Flowserve Reports Second Quarter EPS of $1.92, Including Realignment Charges of $0.25

Flowserve Corp. (NYSE:FLS), a global leader in the fluid motion and control industry, announced today second quarter results in its Form 10-Q report for the second quarter of 2009 filed with the Securities and Exchange Commission. The company announced second quarter fully diluted EPS of $1.92, down $0.20 or 9%, including realignment charges of $0.25. Bookings for the second quarter were $1.04 billion, down 21%, or 13% excluding negative currency effects of $106 million. Second quarter sales decreased to $1.09 billion, down 6%, or up 4% excluding negative currency effects of $110 million. The company also reported continued strong backlog of $2.71 billion, including positive currency effects of $35 million.

Operating income declined $14 million to $159 million, but excluding realignment charges of $20 million, operating income increased $6 million or 4%, including negative currency effects of $23 million. Flowserve also posted a quarterly operating margin of 14.6%, including realignment charges, or 16.4% excluding realignment charges.

Additionally, the company raised its 2009 full year EPS target range forecast to between $7.15 and $7.75, up from the previously announced range of between $6.75 and $7.50, including, as previously announced, up to $40 million, or approximately $0.50 per share, in realignment charges. The target range increase reflects expected continued performance on operational excellence initiatives, favorable currency related to earlier guidance during the first half of 2009 and planned benefits from strong execution of its current realignment initiatives.

Highlights

Second Quarter of 2009 (all comparisons versus the second quarter of 2008 unless otherwise noted):

• Second quarter fully diluted EPS of $1.92, down 9%, including approximately $0.25 of realignment charges
• Bookings of $1.04 billion, down 21%, or 12% excluding negative currency effects of $106 million and $22 million of thruster orders in the same quarter in 2008 that did not recur
• Sales of $1.09 billion, down 6%, or up 4% excluding negative currency effects of $110 million
• Bookings and sales increased sequentially, quarter over quarter, 7% and 6%, respectively
• Gross margin decreased 70 basis points to 35.4%, including realignment charges of 110 basis points
• Continued Selling, General & Administrative (SG&A) improvement as a percentage of sales, down 40 basis points to 21.2%, including realignment charges of 70 basis points
• Operating income of $159 million, down $14 million or 8%, including $20 million of realignment charges and negative currency effects of $23 million
• Operating margin decreased 30 basis points to 14.6% including realignment charges of 180 basis points, or increased to 16.4% excluding realignment charges
• Strong cash flow from operations of $102 million
• Tax rate for current quarter of 27.2% compared to a lower rate of 23.6%, which included benefits from discrete items in the prior year period
• Strong backlog of $2.71 billion, including positive currency effects of $35 million, when compared to $2.83 billion in backlog at December 31, 2008

The First Half of 2009 (all comparisons versus the first half of 2008, unless otherwise noted):

• Year-to-date fully diluted EPS of $3.56, down 2% from $3.65, including approximately $0.38 of realignment charges
• Bookings of $2.00 billion, down 27%, or 16% excluding negative currency effects of $227 million and $96 million of thruster orders in the prior year period that did not recur
• Sales of $2.12 billion, down 2%, or up 9% excluding negative currency effects of $230 million
• Gross margin increased 20 basis points to 35.7%, including realignment charges of 80 basis points
• Continued Selling, General & Administrative (SG&A) improvement as a percentage of sales, down 80 basis points to 21.6%, including realignment charges of 50 basis points
• Operating income of $306 million, up $14 million or 5%, including $30 million of realignment charges and negative currency effects of $48 million
• Strong operating margin performance, up 90 basis points to 14.5% including realignment charges of 140 basis points, or up 230 basis points to 15.9% excluding realignment charges

"While we continue to see our markets impacted by the challenging global economic conditions, we are very pleased with the improvement we saw in sequential quarter over quarter bookings and sales,” said Lewis Kling, Flowserve President and Chief Executive Officer. "This order improvement, which drove a book-to-bill ratio of 0.95, resulted in a strong remaining backlog, which gives us strength for future business and revenue opportunities. This, coupled with our strong operating platform, focus on costs and balance sheet strength, provide confidence for us well into the future,” Kling added.

