Flowserve Reports Record Second Quarter EPS of $2.13, up 92%

Flowserve Corp. (NYSE:FLS), a global leader in the fluid motion and control industry, announced today record second quarter performance including earnings per share, sales and bookings. The company announced second quarter fully diluted EPS of $2.13, up 92%, and operating income of $171.6 million, up 77%, over the second quarter of 2007. This earnings growth significantly outpaced strong quarterly sales growth of 24%, compared to the same quarter of 2007. Flowserve also posted record second quarter bookings of $1.31 billion, up 24%, over the prior year period, led by continued strong growth of both its original equipment and aftermarket business. Additionally, the company significantly raised its 2008 full year EPS target range forecast to between $7.20 and $7.50, from the previously announced range of $5.90 to $6.20. Highlights Second Quarter of 2008 (all comparisons versus the second quarter of 2007, unless otherwise noted) Record second quarter fully diluted EPS of $2.13 (including $0.16 in benefits from tax items), up 92%, from $1.11 Record bookings of $1.31 billion, up 24% from $1.05 billion Record second quarter sales of $1.16 billion, up 24% from $931 million Significant gross margin performance, up 360 basis points from 32.5% to 36.1% Strong reduction of SG&A of 80 basis points, as a percentage of sales, from 22.5% to 21.7% Record second quarter operating income of $171.6 million, up $75 million, or 77% Substantial operating margin performance, up 440 basis points from 10.4% to 14.8% Record backlog of $3.05 billion, up 34%, compared to December 31, 2007 The First Half of 2008 (all comparisons versus the first half of 2007, unless otherwise noted) Record fully diluted EPS of $3.66, up 117% from $1.69 Record bookings of $2.74 billion, up 28% from $2.14 billion Record sales of $2.15 billion, up 24% from $1.73 billion Significant reduction of SG&A of 130 basis points, as a percentage of sales, from 23.8% to 22.5% Significant operating margin performance, up 400 basis points, from 9.5% to 13.5% Discussion and analysis of the second quarter of 2008 financial results (all comparisons versus the second quarter of 2007, unless otherwise noted) Fully diluted EPS increased sharply to a second quarter record $2.13 per share, up 92%. EPS was higher primarily due to improvements in operating income driven by an increase in sales of 24%, an improvement in gross margin of 360 basis points and a reduction of 80 basis points for Selling, General & Administrative (SG&A) expenses as a percentage of sales. EPS for the quarter also included a $0.16 benefit from tax items. Bookings increased significantly to $1.31 billion, up $257 million, or 24%, including currency benefits of approximately $97 million. This is the sixth consecutive quarter of bookings exceeding $1 billion. The increase is attributable to strong growth in the power and chemical markets, as well as continued strength in the oil and gas markets, primarily in Asia Pacific, Europe, the Middle East and Africa (EMA) and North America. Backlog increased 34% to a record $3.05 billion from $2.28 billion at December 31, 2007. Currency effects provided an increase of approximately $111 million, and the first quarter acquisition of Niigata Worthington additionally contributed approximately $89 million to this closing backlog. "As a leader in its industry, Flowserve is continuing to execute well against both its original equipment and aftermarket strategies,” said Lewis Kling, Flowserve President and CEO. "We also continue to see strength in our large project infrastructure business globally in the oil and gas, power, chemical and water markets.” Sales increased to $1.16 billion, up $227 million, or 24%. This increase included currency benefits of approximately $85 million. The increase is attributable to strong growth in the power and chemical markets, as well as continued strength in the oil and gas market. Gross profit increased to $418 million, up $116 million, or 38%. Gross margin increased by 360 basis points to 36.1%. The increase reflected price increases, higher sales volumes, which positively impacted fixed cost absorption, ongoing operational excellence initiatives and the success of the company’s end-user aftermarket strategy, which resulted in a higher level of aftermarket sales. SG&A expenses as a percentage of sales decreased 80 basis points to 21.7%. The improvement was primarily attributable to leverage from higher sales and cost containment initiatives. SG&A, in total, increased to $251 million, up $41 million, or 20%, which demonstrated leverage when compared to the sales increase of 24%. The SG&A increase was primarily attributable to an increase in commissions and other selling related expenses in support of the significant rise in bookings and sales, other employee related costs, including increased incentive accruals, and a currency related increase. "We are well on our way to our target goal of SG&A as