Flowserve Corporation : Reports Full Year and Fourth Quarter 2011 Results

Reports Full Year EPS of $7.64, Up 11.0% Over 2010; Reaffirms 2012 Full Year EPS Target Range of $8.00 to $8.80

DALLAS, February 22, 2012 - Flowserve Corp. (NYSE:FLS), a leading provider of flow control products and services for the global infrastructure markets, announced today financial results for the full year and fourth quarter in its 2011 Annual Report on Form 10-K filed with the Securities and Exchange Commission. Highlights were as follows:

Full Year 2011 (all comparisons versus full year 2010 unless otherwise noted):

• Fully diluted EPS of $7.64, up 11.0%, including $0.05 of net currency benefits
• Bookings of $4.66 billion, up 10.2%, or 6.7% excluding positive currency effects of $149 million, reflecting solid short cycle original equipment activity and increased aftermarket activity
• Aftermarket bookings up $153.5 million, or 9.0%, over 2010
• Sales of $4.51 billion, up 11.9%, or 8.3% excluding positive currency effects of $144 million, driven by increased short cycle original equipment sales and strong aftermarket sales
• Aftermarket sales up $276.7 million, or 17.6%, over 2010
• Gross margin decrease of 140 basis points to 33.6%
• SG&A as a percentage of sales down 70 basis points to 20.3%
• Operating income of $618.7 million, up 6.4%, including realignment charges of $12.0 million
• Operating margin decrease of 70 basis points to 13.7%
• Backlog at December 31, 2011 of $2.7 billion, including negative currency effects of $51 million, compared to $2.6 billion in backlog at December 31, 2010

Fourth Quarter 2011 (all comparisons versus fourth quarter 2010 unless otherwise noted):

• Fully diluted EPS of $2.25, up 12.5%, including $0.05 of negative currency effects
• Bookings of $1.15 billion, up 11.3%, or 12.0% excluding negative currency effects of $8 million, reflecting solid chemical, oil & gas and general industries orders and continued strong aftermarket activity
• Aftermarket bookings up $21.9 million, or 4.9%, over fourth quarter 2010
• Sales of $1.27 billion, up 11.0%, or 11.7% excluding negative currency effects of $8 million, reflecting solid original equipment sales and strong aftermarket sales across all divisions
• Aftermarket sales up $51.3 million, or 10.9%, over fourth quarter 2010
• Gross margin decrease of 50 basis points to 33.2%
• SG&A as a percentage of sales down 130 basis points to 18.4%
• Operating income of $193.4 million, up 17.9%
• Operating margin increase of 90 basis points to 15.3%

Mark Blinn, Flowserve president and chief executive officer, said, "I am pleased with our performance in 2011 and particularly in the fourth quarter, as we continued to drive top line growth and improve our operating results.  Double digit bookings growth during the year was led by improvement in our short cycle business and aftermarket activity, which balanced competitiveness in our long cycle business.  Strength in the chemical, general industries and oil and gas industries, particularly in the latter part of the year, drove this growth.

"Our focus on deepening our customer relationships by expanding our global QRC network and service capabilities continued to produce significant value for our shareholders, leading to record aftermarket sales in the fourth quarter.  At the same time, our cost management discipline helped maintain positive operating momentum in the fourth quarter, producing year-over-year and sequential operating margin improvement.  This continues to validate our strategic focus and the efforts of our outstanding workforce."

Blinn added, "We are proud of what we accomplished in 2011 and how we have positioned ourselves to drive growth in 2012.  Our continued strategic investments to drive growth in emerging markets and expand our customized product and aftermarket offerings have expanded our global reach and will support our objective to achieve 5% to 7% revenue growth in 2012.  Our focus on high margin business, through innovation and portfolio management, combined with our disciplined cost management culture, has generated recent operating margin improvements that will provide the foundation from which we will drive towards our longer term operating margin improvement target. 

