e10vq

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GSxbY+xLQkl5q3MhpD5BN43Za3h0BF+zgseDwuSloxigr9pp/stwpjXvFNmwYEVA /kgPPssgyOaBqtvGYFRq4A== 0000950134-07-010900.txt : 20070509 0000950134-07-010900.hdr.sgml : 20070509 20070509165300 ACCESSION NUMBER: 0000950134-07-010900 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20070331 FILED AS OF DATE: 20070509 DATE AS OF CHANGE: 20070509 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FLOWSERVE CORP CENTRAL INDEX KEY: 0000030625 STANDARD INDUSTRIAL CLASSIFICATION: PUMPS & PUMPING EQUIPMENT [3561] IRS NUMBER: 310267900 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13179 FILM NUMBER: 07833174 BUSINESS ADDRESS: STREET 1: 5215 N. O'CONNOR BLVD. STREET 2: SUITE 2300 CITY: IRVING STATE: TX ZIP: 75039 BUSINESS PHONE: 9724436500 MAIL ADDRESS: STREET 1: 5215 N. O'CONNOR BLVD. STREET 2: SUITE 2300 CITY: IRVING STATE: TX ZIP: 75039 FORMER COMPANY: FORMER CONFORMED NAME: DURCO INTERNATIONAL INC DATE OF NAME CHANGE: 19970508 FORMER COMPANY: FORMER CONFORMED NAME: DURIRON CO INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: THE DURIRON CO INC DATE OF NAME CHANGE: 19900509 10-Q 1 d46447e10vq.htm FORM 10-Q e10vq

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2007


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM to .

Commission File No. 1-13179

FLOWSERVE CORPORATION

(Exact name of registrant as specified in its charter)


New York		31-0267900

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

5215 N. O’Connor Blvd., Suite 2300, Irving, Texas		75039

(Address of principal executive offices)		(Zip Code)

(972) 443-6500

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ Accelerated filer o Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No

As of May 1, 2007, there were 57,050,499 shares of the issuer’s common stock outstanding.

FLOWSERVE CORPORATION
FORM 10-Q

TABLE OF CONTENTS


	Page
	No.
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Consolidated Statements of Income – Three Months Ended March 31, 2007 and 2006 (unaudited)		1
Condensed Consolidated Statements of Comprehensive Income – Three Months Ended March 31, 2007 and 2006 (unaudited)		1
Condensed Consolidated Balance Sheets – March 31, 2007 and December 31, 2006 (unaudited)		2
Condensed Consolidated Statements of Cash Flows – Three Months Ended March 31, 2007 and 2006 (unaudited)		3
Notes to Condensed Consolidated Financial Statements		4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.		14
Item 3. Quantitative and Qualitative Disclosures About Market Risk.		25
Item 4. Controls and Procedures.		26
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.		27
Item 1A. Risk Factors.		29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.		30
Item 3. Defaults Upon Senior Securities.		30
Item 4. Submission of Matters to a Vote of Security Holders.		30
Item 5. Other Information.		30
Item 6. Exhibits.		31
SIGNATURES
Officer Severance Plan
Employment Agreement - Mark A. Blinn
Certification Pursuant to Section 302
Certification Pursuant to Section 302
Certification Pursuant to Section 906
Certification Pursuant to Section 906

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

FLOWSERVE CORPORATION
(Unaudited)

CONDENSED CONSOLIDATED STATEMENTS OF INCOME


(Amounts in thousands, except per share data)	Three Months Ended March 31,
	2007			2006
Sales	$	803,400		$	653,857
Cost of sales		(537,926	)		(435,863	)

Gross profit		265,474			217,994
Selling, general and administrative expense		(203,582	)		(180,657	)
Net earnings from affiliates		5,530			3,786

Operating income		67,422			41,123
Interest expense		(14,072	)		(15,682	)
Interest income		1,086			1,083
Other (expense) income, net		(1,402	)		1,133

Earnings before income taxes		53,034			27,657
Provision for income taxes		(19,420	)		(9,057	)

Net earnings	$	33,614		$	18,600


Earnings per share:
Basic	$	0.60		$	0.34
Diluted		0.59			0.32

Dividends per share	$	0.15		$	—

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


(Amounts in thousands)	Three Months Ended March 31,
	2007			2006
Net earnings	$	33,614		$	18,600

Other comprehensive income (expense):
Foreign currency translation adjustments, net of tax		4,763			5,393
Pension and other postretirement effects, net of tax		322			—
Cash flow hedging activity, net of tax		(729	)		1,417

Other comprehensive income		4,356			6,810

Comprehensive income	$	37,970		$	25,410

See accompanying notes to condensed consolidated financial statements.

FLOWSERVE CORPORATION
(Unaudited)

CONDENSED CONSOLIDATED BALANCE SHEETS


	March 31,			December 31,
(Amounts in thousands, except per share data)	2007			2006
ASSETS
Current assets:
Cash and cash equivalents	$	37,994		$	67,000
Restricted cash		2,469			3,457
Accounts receivable, net of allowance for doubtful accounts of $12,872 and $13,135, respectively		579,506			551,815
Inventories, net		627,427			547,373
Deferred taxes		95,918			95,027
Prepaid expenses and other		57,449			38,209

Total current assets		1,400,763			1,302,881
Property, plant and equipment, net of accumulated depreciation of $522,831 and $509,033, respectively		450,815			442,892
Goodwill		850,379			851,123
Deferred taxes		3,197			25,731
Other intangible assets, net		140,898			143,358
Other assets, net		114,076			103,250

Total assets	$	2,960,128		$	2,869,235


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	384,083		$	412,869
Accrued liabilities		477,556			458,230
Debt due within one year		95,708			8,050
Deferred taxes		5,053			4,887

Total current liabilities		962,400			884,036
Long-term debt due after one year		555,074			556,519
Retirement obligations and other liabilities		429,440			408,094
Shareholders’ equity:
Common shares, $1.25 par value		73,390			73,289
Shares authorized – 120,000
Shares issued – 58,712 and 58,631, respectively
Capital in excess of par value		549,729			543,159
Retained earnings		577,974			582,767

		1,201,093			1,199,215
Treasury shares, at cost – 2,772 and 2,609 shares, respectively		(108,919	)		(95,262	)
Deferred compensation obligation		7,024			6,973
Accumulated other comprehensive loss		(85,984	)		(90,340	)

Total shareholders’ equity		1,013,214			1,020,586

Total liabilities and shareholders’ equity	$	2,960,128		$	2,869,235

See accompanying notes to condensed consolidated financial statements.

FLOWSERVE CORPORATION
(Unaudited)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(Amounts in thousands)	Three Months Ended March 31,
	2007			2006
Cash flows – Operating activities:
Net earnings	$	33,614		$	18,600
Adjustments to reconcile net earnings to net cash used by operating activities:
Depreciation		16,237			14,613
Amortization of intangible and other assets		2,464			2,552
Amortization of deferred loan costs		424			528
Excess tax benefits from stock-based payment arrangements		(3,017	)		—
Stock-based compensation		5,282			3,882
Net earnings from affiliates, net of dividends received		(4,152	)		(3,494	)
Change in assets and liabilities:
Accounts receivable, net		(24,270	)		(3,824	)
Inventories, net		(75,992	)		(13,252	)
Prepaid expenses and other		(18,458	)		(4,086	)
Other assets, net		185			(1,432	)
Accounts payable		(40,051	)		(11,968	)
Accrued liabilities		24,403			(52,481	)
Retirement obligations and other liabilities		9,163			6,477
Net deferred taxes		355			(1,796	)

Net cash flows used by operating activities		(73,813	)		(45,681	)


Cash flows – Investing activities:
Capital expenditures		(22,446	)		(12,482	)
Change in restricted cash		988			708

Net cash flows used by investing activities		(21,458	)		(11,774	)


Cash flows – Financing activities:
Net borrowings under lines of credit		85,000			20,072
Excess tax benefits from stock-based payment arrangements		3,017			—
Payments on long-term debt		—			(10,856	)
Borrowings under other financing arrangements		1,213			—
Repurchase of common shares		(30,579	)		—
Proceeds from stock option activity		7,142			—

Net cash flows provided by financing activities		65,793			9,216
Effect of exchange rate changes on cash		472			1,159

Net change in cash and cash equivalents		(29,006	)		(47,080	)
Cash and cash equivalents at beginning of year		67,000			92,864

Cash and cash equivalents at end of period	$	37,994		$	45,784

See accompanying notes to condensed consolidated financial statements.

