Flowserve Earns 43 Cents A Share In Fourth Quarter, $1.48 A Share For Full Year 2002, Before Special Items

Excluding special items, net income was 43 cents a share in the fourth quarter of 2002, in line with the company's guidance, compared with 58 cents in the prior year period. Special items in all periods generally relate to expenses for integration, restructuring and early debt reduction.

Fourth quarter 2002 cash flow from operations increased about 400 percent to $121.8 million compared with $24.7 million in the fourth quarter of the prior year.

Fourth Quarter Highlights (Comparisons are versus fourth quarter 2001. Pro forma results give effect as if the May 2, 2002 acquisition of the Flow Control Division of Invensys plc (IFC) had been completed on Jan. 1, 2001.)

-- Cash flow from operations - Improves to $121.8 million from $24.7 million. -- Debt - Optional prepayments of $100 million. -- Net debt-to-capital ratio - Improves to 58 percent from 71 percent. -- DSO - Improves by 5 days, improves 7 days compared with third quarter of 2002. -- Sales - Up 16 percent, down 6 percent pro forma. -- Bookings - Up 24 percent, down 1 percent pro forma. -- Operating income (excluding special items) - Down 7 percent, down 25 percent pro forma. -- Net interest expense - Improves 12 percent. -- EPS - Improves to 30 cents from loss of 3 cents, down 26 percent excluding special items. Fourth Quarter Results

Net income increased to $16.6 million in the fourth quarter of 2002 from a net loss of $1.4 million in the year ago quarter.

"Fourth quarter earnings per share were within the range of our guidance," said Flowserve Chairman, President and Chief Executive Officer C. Scott Greer. "More importantly, we were more than able to turn that into cash. As we have said before, while our end-user markets are weak, our focus is on generating cash and debt reduction. And we have done it, generating $122 million of operating cash flow in the fourth quarter and $249 million during 2002 and paying down $234 million of debt during the year. This demonstrates the powerful cash flow generation capability of this business."

Fourth quarter 2002 sales increased 16 percent to $624.8 million from $539.3 million in the prior year period. Bookings were $559.9 million in the fourth quarter of 2002 compared with $452.9 million in the prior year period, an increase of 24 percent. The increases in reported sales and bookings primarily reflect the acquisition of IFC and strong activity in the seals business. These were partially offset by weak conditions in the chemical, power, and general industrial sectors, particularly affecting quick-turnaround business, including industrial pumps, manual valves and service. On a pro forma basis, fourth quarter 2001 sales were $663.1 million and bookings were $567.6 million.

Operating income, excluding special items, was $58.6 million in the fourth quarter of 2002, compared with $63.1 million reported and $78.1 million pro forma in the year-ago quarter. The decline in operating profit is due to lower sales of high margin quick-turnaround business versus increased sales of lower margin projects. In addition, margins were negatively impacted by underabsorption resulting from lower production volumes in portions of the business. This was exacerbated by lower throughput due to inventory reductions. Fourth quarter 2002 operating margin, excluding special items, was 9.4 percent compared with 11.7 percent reported and 11.8 percent pro forma in the prior year period.

Fourth quarter 2002 earnings benefited by $3.4 million, or 6 cents a share, from adoption of SFAS 141 and 142 effective Jan. 1, 2002. However, earnings per share were negatively impacted by a 32 percent higher share count compared with the year-ago quarter.

Full Year Results

For full year 2002, net income was $53.0 million, or $1.02 a share. This represents an increase of $54.5 million compared with a net loss of $1.5 million, or 4 cents a share, for full year 2001. Net income, excluding special items, was $1.48 a share in full year 2002 compared with $1.42 for full year 2001.

Sales for 2002 were $2.25 billion compared with $1.92 billion in the prior year. Bookings for 2002 were $2.18 billion compared with $1.98 billion in the prior year. On a pro forma basis, 2002 sales were $2.41 billion compared with $2.44 billion in 2001. Pro forma bookings were $2.33 billion in 2002 compared with $2.51 billion in 2001.

Operating income, excluding special items, was $213.8 million in 2002, up 5 percent compared with $204.0 million in 2001. Operating margin, excluding special items, was 9.5 percent in 2002 compared with 10.6 percent in 2001. Pro forma operating income, excluding special items, was $230.8 million in 2002 and $277.0 million in 2001. Pro forma operating margin, on the same basis, was 9.6 percent in 2002 and 11.3 percent in 2001.

Full year 2002 earnings benefited by $14.3 million, or 27 cents a share, from adopting SFAS 141 and 142 effective Jan. 1, 2002. However, earnings per share were negatively impacted by a 33 percent higher share count compared with the prior year.

Cash Flow Increases

In the fourth quarter of 2002, the company generated $121.8 million of cash flow from operations, up about 400 percent compared with $24.7 million in the year-ago quarter. The improvement in cash flow from operations reflects improved earnings and reductions in working capital. For full year 2002, cash flow from operations was $248.9 million compared with a use of cash of $47.9 million in 2001, an improvement of $296.8 million.

Working Capital Improves

Working capital generated $80.3 million of cash flow in the fourth quarter of 2002. Improvement in accounts receivable generated $30.2 million of cash flow in the fourth quarter despite a higher level of fourth quarter sales. The improvement reflects focused collection activities, and to a lesser extent, incremental factoring of international receivables of about $20 million. As a result, days' sales outstanding improved to 71 days at year-end 2002 compared with 78 days at the end of the third quarter of 2002, and 76 days at the end of 2001.

Reduction in inventories generated $37.5 million of cash flow in the fourth quarter. The reduction reflects the seasonally strong shipping quarter and the continued focus on finished goods inventory reductions. Inventory turnover improved to 4.1-times in the fourth quarter of 2002 compared with 3.4-times in the third quarter of 2002, but was about flat compared with year-end 2001.