percentage of sales at or below 20 percent with corporate expenses within our 200-300 basis point target,” said Mark Blinn, Flowserve Senior Vice President, Chief Financial Officer and Latin America Operations. "As a priority for our organization, I am pleased to see us continue to leverage our SG&A costs to continue to drive improvement in our operating income.” Operating income increased significantly to $172 million, up $75 million, or 77%. Operating income benefited from higher sales, significantly improved gross profit and leverage of SG&A expenses. Operating margin increased 440 basis points from 10.4% to 14.8%. "We have once again delivered quarterly record bookings, record sales and record earnings to our shareholders,” said Kling. "These second quarter record results show continued strength in our end-markets, strong leverage in our income statement, and most important, successful execution of our key strategies.” "We are also pleased that strong second quarter operating performance provided cash flows to make an optional $50 million contribution to our U.S. pension plan, repurchase $35 million of common stock and eliminate $27 million of accounts receivable factoring, as well as continue to invest in the growth of our business,” Blinn added. Flowserve Pump Division Flowserve Pump Division (FPD) bookings for the second quarter 2008 increased significantly to $736 million, up $120 million, or 20%, including currency benefits of approximately $58 million. The remaining increase was attributable to increased bookings in EMA, Asia Pacific and North America and also included $16 million provided by the acquisition of Niigata Worthington. It was primarily spread across the power, chemical, water and general industry markets. Bookings of original equipment increased approximately 17%, while aftermarket bookings increased approximately 24%. "Given the strength in the company's core end-markets and expectations for continued strong execution, we anticipate pump division second half bookings to be even stronger than the first half,” said Kling. FPD sales for the second quarter of 2008 increased to $633 million, up $108 million, or 21%, including currency benefits of approximately $49 million. The acquisition of Niigata Worthington provided approximately $29 million in additional sales. Sales of original equipment increased 17%, and aftermarket sales grew 29%. The aftermarket sales mix increased 200 basis points to approximately 41% in the second quarter of 2008, from approximately 39% in the second quarter of 2007. FPD gross profit increased to $206 million, up $62 million, or 43%. Gross margin for the second quarter of 2008 increased 510 basis points to 32.5%. This increase was favorably impacted by better original equipment pricing, improved aftermarket growth, better capacity utilization and absorption as a result of higher sales volumes, operational excellence initiatives, as well as specialty pumps produced in the period. FPD operating income for the second quarter of 2008 increased to $103 million, up $38 million, or 59%, including currency benefits of approximately $9 million. The significant increase was primarily attributable to the $62 million increase in gross profit, partially offset by a $24 million increase in SG&A primarily related to increased selling and marketing-related expenses in support of increased bookings and sales and $7 million of Niigata Worthington SG&A and related integration costs. Operating margin improved substantially from 12.4% to 16.3%. Flow Control Division Flow Control Division (FCD) bookings for the second quarter of 2008 increased to $430 million, up $115 million, or 36%, including currency benefits of approximately $30 million. The increase was generally attributable to sustained strength across all key end-markets. FCD sales for the second quarter of 2008 increased to $370 million, up $85 million, or 30%, including currency benefits of approximately $26 million. The increase was the result of increased sales in all key markets, particularly the power market in North America and Latin America, the power and oil and gas markets in EMA and the chemical market in Asia Pacific. FCD gross profit increased to $133 million, up $32 million, or 31%. Gross margin improved 30 basis points to 35.9%. Gross margin increases resulting from price increases, improved fixed cost absorption on higher sales and the implementation of various continuous improvement process (CIP) initiatives were partially offset by inflation in materials costs and a higher mix of project sales. FCD operating income increased to $63 million, up $22 million, or 53%, including approximately $5 million in currency benefits. The increase was primarily due to the $32 million improvement in gross profit and a benefit from a contract settlement of $2.3 million, partially offset by higher selling costs and increased R&D spending. Operating margin improved 260 basis points from 14.4% to 17.0%. "The Flow Control Division continued this quarter to