Flowserve Earns 31 Cents A Share In Third Quarter, Before Special Items

The company reported net income of $9.3 million, or 17 cents a share, in the third quarter of 2002, compared with $5.8 million, or 15 cents a share, in the third quarter of 2001. Net income, excluding special items, was $16.9 million, or 31 cents a share, in the third quarter of 2002, compared with $14.7 million, or 38 cents a share, in the prior year period.

In the third quarter of 2002, special items generally relate to the company's May 2, 2002 acquisition of the Flow Control Division of Invensys plc (IFC) and had an impact on earnings of 14 cents a share. They include integration and restructuring expenses of $8.3 million, a negative purchase accounting adjustment of $2.6 million associated with the required write-up of inventory, which is included in the cost of sales, and an extraordinary loss of $0.5 million, net of tax, resulting from the non-cash write-off of deferred financing fees associated with the non-mandatory debt prepayment in the quarter. Special items in 2001 include integration expenses of $13.8 million associated with the August 2000 acquisition of Ingersoll-Dresser Pump Co.

Operating Income

Operating income, excluding special items, was $50.6 million in the third quarter of 2002, compared with $51.3 million reported and $72.5 million pro forma in the prior year period. Operating margin, before special items, was 8.6 percent in the third quarter of 2002, compared with 10.9 percent reported and 11.9 percent pro forma in the prior year period.

The declines between periods primarily reflect weakened conditions in the chemical, general industrial, and power sectors, particularly affecting higher margin book-and-ship, or quick turnaround business including industrial pumps, manual valves and service. Third quarter 2002 results also reflect an unfavorable mix of lower margin project business compared with the prior year period. In addition, 2002 results were impacted by underabsorbed overhead due to decreased throughput at certain plants due to lower volume and reductions of finished goods inventories.

IFC continued to enhance consolidated results by generating approximately $14.2 million of operating income and operating margin of 11.6 percent in the third quarter of 2002, before special items.

Company earnings were affected by the $5.5 million, or 7 cents a share, benefit of compliance with SFAS 141 and 142.

Earnings before interest, taxes, depreciation and amortization, excluding special items, were $67.9 million in the third quarter of 2002, compared with $69.6 million reported and $98.1 million pro forma in the third quarter of 2001.

Sales and Bookings

Third quarter 2002 sales were $586.7 million compared with $469.6 million reported and $607.6 million pro forma in the prior year period. Third quarter 2002 bookings were $578.0 million compared with $485.6 million and $620.4 million pro forma in the prior year period. Third quarter 2002 bookings and sales were adversely affected by weakened market conditions in the chemical, power, and general industrial sectors, as previously discussed. Currency translation had little impact on third quarter 2002 bookings and sales.

Cash Flow Remains Solid, Working Capital Improves

Cash flow from operations was $45.8 million in the third quarter of 2002, compared with $0.4 million in the third quarter of 2001. In the third quarter, special items that used operating cash were $8.0 million in 2002 compared with $19.0 million in 2001. Year-to-date, operating cash flow generated was $125.9 million compared with a use of $72.6 million in the first nine months of 2001.

Working capital utilization improved as working capital declined $70.7 million, or 10.3 percent, in the third quarter of 2002 compared with this year's second quarter. Accounts receivable declined $47.7 million, or 9 percent, to $510.3 million in the third quarter of 2002 compared with the second quarter of 2002. Days sales outstanding improved to 78 days in the third quarter of 2002 compared with 81 days in this year's second quarter. Inventories declined nearly $1 million, to $485.8 million, in the third quarter of 2002 compared with the preceding quarter of 2002.

Net Interest Expense Declines

Third quarter 2002 net interest expense fell 16 percent to $23.8 million compared with $28.3 million in the year ago quarter. This improvement reflects repayments of higher cost debt in the fourth quarter of 2001, renegotiation of the company's debt facilities at lower rates, and the decline in market interest rates.

Debt Reduced

The company repaid $88.3 million of debt on Sept. 30, 2002. At the end of the quarter, net debt was $41.1 million lower compared with the end of the second quarter of 2002. The company's net debt-to-capital ratio improved to 60.5 percent at the end of the third quarter of 2002, from 61.1 percent at the end of the second quarter of 2002, 71.3 percent at year end 2001, and 80.2 percent at the end of the third quarter of 2001.

Comparable Operations

From comparable operations (excluding IFC) and excluding special items, third quarter 2002 operating income was approximately $36.5 million. Third quarter 2002 sales from comparable operations were approximately $465.5 million while bookings were approximately $468.2 million.

Realignment of Operating Segments

As previously announced, beginning with the third quarter of 2002, the company realigned its operating segments. Under this new organization, the Flow Solutions Division (FSD) includes the seals business only, with the pump and valve service businesses being included in the Flowserve Pump Division (FPD) and Flow Control Division (FCD), respectively. Segment information reflects the organizational changes in all periods.

Soft Markets, Unfavorable Mix Hinder FPD

FPD reported operating income of $25.2 million in the third quarter of 2002, compared with $32.0 million, before special items, in the year ago period. Third quarter 2002 sales were $291.7 million compared with $280.9 million in the third quarter of 2001. Third quarter operating margin was 8.6 percent compared with 11.4 percent, before special items, in last year's third quarter.

Weak Markets, Lower Volume Hurt FCD

Operating income, before special items, was $15.8 million in the third quarter of 2002, compared with $10.8 million reported and $31.2 million pro forma in the year ago quarter. Third quarter 2002 sales were $218.2 million compared with $112.3 million reported and $249.8 million pro forma in the prior year period. Operating margin, before special items, declined to 7.2 percent compared with 9.6 percent reported and 12.5 percent pro forma in last year's third quarter.

Similar to the pump business, FCD's results were impacted by the weakness in certain key markets and underabsorption issues related to lower volume and reductions in finished goods inventories.

FSD Operating Income Increases 9 Percent

FSD third quarter 2002 operating income increased 9 percent to $17.6 million, compared with $16.2 million in the year ago quarter. Third quarter 2002 sales increased 2 percent to $86.4 million, compared with $84.8 million in the third quarter of the prior year. Operating margin improved 130 basis points to 20.4 percent.

Outlook

"While our long term outlook for our key end-markets remains positive, we remain guarded in our short-term view," Flowserve Chairman, President and Chief Executive Officer C. Scott Greer said. "The quick turnaround business in the chemical, general industrial, and power sectors shows few signs of a near-term rebound, though we are convinced that these depressed levels cannot continue indefinitely and could begin to improve in 2003. Water and upstream petroleum-related business continues to hold up reasonably well. We are continuing to book a fairly good level of project business in these areas. That said, project business typically does not generate margins as high as those in our quick turnaround business. These factors will continue to affect our operating results in the near term.

"Our current focus is to work hard on things that are within our control. We are making progress in improving our balance sheet and working capital, reducing debt, and improving our cost structure. As we recently announced, the IFC integration is on track and we have increased our annual run-rate synergy savings estimates to $15 to 20 million," Greer said.

For the fourth quarter of 2002, the company estimates earnings per share, excluding special items, in the range of 40 to 50 cents, based on average outstanding shares of approximately 55.3 million. For full year 2002, the company continues to estimate earnings per share, excluding special items, in the range of $1.45 to $1.55, based on average outstanding shares of approximately 52.5 million. The company noted that the sum of the 2002 quarterly earnings per share figures will not equal the full year calculation because of the differences in the average number of outstanding shares in the periods. Flowserve issued 9.2 million shares of common stock in the second quarter of 2002 in conjunction with its acquisition of IFC.