FLOWSERVE CORPORATION
(Unaudited)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation and Accounting Policies

Basis of Presentation

The accompanying condensed consolidated balance sheet as of March 31, 2007, and the related condensed consolidated statements of income and comprehensive income for the three months ended March 31, 2007 and 2006, and the condensed consolidated statements of cash flows for the three months ended March 31, 2007 and 2006, are unaudited. In management’s opinion, all adjustments comprising normal recurring adjustments necessary for a fair presentation of such condensed consolidated financial statements have been made.

The accompanying condensed consolidated financial statements and notes in this Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2007 (“Quarterly Report”) are presented as permitted by Regulation S-X and do not contain certain information included in our annual financial statements and notes thereto. Accordingly, the accompanying condensed consolidated financial information should be read in conjunction with the consolidated financial statements for the year ended December 31, 2006 presented in our Annual Report on Form 10-K for the year ended December 31, 2006 (“2006 Annual Report”).

Certain reclassifications have been made to prior period amounts to conform with the current period presentation.

Income Taxes, Deferred Taxes, Tax Valuation Allowances and Tax Reserves

As of January 1, 2007, we adopted Financial Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109.” FIN No. 48 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN No. 48, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities. The determination is based on the technical merits of the position and presumes that each uncertain tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information.

Other Accounting Policies

Other significant accounting policies, for which no significant changes have occurred in the three months ended March 31, 2007, are detailed in Note 1 of our 2006 Annual Report.

Accounting Developments

Pronouncements Implemented

In February 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 155, “Accounting for Certain Hybrid Financial Instruments,” which amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS No. 155 improves the financial reporting of certain hybrid financial instruments and simplifies the accounting for these instruments. In particular, SFAS No. 155:

	•		permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation;

	•		clarifies which interest-only and principal-only strips are not subject to the requirements of SFAS No. 133;

	•		establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation;

	•		clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and

	•		amends SFAS No. 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument.

SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s fiscal year that begins after September 15, 2006. Our adoption of SFAS No. 155 in the first three months of 2007 had no impact on our consolidated financial condition or results of operations.

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets – an amendment of Statement No. 140.” SFAS No. 156 clarifies when an obligation to service financial assets should be separately recognized as a servicing asset or a servicing liability, requires that a separately recognized servicing asset or servicing liability be initially measured at fair value and permits an entity with a separately recognized servicing asset or servicing liability to choose either the amortization method or fair value method for subsequent measurement. SFAS No. 156 is effective for all separately recognized servicing assets and liabilities acquired or issued after the beginning of an entity’s fiscal year that begins after September 15, 2006. Our adoption of SFAS No. 156 in the first three months of 2007 had no impact on our consolidated financial condition or results of operations.

In March 2006, the Emerging Issues Task Force (“EITF”) issued EITF Issue No. 06-03, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation).” EITF No. 06-03 requires that the presentation of taxes assessed by a governmental authority that are directly imposed on a revenue-producing transaction between a seller and a customer on either a gross (included in revenues and costs) or a net (excluded from revenues) basis is an accounting policy decision that should be disclosed pursuant to APB No. 22, “Disclosure of Accounting Policies.” In addition, if any of such taxes are reported on a gross basis, a company should disclose, on an aggregated basis, the amounts of those taxes in interim and annual financial statements for each period for which an income statement is presented if those amounts are significant. EITF Issue No. 06-03 is effective for interim and annual reporting periods beginning after December 31, 2006. As we have historically presented such taxes on a net basis within our results of operations, our adoption of EITF Issue No. 06-03 in the first three months of 2007 did not have a material impact on our consolidated financial position or results of operations.

In July 2006, the FASB issued Financial Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109.” FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN No. 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, as well as guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The evaluation of a tax position in accordance with FIN No. 48 is a two-step process. The first step is a recognition process whereby the enterprise determines whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The second step is a measurement process whereby a tax position that meets the more-likely-than-not recognition threshold is calculated to determine the amount of benefit to recognize in the financial statements. The provisions of FIN No. 48 are effective for fiscal years beginning after December 15, 2006. The impact on our consolidated financial condition and results of operations of adopting FIN No. 48 in the first three months of 2007 is presented in Note 11.

Pronouncements Not Yet Implemented

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 establishes a single definition of fair value and a framework for measuring fair value under accounting principles generally accepted in the United States (“GAAP”), and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements; however, it does not require any new fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We are still evaluating the impact of SFAS No. 157 on our consolidated financial condition and results of operations.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115.” SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. It provides entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We are still evaluating the impact of SFAS No. 159 on our consolidated financial condition and results of operations.

Although there are no other final pronouncements recently issued that we have not adopted and that we expect to impact reported financial information or disclosures, accounting promulgating bodies have a number of pending projects that may directly impact us. We continue to evaluate the status of these projects and as these projects become final, we will provide disclosures regarding the likelihood and magnitude of their impact, if any.

2. Stock-Based Compensation Plans

Our stock-based compensation relates to stock options, restricted stock and other equity-based awards, and is accounted for under SFAS No. 123(R), “Share-Based Payment”. Under this method, we recorded stock-based compensation expense of $3.6 million ($5.3 million pre-tax) and $2.8 million ($3.9 million pre-tax) for the three months ended March 31, 2007 and 2006, respectively.

Stock Options — Information related to stock options issued to officers, other employees and directors under all plans described in Note 7 to our consolidated financial statements included in our 2006 Annual Report is presented in the following table:


	Three Months Ended March 31, 2007
						Remaining
				Weighted Average		Contractual Life		Aggregate Intrinsic
	Shares			Exercise Price		(in years)		Value (in millions)
Number of shares under option:
Outstanding — January 1, 2007		1,462,032		$	30.27
Exercised		(296,463	)		24.09
Cancelled		(33,644	)		35.31

Outstanding — March 31, 2007		1,131,925		$	31.74		7.1	$	28.8

Exercisable — March 31, 2007		586,634		$	26.84		5.9	$	17.8

No options were granted during the three months ended March 31, 2007. The weighted average fair value per share of options granted was $24.23 for the three months ended March 31, 2006. The total fair value of stock options vested during the three months ended March 31, 2007 and 2006 was $2.3 million and $0.5 million, respectively. The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model.

As of March 31, 2007, we have $4.4 million of unrecognized compensation cost related to outstanding unvested stock option awards, which is expected to be recognized over a weighted-average period of approximately 1.4 years. The total intrinsic value of stock options exercised during the three months ended March 31, 2007 was $8.8 million. No options were exercised during the three months ended March 31, 2006 as we were in a black-out period due to our then non-current status of filings with the Securities and Exchange Commission (“SEC”).

Stock-based compensation expense related solely to stock options recognized for the three months ended March 31, 2007 and 2006, was $0.7 million ($1.1 million pre-tax) and $1.2 million ($1.6 million pre-tax), respectively.

Restricted Stock — Awards of restricted stock are valued at the closing market price of our common stock on the date of grant. The unearned compensation is amortized to compensation expense over the vesting period of the restricted stock. We have unearned compensation of $30.6 million and $15.0 million at March 31, 2007 and December 31, 2006, respectively, which is expected to be recognized over a weighted-average period of approximately 2.0 years. These amounts will be recognized into net earnings in prospective periods as the awards vest. The total fair value of restricted shares and units vested during the three months ended March 31, 2007 and 2006 was $6.3 million and $1.8 million, respectively.

Stock-based compensation expense related to restricted stock recognized was $2.9 million ($4.2 million pre-tax) and $1.6 million ($2.3 million pre-tax) for the three months ended March 31, 2007 and 2006, respectively.

The following table summarizes information regarding restricted stock activity:


	Three Months Ended March 31, 2007
				Weighted Average
				Grant-Date Fair
	Shares			Value
Number of unvested shares:
Outstanding — January 1, 2007		800,523		$	37.91
Granted		398,220			52.21
Vested		(163,681	)		38.67
Cancelled		(20,042	)		36.75

Unvested restricted stock — March 31, 2007		1,015,020		$	43.42

Restricted stock granted during the three months ended March 31, 2007, includes approximately 186,000 shares with performance-based vesting provisions, and vesting ranges from 0% to 200% based on pre-defined performance targets. Performance-based restricted stock is earned upon the achievement of performance targets, and is payable in common shares. Compensation expense is recognized over a 37-month cliff vesting period based on the fair market value of our common stock on the date of grant, as adjusted for anticipated forfeitures. During the performance period, compensation expense may be adjusted based on changes in the expected achievement of the performance targets.