enhance its already impressive operating results through operational excellence initiatives that helped drive operating income increases and operating margin expansion,” said Kling. Flow Solutions Division Flow Solutions Division (FSD) bookings for the second quarter of 2008 increased to $170 million, up $31 million, or 23%, including currency benefits of approximately $9 million. This increase is primarily attributable to increased aftermarket bookings in all regions and increased original equipment bookings in EMA and Latin America. FSD sales increased to $174 million, up $40 million, or 29%, including currency benefits of approximately $9 million. The increase was driven primarily by continued growth in EMA and North America, particularly in the chemical and oil and gas markets. FSD gross profit increased to $80 million, up $18 million, or 30%. Gross margin for the second quarter of 2008 increased 20 basis points to 45.7%. The increase was principally the result of improved fixed cost absorption on higher sales, improved pricing and the impact of cost savings initiatives partially offset by a product mix shift towards lower margin project business in EMA, Latin America and North America. FSD operating income for the second quarter of 2008 increased to $38 million, up $12 million, or 45%, including currency benefits of approximately $3 million. FSD operating margin increased 240 basis points to 21.6%, primarily due to the $18 million improvement in gross profit and a benefit from a legal settlement of $1.3 million, partially offset by increased SG&A expenses related to an increase in selling-related expenses in support of the rise in bookings and sales and engineering personnel, as well as related infrastructure to support the global growth of its business through its Quick Response Center (QRC) platform. "The Flow Solutions Division continues to drive its aftermarket strategy by providing expertise and service to our customers through Quick Response Centers across the globe,” said Mr. Kling. "This end-user strategy, along with the continued strength in our end-markets, continued to drive double-digit growth in both quarterly bookings and sales.” Outlook "Based on the current trends, subject to FIN 48, the company expects a structural tax rate for the remainder of 2008 and 2009 of 29% or less and benefits in 2008 of 200 to 400 basis points from ongoing tax planning. Additional tax planning should also benefit future periods as well,” said Blinn. Mr. Kling added, "Based on our second quarter results, continued strength in our key markets, confidence in our ability to successfully execute in the current global environment and progress in our operational excellence initiatives and tax planning work, we are significantly raising our 2008 full year EPS target range forecast to between $7.20 and $7.50, from our previously announced range of $5.90 to $6.20.” Conference Call The conference call will take place on Thursday, July 31 at 11:00 AM Eastern. 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 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; 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.   CONDENSED CONSOLIDATED STATEMENTS OF INCOME   (Amounts in thousands, except per share data)   Three Months Ended June 30,   2008       2007     Sales $ 1,157,605 $ 930,677 Cost of sales   (739,635 )   (628,262 ) Gross profit 417,970 302,415 Selling, general and administrative expense (250,901 ) (209,537 ) Net earnings from affiliates   4,512     4,030   Operating income 171,581 96,908 Interest expense (12,732 ) (15,761 ) Interest income 1,605 486 Other income, net   575     2,338   Earnings before income taxes 161,029 83,971 Provision for income taxes   (38,165 )   (20,766 ) Net earnings $ 122,864   $ 63,205       Earnings per share: Basic $ 2.16 $ 1.12 Diluted 2.13 1.11   Cash dividends declared per share $ 0.25 $ 0.15   CONDENSED CONSOLIDATED STATEMENTS OF INCOME   (Amounts in thousands, except per share data)   Six Months Ended June 30,   2008       2007     Sales $ 2,150,924 $ 1,734,077 Cost of sales   (1,387,108 )   (1,166,188 ) Gross profit 763,816 567,889 Selling, general and administrative expense (484,029 ) (413,118 ) Net earnings from affiliates   10,484     9,560   Operating income 290,271 164,331 Interest expense (25,591 ) (29,832 ) Interest income 4,460 1,572 Other income, net   17,055     935   Earnings before income taxes 286,195 137,006 Provision for income taxes   (75,264 )   (40,187 ) Net earnings $ 210,931   $ 96,819       Earnings per share: Basic $ 3.71 $ 1.72 Diluted 3.66 1.69   Cash dividends declared per share $ 0.50 $ 0.30   CONDENSED CONSOLIDATED BALANCE SHEETS     June 30,   December 31, (Amounts in thousands, except per share data)   2008     2007     ASSETS Current assets: Cash and cash equivalents $ 136,742 $ 370,575 Restricted cash 360 2,663 Accounts receivable, net of allowance for doubtful accounts of $18,238 and $14,219, respectively 919,856 666,733 Inventories, net 892,810 680,199 Deferred taxes 