Second Quarter EPS Rises 12.5% to $1.98 and Bookings Reach $1.21 Billion; Company Reaffirms 2012 Full Year EPS Target Range of $8.00 to $8.80

DALLAS, July 30, 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 second quarter of 2012 in its Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission. Highlights from the second quarter and first half of 2012 were as follows:

Second Quarter 2012 (all comparisons versus second quarter 2011 unless otherwise noted):

  • Fully diluted EPS of $1.98, up 12.5%, including $0.11 of below the line negative currency effects and a $0.05 net benefit from discrete corporate items
    • Fully diluted EPS up 24% excluding below the line currency effects year over year
  • Bookings of $1.21 billion, up 0.2%, or 7.1% excluding negative currency effects of $84 million
    • Highest quarterly aftermarket bookings of $508 million, up 7.4%, or 13.2% excluding negative currency effects
  • Sales of $1.18 billion, up 5.0%, or 12.6% excluding negative currency effects of $86 million
  • Gross margin decrease of 30 basis points to 32.5% reflecting shipments of low margin legacy backlog
  • SG&A as a percentage of sales down 180 basis points to 18.9%
  • Operating income of $164.8 million, up 17.6%, or 28.3% excluding negative currency effects
  • Operating margin increase of 150 basis points to 13.9%
  • Positive operating cash flow of $168 million, compared to a $10 million cash use in prior year period
  • Tax rate of 26.7% compared to 27.9% for second quarter 2011
  • Repurchased over 3.3 million shares as part of $1 billion share repurchase program
  • Backlog of $2.9 billion at June 30, 2012, including negative currency effects of approximately $30 million, compared to $2.7 billion in backlog at December 31, 2011

First Half of 2012 (all comparisons versus first half of 2011 unless otherwise noted):

  • Fully diluted EPS of $3.67, up 5.5%, or up 16.4% excluding below the line currency effects year over year
  • Bookings of $2.45 billion, up 3.4%, or 8.1% excluding negative currency effects of $111 million
    • Highest year to date aftermarket bookings of $970 million, up 7.2%, or 11.1% excluding negative currency effects
  • Sales of $2.26 billion, up 6.3%, or 11.5% excluding negative currency effects of $109 million
  • Gross margin decrease of 80 basis points to 33.0% reflecting shipments of low margin legacy backlog
  • SG&A as a percentage of sales down 170 basis points to 19.8%
  • Operating income of $307.3 million, up 13.6%, or 21.0% excluding negative currency effects
  • Operating margin increase of 90 basis points to 13.6%

Mark Blinn, Flowserve president and chief executive officer, said, "I am pleased with our performance in the second quarter and first half of the year.  Management focus and operational discipline drove solid execution as we continued to capitalize on investments in our end user strategy and pursue opportunities across our geographically diverse end markets.  Our highest level of quarterly and year to date aftermarket bookings highlighted our solid second quarter bookings.  Overall, our focus on discipline and selectivity in project pursuit continued to support our bookings performance and improve the quality of orders going into backlog.

"As our results reflect, internal operating improvements driven by our "One Flowserve" initiative are gaining momentum.  While keeping our longer-term operating margin target in mind, our leadership has remained focused on our customers and on increasing shareholder value by leveraging operational excellence and cost management across our global platform.  While we still have work to do, I am encouraged by the positive impact these initiatives have had on our results thus far, and on our prospects for continued improvements going forward."

Blinn added, "Looking to the balance of 2012 and 2013, we remain optimistic about our business opportunities and the progress of the current cycle.  While short cycle growth has moderated, our project bidding levels remain active, providing us confidence in major project opportunities in 2013 and the overall state of our diverse global end markets.  Economic difficulties in Europe continue to add a measure of caution to our view, as we continue to closely monitor potential impacts of Europe's debt crisis and increasing currency headwinds from a stronger U.S. dollar.  Long-term opportunities provided by our strategic initiatives remain in sharp focus as we work to achieve our revenue growth and margin expansion goals."