3. Derivative Instruments and Hedges

We enter into forward exchange contracts to hedge our risks associated with transactions denominated in currencies other than the local currency of the operation engaging in the transaction. Our risk management and derivatives policy specifies the conditions under which we may enter into derivative contracts. At March 31, 2007 and December 31, 2006, we had $337.6 million and $433.7 million, respectively, of notional amount in outstanding forward contracts with third parties. At March 31, 2007, the length of forward contracts currently in place was two days to 20 months.

The fair market value adjustments of our forward exchange contracts are recognized directly in our results of operations. The fair value of these outstanding forward contracts at March 31, 2007 and December 31, 2006 was a net asset of $4.3 million and $3.4 million, respectively. Unrealized net gains from the changes in the fair value of these forward contracts of $0.3 million and $0.2 million, for the three months ended March 31, 2007 and 2006, respectively, are included in other (expense) income, net in the condensed consolidated statements of income.

Also as part of our risk management program, we enter into interest rate swap agreements to hedge exposure to floating interest rates on certain portions of our debt. At both March 31, 2007 and December 31, 2006, we had $435.0 million of notional amount in outstanding interest rate swaps with third parties. At March 31, 2007, the maximum remaining length of any interest rate contract in place was approximately 33 months. The fair value of the interest rate swap agreements was a net asset of $0.8 million and $1.9 million at March 31, 2007 and December 31, 2006, respectively. Unrealized net (losses) gains from the changes in fair value of our interest rate swap agreements, net of reclassifications, of $(0.7) million and $1.4 million, net of tax, for the three months ended March 31, 2007 and 2006, respectively, are included in other comprehensive income.

During 2004, we entered into a compound derivative contract to hedge exposure to both currency translation and interest rate risks associated with our European Investment Bank credit facility. The notional amount of the derivative was $85.0 million, and it served to convert floating rate interest rate risk to a fixed rate, as well as U.S. dollar currency risk to Euros. As described more fully in our 2006 Annual Report, we repaid all amounts outstanding under this facility on December 15, 2006 and settled the derivative. The unrealized gain on the derivative and the foreign transaction gain on the underlying loan aggregated to $2.2 million for the three months ended March 31, 2006, and is included in other (expense) income, net in the condensed consolidated statement of income.

We are exposed to risk from credit-related losses resulting from nonperformance by counterparties to our financial instruments. We perform credit evaluations of our counterparties under forward contracts and interest rate swap agreements and expect all counterparties to meet their obligations. We have not experienced credit losses from our counterparties.

4. Debt

Debt, including capital lease obligations, consisted of:


	March 31,		December 31,
(Amounts in thousands)	2007		2006
Term Loan, interest rate of 6.88% in 2007 and 2006	$	558,220	$	558,220
Revolving Line of Credit, interest rate of 7.08%		85,000		—
Capital lease obligations and other		7,562		6,349


Debt and capital lease obligations		650,782		564,569
Less amounts due within one year		95,708		8,050

Total debt due after one year	$	555,074	$	556,519

Credit Facilities

On August 12, 2005, we entered into credit facilities comprised of a $600.0 million term loan expiring on August 10, 2012 and a $400.0 million revolving line of credit, which can be utilized to provide up to $300.0 million in letters of credit, expiring on August 12, 2010. We refer to these credit facilities collectively as our Credit Facilities. At March 31, 2007 and December 31, 2006, we had $85.0 million and $0 outstanding under the revolving line of credit, respectively. We had outstanding letters of credit of $90.5 million and $83.9 million at March 31, 2007 and December 31, 2006, respectively, which reduced borrowing capacity to $224.5 million and $316.1 million, respectively.

Borrowings under our Credit Facilities bear interest at a rate equal to, at our option, either (1) the base rate (which is based on the greater of the prime rate most recently announced by the administrative agent under our Credit Facilities or the Federal Funds rate plus 0.50%) or (2) LIBOR plus an applicable margin determined by reference to the ratio of our total debt to consolidated Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”), which as of March 31, 2007 was 1.5% for LIBOR borrowings.

The loans under our Credit Facilities are subject to mandatory repayment with, in general:

	•		100% of the net cash proceeds of asset sales; and

	•		Unless we attain and maintain investment grade credit ratings:

	o		50% of the proceeds of any equity offerings; and

	o		100% of the proceeds of any debt issuances (subject to certain exceptions).

We may prepay loans under our Credit Facilities in whole or in part, without premium or penalty. During the three months ended March 31, 2007, we made no payments under our Credit Facilities. We have scheduled repayments of $1.4 million due in both the third and fourth quarters of 2007.

5. Inventories

Inventories are stated at lower of cost or market. Cost is determined by the first-in, first-out method. Inventories, net consisted of the following:


	March 31,			December 31,
(Amounts in thousands)	2007			2006
Raw materials	$	194,797		$	167,224
Work in process		390,840			354,808
Finished goods		251,551			225,157
Less: Progress billings		(147,594	)		(140,056	)
Less: Excess and obsolete reserve		(62,167	)		(59,760	)

Inventories, net	$	627,427		$	547,373

6. Equity Method Investments

Summarized below is combined income statement information, based on the most recent financial information, for investments in entities we account for using the equity method:


	Three Months Ended March 31,
(Amounts in thousands)	2007			2006
Revenues	$	99,687		$	78,300
Gross profit		28,858			23,111
Income before provision for income taxes		19,451			14,084
Provision for income taxes		(6,467	)		(4,629	)

Net income	$	12,984		$	9,455

The provision for income taxes is based on the tax laws and rates in the countries in which our investees operate. The tax jurisdictions vary not only by their nominal rates, but also by the allowability of deductions, credits and other benefits. Our share of net income is reflected in our condensed consolidated statements of income.

7. Earnings Per Share

Basic and diluted earnings per weighted average share outstanding were calculated as follows:


	Three Months Ended March 31,
(Amounts in thousands, except per share amounts)	2007		2006
Net earnings	$	33,614	$	18,600

Denominator for basic earnings per share — weighted average shares		56,206		55,472
Effect of potentially dilutive securities		865		2,129

Denominator for diluted earnings per share — weighted average shares		57,071		57,601


Earnings per share:
Basic	$	0.60	$	0.34
Diluted		0.59		0.32

Options outstanding with an exercise price greater than the average market price of the common stock were not included in the computation of diluted earnings per share. For the three months ended both March 31, 2007 and 2006, we had an immaterial number of options to purchase common stock that were excluded from the computations of potentially dilutive securities.

8. Legal Matters and Contingencies

We are a defendant in a large number of pending lawsuits (which include, in many cases, multiple claimants) that seek to recover damages for personal injury allegedly caused by exposure to asbestos-containing products manufactured and/or distributed by us in the past. Any such products were encapsulated and used only as components of process equipment, and we do not believe that any emission of respirable asbestos fibers occurred during the use of this equipment. We believe that a high percentage of the applicable claims are covered by applicable insurance or indemnities from other companies.

In 2003, related lawsuits were filed in federal court in the Northern District of Texas (the “Court”), alleging that we violated federal securities laws. Since the filing of these cases, which have been consolidated, the lead plaintiff has amended its complaint several times. The lead plaintiff’s current pleading is the fifth consolidated amended complaint (the “Complaint”). The Complaint alleges that federal securities violations occurred between February 6, 2001 and September 27, 2002 and names as defendants our company, C. Scott Greer, our former Chairman, President and Chief Executive Officer, Renee J. Hornbaker, our former Vice President and Chief Financial Officer, PricewaterhouseCoopers LLP, our independent registered public accounting firm, and Banc of America Securities LLC and Credit Suisse First Boston LLC, which served as underwriters for our two public stock offerings during the relevant period. The Complaint asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder, and Sections 11 and 15 of the Securities Act of 1933. The lead plaintiff seeks unspecified compensatory damages, forfeiture by Mr. Greer and Ms. Hornbaker of unspecified incentive-based or equity-based compensation and profits from any stock sales, and recovery of costs. On November 22, 2005, the Court entered an order denying the defendants’ motions to dismiss the Complaint. The case is currently set for trial on October 1, 2007. We continue to believe that the lawsuit is without merit and are vigorously defending the case.

