Flowserve Files 2004 Form 10-K; Announces Financial Results for 2004 and Prior Years

Flowserve Corp. (NYSE:FLS) today announced financialresults for 2004, and restated results for 2000 through the firstquarter of 2004. The company also said it has filed its 2004 Form 10-KAnnual Report with the Securities and Exchange Commission.
Announcement Highlights:

-- 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.

-- 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
restatement.

-- 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
internal controls.

-- An adverse audit opinion on the effectiveness of its
internal controls.

-- Reported material weaknesses in the internal control areas
previously disclosed in summary overview form in past news
releases.

-- 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 restatementand 2004 financial statements closing behind us," said FlowservePresident and Chief Executive Officer Lewis M. Kling. "While thisprocess took longer than expected, we were unwilling to compromise ourcommitment to thoroughness and accuracy."

2004 Financial Results

As previously announced, full year 2004 bookings increased 10percent to $2.66 billion compared with $2.42 billion in the prioryear. Year-end 2004 backlog stood at $836.4 million compared with$818.2 million at the end of the prior year. Sales increased 11percent to $2.64 billion in 2004 compared with restated $2.37 billionin 2003. Bookings and sales for 2004 each benefited by approximately 5percent from currency effects, while backlog benefited byapproximately 4 percent.

Operating income in 2004 increased 10 percent to $155.8 million,compared with $141.9 million in 2003. The increase is attributable tooperational improvements from the company's Continuous ImprovementProcess initiative, which resulted in cost savings, synergies and ahigher mix of aftermarket business, which generally has a highermargin. In addition, 2004 operating income included currency effectsof approximately $14 million and a $22.7 million reduction inintegration and restructuring expenses. These positive results wereoffset 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 reservefor obsolete and slow-moving inventory in the company's Flow ControlDivision. Operating margin percentage was 5.9 percent in 2004 comparedwith restated 6.0 percent in 2003.

For full year 2004, net income was $24.2 million, or 43 cents ashare, compared with restated net income of $44.5 million, or 80 centsa share, in full year 2003. Net income from continuing operations,which excludes the results of the company's government and marinebusiness, which was sold in November 2004, was $20.2 million, or 36cents a share, in 2004 compared with restated $43.1 million, or 78cents a share, in 2003.

Results for full year 2004 were impacted by an unusually largeprovision for income taxes of $39.5 million, resulting in an effectivetax rate of 66 percent, compared with a 23 percent effective tax ratein 2003. The 2004 effective tax rate differed from the federalstatutory rate of 35 percent primarily due to the $23.3 million of nettax impact from foreign operations which resulted from significantforeign accumulated earnings repatriation to pay down U.S. debt andincreases in non-U.S. tax reserves. The company also confirmed thatthe previously announced IRS tax audit of the company covering theyears 1999 through 2001 was resolved with little cash impact on thecompany.

As previously reported, in 2004 the company made effective debtrepayments totaling $210 million, exceeding prior year repayments of$164 million. The 2004 debt repayment included $22.9 million from theproceeds of the sale of the company's government and marine businessin November 2004. The actual balance sheet reduction of debt in 2004was $258 million, with effective additional financing of $48 millionprovided by an asset securitization facility established in October2004. The company terminated this facility in October 2005.

2004 Division Results

The Flowserve Pump Division reported sales of $1.33 billion, anincrease 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 byapproximately 5 percent from currency. Operating income was $110.1million in 2004, an increase of 28 percent, compared with restated$85.9 million in 2003. Operating income in 2004 benefited by highersales, a more favorable mix of business, the company's operationalexcellence initiative, and by approximately 8 percent from currency.Operating income for 2004 also benefited from an $8.5 million gainfrom an insurance claim for patterns destroyed in a foundry fire andby $2.9 million from the contribution from TKL, an Australian pumpoperation that was acquired in March 2004. These were partially offsetby a $16.5 million increase in divisional incentive compensation.Operating margin increased to 8.3 percent in 2004 compared withrestated 7.4 percent in 2003.

The Flow Control Division reported sales of $954.5 million in2004, an increase of 8 percent, compared with restated $881.4 millionin 2003. Bookings increased 9 percent to $967.8 million in 2004,compared with $890.5 million in 2003. Sales and bookings in 2004 eachbenefited by approximately 5 percent from currency effects. Operatingincome was $59.6 million in 2004, compared with restated $38.4 millionin 2003. Operating income in 2004 was favorably impacted byapproximately 7 percent from currency effects, which was more thanoffset by the previously discussed $14.1 million increase in theprovision for obsolete and slow-moving inventory and a $10.3 millionincrease in divisional incentive compensation. Operating margin was6.2 percent in 2004 compared with restated 4.4 percent in 2003.