Financial Performance and Guidance

Mike Taff, senior vice president and chief financial officer, said, "We are encouraged by our financial performance this second quarter.  Our results benefitted from improved execution on increased sales volumes, where our continued focus on cost leverage, including tight corporate cost controls, resulted in notable improvements in SG&A leverage and incremental margins.  However, as expected, our second quarter earnings and margins were somewhat impacted by shipments of low margin legacy backlog taken in more challenging markets to build our aftermarket base and by reduction of targeted past due backlog, where we continue to make progress.

"Total shareholder return and optimal capital allocation remain top management priorities.  During the quarter, we repurchased over 3.3 million shares of common stock in support of our recently announced capital structure strategy, which targets a more efficient long-term gross leverage ratio of 1x to 2x EBITDA.  We expect to continue executing on our $1 billion share repurchase program through the remainder of the year, with completion targeted in 2013.  Following our recent upgrades to investment grade credit ratings from the three major ratings agencies, we expect to take advantage of the current attractive debt markets to further support our capital structure strategy."

Taff added, "Working capital improvement also remains a top management priority, and we were pleased with our year over year and sequential improvements in operating cash flow.  While we made progress in the quarter, resulting in sequential improvements in performance metrics, attractive opportunities for additional improvements remain.  Our goal is to drive days' sales outstanding into the mid 60s over the next 12 to 18 months, and drive inventory turns to 4.0x to 4.5x over the next 18 to 24 months.  I am confident that our disciplined cash collection efforts, improvements in our front-end bidding process and implementation of other operational improvements provide the opportunity to reach our goals.

"The continued strengthening of the U.S. dollar against the Euro and other functional currencies has had a significant impact on our reported results.  As a result, we have increased our estimate of above and below the line negative currency effects for the full year.  We now estimate total negative currency effects of $1.00 per share at current exchange rates compared to $0.50 per share in prior guidance, with most of the expected increase impacting the second half of 2012.  Our planned share repurchase activity for 2012 is expected to add approximately $0.30 to our full year results, which should help partially offset this impact.  We expect the third quarter of 2012 to be impacted by seasonality, ongoing shipments of low margin legacy backlog and currency.  But, our fourth quarter is shaping up to clearly be our strongest of the year.  After considering the net impact of all these factors, we are reaffirming our 2012 earnings guidance of $8.00 to $8.80 per share."

Operational Performance

Tom Pajonas, senior vice president and chief operating officer, said, "Our commitment to our "One Flowserve" operational improvement initiatives supported our operating results this quarter. We advanced initiatives on low cost sourcing, on-time delivery and cost of quality across our platforms, where management focus and discipline remain key to execution.  Expected margin quality in backlog continued to improve with increased project visibility, improved markets and continued bid discipline and selectivity across all our platforms.

"The Engineered Product Division (EPD) capitalized on improving business conditions, driving bookings growth over 10% on a constant currency basis, with original equipment and aftermarket growth in the general, oil and gas and chemical industries.  Similar to the first quarter, gross margins were challenged due to the shipment of low margin legacy backlog.  However, we are working through the remaining legacy backlog, and increased discipline and selectivity in EPD's recent order intake has improved the expected margins in its order book.  Despite the gross margin headwinds, operating margin was up, benefitting from our renewed operational focus and improved SG&A leverage."

Pajonas added, "The Industrial Product Division (IPD) delivered solid performance this quarter, demonstrating that its recovery plan remains on track and is gaining momentum.  Bookings increased on the strength of original equipment orders in the general and chemical industries.  Sales increases were driven by original equipment and aftermarket shipments to North America, the Middle East and Africa, somewhat offset by a decrease in Latin America.  Gross margin and operating margin improved both sequentially and year over year, supported by operational improvements.

"The Flow Control Division (FCD) continued to deliver solid performance in the second quarter.  Bookings were relatively flat on a constant currency basis, even with a difficult comparison to the second quarter of 2011, which saw the highest bookings in FCD's history.  Overall, bookings were impacted by reduced original equipment bookings in Europe and Latin America and increased selectivity in oil and gas orders, somewhat offset by select opportunities in the nuclear power business.  Sales increased 11% on a constant currency basis, with increased sales into Asia Pacific and the Americas offsetting softness in Europe and the Middle East.  Margins decreased due to a sales mix shift to original equipment and a product mix shift, reflecting the shipment of certain lower margin oil and gas projects strategically bid in early 2011 to build our aftermarket base in this sector."