In 2005, a shareholder derivative lawsuit was filed purportedly on our behalf in the 193rd Judicial District of Dallas County, Texas. The lawsuit names as defendants Mr. Greer, Ms. Hornbaker, and current board members Hugh K. Coble, George T. Haymaker, Jr., William C. Rusnack, Michael F. Johnston, Charles M. Rampacek, Kevin E. Sheehan, Diane C. Harris, James O. Rollans and Christopher A. Bartlett. We are named as a nominal defendant. Based primarily on the purported misstatements alleged in the above-described federal securities case, the plaintiff asserts claims against the defendants for breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets and unjust enrichment. The plaintiff alleges that these purported violations of state law occurred between April 2000 and the date of suit. The plaintiff seeks on our behalf an unspecified amount of damages, injunctive relief and/or the imposition of a constructive trust on defendants’ assets, disgorgement of compensation, profits or other benefits received by the defendants from us, and recovery of attorneys’ fees and costs. We strongly believe that the suit was improperly filed and have filed a motion seeking dismissal of the case. The Court has since ordered the plaintiffs to replead. The trial is currently set for December 2007.

fiduciary duty occurred between 2000 and 2004. The plaintiff sought on our behalf an unspecified amount of damages, disgorgement by Mr. Greer and Ms. Hornbaker of salaries, bonuses, restricted stock and stock options, and recovery of attorneys’ fees and costs. Pursuant to a motion filed by us, the federal court dismissed that case on March 14, 2007, primarily on the basis that the case was not properly filed in federal court. On or about March 27, 2007, the same plaintiff re-filed essentially the same lawsuit naming the same defendants in the Supreme Court of the State of New York. We strongly believe that this new lawsuit was improperly filed in the Supreme Court of the State of New York as well and have filed a motion seeking dismissal of the case.

On February 7, 2006, we received a subpoena from the SEC seeking documents and information relating primarily to products that two of our foreign subsidiaries delivered to Iraq from 1996 through 2003 under the United Nations Oil-for-Food Program. We believe that the SEC’s investigation is focused primarily on whether any inappropriate payments were made to Iraqi officials in violation of the federal securities laws. We subsequently learned that the United States Department of Justice is investigating the same allegations. In addition, two foreign subsidiaries have been contacted by governmental authorities in their respective countries concerning their involvement in the United Nations Oil-for-Food Program. These investigations include periods prior to, as well as subsequent to, our acquisition of certain of the foreign operations involved in the investigations. We may be subject to certain liabilities if violations are found regardless of whether they relate to periods before or subsequent to our acquisition.

We believe that both the domestic and foreign governmental authorities are investigating other companies connection with the United Nations Oil-for-Food Program.

We engaged outside counsel in February 2006 to conduct an investigation of our foreign subsidiaries’ participation in the United Nations Oil-for-Food program. The Audit Committee of the Board of Directors has been regularly monitoring this situation since the receipt of the SEC subpoena and assumed direct oversight of the investigation in January 2007. We currently expect this internal investigation will be completed during the second quarter of 2007.

Our internal investigation has included, among other things, a detailed review of contracts with the Iraqi government under the United Nations Oil-for-Food Program during 1996 through 2003, a forensic review of the accounting records associated with these contracts, and interviews of persons with knowledge of the events in question. Our investigation has found evidence to date that, during the years 2001 through 2003, certain non-U.S. personnel at the two foreign subsidiaries authorized payments in connection with certain of our product sales under the United Nations Oil-for-Food Program totaling approximately €0.6 million, which were subsequently deposited by third parties into Iraqi-controlled bank accounts. These payments were not authorized under the United Nations Oil-for-Food Program and were not properly documented in the subsidiaries’ accounting records, but were expensed as paid. During the course of the investigation, certain other potential issues involving non-U.S. personnel were identified at one of the foreign subsidiaries, which are currently under review.

We have taken certain disciplinary actions against persons who engaged in misconduct, violated our ethics policies or failed to cooperate fully in the investigation, including terminating the employment of certain non-U.S. senior management personnel at one of the foreign subsidiaries. Certain other non-U.S. senior management personnel at that facility involved in the above conduct had been previously separated from our company for other reasons. Additional disciplinary actions may be taken as our investigation continues.

We will continue to fully cooperate in the domestic and foreign governmental investigations. These investigations are in progress but, at this point, are incomplete. Accordingly, we cannot predict the outcome of these investigations at this time. If the domestic or foreign authorities take enforcement action with regard to these investigations, we may be required to pay fines, disgorge profits, consent to injunctions against future conduct or suffer other penalties, which could materially affect our business, financial condition, results of operations and cash flows.

In March 2006, we initiated a process to determine our compliance posture with respect to U.S. export control laws and regulations. Upon initial investigation, it appeared that some product transactions and technology transfers were not re-exported in full compliance with U.S. export control laws and regulations. As a result, in conjunction with outside counsel, we are currently involved in a systematic process to conduct further review, validation, and voluntary disclosure of export violations discovered as part of this review process. We currently believe this process will not be substantially complete until the end of 2008, given the complexity of the export laws and the current scope of the investigation. Any violations of U.S. export control laws and regulations that are identified and disclosed to the U.S. government may result in civil or criminal penalties, including fines and/or other penalties. Because our review into this issue is ongoing, we are currently unable to determine the full extent of any confirmed violations or determine the nature or total amount of potential penalties to which we might be subject to in the future. Given that the resolution of this matter is uncertain at this time, we are not able to reasonably estimate the maximum amount of liability that could result from final resolution of this matter. We cannot currently predict whether the ultimate resolution of this matter will have a material adverse effect on our business, including our ability to do business outside the U.S. or on our financial condition.

We have been involved as a potentially responsible party at former public waste disposal sites that may be subject to remediation under pending government procedures. The sites are in various stages of evaluation by federal and state environmental authorities. The projected cost of remediation at these sites, as well as our alleged “fair share” allocation, is uncertain and speculative until all studies have been completed and the parties have either negotiated an amicable resolution or the matter has been judicially resolved. At each site, there are many other parties who have similarly been identified, and the identification and location of additional parties is continuing under applicable federal or state law. Many of the other parties identified are financially strong and solvent companies that appear able to pay their share of the remediation costs. Based on our information about the waste disposal practices at these sites and the environmental regulatory process in general, we believe that it is likely that ultimate remediation liability costs for each site will be apportioned among all liable parties, including site owners and waste transporters, according to the volumes and/or toxicity of the wastes shown to have been disposed of at the sites. We believe that our exposure for existing disposal sites will be less than $100,000.

We are also a defendant in several other lawsuits, including product liability claims, that are insured, subject to the applicable deductibles, arising in the ordinary course of business. Based on currently available information, we believe that we have adequately accrued estimated probable losses for such lawsuits.

Although none of the aforementioned potential liabilities can be quantified with absolute certainty except as otherwise indicated above, we have established reserves covering exposures relating to contingencies, to the extent believed to be reasonably estimable and probable, which we believe to be reasonable based on past experience and available facts. While additional exposures beyond these reserves could exist, they currently cannot be estimated. We will continue to evaluate these potential contingent loss exposures and, if they develop, recognize expense as soon as such losses become probable and can be reasonably estimated.

We are also involved in ordinary routine litigation incidental to our business, none of which we believe to be material to our business, operations or overall financial condition. However, resolutions or dispositions of claims or lawsuits by settlement or otherwise could have a significant impact on our operating results for the reporting period in which any such resolution or disposition occurs.

