Flowserve Corporation

Transcription

1 Deutsche Bank High Yield and Credit Products Conference Flowserve Corporation Lew Kling - President and CEO Mark Blinn - Vice President and CFO Mike Conley - Vice President, Investor Relations June 15, 2006

2 Safe Harbor Statement SAFE HARBOR STATEMENT: This presentation includes forward-looking statements. Forward looking statements are all statements that are not statements of historical facts and include, without limitation, statements relating to our business strategy and statements of expectations, beliefs, future plans and strategies and anticipated developments concerning our industry, business, operations and financial performance and condition. The words believe, seek, anticipate, plan, estimate, expect, intend, project, forecast, predict, potential, continue, will, may, could, should, and other words of similar meaning are intended to identify forward-looking statements. The forward-looking statements made in this news release are made pursuant to safe harbor provisions of the Private Securities Litigation Reform Act of These forward-looking statements involve known and unknown risks, uncertainties and other factors that, in some cases, are beyond our control. These risks, uncertainties and factors may cause our actual results, performance and achievements, or industry results and market trends, to be materially different from any future results, performance, achievements or trends expressed or implied by such forward-looking statements. Important risks, uncertainties and other factors that could cause actual results to differ from these forward-looking statements include, but are not limited to, the following: delays in future reports of the Company s management and outside auditors on the Company s internal control over financial reporting and related certifications; continuing delays in the Company s filing of its periodic public reports and any SEC, NYSE or debt rating agencies actions resulting therefrom; the possibility of adverse consequences of the pending securities litigation and SEC investigations; the possibility of adverse consequences of governmental tax audits of the Company s tax returns, including the upcoming IRS audit of the company's U.S. tax returns for the years 2002 through 2004; the Company s ability to convert bookings, which are not subject to nor computed in accordance with generally accepted accounting principles, into revenues at acceptable, if any, profit margins, since such profit margins cannot be assured nor be necessarily assumed to follow historical trends; changes in the financial markets and the availability of capital; changes in the already competitive environment for the Company s products or competitors' responses to the Company s strategies; the Company s ability to integrate acquisitions into its management and operations; political risks, military actions or trade embargoes affecting customer markets, including the continuing conflict in Iraq, uncertainties in certain Middle Eastern countries such as Iran, and their potential impact on Middle Eastern markets and global petroleum producers; the Company s ability to comply with the laws and regulations affecting its international operations, including the U.S. export laws, and the effect of any noncompliance; the health of the petroleum, chemical, power and water industries; economic conditions and the extent of economic growth in the U.S. and other countries and regions; unanticipated difficulties or costs associated with the implementation of systems, including software; the Company s relative geographical profitability and its impact on the Company's utilization of foreign tax credits; the recognition of significant expenses associated with realigning operations of acquired companies with those of Flowserve; the Company s ability to meet the financial covenants and other requirements in its debt agreements; any terrorist attacks and the response of the U.S. to such attacks or to the threat of such attacks; technological developments in the Company s products as compared with those of its competitors; changes in prevailing interest rates and the Company s effective interest costs; and adverse changes in the regulatory climate and other legal obligations imposed on the Company. It is not possible to foresee or identify all the factors that may affect our future performance or any forward-looking information, and new risk factors can emerge from time to time. Given these risks and uncertainties, you should not place undue reliance on forward-looking statements as a prediction of actual results. All forward-looking statements included in this news release are based on information available to us on the date of this news release. We undertake no obligation to revise or update any forward-looking statement or disclose any facts, events or circumstances that occur after the date hereof that may affect the accuracy of any forward-looking statement. Page 2