109,319 105,221 Prepaid expenses and other   87,317     71,380   Total current assets 2,146,404 1,896,771 Property, plant and equipment, net of accumulated depreciation of $628,828 and $575,280, respectively   508,743 488,892 Goodwill 858,113 853,265 Deferred taxes 14,541 13,816 Other intangible assets, net 131,183 134,734 Other assets, net   134,284     132,943   Total assets $ 3,793,268   $ 3,520,421     LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable $ 490,552 $ 513,169 Accrued liabilities 821,190 723,026 Debt due within one year 23,242 7,181 Deferred taxes   6,807     6,804   Total current liabilities 1,341,791 1,250,180 Long-term debt due after one year 548,303 550,795 Retirement obligations and other liabilities 399,870 426,469 Shareholders’ equity: Common shares, $1.25 par value 73,474 73,394 Shares authorized – 120,000 Shares issued – 58,779 and 58,715, respectively Capital in excess of par value 577,153 561,732 Retained earnings   956,409     774,366   1,607,036 1,409,492 Treasury shares, at cost – 2,259 and 2,406 shares, respectively (123,583 ) (101,781 ) Deferred compensation obligation 7,794 6,650 Accumulated other comprehensive income (loss)   12,057     (21,384 ) Total shareholders’ equity   1,503,304     1,292,977   Total liabilities and shareholders’ equity $ 3,793,268   $ 3,520,421     CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS   (Amounts in thousands)   Six Months Ended June 30,   2008       2007     Cash flows – Operating activities: Net earnings $ 210,931 $ 96,819 Adjustments to reconcile net earnings to net cash used by operating activities: Depreciation 36,501 32,796 Amortization of intangible and other assets 5,021 4,931 Amortization of deferred loan costs 908 853 Net gain on disposition of assets (1,018 ) (695 ) Gain on bargain purchase (3,400 ) - Excess tax benefits from stock-based compensation arrangements (10,066 ) (5,406 ) Stock-based compensation 16,392 11,836 Net earnings from affiliates, net of dividends received (4,763 ) (2,953 ) Change in assets and liabilities: Accounts receivable, net (211,047 ) (100,248 ) Inventories, net (165,242 ) (120,630 ) Prepaid expenses and other (9,376 ) (28,914 ) Other assets, net (4,169 ) (317 ) Accounts payable (45,690 ) (16,472 ) Accrued liabilities and income taxes payable 42,914 54,710 Retirement obligations and other liabilities (48,212 ) 13,735 Net deferred taxes   12,063     (1,711 ) Net cash flows used by operating activities   (178,253 )   (61,666 )   Cash flows – Investing activities: Capital expenditures (37,706 ) (45,501 ) Proceeds from disposal of assets 2,178 1,266 Change in restricted cash   2,302     433   Net cash flows used by investing activities   (33,226 )   (43,802 )   Cash flows – Financing activities: Net borrowings under lines of credit - 115,000 Excess tax benefits from stock-based compensation arrangements 10,066 5,406 Payments on long-term debt (2,841 ) - Borrowings under other financing arrangements 10,816 4,589 Repurchase of common shares (34,980 ) (44,798 ) Payments of dividends (22,997 ) (8,588 ) Proceeds from stock option activity   9,929     12,568   Net cash flows (used) provided by financing activities (30,007 ) 84,177 Effect of exchange rate changes on cash   7,653     2,246   Net change in cash and cash equivalents (233,833 ) (19,045 ) Cash and cash equivalents at beginning of year   370,575     67,000   Cash and cash equivalents at end of period $ 136,742   $ 47,955     SEGMENT INFORMATION     FLOWSERVE PUMP DIVISION Three Months Ended June 30, (Amounts in millions)   2008     2007   Bookings $ 736.4 $ 616.2 Sales 633.2 525.2 Gross profit 206.0 144.1 Gross profit margin 32.5 % 27.4 % Operating income 103.4 65.2 Operating margin 16.3 % 12.4 %   FLOW CONTROL DIVISION Three Months Ended June 30, (Amounts in millions)   2008     2007   Bookings $ 429.6 $ 314.9 Sales 370.2 285.1 Gross profit 132.9 101.4 Gross profit margin 35.9 % 35.6 % Operating income 62.8 41.1 Operating margin 17.0 % 14.4 %   FLOW SOLUTIONS DIVISION Three Months Ended June 30, (Amounts in millions)   2008     2007   Bookings $ 169.5 $ 138.4 Sales 174.0 134.5 Gross profit 79.6 61.2 Gross profit margin 45.7 % 45.5 % Operating income 37.5 25.9 Operating margin 21.6 % 19.2 %   SEGMENT INFORMATION     FLOWSERVE PUMP DIVISION Six Months Ended June 30, (Amounts in millions)   2008     2007   Bookings $ 1,626.7 $ 1,274.4 Sales 1,194.3 943.8 Gross profit 380.6 261.1 Gross profit margin 31.9 % 27.7 % Operating income 181.8 107.0 Operating margin 15.2 % 11.3 %   FLOW CONTROL DIVISION Six Months Ended June 30, (Amounts in millions)   2008     2007   Bookings $ 819.5 $ 624.0 Sales 670.5 553.7 Gross profit 239.1 194.5 Gross profit margin 35.7 % 35.1 % Operating income 106.0 77.5 Operating margin 15.8 % 14.0 %   FLOW SOLUTIONS DIVISION Six Months Ended June 30, (Amounts in millions)   2008     2007   Bookings $ 340.8 $ 279.0 Sales 324.6 263.7 Gross profit 145.6 118.4 Gross profit margin 44.9 % 44.9 % Operating income 63.9 51.0 Operating margin 19.7 % 19.3 %