As a result of the improvements in working capital utilization, working capital as a percentage of sales improved 450 basis points to 23.9 percent at year-end 2002, compared with 28.4 percent at the end of the third quarter of 2002, and 25.1 percent at the end of 2001.

"I am extremely pleased with our continuing progress on the working capital front," Greer said. "The fourth quarter is typically a heavy shipping quarter and receivables would generally be expected to increase accordingly. That we reduced receivables during this period is a testament to our focus on generating cash, paying down debt, and strengthening our balance sheet. This is an excellent demonstration of how, despite a difficult business environment, we are focusing on things we can control to make Flowserve a stronger company."

Significant Debt Reduction

As a result of improved working capital utilization and strong cash flow from operations, the company made an optional debt prepayment of $100 million on Dec. 31, 2002. This prepayment reduced the company's Tranche A term loan by approximately $30 million and Tranche C term loan by approximately $70 million. As a result, net debt fell to $1.05 billion at year-end 2002 compared with $1.16 billion at the end of the third quarter of 2002. The net debt-to-capital ratio improved to 58 percent at year-end 2002 compared with 60 percent at the end of the third quarter of 2002, and 71 percent at year-end 2001. Despite financing a large acquisition and a challenging business environment, this ratio has continued to improve from a high of 82 percent to the current level.

During the final two quarters of 2002, Flowserve repaid $188 million of debt, including $170 million of optional prepayments. As a result of these optional debt prepayments, Flowserve has no mandatory principal payment due until Sept. 30, 2003.

"As we have said before, in this tough market environment, we are stressing cash generation and debt reduction," Greer said. "Moreover, we expect to continue to make additional prepayments on our outstanding debt as we drive toward our net debt-to-capital target of less than 50 percent."

Net Interest Expense Declines

Fourth quarter 2002 net interest expense fell 12 percent to $23.4 million compared with $26.6 million in the year ago quarter. This improvement, despite the borrowings associated with the IFC acquisition, reflects repayments of higher cost debt at the end of the fourth quarter of 2001, debt repayments during 2002, renegotiation of the company's debt facilities at lower rates, and the decline in market interest rates. Full year 2002 net interest expense fell 21 percent to $92.9 million from $118.1 million in 2001.

Weak Markets Continue For Pump and Valve Divisions

The Flowserve Pump Division (FPD) reported operating income of $37.2 million in the fourth quarter of 2002, compared with $56.2 million, before special items, in the year ago period. Fourth quarter 2002 sales were $328.0 million compared with $357.6 million in the prior year period. Fourth quarter 2002 operating margin was 11.3 percent compared with 15.7 percent, before special items, in last year's fourth quarter.

In the Flow Control Division (FCD), operating income, before special items, was $17.1 million in the fourth quarter of 2002, compared with $5.3 million reported and $22.0 million pro forma in the year-ago quarter. Fourth quarter 2002 sales were $211.0 million compared with $109.2 million reported and $233.0 million pro forma in the prior year period. Operating margin, before special items, was 8.1 percent compared with 4.9 percent reported and 9.4 percent pro forma in last year's fourth quarter.

"While FPD's quarterly sales increased sequentially due to seasonality, the year-over-year declines in quarterly sales, operating income and margin primarily reflect the continuation of the weakened conditions in the chemical, general industrial, and power sectors, the unfavorable mix of project business, and underabsorbed overhead at certain plants due to lower production volumes and reductions in finished goods inventories," Greer said. "FCD faced similar business conditions in the fourth quarter of 2002, although the severity of their impact on reported results was somewhat masked by the benefits contributed by the acquisition of IFC. IFC's synergies were at an annual run rate of $12 million at the end of 2002 and we are still on track for total expected annual benefits in the range of $15 to 20 million."

FSD Operating Income Increases 76 Percent

The Flow Solutions Division's (FSD) fourth quarter 2002 operating income increased 76 percent to $16.2 million, compared with $9.2 million in the year ago quarter. Fourth quarter 2002 sales increased 14 percent to $91.5 million, compared with $80.3 million in the fourth quarter of the prior year. Operating margin improved 620 basis points to 17.7 percent.

"Once again, FSD posted strong results despite the challenging market environment," Greer said. "In fact, this was FSD's best fourth quarter. These results reflect FSD's market share gains and successful business approach that focuses on providing its customers with not only a full range of leading edge sealing products, but also with an array of flow solutions. More and more, this full solutions approach is what our customers are asking for and will help minimize the cyclicality in our end-markets."

Cautious Outlook in Near Term

Given the weakness in some its key end-markets, the company is maintaining its cautious view for the near term. "With the exception of the upstream petroleum and water markets, which continue to be active, we are maintaining our cautious near-term outlook for our other key end-markets, though we remain optimistic for the long term," Greer said. "At this time, we do not expect to see a turnaround or any significant improvement in our end-markets in the first half of 2003. Meanwhile, we will continue our emphasis on cash flow generation and debt repayment.

"From an earnings perspective, the fall-off in quick turnaround business in 2002 did not occur until the second half of the year. As a result, we enter 2003 facing some tough year-over-year comparisons to the first half of last year. Thus, for the first quarter of 2003, we estimate earnings per share, excluding special items, in the range of 20 to 28 cents. However, we estimate full year 2003 earnings per share, excluding special items, to be comparable to 2002 despite these challenging first-half comparisons due to deleveraging, the synergy benefits from the IFC integration and our Continuous Improvement Process. We also must remain cautious about the near term and mindful of the current global geo-political situation and the potential impacts on our markets," Greer said.

About Flowserve

Flowserve Corp. is one of the world's leading providers of industrial flow management services. Operating in 34 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.