"The advancement of our "One Flowserve" initiative, begun through the successful combination of our pumps and seals businesses, was continued by bringing the leadership of all our operations under Tom Pajonas as chief operating officer.  This unified leadership structure will enable us to leverage operational excellence across our global platform to drive additional improvements.  Looking forward, I am confident that we have the people, products and platform in place to execute on our strong backlog and grow our business to continue to create value for our shareholders in 2012 and beyond."

Financial Performance and Guidance

Mike Taff, senior vice president and chief financial officer, said, "Increased sales volumes and continued improvements in SG&A leverage positively influenced our earnings and operating margin this quarter.  Our fourth quarter earnings were negatively impacted by a profit mix shift to higher tax jurisdictions, resulting in a quarterly tax rate of 30.3%.  We do not view this shift as permanent, and we expect our structural rate of 28-30% to remain intact going forward.

"In the fourth quarter, we announced a policy to return 40% to 50% of our running two-year average net earnings to shareholders annually.  Demonstrating our commitment to this policy, we repurchased approximately $109 million of our common stock in the fourth quarter and replenished the capacity of our share repurchase program to $300 million.  This, along with the recently announced 12.5% increase in our quarterly dividend, underscores the confidence we have in the cash flow generation capability of our business and our commitment to disciplined cash management and creating shareholder value going forward."

Taff added, "Improving our levels of working capital remains a sharp focus and high priority for improvement in 2012.  Increased growth in our business in the last year contributed to increases in raw materials and work in process inventory balances. But, our working capital levels have also been influenced by our levels of past due backlog and other factors within our control.  We reduced our past due backlog during the fourth quarter by over $60 million, and we are working to decrease the amount by another $60 million in the first half of 2012.  Increased focus from our new leadership structure should provide additional benefits going forward.

"Our reaffirmed 2012 earnings guidance of $8.00 to $8.80 per share anticipates approximately $0.50 of negative currency effects compared to 2011.  This is driven by the recent strengthening of the U.S. dollar against many of our functional currencies, in particular the Euro when compared to the first half of 2011.  As we discussed, we expect our performance in 2012 will be weighted towards the second half of the year.  In particular, the first quarter is expected to be impacted by some large, low margin late project shipments booked in 2010 and early in 2011, as well as a reduced level of aftermarket shipments compared to the fourth quarter of 2011.  That said, we remain confident in the earnings generation capability of our operating platform to achieve our 2012 goals."

Operational Performance

Tom Pajonas, senior vice president and chief operating officer, said, "I was pleased to see the momentum in short cycle and aftermarket business that began to build in 2011 continue through the end of the year.  Our long cycle bid selectivity helped offset continued competitiveness in this business.  With increasing levels of project activity in the oil and gas industry, we anticipate improvement in long cycle business conditions in 2012.  We also continued to make progress in managing costs and margins through operational excellence, disciplined project pursuit and the successful completion of our realignment programs.

"Full year bookings for the Engineered Product Division (EPD) grew 4.1%, with solid growth in the chemical, power and general industries.  Sales grew 7.8% for the year, driven by regional growth in North America, the Middle East and Asia Pacific, followed to a lesser extent by Latin America. Operating margin was 17.0% for the full year in a mixed market environment, with continued negative impact from certain large projects with low margins and charges related to certain projects that have not shipped or shipped late.  Our focus on project selectivity has helped offset some of this impact, and we expect improvement after these isolated projects are shipped in the first half of 2012. We are also excited about the addition of Lawrence Pumps (LPI) to the Flowserve family and the critical products and aftermarket potential it offers that will allow us to provide additional value to our customers."

Pajonas added, "The Industrial Product Division (IPD) delivered improved bookings and sales for the full year and fourth quarter, which was driven by activity in the general and chemical industries.  Margins for the full year reflect less favorable pricing on shipped projects, increased material costs and charges incurred as part of the division's recovery plan.  While we have made some progress in improving IPD over the last year, we still have significant opportunity to strengthen its performance further.  IPD should benefit from a strengthening business environment and renewed focus from our new operational leadership structure.