9. Retirement and Postretirement Benefits

Components of the net periodic cost for retirement and postretirement benefits for the three months ended March 31, 2007 and 2006 were as follows:


	U.S.						Non-U.S.						Postretirement
(Amounts in millions)	Defined Benefit Plans						Defined Benefit Plans						Medical Benefits
	2007			2006			2007			2006			2007			2006
Net periodic cost
Service cost	$	3.7		$	3.7		$	1.0		$	0.9		$	—		$	—
Interest cost		4.1			3.8			2.9			2.5			1.0			1.0
Expected return on plan assets		(4.3	)		(3.9	)		(1.8	)		(1.4	)		—			—
Amortization of unrecognized net loss		1.4			1.6			0.4			0.6			0.3			0.3
Amortization of prior service benefit		(0.3	)		(0.3	)		—			—			(1.1	)		(1.1	)

Net cost recognized	$	4.6		$	4.9		$	2.5		$	2.6		$	0.2		$	0.2

See additional discussion of our retirement and postretirement benefits in Note 12 to our consolidated financial statements included in our 2006 Annual Report

10. Shareholders’ Equity

On September 29, 2006, the Board of Directors authorized a program to repurchase up to two million shares of our outstanding common stock. Shares may be repurchased to offset potentially dilutive effects of stock options issued under our equity-based compensation programs. We repurchased 0.5 million shares for $25.3 million during the three months ended March 31, 2007. To date, we have repurchased a total of 1.8 million shares. We expect to conclude the program by the end of the second quarter of 2007.

On February 28, 2007, our Board of Directors authorized the payment of a quarterly cash dividend of $0.15 per share, which was paid on April 11, 2007 to shareholders of record as of March 28, 2007.

11. Income Taxes

For the three months ended March 31, 2007, we earned $53.0 million before taxes and provided for income taxes of $19.4 million, resulting in an effective tax rate of 36.6%. The effective tax rate varied from the U.S. federal statutory rate for the three months ended March 31, 2007 primarily due to the net impact of foreign operations.

For the three months ended March 31, 2006, we earned $27.7 million before taxes and provided for income taxes of $9.1 million, resulting in an effective tax rate of 32.7%. The effective tax rate varied from the U.S. federal statutory rate for the three months ended March 31, 2006 primarily due to the net impact of foreign operations.

In July 2006, the FASB issued FIN No. 48, which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN No. 48, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities. The determination is based on the technical merits of the position and presumes that each uncertain tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information.

The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. We adopted the provisions of FIN No. 48 on January 1, 2007.

The cumulative effect of adopting FIN No. 48 was an increase in tax reserves and a decrease of $29.8 million to opening retained earnings at January 1, 2007. Upon adoption, the amount of gross unrecognized tax benefits at January 1, 2007 was approximately $129 million. There are offsetting tax benefits of approximately $43 million associated with the correlative effects of transfer pricing adjustments, net operating losses and timing adjustments. The net liability for uncertain tax positions is $86.0 million. Of this amount $84.9 million, if recognized, would favorably impact our effective tax rate.

Interest and penalties related to income tax liabilities are included in income tax expense. The balance of accrued interest and penalties recorded on the balance sheet at January 1, 2007 was approximately $14 million.

The amount of unrecognized tax benefits did not materially change as of March 31, 2007. With limited exception, we are no longer subject to U.S. federal, state and local income tax audits for years through 2001 or non-U.S. income tax audits for years through 2000. Our U.S. income tax returns for 2002 through 2004 are currently under examination by the Internal Revenue Service (“IRS”). It is reasonably possible that within the next 12 months we and the IRS will resolve some or all of the matters presently under examination; however, an estimate of the range of possible changes that may result from the examination cannot be made at this time. Additionally, we are currently under examination for various years in Germany, Italy, Canada, the Netherlands and Argentina. We do not expect any changes from these examinations to have a significant impact on our financial condition or results of operations.

12. Segment Information

We are principally engaged in the worldwide design, manufacture, distribution and service of industrial flow management equipment. We provide pumps, valves and mechanical seals primarily for the petroleum industry, chemical-processing industry, power-generation industry, water industry, general industry and other industries requiring flow management products.

We have the following three divisions, each of which constitutes a business segment:

	•		Flowserve Pump Division (“FPD”);

	•		Flow Control Division (“FCD”); and

	•		Flow Solutions Division (“FSD”).

Each division manufactures different products and is defined by the type of products and services provided. Each division has a President, who reports directly to our Chief Executive Officer, and a Division Vice President — Finance, who reports directly to our Chief Accounting Officer. For decision-making purposes, our Chief Executive Officer and other members of senior executive management use financial information generated and reported at the division level. Our corporate headquarters does not constitute a separate division or business segment.

We evaluate segment performance and allocate resources based on each segment’s operating income. Amounts classified as “All Other” include the corporate headquarters costs and other minor entities that do not constitute separate segments. Intersegment sales and transfers are recorded at cost plus a profit margin, with the margin on such sales eliminated with consolidation.

The following is a summary of the financial information of the reportable segments reconciled to the amounts reported in the condensed consolidated financial statements.

Three Months Ended March 31, 2007


							Subtotal -
	Flowserve		Flow		Flow		Reportable					Consolidated
(Amounts in thousands)	Pump		Control		Solutions		Segments		All Other			Total
Sales to external customers	$	418,229	$	267,573	$	116,516	$	802,318	$	1,082		$	803,400
Intersegment sales		441		1,057		12,663		14,161		(14,161	)		—
Segment operating income		41,736		36,391		25,128		103,255		(35,833	)		67,422

Three Months Ended March 31, 2006


							Subtotal -
	Flowserve		Flow		Flow		Reportable					Consolidated
(Amounts in thousands)	Pump		Control		Solutions		Segments		All Other			Total
Sales to external customers	$	327,437	$	217,043	$	108,216	$	652,696	$	1,161		$	653,857
Intersegment sales		623		755		9,996		11,374		(11,374	)		—
Segment operating income		26,995		25,170		23,557		75,722		(34,599	)		41,123

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our consolidated financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements, and notes thereto, and the other financial data included elsewhere in this Quarterly Report. The following discussion should also be read in conjunction with our audited consolidated financial statements, and notes thereto, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2006 Annual Report.

EXECUTIVE OVERVIEW

We are an established leader in the fluid motion and control business, with a strong portfolio of pumping systems, valves, sealing solutions, automation and services in support of the oil and gas, chemical, power generation, water treatment and general industrial markets. These products are integral to the movement, control and protection of fluids in customers’ critical processes, whether it is a refinery, a power generation facility or a transportation pipeline. Our business model is heavily influenced by the capital spending of these industries for the placement of new products into service and for maintenance on existing facilities. The worldwide installed base of our products is another important source of revenue, where products are expected to ensure the maximum operating time of many key industrial processes. The aftermarket business includes parts, service solutions, product life cycle solutions and other value added services, and is generally a higher margin business and a key component to our profitable growth.

We experienced favorable conditions in 2006 in several of our core markets, specifically oil and gas, which has continued through the first three months of 2007. The sustained increase in the price of crude oil and natural gas, in particular, has spurred capital investment by oil and gas companies, resulting in many new projects and expansion opportunities for us. Favorable market conditions have resulted in corresponding growth, much of which is in non-traditional areas of the world where new oil and gas reserves have been discovered. We believe the outlook for our business remains favorable; however, we believe that oil and gas prices will fluctuate in the future and such volatility could have a negative impact on our business in some or all of the geographical areas in which we conduct business. We and our customers are seeing rapid growth in the Middle East and Asia, with China providing a significant source of project growth as that country continues to develop. We continue to execute on our strategy to increase our presence in these regions to capture aftermarket business through our current installed base, as well as new projects and process plant expansions. The opportunity to increase our installed base of new products and drive recurring aftermarket business in future years is a critical by-product of these favorable market conditions. Although we have experienced strong demand for our products and services in recent periods, we face challenges affecting many companies in our industry and/or with significant international operations.

We currently employ approximately 14,000 employees in more than 55 countries who are focused on six key strategies that reach across the business. See “Our Strategies” section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2006 Annual Report for a discussion of our six key strategies. We continue to build on our geographic breadth with the implementation of additional Quick Response Centers (“QRCs”) with the goal to be positioned as near to our customers as practicable for service and support in order to capture this important aftermarket business. Along with ensuring that we have the local capability to sell, install and service our equipment in remote regions, it becomes equally imperative to continuously improve our global operations. Our global supply chain capability is being expanded to meet global customer demands and ensure the quality and timely delivery of our products. Significant efforts are underway to reduce the supply base and drive processes across the divisions to find areas of synergy and cost reduction. In addition, we are improving our supply chain management capability to ensure it can meet global customer demands. We continue to focus on improving on-time delivery and quality, while reducing warranty costs across our global operations through a focused Continuous Improvement Process (“CIP”) initiative. The goal of the CIP initiative is to maximize service fulfillment to customers such as on-time delivery, reduced cycle time and quality at the highest internal productivity. This program is a key factor in our margin expansion plans.