Segment Overview (all comparisons versus second quarter 2011 unless otherwise noted)

Engineered Product Division (EPD)

EPD bookings for the second quarter of 2012 were $602.8 million, an increase of $14.7 million, up 2.5%, or 10.2% excluding negative currency effects of approximately $45 million. EPD sales for the second quarter of 2012 were $586.7 million, an increase of $29.4 million, up 5.3%, or 13.2% excluding negative currency effects of approximately $44 million.

EPD gross profit for the second quarter of 2012 was $195.7 million, up $3.7 million or 1.9%.  Gross margin for the second quarter of 2012 decreased 110 basis points to 33.4%, which was primarily attributable to certain large projects that shipped from backlog at low margins, partially offset by a sales mix shift to higher margin aftermarket and the effects of lower costs associated with operational execution improvements.

EPD operating income for the second quarter of 2012 increased to $95.1 million, up $8.4 million or 9.7%, including negative currency effects of approximately $8 million. The increase was primarily attributable to reduced SG&A and increased gross profit.  Operating margin increased 60 basis points to 16.2%. 

Industrial Product Division (IPD)

IPD bookings for the second quarter of 2012 were $242.9 million, an increase of $14.1 million, up 6.2%, or 11.8% excluding negative currency effects of approximately $13 million.  IPD sales for the second quarter of 2012 were $231.7 million, an increase of $7.2 million, up 3.2%, or 9.4% excluding negative currency effects of approximately $14 million.

IPD gross profit for the second quarter of 2012 increased to $55.8 million, up $11.6 million or 26.2%.  Gross margin for the second quarter of 2012 increased 440 basis points to 24.1%, which was primarily attributable to IPD recovery plan realignment costs incurred in the second quarter of 2011 that did not recur in 2012.

IPD operating income for the second quarter of 2012 increased to $23.8 million, up $14.2 million or 147.9%, which includes negative currency effects of $2 million.  The increase was primarily attributable to increased gross margin and reduced SG&A.  Operating margin increased 600 basis points to 10.3%.

Flow Control Division (FCD)

FCD bookings for the second quarter of 2012 were $411.6 million, a decrease of $28.4 million, down 6.5%, or 0.5% excluding negative currency effects of approximately $26 million.  FCD sales for the second quarter of 2012 were $401.5 million, an increase of $14.4 million, up 3.7%, or 11.0% excluding negative currency effects of approximately $28 million.

FCD gross profit for the second quarter of 2012 increased to $132.3 million, up $0.4 million or 0.3%.  Gross margin for the second quarter of 2012 decreased 110 basis points to 33.0%, which was primarily attributable to product line mix and a sales mix shift to original equipment.

FCD operating income for the second quarter of 2012 increased to $60.4 million, up $0.5 million or 0.8%, including negative currency effects of approximately $4 million.  The increase was primarily attributable to slightly improved gross profit and reduced SG&A.  Operating margin decreased 50 basis points to 15.0%.

Conference Call

The conference call will take place on Tuesday, July 31, 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.

 

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CONDENSED CONSOLIDATED STATEMENTS OF INCOME    
(Unaudited)    
     
(Amounts in thousands, except per share data)Three Months Ended June 30, 
 2012 2011 
     
Sales $1,182,225  $  1,125,752 
Cost of sales     (797,623)        (756,414) 
Gross profit      384,602         369,338 
Selling, general and administrative expense     (223,892)        (232,983) 
Net earnings from affiliates         4,086            3,751 
Operating income      164,796         140,106 
Interest expense        (8,922)           (9,534) 
Interest income            237               394 
Other (expense) income, net        (8,046)            5,985 
Earnings before income taxes      148,065         136,951 
Provision for income taxes      (39,580)          (38,227) 
Net earnings, including noncontrolling interests      108,485           98,724 
Less: Net (earnings) loss attributable to noncontrolling interests        (1,169)                   8 
Net earnings attributable to Flowserve Corporation $   107,316  $       98,732 
     
Net earnings per share attributable to Flowserve Corporation common shareholders:    
Basic $        1.99  $          1.77 
Diluted           1.98              1.76 
     
