Flowserve Second Quarter EPS, Cash Flow From Operations And Leverage Improve; Chemical and Industrial Outlook Lower

Second Quarter Highlights

(Comparisons are versus second quarter 2001 and exclude special items in both periods.)

• EPS - Up 31 percent.
• Operating income - Up 20 percent; Unchanged excluding IFC.
• Sales - Up 28 percent; Up 9 percent excluding IFC.
• Bookings - Up 6 percent; Down 9 percent excluding IFC.
• Net interest expense - Down 24 percent.
• Net debt-to-capital ratio - Improves to 61.1 percent from 82.3 percent.
• Cash flow from operations - Improves to $49.2 million, up $59.7 million. -- DSO improves by 8 days, excluding IFC.

Second Quarter Results

The company reported net income of $14.3 million, or 28 cents a share, in the second quarter of 2002 compared with $2.6 million, or 7 cents a share, in the second quarter of 2001.

Net income, excluding special items, was $24.1 million, or 46 cents a share, in the second quarter of 2002, an increase of 31 percent compared with $13.4 million, or 35 cents a share, in the prior year quarter.

In the second quarter of 2002, special items relate to the company's May 2 acquisition of the Flow Control Division of Invensys PLC (IFC). These include the following: integration and restructuring expenses of $2.6 million; an extraordinary charge of $6.3 million, net of tax, reflecting the write-off of deferred financing and other related fees resulting from the refinancing of the company's senior credit facility; and 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. Special items in 2001 include integration expenses associated with the August 2000 acquisition of Ingersoll-Dresser Pump Co. (IDP).

Currency translation had an unfavorable impact of 12 percent on earnings in the second quarter of 2002 due to the devaluation of the Latin American currencies, despite strengthening of the euro in June.

Operating Income Increases

Operating income, excluding special items, was $62.6 million in the second quarter of 2002 compared with $52.1 million in the prior year period. IFC contributed $10.2 million of operating income, excluding special items, in the second quarter of 2002. Second quarter 2002 operating margin, excluding special items, was 10.6 percent compared with 11.2 percent in the year ago period.

Results for the second quarter of 2002 primarily reflect weakening in the quick turnaround business, particularly the chemical and industrial sectors, specifically affecting industrial pumps, manual valves and service. Furthermore, quarterly revenues had a higher proportion of project business compared with the prior year period. Project business generally has thinner margins than other types of business. Currency translation also had an unfavorable impact in the second quarter of 5 percent on operating income. These unfavorable factors were partially offset by the $4.7 million, or 7 cents a share, benefit of compliance with SFAS 141 and 142.

Earnings before interest, taxes, depreciation and amortization, excluding special items, (adjusted EBITDA) were $77.7 million in the second quarter of 2002, an increase of 10 percent compared with $70.8 million in the year ago quarter, and an increase of 42 percent compared with $54.4 million in the first quarter of 2002. IFC contributed $14.1 million of adjusted EBITDA during the second quarter of 2002.

Sales and Bookings

Second quarter 2002 sales increased 28 percent to $592.7 million compared with $464.6 million in the prior year period. Excluding the $88.1 million of sales contributed by IFC, second quarter 2002 sales increased 9 percent compared with the year ago quarter, primarily due to an increase in engineered projects. Currency translation had virtually no impact on second quarter 2002 sales.

Second quarter 2002 bookings increased 6 percent to $572.3 million compared with $540.8 million in the prior year period. Excluding the $79.1 million of bookings contributed by IFC, bookings declined 9 percent compared with the year ago quarter. Second quarter 2002 bookings were adversely affected by weakening in the quick turnaround business in the chemical and general industrial sectors, as previously discussed, but was partially offset by a $20 million order in the nuclear power sector. Currency translation had virtually no impact on second quarter 2002 bookings.

Significant Cash Flow Improvement

Cash flow from operations was $49.2 million in the second quarter of 2002, an increase of 67 percent compared with the first quarter of 2002 and an improvement of $59.7 million compared with the second quarter of 2001. Cash flow from operations for the second quarter of 2002 benefited from a $23 million tax refund related to the treatment of net operating loss carrybacks under the new U.S. tax laws.

Primarily as a result of the acquisition of IFC and currency translation, working capital, excluding cash, increased $172.5 million in the second quarter of 2002 compared with the first quarter of 2002. On a comparable operations basis, working capital, excluding cash, increased $14.3 million. Receivables and inventories each increased about 4 percent, primarily due to currency translation, while payables declined 10 percent primarily due to the timing of vendor invoices. Days sales outstanding, on a comparable operations basis, improved 9 percent to 80 days in the second quarter of 2002 compared with 88 days in the first quarter of 2002.