RECENT DEVELOPMENTS

We believe that both the domestic and foreign governmental authorities are investigating other companies connection with the United Nations Oil-for-Food Program.

We will continue to fully cooperate in the domestic and foreign governmental investigations. These investigations are in progress but, at this-point, are incomplete. Accordingly, we cannot predict the outcome of these investigations at this time. If the domestic or foreign authorities take enforcement action with regard to these investigations, we may be required to pay fines, disgorge profits, consent to injunctions against future conduct or suffer other penalties, which could materially affect our business, financial condition, results of operations and cash flows.

RESULTS OF OPERATIONS — Three Months ended March 31, 2007 and 2006

Consolidated Results

Bookings, Sales and Backlog


	Three Months Ended March 31,
(Amounts in millions)	2007		2006

Bookings	$	1,088.8	$	878.6
Sales		803.4		653.9

We define a booking as the receipt of a customer order that contractually engages us to perform activities on behalf of our customer with regard to manufacture, service or support. Bookings for the three months ended March 31, 2007 increased by $210.2 million, or 23.9%, as compared with the same period in 2006. The increase includes currency benefits of approximately $47 million. The increase is primarily attributable to the strong oil and gas industry, which has positively impacted all divisions. Original

equipment bookings accounted for approximately three-quarters of the increase, most notably in FPD. Bookings for both FCD and FSD also increased in North America and Asia Pacific.

Sales for the three months ended March 31, 2007 increased by $149.5 million, or 22.9%, as compared with the same period in 2006. The increase includes currency benefits of approximately $35 million. The increase is attributable to the strength in the oil and gas market, particularly in North America, expansion in the Asia Pacific region and significant increases in original equipment sales in both FPD and FCD. Strength in all valve markets also contributed to the sales increase.

Net sales to international customers, including export sales from the U.S., were approximately 64% of consolidated sales for the three months ended March 31, 2007, compared with approximately 62% for the same period in 2006. The increase in 2007 is due primarily to a weakening of the U.S. dollar exchange rate against the Euro and the British pound during the three months ended March 31, 2007 as compared with the same period in 2006.

Backlog represents the value of aggregate uncompleted customer orders. Backlog of $1.9 billion at March 31, 2007 increased by $300.0 million, or 18.4%, as compared with December 31, 2006. Currency effects provided an increase of approximately $13 million. The increase resulted primarily from increased bookings during the three months ended March 31, 2007, as discussed above. The increase in total bookings also reflects an increase in orders for large engineered products, which naturally have longer lead times, as well as expanded lead times at the request of certain customers.

Gross Profit and Gross Profit Margin


	Three Months Ended March 31,
(Amounts in millions)	2007			2006

Gross profit	$	265.5		$	218.0
Gross profit margin		33.0	%		33.3	%

Gross profit for the three months ended March 31, 2007 increased by $47.5 million, or 21.8%, as compared with the same period in 2006. Gross profit margin for the three months ending March 31, 2007 of 33.0% decreased from 33.3% for the same period in 2006. The decrease is primarily attributable to a 32% increase in sales of original equipment, which is attributable to all divisions, as compared with a 9% increase in sales of aftermarket products. Original equipment generally carries a lower margin than aftermarket products. The increase in our installed base of original equipment is expected to increase recurring aftermarket opportunities in future years. The decrease is partially offset by increased sales in all of our divisions, which favorably impacts our absorption of fixed costs, and cost savings achieved through our CIP and supply chain initiatives, both of which have positively impacted each of our divisions. Our CIP initiative is driving increased throughput on existing capacity, reduced cycle time, lean manufacturing and reduced warranty costs. Our supply chain initiative is focused on materials cost savings through low cost supply sources, long-term supply agreements and product outsourcing.

Selling, General and Administrative Expense (“SG&A”)


	Three Months Ended March 31,
(Amounts in millions)	2007			2006

SG&A expense	$	203.6		$	180.7
SG&A expense as a percentage of sales		25.3	%		27.6	%

SG&A for the three months ended March 31, 2007 increased by $22.9 million, or 12.7%, as compared with the same period in 2006. Currency effects yielded an increase of approximately $6 million. The increase in SG&A is primarily attributable to an increase in employee-related costs of $12.5 million due to continued investment in in-house capabilities and sales personnel to drive long-term growth, as well as annual merit increases. The increase is also due to increases of $1.3 million and $1.7 million in travel and commissions expenses, respectively, in support of increased bookings and sales and overall business growth. A decrease of $5.2 million in audit fees was offset by an increase in other professional fees. SG&A as a percentage of sales for the three months ended March 31, 2007 decreased 230 basis points as compared with the same period in 2006. The decrease is attributable to leverage from higher sales, as well as ongoing efforts to contain costs.

Net Earnings from Affiliates


	Three Months Ended March 31,
(Amounts in millions)	2007		2006

Net earnings from affiliates	$	5.5	$	3.8

Net earnings from affiliates for the three months ended March 31, 2007 increased by $1.7 million, or 44.7%, as compared with the same period in 2006. Net earnings from affiliates represents our joint venture interests in the Asia Pacific region and the Middle East. The improvement in earnings is primarily attributable to an FCD joint venture in India.

Operating Income and Operating Margin


	Three Months Ended March 31,
(Amounts in millions)	2007			2006

Operating income	$	67.4		$	41.1
Operating margin		8.4	%		6.3	%

Operating income for the three months ended March 31, 2007 increased by $26.3 million, or 64.0%, as compared with the same period in 2006. The increase includes currency benefits of approximately $5 million. The increase is primarily a result of the $47.5 million increase in gross profit, partially offset by the $22.9 million increase in SG&A, as discussed above. Operating margin increased 210 basis points, due primarily to the decrease in SG&A as a percentage of sales, as discussed above.

Interest Expense and Interest Income


	Three Months Ended March 31,
(Amounts in millions)	2007			2006

Interest expense	$	(14.1	)	$	(15.7	)
Interest income		1.1			1.1

Interest expense for the three months ended March 31, 2007 decreased by $1.6 million, as compared with the same period in 2006. The decrease is primarily attributable to a decrease in average debt outstanding during the period, partially offset by increased average interest rates. Approximately 67% of our debt was at fixed rates at March 31, 2007, including the effects of $435.0 million notional interest rate swaps.

Interest income did not change for the three months ended March 31, 2007, as compared with the same period in 2006. A lower average cash balance was offset by increased average interest rates.

Tax Expense and Tax Rate


	Three Months Ended March 31,
(Amounts in millions)	2007			2006

Provision for income tax	$	19.4		$	9.1
Effective tax rate		36.6	%		32.7	%

Our effective tax rate of 36.6% for the three months ended March 31, 2007 increased from 32.7% for the same period in 2006. The increase is primarily due to the favorable impact of certain discrete items during the three months ended March 31, 2006. These discrete items did not recur in the same period in 2007.

Other Comprehensive Income


	Three Months Ended March 31,
(Amounts in millions)	2007		2006

Other comprehensive income	$	4.4	$	6.8

Other comprehensive income for the three months ended March 31, 2007 decreased by $2.4 million as compared with the same period in 2006. The decrease primarily reflects a decline in interest rate hedging results.

Business Segments

We conduct our business through three business segments that represent our major product types:

	•		FPD for engineered pumps, industrial pumps and related services;

	•		FCD for industrial valves, manual valves, control valves, nuclear valves, valve actuators and related services; and

	•		FSD for precision mechanical seals and related services.

We evaluate segment performance and allocate resources based on each segment’s operating income. See Note 12 to our condensed consolidated financial statements included in this Quarterly Report for further discussion of our segments. The key operating results for our three business segments, FPD, FCD and FSD are discussed below.

Flowserve Pump Division

Through FPD, we design, manufacture and distribute highly engineered pumps, industrial pumps and pump systems (collectively referred to as “original equipment”). FPD also manufactures replacement parts and related equipment, and provides a full array of support services (collectively referred to as “aftermarket”). FPD has 27 manufacturing facilities worldwide, of which nine are located in North America, 11 in Europe, five in South America and two in Asia. FPD also has more than 60 service centers, including those located in a manufacturing facility. We believe that we are the largest pump manufacturer serving the oil and gas, chemical and power generation industries, and the third largest pump manufacturer overall.