The Flow Solutions Division reported sales of $394.0 million, anincrease of 10 percent, compared with $357.7 million in 2003. Bookingsincreased 9 percent to $395.0 million in 2004, compared with $361.1million in 2003. Sales and bookings in 2004 each benefited byapproximately 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 fromcurrency effects, which was primarily offset by a $8.2 millionincrease in divisional incentive compensation, an increase inworldwide metals prices and an increase in the reserve for slow-movinginventory. Operating margin was 18.4 percent in 2004 compared withrestated 20.7 percent in the prior year.

Restatement Work Completed

"We have completed the restatement, received an unqualifiedopinion on our 2004 financial statements, and filed our 2004 Form10-K," said Chief Financial Officer Mark A. Blinn. "Now, we canrefocus on closing out 2005 and completing our 2005 consolidatedfinancial statements and related audit."

Kling added, "I emphasize that this comprehensive and detailedrestatement effort was successfully conducted while we continued toeffectively manage and improve our business. Moreover, with theseissues now behind us, the new leadership team that we assembled in thelast two years can now increase its attention to further implementingour operational excellence and process improvement initiatives,growing our business, improving our internal controls and operations,and furthering Flowserve's transition into a global solutionscompany."

The company restated its financial statements for 2002, 2003 andthe first quarter of 2004. The cumulative net reduction in netearnings from the restatement adjustments, including net charges priorto Jan. 1, 2002, was $35.9 million, primarily related to intercompanyaccounts, long-term contract accounting, financial derivatives,inventory valuation, pension expense, fixed assets and intangibles,unclaimed property, tax matters, and other adjustments fromunreconciled accounts. The amount of net charges arising prior to 2002is reflected in the financial statements as a $13.7 million reductionto beginning retained earnings as of Jan. 1, 2002, and is included inthe $35.9 million cumulative net reduction in net earnings. The netcharge from the restatement reduced previously reported net earningsfor 2002 and 2003 by $10.7 million and $8.4 million, respectively, orby 20 cents and 16 cents a share, respectively, and reduced previouslyreported 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 tothe 2004 financial statements and this restatement, which is due tothe degree of thoroughness and depth of our analysis throughout thisprocess," Blinn said.

As part of its assessment of internal control over financialreporting under Section 404 of the Sarbanes-Oxley Act and therestatement, the company performed additional analyses and otherprocedures to further ensure that its consolidated financialstatements were prepared in accordance with generally acceptedaccounting principles (GAAP). These procedures included, among otherthings, expansion of its year-end closing procedures and dedication ofsignificant internal resources and external consultants to scrutinizeaccount analyses and reconciliations at a detailed level.

The company conducted expanded assessments of customer shipmentsat certain of its locations for revenue cut-off; analyzed certainlong-term sales contracts; analyzed pending litigation matters;analyzed leasehold improvements for proper classification andamortization; analyzed inventory reserves, including obsolete and slowmoving 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 factoringand securitization arrangements; analyzed accounting for financialderivatives; analyzed purchase accounting for acquired businesses;performed expanded procedures on the existence, depreciation anddisposals of fixed assets; performed expanded analyses ofintercompany, income tax and foreign currency translation accounts;and conducted site visits at selected locations to perform additionalaccount balance examinations. As a result of these and other expandedprocedures, the company believes that the financial statementsincluded it its 2004 Form 10-K present fairly, in all materialrespects, its financial position, results of operations and cash flowsfor the periods presented in conformity with GAAP.

The company said that its review of deferred tax accountingpursuant to requirements of APB 23, as described in its Feb. 6, 2006,news release, resulted in no adjustment to the current financialstatements, although its provision of deferred income taxes onunremitted foreign earnings could impact future financial statements.

"As a result of our restatement and Sarbanes-Oxley work, we areaggressively implementing a number of initiatives to improve ourprocesses and controls and strengthen our finance organization, whichwill help us achieve our goal of taking Flowserve to the next level ofsuccess," Blinn said. "I am confident Flowserve will be well served bythese important investments in our future."

