Flowserve Reports Record Full Year 2008 EPS of $7.74, up 74%

Flowserve Corp. (NYSE: FLS), a global leader in the fluid motion and control industry, announced today record full year and fourth quarter earnings per share and sales in its 2008 Form 10-K Report filed with the Securities and Exchange Commission. The company announced record full year and fourth quarter fully diluted EPS of $7.74, up 74% and $2.03, up 22%, respectively, and full year and fourth quarter operating income of $613 million, up 50% and $159 million, up 16%, respectively. The company indicated that EPS and operating income growth outpaced strong full year and fourth quarter sales growth of $4.47 billion, up 19%, and $1.17 billion, up 5%, respectively. Flowserve also posted previously announced record full year bookings of $5.11 billion, an increase of 18%, or 13% excluding currency benefits and the financial impact of the 2008 acquisition of the remaining external interests in the company’s Niigata Worthington joint venture. Fourth quarter bookings of $1.02 billion decreased 8%, or down 3% excluding the net impact of negative currency effects and the Niigata acquisition.

Additionally, the company reaffirmed its 2009 full year EPS target range of between $6.75 and $7.50, which includes the previously announced full impact of up to $40 million, or approximately $0.50 per share, in realignment costs.

Highlights:

Full Year 2008 (all comparisons versus full year 2007 unless otherwise noted)

• Record fully diluted EPS of $7.74, up 74%
• Strong operating margin improvement of 280 basis points to 13.7%
• Gross margin significantly improved by 210 basis points to 35.3%
• Reduced SG&A as a percentage of sales by 80 basis points to 22.0%
• Strong cash flow from operations of $406 million
• Record operating income of $613 million, up 50%
• Record sales of $4.47 billion, up 19%, or 14% excluding currency benefits and the Niigata acquisition
• Record bookings of $5.11 billion, up 18%, or 13% excluding currency benefits and the Niigata acquisition
• Record year-end backlog of $2.83 billion, up 24% compared to December 31, 2007
• Reduced full year tax rate of 25% due to discrete tax benefits amounting to approximately $22 million, as well as ongoing tax planning

Fourth Quarter of 2008 (all comparisons versus the fourth quarter of 2007 unless otherwise noted)

• Record fully diluted EPS of $2.03, up 22%
• Substantial operating margin improvement of 120 basis points to 13.6%
• Gross margin significantly improved by 220 basis points to 35.2%
• Increase in SG&A as a percentage of sales of 90 basis points to 21.9%
  • The increase of 90 basis points includes the impact of $7.3 million in bad debt recorded in 2008 (60 basis points) and approximately $15 million of both favorable legal developments and the sale of certain assets (140 basis points), which were recorded in 2007 and did not recur
• Record operating income of $159 million, up $22 million or 16%
• Record sales of $1.17 billion, up 5%, or 11% excluding the net impact of negative currency effects and the Niigata acquisition
• Bookings of $1.02 billion, down 8%, or down 3% excluding the net impact of negative currency effects and the Niigata acquisition
• Foreign currency related gains of $14 million

Discussion and analysis of the full year 2008 financial results (all comparisons versus the full year of 2007 unless otherwise noted)

Fully diluted EPS increased sharply to a full year record $7.74 per share, up 74%. EPS was higher primarily due to improvements in operating income driven by an increase in sales of 19%, an improvement in gross margin of 210 basis points and a reduction of 80 basis points for Selling, General & Administrative (SG&A) expenses as a percentage of sales. Also improving EPS was a lower full year 2008 tax rate, resulting primarily from impacts of effective tax planning, favorable tax audit resolutions and the reversal of valuation reserves.

Cash flow from operations was $406 million as a result of strong operating performance and continued working capital efficiency. This strong cash flow supported, in 2008, the repurchase of 1.7 million shares of common stock for $165 million, $71 million of pension plan contributions, $51 million of common stock dividends and $127 million of capital expenditures, which helped support improved operational capabilities and the company’s expanded global footprint.

"The company’s strong cash generating performance resulted in the further strengthening of the company’s 2008 year-end balance sheet which includes approximately $470 million in cash,” said Lewis Kling, Flowserve President and Chief Executive Officer. "The company ended the year with a net debt to book capital of 5%. This balance sheet strength provides us with many opportunities and flexibility for the future, which was recently highlighted by our announcement of an 8 percent increase to our quarterly dividend,” Kling added.

Sales increased significantly to $4.47 billion, up $711 million, an increase of 19%, or 14% excluding currency benefits of approximately $113 million, as well as $87 million in sales from Niigata. The strong sales growth reflects increased shipments to customers throughout the company’s global markets, with particular growth in the Middle East and Asia Pacific.