	Three Months Ended March 31,
(Amounts in millions)	2007			2006

Bookings	$	658.2		$	495.6
Sales		418.7			328.1
Gross profit		117.0			94.3
Gross profit margin		27.9	%		28.7	%
Operating income		41.7			27.0
Operating margin		10.0	%		8.2	%

Bookings for the three months ended March 31, 2007 increased by $162.6 million, or 32.8%, as compared with the same period in 2006. The increase includes currency benefits of approximately $31 million. Bookings for original equipment increased approximately $114 million, or 36%, and represented 70% of the total bookings increase. Aftermarket bookings increased approximately $49 million, or 28%. Europe, the Middle East and Africa (“EMA”), North America and South America bookings increased $94.6 million, $45.3 million and $38.8 million, respectively, and are primarily attributable to the oil and gas industry. These improvements were slightly offset by a decline in bookings in the Asia Pacific region. The bookings growth in EMA was driven by large original equipment bookings, predominantly for the oil and gas industry. Additionally, EMA and Latin America had significant increases in the water and power industries, respectively.

Sales for the three months ended March 31, 2007 increased by $90.6 million, or 27.6%, as compared with the same period in 2006. The increase includes currency benefits of approximately $19 million. Sales of original equipment increased approximately $76 million, or 47%, and result from continued growth in original equipment bookings, which has occurred for an extended period of time. Sales of aftermarket products increased approximately $15 million, or 10%. EMA sales increased $62.4 million and original equipment sales in EMA represented 91% of total sales growth for the area. Sales in North America increased $24.3 million, which is attributable to increases of 20% and 16% in original equipment and aftermarket, respectively.

Gross profit for the three months ended March 31, 2007 increased by $22.7 million, or 24.1%, as compared with the same period in 2006. Gross profit margin for the three months ended March 31, 2007 of 27.9% decreased from 28.7% for the same period in 2006. While both original equipment and aftermarket sales increased, original equipment sales growth exceeded the growth in aftermarket. As a result, original equipment sales increased to 58% of total sales as compared with 51% of total sales for the same period in 2006. Original equipment generally carries a lower margin than aftermarket.

Operating income for the three months ended March 31, 2007 increased by $14.7 million, or 54.4%, as compared with the same period in 2006. The increase includes currency benefits of approximately $2 million. The increase was due primarily to increased gross profit of $22.7 million, partially offset by a $9.1 million increase in SG&A primarily related to increased salaries, commissions, and travel in support of increased bookings and sales.

Backlog of $1.5 billion at March 31, 2007 increased by $248.8 million, or 19.7%, as compared with December 31, 2006. Currency effects provided an increase of approximately $10 million. Backlog growth is primarily a result of an extended period of bookings growth combined with longer supplier and customer lead times and growth in the size of projects.

Flow Control Division

Our second largest business segment is FCD, which designs, manufactures and distributes a broad portfolio of industrial valve products, including modulating and finite valves, actuators and controls. FCD leverages its experience and application know-how by offering a complete menu of engineered services to complement its expansive product portfolio. FCD has manufacturing and service facilities in 19 countries around the world, with only five of its 20 manufacturing operations located in the U.S. Based on independent industry sources, we believe that we are the third largest industrial valve supplier on a global basis.


	Three Months Ended March 31,
(Amounts in millions)	2007			2006

Bookings	$	309.1		$	267.7
Sales		268.6			217.8
Gross profit		93.0			75.3
Gross profit margin		34.6	%		34.6	%
Operating income		36.4			25.2
Operating margin		13.5	%		11.6	%

Bookings for the three months ended March 31, 2007 increased by $41.4 million, or 15.5%, as compared with the same period in 2006. The increase includes currency benefits of approximately $15 million. The growth in bookings is primarily attributable to the sustained strength of our key end-markets. Increased bookings in the process valve market resulted from strength in the North American and Asian chemical business, with a notable contribution from China. Increased project business for all valve offerings in the Asian chemical and North American oil and gas industries also contributed to the improvement.

Sales for the three months ended March 31, 2007 increased by $50.8 million, or 23.3%, as compared with the same period in 2006. The increase includes currency benefits of approximately $12 million. The increase is principally the result of strong North American project sales for all significant areas of our valve portfolio. Sales of control valves increased due to satisfaction of large orders into the Australian mining and Asian pulp and paper markets and by continued strength in North America, across markets. We realized notable improvements in the process valve market across Asia, specifically in the chemical and oil and gas industries. The fulfillment of several significant Russian district heating orders received in the second half of 2006 also contributed to the sales increase. In the first three months of 2007, we successfully implemented modest price increases in an effort to mitigate the impact of increased metals cost and to reflect the increase in manufacturing and supply chain lead times.

Gross profit for the three months ended March 31, 2007 increased by $17.7 million, or 23.5%, as compared with the same period in 2006. Gross profit margin for the three months ended March 31, 2007 of 34.6% was comparable with the same period in 2006. This reflects higher sales levels, which favorably impacts our absorption of fixed costs, and our implementation of various CIP and supply chain initiatives. Offsetting these gains were the inflation in our materials and conversion costs, metals price increases and a stronger concentration of original equipment in our sales mix.

Operating income for the three months ended March 31, 2007 increased by $11.2 million, or 44.4%, as compared with the same period in 2006. The increase includes currency benefits of approximately $2 million. The increase is principally attributable to the $17.7 million improvement in gross profit, partially offset by $6.8 million of higher SG&A costs. The increased SG&A reflects increased headcount cost of $4.2 million principally related to sales force personnel and $1.0 million of higher external commissions expense resulting from increased sales levels. As a key initiative for 2007, we continue to evaluate our SG&A infrastructure costs and explore opportunities to reduce our cost platform, including limiting additional growth in headcount and travel and by reducing professional fees. SG&A as a percentage of sales for the three months ended March 31, 2007 decreased 200 basis points as compared with the same period in 2006. The decrease is attributable to leverage from higher sales, as well as ongoing efforts to contain costs, as noted previously.

Backlog of $360.0 million at March 31, 2007 increased by $45.7 million, or 14.5%, as compared with December 31, 2006. Currency effects provided an increase of approximately $2 million. This increase in backlog is primarily attributable to the excess of bookings over sales during the first three months of 2007.

Flow Solutions Division

Through FSD, we engineer, manufacture and sell mechanical seals, auxiliary systems and parts, and provide related services, principally to process industries and general industrial markets, with similar products sold internally in support of FPD. FSD has added to its global operations and now has nine manufacturing locations, four of which are located in the U.S. FSD operates 67 QRCs worldwide, including 24 sites in North America, 16 in Europe, and the remainder in South America and Asia. Our ability to rapidly deliver mechanical sealing technology through our global engineering systems, our on-site engineers and our extensive network of QRCs represents a significant competitive advantage. This business model has enabled FSD to establish a large number of alliances with multi-national customers. Based on independent industry sources, we believe that we are the second largest mechanical seal supplier in the world.


	Three Months Ended March 31,
(Amounts in millions)	2007			2006

Bookings	$	140.6		$	127.9
Sales		129.2			118.2
Gross profit		57.2			51.8
Gross profit margin		44.3	%		43.8	%
Operating income		25.1			23.6
Operating margin		19.5	%		19.9	%

Bookings for the three months ended March 31, 2007 increased by $12.7 million, or 9.9%, as compared with the same period in 2006. This increase includes currency benefits of approximately $3 million. The increase is due primarily to a $7.3 million increase in customer bookings, which is primarily attributable to increased original equipment bookings in Asia Pacific and North America, as well as a $5.4 million increase in interdivision bookings (which are eliminated and are not included in consolidated bookings as disclosed above). The oil and gas and chemical markets continue to be our strongest markets.

Sales for the three months ended March 31, 2007 increased by $11.0 million, or 9.3%, as compared with the same period in 2006. This increase includes currency benefits of approximately $3 million. The increase is primarily attributable to South America, where a strong oil and gas market continues to provide solid bookings and sales, and to Asia Pacific, where increased original equipment and aftermarket bookings have contributed to increased sales.