Cash dividends declared per share $        0.36  $          0.32 
     
     
     
CONDENSED CONSOLIDATED STATEMENTS OF INCOME    
(Unaudited)    
     
(Amounts in thousands, except per share data)Six Months Ended June 30, 
 2012 2011 
     
Sales $2,257,205  $  2,122,959 
Cost of sales  (1,513,420)     (1,405,926) 
Gross profit      743,785         717,033 
Selling, general and administrative expense     (445,781)        (455,622) 
Net earnings from affiliates         9,315            8,948 
Operating income      307,319         270,359 
Interest expense      (17,731)          (18,139) 
Interest income            519               883 
Other (expense) income, net      (12,985)           14,474 
Earnings before income taxes      277,122         267,577 
Provision for income taxes      (75,095)          (71,857) 
Net earnings, including noncontrolling interests      202,027         195,720 
Less: Net earnings attributable to noncontrolling interests        (1,586)                  (5) 
Net earnings attributable to Flowserve Corporation $   200,441  $     195,715 
     
Net earnings per share attributable to Flowserve Corporation common shareholders:    
Basic $        3.70  $          3.51 
Diluted           3.67              3.48 
     
Cash dividends declared per share $        0.72  $          0.64 
     
     
     
CONDENSED CONSOLIDATED BALANCE SHEETS     
(Unaudited)    
     
(Amounts in thousands, except per share data)June 30, December 31, 
 20122011 
     
ASSETS    
Current assets:    
Cash and cash equivalents $   175,213  $     337,356 
Accounts receivable, net of allowance for doubtful accounts of $19,174 and $20,351, respectively   1,057,642      1,060,249 
Inventories, net   1,149,178      1,008,379 
Deferred taxes      126,605         121,905 
Prepaid expenses and other      109,009         100,465 
Total current assets   2,617,647      2,628,354 
Property, plant and equipment, net of accumulated depreciation of $749,973 and $719,992, respectively      591,805         598,746 
Goodwill   1,042,410      1,045,077 
Deferred taxes       19,291           17,843 
Other intangible assets, net      154,839         163,482 
Other assets, net      179,891         169,112 
Total assets $4,605,883  $  4,622,614 
     
LIABILITIES AND EQUITY    
Current liabilities:    
Accounts payable $   541,925  $     597,342 
Accrued liabilities      831,182         808,601 
Debt due within one year      370,635           53,623 
Deferred taxes         8,848           10,755 
Total current liabilities   1,752,590      1,470,321 
Long-term debt due after one year      426,140         451,593 
Retirement obligations and other liabilities      429,549         422,470 
Shareholders' equity:    
Common shares, $1.25 par value       73,664           73,664 
Shares authorized - 120,000    
Shares issued - 58,931 and 58,931, respectively    
Capital in excess of par value      538,944         621,083 
Retained earnings   2,367,469      2,205,524 
    2,980,077      2,900,271 
Treasury shares, at cost - 8,080 and 5,025 shares, respectively     (765,729)        (424,052) 
Deferred compensation obligation       10,554            9,691 
Accumulated other comprehensive loss     (237,302)        (216,097) 
Total Flowserve Corporation shareholders' equity   1,987,600      2,269,813 
Noncontrolling interest       10,004            8,417 
Total equity   1,997,604      2,278,230 
Total liabilities and equity $4,605,883  $  4,622,614 
     
     
     
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS    
(Unaudited)    
     
(Amounts in thousands)Six Months Ended June 30, 
 2012 2011 
     
Cash flows - Operating activities:    
Net earnings, including noncontrolling interests $   202,027  $     195,720 
Adjustments to reconcile net earnings to net cash provided (used) by operating
  activities:
    