Gross profit increased to $1.58 billion, up $333 million, or 27%. Gross margin increased by 210 basis points to 35.3%. This increase in both gross profit and gross margin reflected improved original equipment pricing, increased throughput, which positively impacted fixed cost absorption, and the positive impact of the company’s operational excellence initiatives.

SG&A expenses as a percentage of sales improved 80 basis points to 22.0%. The improvement was primarily attributable to leverage from higher sales, efficiencies in using selling resources and effective ongoing cost containment efforts. SG&A expenses increased to $984 million, up $128 million or 15%, while sales increased 19%, demonstrating the company’s effective cost leverage in 2008.

Operating income increased significantly to $613 million, up $203 million or 50%, including currency benefits of approximately $20 million. This increase was attributed to significantly higher sales, improved gross profit and reduced SG&A expenses as a percentage of sales. Operating margin increased 280 basis points to 13.7%.

As part of the company’s regular and ongoing program to manage currency risk on certain sales contracts, Flowserve recorded foreign currency related gains in "Other Income” of approximately $17 million. Additionally, the company recognized a net gain of $2.8 million in "Other Income” arising from the 2008 acquisition of the remaining external interests of its former Niigata joint venture.

Full year bookings increased to a record $5.11 billion, up $787 million, an increase of 18%, or 13% excluding currency benefits of approximately $181 million and $69 million provided by Niigata. The increase was driven primarily by demand in oil and gas and general industries, especially in the Flowserve Pump Division (FPD), primarily in Europe, the Middle East and Africa (EMA). It was supported by continued orders from customers in the chemical markets, especially in the Flow Control Division (FCD), and the power industry in FPD and FCD. Despite cancellations totaling $32 million in the fourth quarter and a negative currency effect of $185 million, year-end backlog increased to $2.83 billion, up 24%, from $2.28 billion on December 31, 2007.

Discussion and analysis of the fourth quarter of 2008 financial results (all comparisons versus the fourth quarter of 2007 unless otherwise noted)

Fully diluted EPS increased to a fourth quarter record of $2.03 per share, up 22%. EPS was higher primarily due to improvements in operating income, driven by an increase in sales of $1.17 billion, up $60 million or 5%, and an improvement in gross margin of 220 basis points to 35.2%. This increase was partially offset by an increase in SG&A expenses as a percentage of sales of 90 basis points to 21.9%. Foreign currency related gains recorded in "Other Income” also contributed $14 million, or $0.18 per share to fourth quarter EPS.

Sales improved to $1.17 billion, up $60 million, an increase of 5%, or 11% excluding the impact of negative currency effects of approximately $89 million, partially offset by $31 million provided by Niigata. Increased sales growth reflected strong conversion of earlier bookings into shipments in the quarter and continued aftermarket demand in the oil and gas, chemical and power markets.

Gross profit increased to $412 million, up $45 million or 12%. Gross margin increased by 220 basis points to 35.2%. This increase reflected higher sales volumes, which positively impacted fixed cost absorption, and the positive impact of the company’s ongoing operational excellence initiatives.

SG&A expenses as a percentage of sales increased 90 basis points to 21.9%. SG&A expenses increased to $256 million, up $22 million or 10%, while sales increased 5%. The increase in SG&A expenses as a percentage of sales was primarily attributed to prior year fourth quarter gains from the sale of the company’s TKL rail assets and favorable developments in certain discrete legal matters.

"SG&A expenses as a percentage of sales increased 90 basis points primarily due to a $7.3 million bad debt accrual in the fourth quarter of 2008 and the 2007 gains from both an asset sale and discrete legal matters which, when excluded, produce an effective decrease of 110 basis points year-over-year,” said Kling.

Operating income increased to $159 million, up $22 million or 16%, including negative currency effects of approximately $19 million. The increase was primarily due to higher sales and improved gross profit, partially offset by increased SG&A expenses. Operating margin increased 120 basis points from 12.4% to 13.6%.

Fourth quarter bookings decreased to $1.02 billion, down $91 million, a decrease of 8%, or down 3% excluding the impact of negative currency effects of approximately $76 million, partially offset by Niigata bookings of $21 million. The decrease was primarily attributable to delays in the customer order placement process, as a result of the recent uncertainty in global economic conditions. This was the eighth consecutive quarter of company bookings exceeding $1 billion.

Flowserve Pump Division

Bookings for the fourth quarter of 2008 declined to $587 million, down $95 million, a decrease of 14%, or 10% excluding the impact of negative currency effects of approximately $46 million, partially offset by Niigata bookings of $21 million. The decrease was primarily attributed to the delays in the customer order placement process, as a result of the recent uncertainty in global economic conditions. Bookings for full year 2008 increased to $3.04 billion, up $489 million, an increase of 19%, or 12% excluding currency benefits of approximately $115 million and Niigata bookings of $69 million. This increase was primarily attributed to increased bookings in EMA, North America and Asia Pacific, and was primarily spread across the oil and gas, power, water and general industry markets.

