Flowserve Files '04 Form 10-K; Announces Financial Results for '04 & Prior Years
Feb. 13, 2006--Flowserve Corp. (NYSE:FLS) today announced financial results for 2004, and restated results for 2000 through the first quarter of 2004. The company also said it has filed its 2004 Form 10-K Annual Report with the Securities and Exchange Commission.
DALLAS--(BUSINESS WIRE)--Feb. 13, 2006--Flowserve Corp. (NYSE:FLS) today announced financial results for 2004, and restated results for 2000 through the first quarter of 2004. The company also said it has filed its 2004 Form 10-K Annual Report with the Securities and Exchange Commission.
-- Filed its 2004 Form 10-K with the SEC.
-- Completed the restatement of its financial statements.
-- Announced that the cumulative net reduction to net income over
the periods restated was $35.9 million, of which $13.7 million
related to periods prior to Jan. 1, 2002, which resulted in a
reduction to retained earnings as of Jan. 1, 2002.
-- Repaid $210 million of effective debt in 2004, as previously
-- Reported 2004 earnings per share of 43 cents, impacted by
increased inventory reserves, increased legal charges, an
abnormally high provision for income taxes, and large
professional and consulting fees associated with the previous
2003 restatement and Sarbanes-Oxley compliance initiative.
-- Announced that previously reported 2002 and 2003 EPS were
reduced by 20 cents and 16 cents, respectively, through the
-- Confirmed that it has concluded the previously announced IRS
tax audit of 1999 through 2001 with little cash impact.
-- Announced that it received:
-- An unqualified audit opinion on 2004 financial statements.
-- An unqualified audit opinion on management's assessment of
-- An adverse audit opinion on the effectiveness of its
-- Reported material weaknesses in the internal control areas
previously disclosed in summary overview form in past news
-- Completed the APB 23 tax matter review announced last week,
which resulted in no impact to the financial statements.
"We are pleased to complete this filing and put this restatement and 2004 financial statements closing behind us," said Flowserve President and Chief Executive Officer Lewis M. Kling. "While this process took longer than expected, we were unwilling to compromise our commitment to thoroughness and accuracy."
2004 Financial Results
As previously announced, full year 2004 bookings increased 10 percent to $2.66 billion compared with $2.42 billion in the prior year. Year-end 2004 backlog stood at $836.4 million compared with $818.2 million at the end of the prior year. Sales increased 11 percent to $2.64 billion in 2004 compared with restated $2.37 billion in 2003. Bookings and sales for 2004 each benefited by approximately 5 percent from currency effects, while backlog benefited by approximately 4 percent.
Operating income in 2004 increased 10 percent to $155.8 million, compared with $141.9 million in 2003. The increase is attributable to operational improvements from the company's Continuous Improvement Process initiative, which resulted in cost savings, synergies and a higher mix of aftermarket business, which generally has a higher margin. In addition, 2004 operating income included currency effects of approximately $14 million and a $22.7 million reduction in integration and restructuring expenses. These positive results were offset by a $44.0 million increase in annual incentive compensation, a $21.7 million increase in professional and consulting fees, and a $14.1 million charge to cost of sales for the increase in the reserve for obsolete and slow-moving inventory in the company's Flow Control Division. Operating margin percentage was 5.9 percent in 2004 compared with restated 6.0 percent in 2003.
For full year 2004, net income was $24.2 million, or 43 cents a share, compared with restated net income of $44.5 million, or 80 cents a share, in full year 2003. Net income from continuing operations, which excludes the results of the company's government and marine business, which was sold in November 2004, was $20.2 million, or 36 cents a share, in 2004 compared with restated $43.1 million, or 78 cents a share, in 2003.
Results for full year 2004 were impacted by an unusually large provision for income taxes of $39.5 million, resulting in an effective tax rate of 66 percent, compared with a 23 percent effective tax rate in 2003. The 2004 effective tax rate differed from the federal statutory rate of 35 percent primarily due to the $23.3 million of net tax impact from foreign operations which resulted from significant foreign accumulated earnings repatriation to pay down U.S. debt and increases in non-U.S. tax reserves. The company also confirmed that the previously announced IRS tax audit of the company covering the years 1999 through 2001 was resolved with little cash impact on the company.
As previously reported, in 2004 the company made effective debt repayments totaling $210 million, exceeding prior year repayments of $164 million. The 2004 debt repayment included $22.9 million from the proceeds of the sale of the company's government and marine business in November 2004. The actual balance sheet reduction of debt in 2004 was $258 million, with effective additional financing of $48 million provided by an asset securitization facility established in October 2004. The company terminated this facility in October 2005.
2004 Division Results
The Flowserve Pump Division reported sales of $1.33 billion, an increase of 14 percent, compared with restated $1.16 billion in 2003. Bookings increased 11 percent to $1.34 billion in 2004, compared with $1.21 billion in 2003. Sales and bookings for 2004 each benefited by approximately 5 percent from currency. Operating income was $110.1 million in 2004, an increase of 28 percent, compared with restated $85.9 million in 2003. Operating income in 2004 benefited by higher sales, a more favorable mix of business, the company's operational excellence initiative, and by approximately 8 percent from currency. Operating income for 2004 also benefited from an $8.5 million gain from an insurance claim for patterns destroyed in a foundry fire and by $2.9 million from the contribution from TKL, an Australian pump operation that was acquired in March 2004. These were partially offset by a $16.5 million increase in divisional incentive compensation. Operating margin increased to 8.3 percent in 2004 compared with restated 7.4 percent in 2003.