Internal Controls Update

The company confirmed that, as previously announced, it hadmaterial weaknesses in internal controls as of Dec. 31, 2004. As aresult, the company received an adverse audit opinion on theeffectiveness of its internal controls. However, the company receivedan unqualified opinion on management's assessment of internal controlsover financial reporting.

The material weaknesses in the company's internal controls as ofDec. 31, 2004, summaries of which the company has previously disclosedin news releases, are reported in the company's 2004 Form 10-K filedtoday. All of these issues were actively addressed in 2005. Whilesubstantial improvements were made, not all of these weaknesses werefully remediated by Dec. 31, 2005. The company will continue to takeall actions necessary to cause its financial statements in its 2005Form 10-K filing to be fairly stated in accordance with GAAP.

Conference Call

The company will hold a conference call today at 5:00 p.m. EasternTime to discuss today's announcements. This conference call can beaccessed through the company's website at www.flowserve.com. Moreinformation about Flowserve Corp. can also be obtained by visitingthis website.

Flowserve Corp. is one of the world's leading providers of fluidmotion and control products and services. Operating in 56 countries,the company produces engineered and industrial pumps, seals and valvesas well as a range of related flow management services.

SAFE HARBOR STATEMENT: This news release includes forward-lookingstatements. Forward looking statements are all statements that are notstatements of historical facts and include, without limitation,statements relating to our business strategy and statements ofexpectations, beliefs, future plans and strategies and anticipateddevelopments concerning our industry, business, operations andfinancial 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 toidentify forward-looking statements. The forward-looking statementsmade in this news release are made pursuant to safe harbor provisionsof the Private Securities Litigation Reform Act of 1995. Theseforward-looking statements involve known and unknown risks,uncertainties and other factors that, in some cases, are beyond ourcontrol. These risks, uncertainties and factors may cause our actualresults, performance and achievements, or industry results and markettrends, to be materially different from any future results,performance, achievements or trends expressed or implied by suchforward-looking statements. Important risks, uncertainties and otherfactors that could cause actual results to differ from theseforward-looking statements include, but are not limited to, thefollowing: delays in future reports of the Company's management andoutside auditors on the Company's internal control over financialreporting and related certifications; continuing delays in theCompany's filing of its periodic public reports and any SEC, NYSE ordebt rating agencies' actions resulting therefrom; the possibility ofadverse consequences of the pending securities litigation and SECinvestigations; the possibility of adverse consequences ofgovernmental tax audits of the Company's tax returns, including theupcoming IRS audit of the company's U.S. tax returns for the years2002 through 2004; the Company's ability to convert bookings, whichare not subject to nor computed in accordance with generally acceptedaccounting principles, into revenues at acceptable, if any, profitmargins, since such profit margins cannot be assured nor benecessarily assumed to follow historical trends; changes in thefinancial markets and the availability of capital; changes in thealready competitive environment for the Company's products orcompetitors' responses to the Company's strategies; the Company'sability to integrate acquisitions into its management and operations;political risks, military actions or trade embargoes affectingcustomer markets, including the continuing conflict in Iraq and itspotential impact on Middle Eastern markets and global petroleumproducers; the Company's ability to comply with the laws andregulations affecting its international operations, including the U.S.export laws, and the effect of any noncompliance; the health of thepetroleum, chemical, power and water industries; economic conditionsand the extent of economic growth in the U.S. and other countries andregions; unanticipated difficulties or costs associated with theimplementation of systems, including software; the Company's relativegeographical profitability and its impact on the Company's utilizationof foreign tax credits; the recognition of significant expensesassociated with realigning operations of acquired companies with thoseof Flowserve; the Company's ability to meet the financial covenantsand other requirements in its debt agreements; any terrorist attacksand the response of the U.S. to such attacks or to the threat of suchattacks; technological developments in the Company's products ascompared with those of its competitors; changes in prevailing interestrates and the Company's effective interest costs; and adverse changesin the regulatory climate and other legal obligations imposed on theCompany. It is not possible to foresee or identify all the factorsthat may affect our future performance or any forward-lookinginformation, and new risk factors can emerge from time to time. Giventhese risks and uncertainties, you should not place undue reliance onforward-looking statements as a prediction of actual results. Allforward-looking statements included in this news release are based oninformation available to us on the date of this news release. Weundertake no obligation to revise or update any forward-lookingstatement or disclose any facts, events or circumstances that occurafter the date hereof that may affect the accuracy of anyforward-looking statement.