Aftermarket bookings remained strong, increasing 5% for the quarter and 16% for the full year. Original equipment bookings declined 32% in the fourth quarter, but increased 20% for the full year. Original equipment bookings represented approximately 55% of total bookings compared to approximately 65% in the fourth quarter of 2007. Original equipment bookings increased to approximately 65% of total bookings for the full year, up from approximately 64% for 2007.

FPD sales for the fourth quarter of 2008 increased to $681 million, up $26 million, an increase of 4%, or 7% excluding the impact of negative currency effects of approximately $52 million, partially offset by $31 million in sales from Niigata. Sales for the full year 2008 increased to $2.51 billion, up $419 million, an increase of 20%, or 13% excluding currency benefits of approximately $67 million and $87 million in sales provided by Niigata. The FPD increase in revenue was primarily attributed to significantly increased sales in EMA, Asia Pacific and Latin America. The increase was generated through solid throughput of orders in the company’s production facilities, most notably for the oil and gas and power markets. Aftermarket sales in FPD for the full year were $989 million, representing an increase of $141 million, or 17% over the previous year. Original equipment sales increased to approximately 63% of total sales in the fourth quarter, up from approximately 61% in the fourth quarter of 2007. Original equipment sales increased to approximately 61% of total sales for the full year, up from approximately 60% for 2007.

FPD gross profit for the fourth quarter increased to $211 million, up $23 million or 12%. Gross margin for the fourth quarter of 2008 increased 220 basis points to 30.9%. The fourth quarter of 2008 gross margin improvement was primarily attributable to improved pricing, capacity utilization and operational efficiencies associated with higher sales volume. Gross profit for the full year 2008 increased to $786 million, up $189 million or 32%. Gross margin for the full year 2008 improved 280 basis points to 31.3%. The full year 2008 gross margin increase was primarily attributable to improved original equipment pricing, increased throughput and increased sales, which favorably increased absorption of fixed manufacturing costs, and benefits from operational excellence initiatives. This increase was partially offset by the aforementioned shift in sales mix to original equipment, which historically carries a lower margin but leads to greater aftermarket opportunities.

FPD operating income for the fourth quarter of 2008 increased to $110 million, up $12 million or 12%, including negative currency effects of approximately $10 million. The increase was attributed to the $23 million increase in gross profit, partially offset by SG&A expenses, which increased at a lower rate. SG&A expenses as a percent of sales increased 90 basis points. The increase of 90 basis points included a $10 million benefit in 2007 from a favorable discrete legal development and an asset sale. Fourth quarter operating margin improved from 15.0% to 16.1%. FPD operating income for the full year 2008 increased to $391 million, up $117 million or 43%, including currency benefits of approximately $11 million. The increase was primarily due to increased gross profit of $189 million, partially offset by increased SG&A expenses. For the full year 2008, SG&A expenses as a percent of sales increased 20 basis points. The increase in SG&A is primarily attributable to increased selling and marketing-related expense in support of increased bookings and sales as well as other employee-related costs due to increased annual and long-term incentive compensation arising from the division’s strong operating earnings. Full year 2008 operating margin improved from 13.1% to 15.5%.

Flow Control Division

Bookings for the fourth quarter of 2008 increased to $299 million, up $2 million, an increase of 1%, or 7% excluding negative currency effects of approximately $20 million. The growth was primarily attributable to strength in the power market offset by declines in general industry and pulp and paper markets. Increased bookings in Asia Pacific were partially offset by declines in Europe and distributor business in North America and Europe. Bookings for full year increased to $1.49 billion, up $241 million, an increase of 19%, or 15% excluding currency benefits of $51 million. The growth in bookings was primarily attributable to the continued demand in EMA, Asia Pacific, North America and Latin America in the chemical and nuclear power generation markets.

FCD sales for the fourth quarter of 2008 increased to $346 million, up $32 million, an increase of 10%, or 18% excluding negative currency effects of approximately $26 million. The increase was principally the result of continued demand in the chemical market in Asia Pacific, oil and gas market in EMA and the pulp and paper market in Latin America. Sales for the full year 2008 increased to $1.38 billion, up $219 million, an increase of 19%, or 16% excluding currency benefits of approximately $34 million. The increase was principally the result of comparative strength in both project and aftermarket business across virtually all of the FCD valve markets.