Discussion and analysis of the second quarter of 2009 financial results (all comparisons versus the second quarter of 2008 unless otherwise noted)

Fully diluted second quarter 2009 EPS decreased to $1.92 per share, down 9% from the record level of second quarter 2008, including realignment charges this quarter of $0.25. Excluding realignment charges, second quarter EPS increased 2% to $2.17. EPS was higher primarily due to continued successful operational excellence initiatives.

"During the second quarter we continued to execute against our previously announced realignment initiative aimed at optimizing our operating platform and improving our overall cost structure,” said Mark Blinn, Flowserve Senior Vice President, Chief Financial Officer and Latin America Operations. "We have achieved direct benefits of $7 million year-to-date and expect the realignment initiative to show increased benefits in the second half of 2009, delivering a full annual run rate savings of approximately $56 million on the planned $40 million of realignment expense. This, along with our continued focus on SG&A efficiencies, aftermarket strategies, as well as benefits from an expected mix shift to greater aftermarket business, should continue to drive earnings power into the future,” Blinn added.

Bookings for the second quarter were $1.04 billion, down 21%, or 11% excluding negative currency effects of $106 million and thruster orders of $22 million in the second quarter of 2008. The decrease is primarily related to the chemical, oil and gas and general industries markets and a decline in the overall distributor business in the Flow Control Division (FCD), due to inventory de-stocking. It also reflects customers’ responses to concerns regarding some remaining disruptions in the credit and capital markets, global economic conditions and the re-evaluation of customer budget assumptions for certain projects, thereby delaying certain expected orders.

Backlog decreased 4% to $2.71 billion from $2.83 billion at December 31, 2008. The decrease includes positive currency effects of approximately $35 million and cancellations of $19 million of orders booked in the prior year.

Sales decreased to $1.09 billion, down $67 million, a decrease of 6%, or up 4% excluding negative currency effects of approximately $110 million. The result is largely attributable to lower sales by the FCD and the Flow Solutions Division (FSD), somewhat offset by increased sales by the Flowserve Pump Division (FPD).

Gross profit decreased to $386 million, down $32 million or 8%. Gross margin decreased by 70 basis points to 35.4%. The gross margin performance was driven by $12 million of realignment charges, which was partially offset by improved pricing on orders booked during 2008 and cost savings from operational excellence programs and the realignment initiative.

SG&A expenses as a percentage of sales decreased 40 basis points to 21.2%. The improvement was primarily attributable to cost containment initiatives. SG&A expenses, in total, decreased to $231 million, down $19 million or 8%. The SG&A decrease is attributable to the impact of currency benefits of approximately $17 million and cost containment initiatives, including the realignment, partially offset by $7 million of realignment charges.

Operating income decreased to $159 million, down $14 million or 8%. The operating income decrease includes negative currency effects of approximately $23 million. Excluding realignment charges of $20 million, operating income increased to $179 million, up $6 million or 4%. Operating margin decreased 30 basis points from 14.9% to 14.6% including realignment charges, or increased to 16.4% excluding realignment charges.

"The continued realignment improvements we made this quarter to our operating platform should not only drive benefits that we will realize later in 2009, but are expected to strengthen the company for growth opportunities well into the future,” added Kling.

