Business Context and Reporting Period
Company: Flowserve Corporation
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 2001
Business Overview: Flowserve operates through three segments: Flowserve Pump Division, Flow Solutions Division, and Flow Control Division. The company's financial results are significantly influenced by the August 2000 acquisition of Ingersoll-Dresser Pump Company (IDP) and ongoing integration activities.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2001 | Nine Months Ended Sep 30, 2001 |
|---|---|---|
| Sales | $469,605 | $1,378,219 |
| Gross Profit | $152,314 | $445,566 |
| Gross Margin | 32.4% | 32.3% |
| Operating Income | $37,559 | $91,052 |
| Net Earnings (Loss) | $5,833 | $(105) |
| EPS (Basic & Diluted) | $0.15 | $0.00 |
| Cash and Equivalents | $24,856 | $24,856 |
| Total Debt (Current + Long-term) | $1,195,463 | $1,195,463 |
| Operating Cash Flow (9mo) | N/A | $(72,635) |
Material Changes vs. Prior Period
- Revenue Growth: Sales increased 14.0% for the quarter and 38.3% for the nine months compared to 2000, primarily driven by the inclusion of IDP results. On a pro forma basis, sales were relatively flat for the quarter and slightly down for the nine months due to currency translation and market conditions.
- Profitability: Operating income surged 460% for the quarter and 67% for the nine months year-over-year. This improvement is attributed to synergy savings from the IDP integration, despite higher integration expenses ($13.8M in Q3; $49.8M YTD).
- Net Income Volatility: The company reported a net loss of $105,000 for the nine months ended September 30, 2001, compared to net earnings of $11.5 million in the prior year. This was largely due to increased interest expense ($91.5M vs $36.3M) from debt incurred for the IDP acquisition and significant integration costs.
- Cash Flow: Operating cash flow turned negative ($72.6M used) for the nine months, contrasting with $32.2M provided in the prior year. This was driven by cash outflows for integration, restructuring, and increased working capital (specifically inventory buildup).
Guidance, Outlook, and Risks
- Integration Outlook: Management expects to substantially complete IDP integration activities by the end of 2001. The restructuring program aims to reduce approximately 1,100 positions and achieve $90 million in annual synergy savings.
- Capital Markets: On November 2, 2001, the company announced an intention to issue approximately $150 million of common stock to repay 12.25% Senior Subordinated Notes, subject to lender consent.
- Market Risks:
- Interest Rate Risk: A 100-basis point increase in rates would increase interest expense by approximately $5.0 million for the nine-month period.
- Currency Risk: A 10% adverse change in foreign exchange rates would impact year-to-date results by $0.9 million.
- Operational Risks: Results were negatively impacted by the September 11, 2001 terrorist attacks, causing delays in shipping, customer travel, and a slowdown in quick-turnaround business. The company also faces risks related to the health of the petroleum, chemical, and power industries.
- Accounting Changes: The company is assessing the impact of new FASB standards (SFAS 141, 142, 143, 144), which may reduce annual amortization expense by approximately $19 million starting in 2002.
Investor Verification Checklist
- Debt Servicing: Verify the company's ability to service $1.2 billion in debt, particularly the 12.25% Senior Subordinated Notes, and the success of the planned $150 million equity offering.
- Integration Costs: Monitor the remaining integration expenses and the realization of projected $90 million in annual synergy savings.
- Working Capital: Assess the sustainability of the inventory buildup ($343M) and its impact on future cash flows.
- Post-9/11 Impact: Evaluate the long-term effect of the September 11 attacks on backlog conversion and quick-turnaround business segments.
- Segment Performance: Review the specific contribution of the Flowserve Pump Division (now including IDP) to overall margins and operating income.