FLS

Business Context and Reporting Period

Company: Flowserve Corporation
Filing Type: Form 8-K (Current Report)
Date of Report: July 19, 2000 (Reporting events of July 14, 2000)
Primary Event: Amendment to the Purchase Agreement for the acquisition of Ingersoll-Dresser Pump Company (IDP) from Ingersoll-Rand Corporation for $775 million in cash, alongside the announcement of financing transactions and an antitrust settlement.

Key Financial Metrics (Pro Forma)

The filing provides unaudited pro forma consolidated financial statements assuming the IDP acquisition and related financing occurred on January 1, 1999, and March 31, 2000.

Material Changes and Transaction Details

• Acquisition Amendment: The Purchase Agreement was amended on July 14, 2000. Key changes include replacing bank letters of credit with unsecured corporate guarantees, deleting EBITDA target requirements for IDP, and shifting liability for certain enhanced pension benefits triggered by plant shutdowns back to Ingersoll-Rand.
• Financing Structure: Flowserve intends to fund the acquisition via:
  • High Yield Offering: $375 million in senior subordinated notes (due 2010), partially in USD and partially in Euros.
  • Senior Credit Facilities: $275 million Term Loan A, $475 million Term Loan B, and a $300 million Revolving Credit Facility.
• Antitrust Resolution: Flowserve reached an agreement in principle with the U.S. Department of Justice to resolve antitrust concerns. This requires the divestiture of specific pump product lines, the Tulsa manufacturing facility, and two service/repair centers. Management estimates these divestitures will affect less than 3% of combined 1999 revenues.

Outlook, Risks, and Management Commentary

• Cost Synergies: Management projects significant cost savings post-acquisition, including:
  • $13.6 million from salesforce reduction (approx. 150 FTEs).
  • $16.1 million from plant rationalization (closure of 4 plants and multiple service centers).
  • $6.1 million from headquarters cost reduction.
• Closing Conditions: The transaction is subject to DOJ approval and financing conditions. If funds are insufficient at closing, Flowserve has the right to extend the closing date until October 31, 2000, subject to interest payments (with a grace period in August).
• Environmental Contingency: Sellers agreed to reimburse Flowserve up to $5 million for environmental problems identified by consultants.
• Financial Impact: Pro forma results show a net loss for the periods presented, primarily due to significant interest expense ($116.7 million for the year ended Dec 31, 1999) and amortization of goodwill and intangibles. However, Adjusted EBITDA remains positive.

Investor Verification Checklist

• Financing Completion: Verify the successful closing of the $375 million note offering and the $1.05 billion senior credit facilities.
• Regulatory Approval: Confirm the finalization and filing of the consent decree with the U.S. District Court for the District of Columbia.
• Divestiture Execution: Monitor the timeline for divesting the Tulsa facility and specific product lines within the 150-day window post-consent decree.
• Interest Rate Sensitivity: Note that for every 0.125% change in interest rates on the new debt, annual interest expense changes by approximately $1.4 million.
• Pro Forma Accuracy: Recognize that purchase price allocations (goodwill and intangibles) are preliminary and subject to refinement upon completion of asset valuations.