3 A Market Leader In The Global Fluid Motion And Control Business Customer Solutions Pumps Multi-Stage Pumps Vertical Pumps High Pressure Pumps Multi-Phase Pumps ANSI / ISO & API Pumps Specialty Products LNG Expanders De-Coking Services Seals Mechanical Seals Bellows Compressor Lift-Off, Dry Running Mixer Pusher Steam Standard Cartridge Slurry Services Valves Ball Valves Plug Valves Gate, Globe And Check Valves Globe Control Valves Rotary Control Valves Actuators Positioners Steam Valves And Traps Services Moving From A Product To A Product And Solutions Company Page 3

4 Everything Starts With Our Customers Customer Surveys Customer Summits Account Mgmt Interviews Executive Key Accounts Customer Feedback Alliance Reviews Trade Shows Product Operational Technical Reliability Of Product Technical Support Quality Technical Responsiveness Orders Delivered When Promised Orders Delivered When Needed Maximize Their Up-Time Energy Efficiency Training Environmental Compliance Cost Reductions Solutions Predictive Diagnostics Smart Products Better Sensor Technology Enhanced Data Mgmt. Wireless Technologies Digital Communication Driving Growth By Addressing Customers Needs Page 4

5 Our Mission Flowserve moves, controls and protects the flow of materials, in some of the world s most critical industries to help customers exceed their business goals and ultimately deliver increased value to our shareholders. Page 5

6 Our Vision Distinguish Ourselves At Our Customers By Delivering Products And Integrated Flow Management Solutions As A Global, Unified, Customer-centric Business Page 6

7 Company Overview Sales By Business Sales By Region Seals 14% Valves 36% Pumps 50% EMA 40% LA 7% AP 13% NA 40% 2004 Sales $2.6 Billion Operating In 56 Countries 13,000 Employees Unmatched Portfolio Of Leading Brands Worldwide Installed Base Of Products Global Installed Base And Unique Combination Of Products To Support Customers Worldwide Page 7

8 Diversified Portfolio Of Markets Significant Long-Term Growth Potential Page 8

9 Estimated 5-Year Market Growth Latin America Chemical, Oil and Gas, Water AP Power Asia-Pacific - Chemical, Power, Oil & Gas Mostly China CAGR (%) LA Chem LA Water LA Power LA O&G NA Power NA Chem AP O&G EMA Power NA Water AP Chem EMA Chem NA O&G EMA O&G EMA Water North America and Middle East Oil &Gas, Chemical AP Water ,000 1,500 2,000 2,500 3,000 3,500 4,000 Market Size in 2006 ($ Millions) 4,500 5,000 5,500 Asia Pacific And Latin America Higher Growth Areas Source: EIF Five-Year Forecast (06Mar06) Page 9

10 Flowserve Revenues (In Billions) $3.0 $2.5 $2.0 $1.5 Driven By Acquisitions $2.23 $1.89 $1.54 Organic Growth $2.37 $2.64 $1.0 $0.5 $ Growing Throughout The Business Cycle Page 10

11 Millions $900 $800 $700 $600 $500 $400 $300 $200 $100 $0 Gross Margin Margin Percentage Gross Margin Margin % Adjusted Margin % Incremental Obsolete and Slow Moving Inventory 35% 30% 25% 20% 15% 10% Millions $200 $180 $160 $140 $120 $100 $80 $60 $40 $20 $0 Operating Income Margin Percentage Operating Income Margin % Adjusted Margin % Obsolete and Slow Moving Inventory Increased Professional Fees 8% 7% 6% 5% 4% 3% 2% 1% 0% Note: See Reg. G reconciliation that follows this presentation. Beginning Transition To The New Flowserve Page 11

12 Core Strategies Drive Near-Term Objectives Portfolio Management Emerging Market Expansion Customer Process Excellence Globalization Profitable Sustained Growth Organic Growth Technology Innovation Near Term Objectives Operational Excellence Product And Solutions Company Organizational Capability Integrated Platform Page 12