Flowserve Pump Division

Highlights

Second Quarter of 2009 (all comparisons versus the second quarter of 2008 unless otherwise noted):

• Bookings of $650 million, down 12%, or up 1% excluding negative currency effects of $70 million and $22 million of thruster orders in the prior year period that did not recur
• Sales of $660 million, up 4%, or 15% excluding negative currency effects of $69 million
• Gross margin decrease of 40 basis points to 32.1%
• Strong Selling, General & Administrative (SG&A) improvement as a percentage of sales, down 140 basis points to 15.0%
• Operating income of $114 million, up $10 million or 10%
• Substantial operating margin improvement of 80 basis points to 17.2%, including realignment charges of 160 basis points, or 18.8% excluding realignment charges

FPD bookings for the second quarter 2009 were $650 million, a decrease of $86 million, down 12%, or up 1% excluding the impact of negative currency effects of approximately $70 million and $22 million of thruster orders in the same quarter in 2008 that did not recur. Bookings of original equipment decreased approximately 18%, which represents most of the total decrease. This original equipment decrease was driven by a decline across all industries, but primarily the chemical, oil and gas and general industries markets.

FPD sales for the second quarter of 2009 were $660 million, an increase of $27 million, up 4%, or 15% excluding negative currency effects of approximately $69 million. After excluding negative currency effects, sales of original equipment increased approximately 11%, while aftermarket sales were comparable to the same period in 2008. Original equipment sales growth reflects successful execution against the strong backlog in the oil and gas and power markets of FPD. Gross profit increased to $212 million, up $6 million or 3%. Gross margin for the second quarter of 2009 decreased 40 basis points to 32.1%, impacted by $8 million of realignment charges and an original equipment sales mix shift to 64% from 59% in the prior year, partially offset by improved pricing and cost savings from continuous improvement process (CIP) initiatives.

Flow Control Division

Highlights

Second Quarter of 2009 (all comparisons versus the second quarter of 2008 unless otherwise noted):

• Bookings of $274 million, down 36%, or 30% excluding negative currency effects of $25 million
• Sales of $303 million, down 18%, or 11% excluding negative currency effects of $29 million
• Gross margin increased 10 basis points to 36.0%
• Selling, General & Administrative (SG&A) as a percentage of sales, up 150 basis points to 20.8%
• Operating income of $47 million, down $16 million or 26%
• Operating margin decrease of 150 basis points to 15.5%, including realignment charges of $7 million, or 17.8% excluding realignment charges

FCD bookings for the second quarter of 2009 were $274 million, a decrease of $156 million, down 36%, or 30% excluding negative currency effects of approximately $25 million. The decrease was generally attributable to weakness in the chemical and general industries markets in North America and Europe and a decline in distributor orders due to inventory de-stocking.

FCD sales for the second quarter of 2009 were $303 million, a decrease of $68 million, down 18%. Excluding negative currency effects of approximately $29 million, sales decreased by 11%. Sales in Europe and North America fell due to softness in chemical and general industries.

Flow Solutions Division

Highlights

Second Quarter of 2009 (all comparisons versus the second quarter of 2008 unless otherwise noted):

• Bookings of $132 million, down 22%, or 16% excluding negative currency effects of $10 million
• Sales of $145 million, down 17%, or 10% excluding negative currency effects of $12 million
• Significant gross margin improvement of 70 basis points to 46.4%
• Selling, General & Administrative (SG&A) as a percentage of sales, up 280 basis points to 27.8%
• Operating income of $29 million, down $9 million or 25%
• Operating margin decrease of 210 basis points to 19.7%, including realignment charges of $3 million, or 21.6% excluding realignment charges

FSD bookings for the second quarter of 2009 were $132 million, a decrease of $38 million, down 22%, or 16% excluding negative currency effects of approximately $10 million. The decrease was primarily attributable to decreased original equipment bookings across most regions.

FSD sales were $145 million, a decrease of $29 million, down 17%. Decreased sales of original equipment in EMA and North America were partially offset by increased original equipment and aftermarket sales in Asia Pacific. Excluding negative currency effects of approximately $12 million, sales decreased 10% over the prior year period.