The Flow Control Division reported sales of $954.5 million in 2004, an increase of 8 percent, compared with restated $881.4 million in 2003. Bookings increased 9 percent to $967.8 million in 2004, compared with $890.5 million in 2003. Sales and bookings in 2004 each benefited by approximately 5 percent from currency effects. Operating income was $59.6 million in 2004, compared with restated $38.4 million in 2003. Operating income in 2004 was favorably impacted by approximately 7 percent from currency effects, which was more than offset by the previously discussed $14.1 million increase in the provision for obsolete and slow-moving inventory and a $10.3 million increase in divisional incentive compensation. Operating margin was 6.2 percent in 2004 compared with restated 4.4 percent in 2003.
The Flow Solutions Division reported sales of $394.0 million, an increase of 10 percent, compared with $357.7 million in 2003. Bookings increased 9 percent to $395.0 million in 2004, compared with $361.1 million in 2003. Sales and bookings in 2004 each benefited by approximately 3 percent from currency effects. Operating income was $72.6 million in 2004 compared with restated $73.9 million in 2003. Operating income in 2004 benefited by approximately 3 percent from currency effects, which was primarily offset by a $8.2 million increase in divisional incentive compensation, an increase in worldwide metals prices and an increase in the reserve for slow-moving inventory. Operating margin was 18.4 percent in 2004 compared with restated 20.7 percent in the prior year.
Restatement Work Completed
"We have completed the restatement, received an unqualified opinion on our 2004 financial statements, and filed our 2004 Form 10-K," said Chief Financial Officer Mark A. Blinn. "Now, we can refocus on closing out 2005 and completing our 2005 consolidated financial statements and related audit."
Kling added, "I emphasize that this comprehensive and detailed restatement effort was successfully conducted while we continued to effectively manage and improve our business. Moreover, with these issues now behind us, the new leadership team that we assembled in the last two years can now increase its attention to further implementing our operational excellence and process improvement initiatives, growing our business, improving our internal controls and operations, and furthering Flowserve's transition into a global solutions company."
The company restated its financial statements for 2002, 2003 and the first quarter of 2004. The cumulative net reduction in net earnings from the restatement adjustments, including net charges prior to Jan. 1, 2002, was $35.9 million, primarily related to intercompany accounts, long-term contract accounting, financial derivatives, inventory valuation, pension expense, fixed assets and intangibles, unclaimed property, tax matters, and other adjustments from unreconciled accounts. The amount of net charges arising prior to 2002 is reflected in the financial statements as a $13.7 million reduction to beginning retained earnings as of Jan. 1, 2002, and is included in the $35.9 million cumulative net reduction in net earnings. The net charge from the restatement reduced previously reported net earnings for 2002 and 2003 by $10.7 million and $8.4 million, respectively, or by 20 cents and 16 cents a share, respectively, and reduced previously reported net earnings for the first quarter of 2004 by $3.1 million, or 6 cents a share.
"In 2005, the company spent $48 million specifically related to the 2004 financial statements and this restatement, which is due to the degree of thoroughness and depth of our analysis throughout this process," Blinn said.
As part of its assessment of internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act and the restatement, the company performed additional analyses and other procedures to further ensure that its consolidated financial statements were prepared in accordance with generally accepted accounting principles (GAAP). These procedures included, among other things, expansion of its year-end closing procedures and dedication of significant internal resources and external consultants to scrutinize account analyses and reconciliations at a detailed level.
The company conducted expanded assessments of customer shipments at certain of its locations for revenue cut-off; analyzed certain long-term sales contracts; analyzed pending litigation matters; analyzed leasehold improvements for proper classification and amortization; analyzed inventory reserves, including obsolete and slow moving inventory calculations and estimates; assessed non-U.S. actuarially determined pension obligations and related liabilities; analyzed liabilities associated with unclaimed third party property; analyzed equity investments; analyzed accounts receivable factoring and securitization arrangements; analyzed accounting for financial derivatives; analyzed purchase accounting for acquired businesses; performed expanded procedures on the existence, depreciation and disposals of fixed assets; performed expanded analyses of intercompany, income tax and foreign currency translation accounts; and conducted site visits at selected locations to perform additional account balance examinations. As a result of these and other expanded procedures, the company believes that the financial statements included it its 2004 Form 10-K present fairly, in all material respects, its financial position, results of operations and cash flows for the periods presented in conformity with GAAP.
The company said that its review of deferred tax accounting pursuant to requirements of APB 23, as described in its Feb. 6, 2006, news release, resulted in no adjustment to the current financial statements, although its provision of deferred income taxes on unremitted foreign earnings could impact future financial statements.
"As a result of our restatement and Sarbanes-Oxley work, we are aggressively implementing a number of initiatives to improve our processes and controls and strengthen our finance organization, which will help us achieve our goal of taking Flowserve to the next level of success," Blinn said. "I am confident Flowserve will be well served by these important investments in our future."
Internal Controls Update
The company confirmed that, as previously announced, it had material weaknesses in internal controls as of Dec. 31, 2004. As a result, the company received an adverse audit opinion on the effectiveness of its internal controls. However, the company received an unqualified opinion on management's assessment of internal controls over financial reporting.
The material weaknesses in the company's internal controls as of Dec. 31, 2004, summaries of which the company has previously disclosed in news releases, are reported in the company's 2004 Form 10-K filed today. All of these issues were actively addressed in 2005. While substantial improvements were made, not all of these weaknesses were fully remediated by Dec. 31, 2005. The company will continue to take all actions necessary to cause its financial statements in its 2005 Form 10-K filing to be fairly stated in accordance with GAAP.
The company will hold a conference call today at 5:00 p.m. Eastern Time to discuss today's announcements. 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.
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.
Technical Contact: Flowserve Corp., Dallas, Investor Contact, Michael E. Conley, 972-443-6557
Media Contact: Lars Rosene, 469-420-3264