13 Our Near-Term Objectives Emerging Emerging Market Market Expansion Expansion Integrated China Strategy Increase Sales Staff Focus Wins On Major Energy Sector Projects Increase Our Asia-Pacific Presence Operational Operational Excellence Excellence Process Improvements; Cycle Time Reduction Drive On-Time Delivery Increase Low Cost Manufacturing Reduce Costs & Improve Fulfillment Product Product And And Solutions Solutions Company Company Pull Through Divisions To Maximize Share Of Wallet Deploy Integrated Asset Management Solutions Demonstrate Consistent Support Anytime, Anywhere Demonstrate The Power Of The Portfolio Integrated Integrated Platform Platform Improve Business Management Broader Customer And Product Information Support SOX Compliance Increase Speed And Quality Of Information Keeping Our Focus On Short And Long Term Initiatives Page 13

14 Integrating Flowserve The Power Of The Portfolio Solutions Products Products & Solutions Products & Solutions Pumps Pumps Pumps Valves Valves Valves Seals Seals Seals Strategy Built Around The Customer Sales Force Enabled Results Driven By Incentives Builds A Competitive Advantage Supports Organic Growth Page 14

15 Integrating Flowserve Using The Power Of The Portfolio Aftermarket Support Customer Customer Customer Driven Support Model Expands On Current Seal Service Template Unified Response Center For All Products Builds A Competitive Advantage Supports Organic Growth Page 15

16 Supporting Our Customers Aftermarket Customers QRC O E M (Projects) Main Production Facility QRC Aftermarket Customers QRC Aftermarket Customers Page 16

17 How Are We Doing?

18 Flowserve Today Bookings Are Strong Core Markets Remain Robust Oil & Gas, Power, Chemical Margin Expansion Initiatives Are In Place Strong Leadership Team Is Installed Cash Generation Is Strong Incentive Plans Are Aligned With All Stakeholders Positioned To Succeed Page 18

19 Strong Bookings* Growth +28% $879 (In Millions) $686 $696 $621 $638 $634 $774 $628 $ % +9% +22% +23% Q1 Q2 Q3 Q Bookings Growth Reflects Strong Markets And Projects *Continuing Operations Page 19

20 YOY Growth In Quarterly Organic Bookings* 40% +34% 35% 30% 25% 20% 15% 10% 5% 0% 1Q'04 2Q'04 3Q'04 4Q'04 1Q'05 2Q'05 3Q'05 4Q'05 1Q'06 Organic Bookings Growth Is Accelerating *Organic bookings = Consolidated bookings less divestitures and excluding currency effects. Page 20

21 Focusing On Margin Expansion Accountability Profitable Growth Accountability Financial Management Accountability Reduce Costs Accountability Becoming A More Profitable Flow Control Company Page 21

22 Focusing On Margin Expansion Profitable Growth Accountability Price Leverage On Engineered Products Price Leverage On Larger Projects No Bid On Low Margin Projects Without Significant Aftermarket Terms And Conditions Held To Acceptable Risks Strong End Markets Life-cycle: After Market Pull Through New Product Development Higher Margin After Market / MRO Product Rationalization Seal Model: QRC, Strategic Installed Base Solutions Orientation Accountability Profitable Growth Financial Management Reduce Costs Accountability Accountability Page 22

23 Focusing On Margin Expansion Cost Reduction Operational Excellence On Time Delivery Cycle Time Reduction Warranty Rework BOM Accuracy Footprint/Capacity Optimization Accountability Material Cost Reductions/ Strategic Sourcing China, India, Mexico, Eastern Europe On-Line Auctions Commodity Management Program Management/ Execution New/Upgraded Processes Shared Service Models Integrated IT Platform Invest Now, Save Later Accountability Profitable Growth Financial Management Reduce Costs Accountability Accountability Page 23

24 Focusing On Margin Expansion Accountability Financial Management Tax Planning And Efficiency Reduced Debt Expenses Through Refinancing Reduced LIBOR Spreads Lower Interest Costs Restatement Completion Reduction In Compliance Costs SOX, Audit Fees, Consultants Accountability Profitable Growth Financial Management Reduce Costs Accountability Accountability Page 24