"The Flow Control Division (FCD) delivered impressive 2011 performance, with full year bookings increasing 22.7% on the strength of the chemical, oil and gas and general industries. Sales increased 23% for the full year, led by Latin America and the Middle East, but also supported by percentage increases in Europe, Asia Pacific and North America.  FCD's solid backlog and continued strong operational performance provide encouraging opportunities for growth going forward."

Segment Overview (all comparisons versus fourth quarter 2010 or full year 2010 unless otherwise noted)

FSG Engineered Product Division (EPD)

EPD bookings for the fourth quarter of 2011 were $590.0 million, an increase of $64.4 million, up 12.3%, or 13.8% excluding negative currency effects of approximately $8 million. Bookings for the full year 2011 were $2.33 billion, an increase of $91.5 million, up 4.1%, or 1.2% excluding currency benefits of approximately $65 million. EPD sales for the fourth quarter of 2011 were $666.1 million, an increase of $81 million, up 13.8%, or 15.2% excluding negative currency effects of approximately $8 million.  Sales for the full year 2011 were $2.32 billion, an increase of $168.7 million, up 7.8%, or 4.7% excluding currency benefits of approximately $67 million.

EPD gross profit for the fourth quarter of 2011 increased to $230.1 million, up $22.3 million.  Gross margin for the fourth quarter of 2011 decreased 100 basis points to 34.5%.  Gross profit for the full year 2011 increased to $803.4 million, up $20.5 million or 2.6%.  Gross margin for the full year 2011 decreased 180 basis points to 34.6%, which was primarily attributable to the effect on revenue of certain large projects at low margins primarily in beginning of year backlog, the negative impact of currency on margins of U.S. dollar denominated sales produced in certain non-U.S. facilities and incremental charges associated with certain projects that have not shipped or shipped late.  These factors were partially offset by a sales mix shift towards higher margin aftermarket sales.

EPD operating income for the fourth quarter of 2011 increased to $124.8 million, up $13.6 million or 12.2%, including negative currency effects of approximately $3 million. Operating income for the full year 2011 decreased to $395.2 million, down $17.4 million or 4.2%, including currency benefits of approximately $9 million.  The full year decrease was primarily attributable to increased SG&A, which was due to increased selling and marketing-related expenses, compensation increases and hiring associates in high-growth areas of the business, acquisition-related and other incremental costs associated with the acquisition of LPI and a $3.9 million penalty assessed by a Spanish regulatory commission in the second quarter.  These factors were partially offset by a decrease in broad-based annual and long-term incentive program compensation.  Fourth quarter operating margin decreased 30 basis points to 18.7%.  Full year 2011 operating margin decreased 220 basis points to 17.0%.

FSG Industrial Product Division (IPD)

IPD bookings for the fourth quarter of 2011 were $230.9 million, an increase of $11.7 million, up 5.3%, which includes currency benefits of less than $1 million.  Bookings for the full year 2011 were $905.4 million, an increase of $77.9 million, up 9.4%, or 5.9% excluding currency benefits of approximately $29 million.  IPD sales for the fourth quarter of 2011 were $261.7 million, an increase of $32.8 million, up 14.3%, or 13.9% excluding currency benefits of approximately $1 million.  Sales for the full year 2011 were $878.2 million, an increase of $78.0 million, up 9.7%, or 6.1% excluding currency benefits of approximately $29 million. 

IPD gross profit for the fourth quarter of 2011 declined to $57.2 million, down $0.9 million or 1.5%.  Gross margin for the fourth quarter of 2011 decreased 350 basis points to 21.9%.  Gross profit for the full year 2011 decreased to $197.5 million, down $7.2 million or 3.5%.  Gross margin for the full year 2011 decreased 310 basis points to 22.5%, which was primarily attributable to less favorable pricing on products shipped from backlog, increased material costs, charges related to the IPD recovery plan and incremental charges from operational efficiency issues in certain sites.  These factors were partially offset by increased savings realized from realignment programs and a sales mix shift to higher margin aftermarket sales.

