “We expect FCD’s results to improve as we work down inventory and benefit from headcount reductions,” Greer said.

Outlook

“As the sequential quarterly improvement in bookings suggests, business activity is strengthening in several of our key end-markets,” Greer said. “MRO activity is beginning to rebound in some of our businesses. We are optimistic that this favorable trend will continue in future periods and should have a positive impact on our results.

“We remain upbeat in our outlook for our petroleum-related business. Several of our major upstream customers have indicated that they plan to maintain healthy capital spending levels in 2002 and 2003. Our engineering and construction customers also tell us that they are seeing good levels of project activity. On the downstream side, we are seeing some activity in desulfurization and debottlenecking projects. In fact, we are beginning to see some early signs of desulfurization activity in our bookings. We hope to see a more significant impact in the second half of 2002,” Greer said.

“In power, we continue to expect global growth in power-related projects, albeit at a slower pace than we have seen in recent years. Our water-related business remains healthy. The outlook for spending continues to be favorable for a range of water-related projects worldwide,” Greer said.

“We remain cautious on the chemical and general industrial sectors,” Greer continued. “That said, we are noticing that chemical plant utilization is edging slightly higher, which we hope is a precursor of improving business conditions. At this time, we feel that this sector has bottomed out. Nonetheless, we are not looking for a meaningful recovery in 2002 and are managing our business accordingly. As for the general industrial sector, while overall economic activity is improving, it is too early to say that we are seeing a meaningful upturn in this area.”

For the second quarter of 2002, the company said it expects earnings per share in the range of 46 to 50 cents, which includes the effects of its recent financing activities and the assumed closing of the IFC acquisition effective May 1. This estimate excludes the impact of one-time costs related to both restructuring/integration expenses and a higher cost of sales due to purchase accounting inventory write-ups, both resulting from the expected IFC closing. This compares with 35 cents a share, before integration expenses and excluding the effects of SFAS 141 and 142, in the second quarter of 2001. Including the effects of these new accounting standards, second quarter 2001 net income was 44 cents a share, before integration expenses. As reported, second quarter 2001 earnings per share were 7 cents, which includes integration expenses and excludes the effects of the new accounting standard.

For the full year 2002, the company said it continues to expect to report earnings per share in the range of $1.90 to $2.30 and that the acquisition of IFC should be neutral to slightly accretive, absent one-time costs.

“In all, we remain upbeat and optimistic about Flowserve’s future,” Greer said. “We are seeing improving business conditions in some of our businesses . We should continue to reduce debt and strengthen our balance sheet. Our continuous improvement initiatives are beginning to gain momentum. We recently completed a successful equity offering that will help us complete our pending acquisition of IFC. This transforming acquisition will propel Flowserve into position as the world’s second largest provider of valves, complementing our similar position in pumps. We couldn’t be more excited about this transaction. All of these are key elements of our strategy to make Flowserve one of the world’s top industrial companies while building value for our shareholders.”

The company will webcast its regular quarterly investor conference call on Tuesday, April 23, 2002 at 11:00 a.m. Eastern Time. This conference call can be accessed through the company’s website at www.flowserve.com. More information about Flowserve Corp. can also be obtained by visiting this website.

Flowserve Corp. is one of the world’s leading providers of industrial flow management services. Operating in 30 countries, the company produces engineered and industrial pumps for the process industries, precision mechanical seals, automated and manual quarter-turn valves, control valves and valve actuators, and provides a range of related flow management services.

SAFE HARBOR STATEMENT: This news release contains various forward-looking statements and includes 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: material adverse events in the national financial markets; 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 operations; political risks, military actions or trade embargoes affecting important country markets; the health of the company’s various customer industries, including the petroleum, chemical, power and water industries; economic turmoil in areas outside the United States; global economic growth; unanticipated difficulties or costs associated with new systems, including software; and the recognition of significant expenses associated with adjustments to realign the company's facilities and other capabilities with its strategies and business conditions, including, without limitation, expenses incurred in restructuring the company’s operations and the cost of financing, including increases in interest costs.

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