25 Focusing On Margin Expansion Accountability Management Accountability Incentive Plan Tied To Key Metrics Upgraded Leadership Team C Player Management Accountability Profitable Growth Financial Management Reduce Costs Accountability Accountability Page 25

26 Accountability Metrics Page 26

27 Strategic Sourcing 100% 80% 60% Methods Of Savings Negotiation & Long Term Agreements e-auction 40% 20% 0% Low Cost Sourcing Value Engineering Initiatives For Sustained Savings Page 27

28 Highlights The Restatement And K Are Behind Us New Lower-Cost, More Flexible Debt Structure Using The Power Of The Portfolio To Transition To A Solutions Company Strong Profitable Bookings Growth For All Products, In All Served Markets, In All Geographies Significant Cash Generation By All Divisions Executable Plan In Place To Grow Margins Operational Excellence Initiatives Implemented To Reduce Costs Strategic Sourcing Organization Accelerating Worldwide Low Cost Procurement Initiatives Technology Development Accelerating Across All Businesses Strong Leadership Team With Increased Accountability The New Flowserve Page 28

29 Financial Update

30 Installed Base Opportunity 55kW (75HP) Pumping System Over 20 Years Operating Costs Energy $415,812 Revenue Opportunity Maintenance Costs Spare Parts, Labor, Repairs $212,000 Installation Costs Initial Purchase Price $61,000 $68,333 Total Lifetime Costs Total Aftermarket Opportunity Can Be Three To Four Times The Initial Purchase Price Page 30

31 Cash Flows (In millions) Cash provided by operating activities $267.5 $181.3 Cash used by investing activities (14.1) (26.6) Cash used by financing activities (250.6) (162.8) Solid Cash Flow Generation Page 31

32 Net Debt To Capital 78% 72% 60% 52% 42% 12/31/00 12/31/01 12/31/02 12/31/03 12/31/04 Total Debt ($MM) $1,130.2* $1,042.0* $1,095.4 $950.8 $701.8 * Before IFC acquisition Solid Cash Flow Has Driven Consistent Debt Reduction Page 32

33 2005 Major Cash Uses Debt Repayment Finance-Related Professional Fees Optional U.S. Pension Contributions Incentive Compensation Call Premium & Deal Fees $78 Million $48 Million $45 Million $44 Million $26 Million Note: GSG cash proceeds were used to repay debt in Cash Was Used For Several Purposes In Addition To Debt Repayment Page 33

34 2006 Major Cash Uses (as of 3/31/06) Incentive Compensation $50 Million Debt Repayment $11 Million Finance-Related Professional Fees tbd 2005 Form 10K-Related Expenses tbd Optional U.S. Pension Contributions tbd Note: GSG cash proceeds were used to repay debt in Cash Continues To Be Used For Several Purposes In Addition To Debt Repayment Page 34

35 ($ in Millions) Q1 Q2 Q3 Q4 Full Year Q1 Q2 Q3 Q4 Full Year Q1 Q2 Q3 Q4 Full Year Bookings (1) Bookings Trends $ $2,269.2 $ $2,520.3 $ $2,926.8 YOY %Incr 11% ~Curr% 2006 Q1 $ % (5%) 8% 10% 9% 22% 23% 16% 7% 5% 3% 2% 1% (4%) <1% Organic Bookings (2) $ $2,423.6 $ $2,914.2 $916.1 YOY %Incr (1) Consolidated bookings less divestitures. (2) Organic bookings = Consolidated bookings less divestitures and excluding currency effects. 11% 16% 10% Organic Bookings Are Accelerating 3% 3% 4% 1% 8% 13% 6% 7% 7% 7% 21% 27% 20% 34% Page 35

36 Looking Forward Expect To Be Current With SEC Filings By Sept. 30 Continued Focus On Enhancing Control Environment New Capital Structure With Debt Refinancing Strong Cash Flow Strong Core Bookings Should Help Drive Improved Operating Results Well Positioned For The Future Page 36