Flowserve Chairman, President and Chief Executive Officer C. Scott Greer said, "Despite greater than expected deterioration in book-and-ship, or quick turnaround, business in chemical, industrial and service, our results for the second quarter of 2002 aren't bad. They also reflect our focus on cash flow. The plants serving these sectors continue to work down inventories in spite of the overhead underabsorption that reduced their operating income performance."

Net Interest Expense Declines

Second quarter 2002 net interest expense fell 24 percent to $23.9 million compared with $31.4 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.

Leverage Improves

The company's net debt-to-capital ratio improved to 61.1 percent at the end of the second quarter of 2002 from 70.0 percent at the end of the first quarter, 71.3 percent at year end 2001, and 82.3 percent a year ago. Net debt was $1.20 billion at the end of the second quarter of 2002 compared with net debt of $984.4 million at the end of the first quarter and $1.02 billion at the end of 2001. This increase reflects the company's acquisition of IFC, which was funded by refinancing certain existing debt and issuing additional debt and equity.

FPD Posts Higher Operating Income

The Flowserve Pump Division (FPD) reported second quarter 2002 operating income of $36.6 million, an increase of 22 percent compared with $29.9 million, excluding special items, in the year ago quarter. Second quarter 2001 operating income, excluding special items, would have been $33.1 million under the new SFAS 141 and 142 accounting standards. Second quarter 2002 sales increased 18 percent to $282.4 million compared with $238.6 million in the prior year period. Operating margin improved 50 basis points to 13.0 percent compared with the prior year quarter.

"FPD posted improved results in the second quarter of 2002, generating greater sales and operating income compared with last year's quarter," Greer said. "Greater sales from engineered projects and incremental benefit from the synergy savings from the acquisition of IDP helped offset some of the impact of the decline in chemical and industrial business. It should be remembered that the chemical, industrial and quick turnaround businesses are the most profitable for the Pump Division."

Seals Business Improvement Partially Offsets Weakness in Services

The Flow Solutions Division (FSD) reported second quarter 2002 operating income of $18.1 million compared with $22.0 million in the prior year period. Second quarter 2001 operating income would have been $23.0 million under the SFAS 141 and 142 accounting standards. Second quarter 2002 sales were $155.4 million, about flat compared with $156.1 million in the year ago quarter. Second quarter 2002 operating margin declined 240 basis points compared with last year's quarter, despite improved Seals margins, primarily due to weakness in Services.

IFC Bolsters FCD Results

The Flow Control Division (FCD) reported second quarter 2002 operating income, excluding special items, of $15.7 million on sales of $163.6 million. IFC contributed $88.1 million to sales and $10.2 million to operating income, excluding special items. Excluding IFC, second quarter 2002 operating income was $5.5 million on sales of $75.6 million. These compare with operating income of $9.2 million on sales of $78.2 million in the prior year period. Second quarter 2001 operating income would have been $9.7 million under the SFAS 141 and 142 accounting standards. Operating margin, excluding special items, was 9.6 percent in the second quarter and was 7.3 percent excluding IFC. These compare with 11.8 percent in the year ago quarter. Results for 2002 were adversely affected by the lower production throughput as inventories were reduced. Results were also impacted by soft conditions in the chemical and general industrial sectors, proportionally a larger part of this business than in the other divisions.

Outlook

"Looking at our key end-markets, we see very much a mixed picture," Greer said. "While petroleum and water look good, other sectors cause us some concern. Project shipments for the power business remain good due to our current backlog though bookings for new projects have slowed, consistent with our previous outlook. Service projects and upgrades for existing power plants are down.

"Of particular concern is the deterioration of the quick-ship business in the chemical and industrial sectors. At the beginning of the year, we had expected this business to be flat to slightly down for the year. During the second quarter, bookings for this sector experienced double-digit year-over-year declines. Considering the importance of this business to our margins, this type of volume decline coupled with our planned inventory reductions will make profit improvement difficult.

"While there has been an increase in the level of inquiries, we don't foresee much in the way of real spending increases until 2003. As a result of the decline in chemical and industrial bookings in the second quarter coupled with the resulting drop in backlog, it is only prudent to estimate earnings per share, excluding special items, in the range of 38 to 43 cents in the third quarter of 2002 and $1.70 to $1.90 for the full year," Greer said.

Separately, the company said it has realigned its operating segments beginning with the third quarter of 2002. Under this new organization, the Flow Solutions Division will include Seals only, with the company's pump and valve service businesses being included as appropriate in the Flowserve Pump Division and Flow Control Division.

"Bringing our service business under the mantle of our various product groups will enable us to better align ourselves with our customers' needs, leverage our relationships with those customers, and take advantage of the natural synergies between our service activities and our core businesses," Greer said. The company said it will disclose historical segment information on a comparable basis in conjunction with its future announcements of quarterly financial results.

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.