Flowserve Reports Improved Financial Results

Flowserve Corp. reported net income of $18.4 million, or 33 cents a share, in the second quarter of 2004, compared with $15.3 million, or 28 cents a share, in the year-ago quarter.

Second Quarter Highlights

(Comparisons are versus second quarter 2003, where applicable.)

• Bookings - Up 8 percent.
• Backlog - Up 7 percent.
• Sales - Up 7 percent.
• Operating income - Up 7 percent.
• EPS - 33 cents compared with 28 cents.
• Debt - Repaid $24.5 million.
• Net debt-to-capital ratio - Improved to 51.1 percent.
• Cash flow from operations - $26.1 million.
• DSO - Improved 1 day.
• Inventory turnover - Improved to 3.5.

References to 2003 results represent restated amounts, where applicable.

Second Quarter Results

Second quarter 2004 sales increased 7 percent to $654.6 million, including about $9.0 million from the previously announced TKL acquisition, compared with $614.4 million in the year-ago quarter. Bookings increased 8 percent to $670.2 million in the second quarter of 2004, compared with $622.4 million in the prior year period. Backlog increased 7 percent to $872.5 million at the end of the second quarter of 2004, compared with $814.7 million at the end of the 2003 second quarter. These results reflect strong bookings performance in all divisions and favorable currency translation impacts.

Compared with last year's quarter, currency translation had an estimated 3 percent favorable impact on second quarter 2004 sales, bookings and backlog.

"I am encouraged by the improving tone of business and the continued strength in bookings across most of our end markets," said Flowserve Chairman, President and Chief Executive Officer C. Scott Greer. "These positives support our optimism for full year 2004."

Gross profit increased 8 percent to $196.3 million in the second quarter of 2004, compared with $181.7 million in the prior year period, while gross profit margin improved 40 basis points to 30.0 percent.

Second quarter 2004 operating income increased 7 percent to $49.6 million, compared with $46.2 million in the year-ago quarter. Second quarter 2004 operating income benefited from higher sales and favorable currency translation, which were partially offset by increased professional fees, incentive accruals and severance charges. As a result, operating margin percentage improved to 7.6 percent in the second quarter of 2004, compared with 7.5 percent in the prior year period.

In 2003, the company incurred special items expense generally relating to the May 2002 acquisition of the Flow Control Division of Invensys plc. Excluding special items, second quarter 2003 operating income was $52.7 million, operating margin was 8.6 percent, and net income was 19.5 million, or 35 cents a share.

Debt Repayment And Cash Flow

The company improved its net debt-to-capital ratio to 51.1 percent at the end of the second quarter, compared with 55.6 percent at the end of the year-ago quarter and 51.8 percent at the end of the first quarter of 2004. It reduced debt by $24.5 million in the second quarter of 2004

Working capital as a percentage of sales improved to 17.4 percent in the second quarter of 2004, compared with 20.8 percent in the prior year period. Days' sales outstanding improved to 68 days at the end of the second quarter of 2004, compared with 69 days at the end of last year's second quarter. Inventory turns improved to 3.5-times at the end of the second quarter of 2004, compared with 3.2-times at the end of the year-ago quarter. The company generated $26.1 million of cash flow from operations in the second quarter of 2004, compared with $81.9 million in the year-ago quarter.

"We remain focused on generating cash and further repaying debt," Greer said. "To date, I am pleased with our successes on these fronts. However, the year-to-date funding needs include the TKL transaction and certain legal settlements, which together totaled more than $30 million, and higher than normal professional fees. These factors, and the company's planned increases in production volumes for the remainder of the year, which require additional working capital, cause us to now forecast debt reduction in 2004 in the range of $70 million to $80 million."

Tax Rate

The effective tax rate in the second quarter of 2004 was 37.4 percent, compared with 34.5 percent in the year-ago quarter. The higher tax rate was primarily related to projected differences in profitability between the company's domestic and foreign operations and its projected utilization of available tax credits. This adversely impacted second quarter 2004 results by approximately 1.5 cents a share compared with the 2003 second quarter tax rate. The tax rate for all of 2004 is expected to be approximately 37.5 percent.