37 Appendix

38 A Firm Foundation For The Future We are finished with 2004, 2003 and 2002 Filed the 2004 Form 10-K Completed restatement of 2003 and 2002 Received unqualified audit opinion on 2004 financial statements Restatement adjustments reduced net earnings by $8 million in 2003 and $11 million in 2002, and $36 million in the aggregate Focused on reviewing and analyzing material recorded amounts in many of our 100+ larger operating sites and in corporate accounts Expanded year end closing procedures to scrutinize account analyses, reconciliations, and certain transactions at a detailed level in 2004, 2003 and 2002 Dedicated substantial internal resources and outside professional consultants Management team will continue to dedicate significant resources to improve control environment and remedy weaknesses Safeguarding The Future Page 38

39 (Dollars In Millions) 2004 Highlights Of Selected Items 2004 % Chg 2003R Highlights Sales $2, % $2,372.6 (+) FX Benefit Of 5% ($114 million) (+) $35 Million (1.5%) Contribution From TKL Acquisition Bookings $2, % $2,423.7 (+) FX Benefit Of 5% (+) $41M (1.7%) Contribution From TKL Acquisition Gross Profit $ % $705.4 % Of Sales 29.5% 29.7% (-) $14.1 Million (53 bps) Of OSMI (-) $14.1 Million (53 bps) Incr In Incentive Awards Page 39

40 (Dollars In Millions) 2004 Highlights Of Selected Items 2004 % Chg 2003R SG&A $ % $540.8 % Of Sales 23.6% 22.8% Op Income $155.8 (5%) $164.6* % Of Sales 5.9% 6.9% Interest Expense $81.0 (4%) $84.2 Highlights (+) $29.9 Million Incr. Incentive Awards (113 bps) (+) $21.7M Incr. In Prof/Consulting Fees (80 bps) (+) FX Of 4% (-) Reflects Increased Incentive Awards, Fees, And OSMI (Total Incr. Of $80M, 300 bps) (-) Lower Rates, Spreads, Debt Balances Other Expense $14.4 $4.5 Tax Expense $39.5 $12.8 Eff. Tax Rate 66.2% 22.9% Net Income** $20.2 $43.1 EPS** $0.36 $0.78 (+) $7.6M (28bps) Loss Of Hedge Accounting On Forward Contracts, $2.7M Debt Retirement (+) Impact Of Foreign Earnings Repatriation (+) Increase In Worldwide Tax Reserves (-) Increased Incentives Awards, Fees And OSMI (+) Lower Interest (-) High Tax Rate * Before special items. Special items reflect restructuring and integration expenses and totaled $22.7 million in ** Continuing Operations Page 40

41 Items Affecting Results (In Millions Of Dollars) Notable 2004 items- Increase In Finance-Related Professional Fees $ 22 Incentive Compensation ($14M COS, $30M SG&A) 44 Increase In Inventory Reserves - OSMI 14 Litigation Expenses 17 Derivative Contracts 8 Insurance Proceeds - Pattern Fire (Gain) (8) Notable 2005 Items- Finance-Related Professional Fees $ 48 GSG Impairment Loss (Disc Ops) 31 Debt Retirement Loss 27 Transition Expenses & Stock Plan Modifications 12 Note: Some restatement expenses will extend into And 2005 Were Impacted By Several Items Page 41

42 Reg. G Reconciliations (Dollars In Millions) Adjusted Gross Margin Reported Gross Margin $778.8 Incremental OSMI 14.1 Adjusted Gross Margin Sales $2,638.2 Adjusted Gross Margin/Sales 30.1% Adjusted Operating Income Reported Operating Income $155.8 OSMI 14.1 Increase In Professional Fees 22.0 Adjusted Operating Margin Sales $2,638.2 Adjusted Operating Margin/Sales 7.3% Page 42