IPD operating income for the fourth quarter of 2011 increased to $23.7 million, up $1.6 million or 7.2%, which includes currency benefits of less than $1 million.  Operating income for the full year 2011 decreased to $62.9 million, down $5.6 million or 8.2%, including currency benefits of approximately $2 million.  The full year decrease was primarily attributable to the decrease in gross profit, partially offset by a decrease in SG&A.  Fourth quarter 2011 operating margin decreased 50 basis points to 9.1%.  Full year 2011 operating margin decreased 140 basis points to 7.2%.

Flow Control Division (FCD)

FCD bookings for the fourth quarter of 2011 were $377.6 million, an increase of $49.8 million, up 15.2%, or 15.5% excluding negative currency effects of approximately $1 million.  Bookings for the full year 2011 were $1.60 billion, an increase of $296.4 million, up 22.7%, or 18.6% excluding currency benefits of approximately $54 million.  Valbart provided bookings of $165.0 million for the full year.  FCD sales for the fourth quarter of 2011 were $380.3 million, an increase of $20.2 million, up 5.6%, or 5.9% excluding negative currency effects of approximately $1 million.  Sales for the full year 2011 were $1.47 billion, an increase of $275.8 million, up 23.0%, or up 19.0% excluding currency benefits of approximately $48 million.  Valbart provided sales of $112.9 million for the full year.

FCD gross profit for the fourth quarter of 2011 increased to $132.7 million, up $13.6 million or 11.4%.  Gross margin for the fourth quarter of 2011 increased 180 basis points to 34.9%.  Gross profit for the full year 2011 increased to $511.5 million, up $89.2 million or 21.1%.  Gross margin for the full year 2011 decreased 60 basis points to 34.7%, which was primarily attributable to increased material costs, partially offset by increased sales, which favorably impacted absorption of fixed manufacturing costs, and various CIP initiatives. 

FCD operating income for the fourth quarter of 2011 increased to $62.1 million, up $9.6 million or 18.3%, including negative currency effects of approximately $1 million.  Operating income for the full year 2011 increased to $233.3 million, up $52.9 million or 29.3%, including currency benefits of approximately $7 million.  The full year increase was primarily attributable to the increase in gross profit, partially offset by an increase in SG&A, which was attributable to increased selling and marketing-related expenses, compensation increases, increased research and development costs and the impact of the hiring of associates in high-growth areas of the business.  Fourth quarter 2011 operating margin increased 170 basis points to 16.3%.  Full year 2011 operating margin increased 70 basis points to 15.8%.

Conference Call

The conference call will take place on Thursday, February 23 at 11:00 AM Eastern.

Mark Blinn, president and chief executive officer, as well as other members of the management team will be presenting.

The call can be accessed at the Flowserve Web site at www.flowserve.com:
http://www.flowserve.com/ under the "Investor Relations" section.

Contact Information

Investor Contact: Mike Mullin, director, investor relations (972) 443-6636:
https://inpublic2.huginonline.com/hugin/createRegulatory.faces?CSRF_NONCE=1C875279B02B5C1CB466D303C01BB102#

Media Contact: Steve Boone, director, global communications (972) 443-6644

About Flowserve

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:
http://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," "forecasts," "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; 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; risks associated with cost overruns on fixed-fee projects and in taking customer orders for large complex custom engineered products; the substantial dependence of our sales on the success of the oil and gas, chemical, power generation and water management industries; the adverse impact of volatile raw materials prices on our products and operating margins; our ability to execute and realize the expected financial benefits from our strategic realignment initiatives; 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 oil and gas producers, and non-compliance with U.S. export/re-export control, foreign corrupt practice laws, economic sanctions and import laws and regulations; our exposure to fluctuations in foreign currency exchange rates, including in hyperinflationary countries such as Venezuela; 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 litigation involving asbestos-containing material claims; a foreign government investigation regarding our participation in the United Nations Oil-for-Food Program; expectations regarding acquisitions and the integration of acquired businesses; our foreign subsidiaries autonomously conducting limited business operations and sales in certain countries 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; the potential adverse impact of an impairment in the carrying value of goodwill or other intangible assets; our dependence upon third-party suppliers whose failure to perform timely could adversely affect our business operations; 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.