FPD Reports Improved Results

In the Flowserve Pump Division (FPD), second quarter 2004 sales increased 10 percent to $324.6 million, including about $9.0 million from the TKL acquisition, compared with $294.9 million in last year's quarter. Absent currency translation, sales were up 7 percent. FPD's bookings in the second quarter of 2004 increased 8 percent to $343.0 million, compared with $317.3 million in the prior year period, with backlog rising 6 percent to $597.1 million.

FPD's operating income increased 19 percent to $25.2 million in the second quarter of 2004, compared with $21.1 million in the year-ago period. Second quarter 2004 operating margin improved 50 basis points to 7.7 percent, compared with 7.2 percent in last year's second quarter.

"FPD's financial results reflect the improved conditions in many of its end-user markets and efficiency gains at some plants," Greer said.

FCD Reports Improved Bookings

Flow Control Division (FCD) sales in the second quarter of 2004 increased nearly 3 percent to $241.1 million, compared with $235.3 million in the second quarter of the prior year. Absent favorable currency translation, second quarter sales were slightly down year over year. FCD's second quarter 2004 bookings increased 6 percent to $242.3 million, compared with $229.0 million in the year-ago period. Backlog at the end of the second quarter of 2004 was $241.4 million, up 9 percent compared with the prior year period.

FCD's second quarter 2004 operating income increased 29 percent to $20.7 million, compared with $16.0 million in the prior year period. Operating margin improved to 8.6 percent in the second quarter of 2004, compared with 6.8 percent in the second quarter of 2003. Before special items in the second quarter of 2003, operating income was $22.5 million and operating margin was 9.5 percent.

"I am pleased by the growth in FCD's bookings," Greer said. "I am also encouraged by the sequential increases in second quarter gross margin percentage in its U.S., Europe and Asia operations, plus our outlook for stable or higher margins in those regions for the remainder of the year. While FCD's mix was still weighted toward project business in the second quarter, the outlook for more profitable aftermarket business is positive."

FSD Continues To Post Strong Results

The Flow Solutions Division's (FSD) second quarter 2004 sales increased 8 percent to $97.9 million, compared with $90.4 million in the year-ago quarter. Absent favorable currency translation, sales increased 6 percent. FSD's bookings in the second quarter of 2004 increased 7 percent to $95.8 million, compared with $89.6 million in the prior year period. Backlog at the end of the second quarter of 2004 was $43.1 million, up 6 percent from the end of the prior year period.

FSD's second quarter 2004 operating income increased 6 percent to $18.4 million, compared with $17.3 million in the year-ago quarter. Operating margin was 18.8 percent in the second quarter of 2004, compared with 19.1 percent in the prior year period.

"Once again, FSD posted excellent quarterly results," Greer said. "Bookings activity was solid in all geographic regions, further increasing our confidence for the remainder of the year. We also made good progress in strengthening and expanding our global network of quick response centers to meet local aftermarket needs, and we continued to add new customer alliances."

Outlook

"We are upbeat about the improving business conditions and higher booking results in the first half of 2004," Greer said. "Our backlog remains solid, the North American economy continued to improve and Asia remains a growth region. Demand in upstream petroleum is strong. In power generation, nuclear-related parts and service activity remains good, and indications from the chemical and general industrial sectors suggest better conditions ahead."

Greer stressed that the company's top priorities are to continue implementing its end-user strategy throughout all of its businesses, improve operational performance and reduce debt.

"Our operational excellence initiatives, which focus on reducing cycle time, improving on-time delivery, enhancing our procurement processes, and continuous improvement, coupled with better working capital management, should improve our cash generating capability and help us meet our debt reduction target," Greer said. "These, combined with our demonstrated ability to capture an increasing share of the end-user business, should help us improve financial performance and shareholder value."

The company currently forecasts third quarter 2004 earnings per share in the range of 28 cents to 33 cents and full year 2004 earnings per share in the range of $1.25 to $1.40.

Conference Call

The company will webcast its investor conference call today 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.

About Flowserve

Flowserve Corp. is one of the world's leading providers of fluid motion and control products and services. Operating in 56 countries, the company produces engineered and industrial pumps, seals and valves as well as a range of related flow management services.