2009 Outlook

"As I have said previously, even in challenging markets like we are currently seeing, I believe there will always be attractive opportunities for a company that delivers on time, delivers quality products that work, supports the products in the field and, now more than ever, has a strong balance sheet to back it all up. Our key to success will be to continue to pursue market share gains while maintaining a focus on operational excellence and our pricing discipline,” stated Kling. "We are particularly encouraged by our pump bookings, since they may be an indicator that our end markets are beginning to stabilize, as pumps are usually ordered earlier than valves and seals due to their longer manufacturing lead times. Our solid second quarter performance, including excellent progress on our ongoing realignment initiatives, increases our confidence to raise our 2009 EPS target range to between $7.15 and $7.75, including up to $0.50 per share in realignment charges,” added Kling.

Conference Call

The conference call will take place on Thursday, July 30 at 11:00 am Eastern time.

Lewis Kling, President and Chief Executive Officer, and Mark Blinn, Senior Vice President, Chief Financial Officer and Latin America Operations, will be presenting.

The call can be accessed at Flowserve’s website at www.flowserve.com under the Investor Relations section.

About Flowserve Corp.

Flowserve Corp. is one of the world’s leading providers of fluid motion and control products and services. Operating in more than 55 countries, the company produces engineered and industrial pumps, seals and valves as well as a range of related flow management services. More information about Flowserve can be obtained by visiting the company’s Web site at www.flowserve.com.

SAFE HARBOR STATEMENT: This news release includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended. Words or phrases such as, "may,” "should,” "expects,” "could,” "intends,” "plans,” "anticipates,” "estimates,” "believes,” "predicts” or other similar expressions are intended to identify forward-looking statements, which include, without limitation, earnings forecasts, 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 forward-looking statements included in this news release are based on our current expectations, projections, estimates and assumptions. These statements are only predictions, not guarantees. Such forward-looking statements are subject to numerous risks and uncertainties that are difficult to predict. These risks and uncertainties may cause actual results to differ materially from what is forecast in such forward-looking statements, and include, without limitation, the following: a portion of our bookings may not lead to completed sales, and our ability to convert bookings into revenues at acceptable profit margins; risks associated with cost overruns on fixed-fee projects and in taking customer orders for large complex custom engineered products requiring sophisticated program management skills and technical expertise for completion; the substantial dependence of our sales on the success of the petroleum, chemical, power and water industries; the adverse impact of volatile raw materials prices on our products and operating margins; economic, political and other risks associated with our international operations, including military actions or trade embargoes that could affect customer markets, particularly Middle Eastern markets and global petroleum producers, and non-compliance with U.S. export/re-export control, foreign corrupt practice laws, economic sanctions and import laws and regulations; our furnishing of products and services to nuclear power plant facilities; potential adverse consequences resulting from litigation to which we are a party, such as shareholder litigation and litigation involving asbestos-containing material claims; a foreign government investigation regarding our participation in the United Nations Oil-for-Food Program; risks associated with certain of our foreign subsidiaries conducting business operations and sales in certain countries that have been identified by the U.S. State Department as state sponsors of terrorism; our relative geographical profitability and its impact on our utilization of deferred tax assets, including foreign tax credits, and tax liabilities that could result from audits of our tax returns by regulatory authorities in various tax jurisdictions; the potential adverse impact of an impairment in the carrying value of goodwill or other intangibles; our dependence upon third-party suppliers whose failure to perform timely could adversely affect our business operations; changes in the global financial markets and the availability of capital and the potential for unexpected cancellations or delays of customer orders in our reported backlog; our dependence on our customers’ ability to make required capital investment and maintenance expenditures; the highly competitive nature of the markets in which we operate; environmental compliance costs and liabilities; potential work stoppages and other labor matters; our inability to protect our intellectual property in the U.S., as well as in foreign countries; obligations under our defined benefit pension plans; and other factors described from time to time in our filings with the Securities and Exchange Commission.

All forward-looking statements included in this news release are based on information available to us on the date hereof, and we assume no obligation to update any forward-looking statement.