FCD gross profit for the fourth quarter increased to $126 million, up $16 million or 14%. Gross margin increased 140 basis points to 36.4% for the fourth quarter of 2008 reflecting improved absorption on higher sales, price increases and traction on continuous improvement process (CIP) initiatives. Gross profit for the full year 2008 increased to $498 million, up $92 million or 23%. Gross margin for the full year 2008 of 36.0% increased 110 basis points from 34.9% in 2007. In addition to the impact of improved absorption due to higher sales, gross profit was also impacted by price increases and successful implementation of various management initiatives involving continuous improvement, lean manufacturing and supply chain management.

Operating income for the fourth quarter of 2008 increased to $52 million, up $6 million or 14%, including negative currency effects of approximately $5 million. Operating margin showed solid improvement, up 60 basis points from 14.3% to 14.9%. Operating income for the full year 2008 increased to $218 million, up $55 million or 33%, including currency benefits of approximately $6 million. Full year 2008 operating margin improved from 14.1% to 15.8%. The fourth quarter and full year 2008 increase in operating income was due primarily to increased gross profit, partially offset by incremental bad debt reserves of $7.3 million in the fourth quarter and other SG&A expenses which increased, although at a lower rate.

Flow Solutions Division

Bookings for the fourth quarter of 2008 increased to $155 million, up $1 million, an increase of 1%, or 7% excluding negative currency effects of approximately $10 million. The highest rates of growth occurred in North America, Asia Pacific and Latin America. Bookings for the full year increased to $669 million, up $76 million, an increase of 13%, or 10% excluding currency benefits of $15 million. North America, EMA and Latin America produced growth in annual FSD project bookings, with particular strength in the oil and gas markets of all regions, and in the chemical markets of North America, EMA and Asia Pacific. Increases in aftermarket bookings occurred primarily in North America, Latin America and Asia Pacific.

FSD sales decreased in the fourth quarter of 2008 to $158 million, down $2 million, a decrease of 1%, or up 6% excluding negative currency effects of approximately $11 million. Sales for the full year 2008 increased to $654 million, up $89 million, an increase of 16%, or 14% excluding currency benefits of approximately $12 million. This increase was driven by increased project sales in EMA, North America and Latin America and increased aftermarket sales in Latin America, North America and Asia.

FSD gross profit for the fourth quarter of 2008 increased to $76 million, up $6 million or 9%. Gross margin for the fourth quarter of 2008 increased 430 basis points to 47.9%. Gross profit for the full year 2008 increased to $299 million, up $47 million or 18%. Gross margin for the full year 2008 was 45.8%, which increased 110 basis points from 44.7% in 2007. The improvements reflected the increase in sales, which favorably impacted absorption of fixed manufacturing costs, as well as the favorable impact of cost savings initiatives throughout the year. These improvements were partially offset by a sales mix shift to original equipment business with lower margins in North America and EMA. Increases in FSD materials costs were largely offset through supply chain management efforts and price increases implemented in mid-2007 and early 2008.

Operating income for FSD for the fourth quarter of 2008 increased to $31 million, up $1 million or 2%, including negative currency effects of approximately $4 million. Operating income for the full year 2008 increased to $127 million, up $16 million or 14%, including currency benefits of approximately $3 million. The improvement in 2008 reflected the increase in gross profit discussed above. This improvement was partially offset by an increase in SG&A expenses due primarily to increases in sales and engineering related expenses, as well as increased infrastructure expansion spending to support the global growth of the FSD business. Fourth quarter operating margin improved from 2007, up 60 basis points to 19.4%. Full year 2008 operating margin of 19.5% was down slightly compared to 2007 due primarily to the continued investment in expanding and optimizing the FSD global footprint of Quick Response Centers (QRC) to be located near, and to better serve, its customers, as well as realignment costs of approximately $1 million in the fourth quarter.

2009 Outlook

"2008 was another record year for Flowserve with substantial growth in earnings, bookings, sales and backlog,” said Lewis Kling, Flowserve President and Chief Executive Officer. "We delivered value to our shareholders and our customers by executing against our core strategies even in the challenging market conditions of the latter part of the year. And, while we realize that there will be capital expenditure challenges facing some of our customers in the coming year, we believe that we are still well positioned to succeed in 2009. Our strong customer relationships, the industry’s broadest product portfolio of flow management solutions and the strength in our global engineering platform all give us confidence in handling the challenges of the current macro-economic uncertainty. These core elements of our customer-centric culture, coupled with our significant installed product base, global Quick Response Center (QRC) network and balance sheet strength provide continued opportunities for future original equipment and aftermarket business growth,” added Kling.

Conference Call

The conference call will take place on Thursday, February 26, at 10:00 AM CST (11:00 AM EST)

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 Web site 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 and tax liabilities that could result from audits of our tax returns by regulatory authorities in various tax jurisdictions; the potential adverse impact of an impairment in the carrying value of goodwill or other intangibles; our dependence upon third-party suppliers whose failure to perform timely could adversely affect our business operations; changes in the global financial markets and the availability of capital; 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.