Depreciation       44,340           44,373 
Amortization of intangible and other assets       10,172            8,299 
Net gain on disposition of assets      (10,549)              (595) 
Excess tax benefits from stock-based compensation arrangements      (10,946)           (5,021) 
Stock-based compensation       15,425           16,271 
Net earnings from affiliates, net of dividends received        (4,723)            1,623 
Change in assets and liabilities:    
Accounts receivable, net      (13,317)        (121,537) 
Inventories, net     (155,739)        (161,296) 
Prepaid expenses and other      (16,617)          (32,670) 
Other assets, net        (7,219)           (6,091) 
Accounts payable      (46,763)        (114,811) 
Accrued liabilities and income taxes payable       49,908          (75,279) 
Retirement obligations and other liabilities         5,140           11,000 
Net deferred taxes           (764)            2,219 
Net cash flows provided (used) by operating activities       60,375        (237,795) 
     
Cash flows - Investing activities:    
Capital expenditures      (56,885)          (48,498) 
Proceeds from disposal of assets         7,902            3,735 
Payments for acquisition, net of cash acquired        (3,996)              (890) 
Affiliate investing activity        (1,620)                 -    
Net cash flows used by investing activities      (54,599)          (45,653) 
     
Cash flows - Financing activities:    
Excess tax benefits from stock-based compensation arrangements       10,946            5,021 
Payments on long-term debt      (12,500)          (12,500) 
Proceeds from short-term financing, net      300,000                 -    
Borrowings under other financing arrangements, net         4,826            4,348 
Repurchase of common shares     (432,898)          (26,025) 
Payments of dividends      (37,082)          (33,977) 
Other           (460)               224 
Net cash flows used by financing activities     (167,168)          (62,909) 
Effect of exchange rate changes on cash           (751)           10,090 
Net change in cash and cash equivalents     (162,143)        (336,267) 
Cash and cash equivalents at beginning of year      337,356         557,579 
Cash and cash equivalents at end of period $   175,213  $     221,312 
     
     
     
SEGMENT INFORMATION    
     
ENGINEERED PRODUCT DIVISIONThree Months Ended June 30, 
(Amounts in millions, except percentages)2012 2011 
Bookings $      602.8  $         588.1 
Sales         586.7            557.3 
Gross profit         195.7            192.0 
Gross profit margin33.4% 34.5% 
Operating income           95.1              86.7 
Operating margin16.2% 15.6% 
     
INDUSTRIAL PRODUCT DIVISIONThree Months Ended June 30, 
(Amounts in millions, except percentages)2012 2011 
Bookings $      242.9  $         228.8 
Sales         231.7            224.5 
Gross profit           55.8              44.2 
Gross profit margin24.1% 19.7% 
Operating income             23.8                9.6 
Operating margin10.3% 4.3% 
     
FLOW CONTROL DIVISIONThree Months Ended June 30, 
(Amounts in millions, except percentages)2012 2011 
Bookings $      411.6  $         440.0 
Sales         401.5            387.1 
Gross profit         132.3            131.9 
Gross profit margin33.0% 34.1% 
Operating income           60.4              59.9 
Operating margin15.0% 15.5% 
     
     
     
SEGMENT INFORMATION    
     
ENGINEERED PRODUCT DIVISIONSix Months Ended June 30, 
(Amounts in millions, except percentages)2012 2011 
Bookings $    1,265.7  $      1,187.6 
Sales      1,121.5          1,081.1 
Gross profit         379.1            380.2 
Gross profit margin33.8% 35.2% 
Operating income         187.2            178.4 
Operating margin16.7% 16.5% 
     
INDUSTRIAL PRODUCT DIVISIONSix Months Ended June 30, 
(Amounts in millions, except percentages)2012 2011 
Bookings $      474.8  $         453.7 
Sales         444.9            400.8 
Gross profit         105.4              89.5 
Gross profit margin23.7% 22.3% 
Operating income             41.2              22.7 
Operating margin9.3% 5.7% 
     
FLOW CONTROL DIVISIONSix Months Ended June 30, 
(Amounts in millions, except percentages)2012 2011 
Bookings $      791.6  $         817.3 
Sales         765.4            724.7 
Gross profit         259.5            247.5 
Gross profit margin33.9% 34.2% 
Operating income         116.0            107.5 
Operating margin15.2% 14.8% 
     
     
     
     

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Investor Contact: Mike Mullin, Director, Investor Relations (972) 443-6636
Media Contact: Steve Boone, Director, Global Communications and Public Affairs, (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 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; access to public and private sources of debt financing; 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.

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