Gross profit for the three months ended March 31, 2007 increased by $5.4 million, or 10.4%, as compared with the same period in 2006. Gross profit margin for the three months ending March 31, 2007 of 44.3% increased from 43.8% for the same period in 2006. The improvement is due to increased sales in all regions, which positively impacts our absorption of fixed costs, and a sales mix shift in EMA toward more profitable aftermarket business. Gross margin was negatively impacted by implementation of a new enterprise resource planning system in EMA.

Operating income for the three months ended March 31, 2007 increased by $1.5 million, or 6.4%, as compared with the same period in 2006. This increase includes currency benefits of less than $1 million. The increase is due to a $5.4 million increase in gross profit, partially offset by a $4.1 million increase in SG&A due primarily to growth in our global engineering and sales teams that occurred in the latter part of 2006.

Backlog of $84.9 million at March 31, 2007 increased by $10.5 million, or 14.1%, as compared with December 31, 2006. Currency had a negligible impact on backlog for the period. Backlog at March 31, 2007 and December 31, 2006 includes $19.3 million and $14.7 million, respectively, of interdivision backlog (which is eliminated and not included in consolidated backlog). Backlog growth is primarily a result of growth in original equipment bookings with longer lead times. Capacity expansions that were completed in 2006 continue to support increased shipments, primarily in North America and EMA, limit the increase in backlog and reduce the percentage of past due backlog from prior year levels.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flow Analysis


	Three Months Ended March 31,
(Amounts in millions)	2007			2006

Net cash flows used by operating activities	$	(73.8	)	$	(45.7	)
Net cash flows used by investing activities		(21.5	)		(11.8	)
Net cash flows provided by financing activities		65.8			9.2

Cash generated by operations and borrowings available under our existing revolving credit facility are our primary sources of short-term liquidity. Our cash balance at March 31, 2007 was $38.0 million, as compared with $67.0 million at December 31, 2006.

The cash flows used by operating activities for the first three months of 2007 primarily reflect a $15.0 million increase in net income, offset by a $48.8 million decrease in cash flows from working capital, particularly due to higher inventory of $76.0 million, especially project-related inventory required to support future shipments of products in backlog. During the first part of the year, increases in working capital reduce cash flow. We have historically derived a greater portion of our operating profit during the second half of the year, which is consistent with our customers’ buying patterns. As a result, our operating cash flows generally increase as the year progresses.

Our goal for days’ sales receivables outstanding (“DSO”) is 60 days. For the first three months of 2007, we achieved a DSO of 65 days as compared with 66 days for the same period in 2006. For reference purposes based on 2007 sales, an improvement of one day could provide approximately $9 million in cash. Increases in inventory used $76.0 million of cash flow for 2007 compared with a use of $13.3 million of cash flow for the same period in 2006. Inventory turns were 3.4 times at March 31, 2007, compared with 4.0 times at March 31, 2006, reflecting the increase in inventory, partially offset by the increase in sales. For reference purposes based on 2007 data, an improvement of one turn could yield approximately $142 million in cash.

Cash flows used by investing activities during the three months ended March 31, 2007 were $21.5 million, as compared with $11.8 million for the same period in 2006. Capital expenditures during the three months ended March 31, 2007 were $22.4 million, an increase of $10.0 million as compared with the same period in 2006, which reflects increased spending to support capacity expansion, enterprise resource planning application upgrades and information technology infrastructure.

Cash flows provided by financing activities during the three months ended March 31, 2007 were $65.8 million, as compared with $9.2 million for the same period in 2006. Cash inflows in 2007 were due primarily to $85.0 million in borrowings under our revolving line of credit. The borrowings were used primarily to fund increased working capital needs, share repurchases, increased capital spending and payments under our annual incentive program (which is generally paid in March based on the prior year’s results). Cash outflows in 2007 include repurchase of common shares for $30.6 million. Cash inflows in 2006 were due to $20.1 million in borrowings under our revolving line of credit. Cash outflows in 2006 were due to net payments on long-term debt, including $10.9 million of mandatory repayments using the proceeds from the sale of our General Services Group, a discontinued operation that was sold effective December 31, 2005.

We believe cash flows from operating activities combined with availability under our existing revolving credit agreement and our existing cash balance will be sufficient to enable us to meet our cash flow needs for the next 12 months. Cash flows from operations could be adversely affected by economic, political and other risks associated with sales of our products, operational factors, competition, fluctuations in foreign exchange rates and fluctuations in interest rates, among other factors. See “Cautionary Note Regarding Forward-Looking Statements.” We made no contributions to our U.S. pension plans during the three months ended March 31, 2007. However, we expect to contribute approximately $20 million during the third quarter of 2007.

On September 29, 2006, the Board of Directors authorized a program to repurchase up to two million shares of our outstanding common stock. Shares may be repurchased to offset potentially dilutive effects of stock options issued under our equity-based compensation programs. We repurchased 0.5 million shares for $25.3 million during the three months ended March 31, 2007, and settled 0.1 million shares purchased in late 2006 for $5.2 million. To date, we have repurchased a total of 1.8 million shares. We expect to conclude the program by the end of the second quarter of 2007.

On February 28, 2007, our Board of Directors authorized the payment of a quarterly cash dividend of $0.15 per share, which was paid on April 11, 2007 to shareholders of record as of March 28, 2007. While we currently intend to pay regular quarterly dividends in the foreseeable future, any future dividends will be reviewed individually and declared by our Board of Directors at its discretion, dependent on its assessment of our financial condition and business outlook at the applicable time.

Acquisitions

We regularly evaluate acquisition opportunities of various sizes. The cost and terms of any financing to be raised in conjunction with any acquisition, including our ability to raise economical capital, is a critical consideration in any such evaluation.

Capital Expenditures

Capital expenditures were $22.4 million for the three months ended March 31, 2007 compared with $12.5 million for the same period in 2006. Capital expenditures in 2007 are focused on capacity expansion, enterprise resource planning, information technology infrastructure and cost reduction opportunities. Capital expenditures in 2006 were focused on capacity expansion, enterprise resource planning application upgrades, information technology infrastructure and cost reduction opportunities. For the full year 2007, our capital expenditures are expected to be between approximately $85 million and $90 million. Certain of our facilities may face capacity constraints in the foreseeable future, which may lead to higher capital expenditure levels.

Financing

Credit Facilities

On August 12, 2005, we entered into Credit Facilities comprised of a $600.0 million term loan maturing on August 10, 2012 and a $400.0 million revolving line of credit, which can be utilized to provide up to $300.0 million in letters of credit, expiring on August 12, 2010. At March 31, 2007 and December 31, 2006, we had $85.0 million and $0 outstanding under the revolving line of credit, respectively. We had outstanding letters of credit of $90.5 million and $83.9 million at March 31, 2007 and December 31, 2006, respectively, which reduced borrowing capacity to $224.5 million and $316.1 million, respectively.

Borrowings under our Credit Facilities bear interest at a rate equal to, at our option, either (1) the base rate (which is based on the greater of the prime rate most recently announced by the administrative agent under our Credit Facilities or the Federal Funds rate plus 0.50%) or (2) LIBOR plus an applicable margin determined by reference to the ratio of our total debt to consolidated EBITDA, which as of March 31, 2007 was 1.5% for LIBOR borrowings.

The loans under our Credit Facilities are subject to mandatory repayment with, in general:

	•		100% of the net cash proceeds of asset sales; and

	•		Unless we attain and maintain investment grade credit ratings:

	o		50% of the proceeds of any equity offerings; and

	o		100% of the proceeds of any debt issuances (subject to certain exceptions).

Our obligations under the Credit Facilities are unconditionally guaranteed, jointly and severally, by substantially all of our existing and subsequently acquired or organized domestic subsidiaries and 65% of the capital stock of certain foreign subsidiaries. In addition, prior to our obtaining and maintaining investment grade credit ratings, our and the guarantors’ obligations under the Credit Facilities are collateralized by substantially all of our and the guarantors’ assets.

Additional discussion of our Credit Facilities, including amounts outstanding and applicable interest rates, is included in Note 4 to our condensed consolidated financial statements, included in this Quarterly Report.

We have entered into interest rate and currency swap agreements to hedge our exposure to cash flows related to our Credit Facilities. These agreements are more fully described in Note 3 to our condensed consolidated financial statements, included in this Quarterly Report, and in “Item 3. Quantitative and Qualitative Disclosures about Market Risk.”

Accounts Receivable Factoring

Through our European subsidiaries, we engage in non-recourse factoring of certain accounts receivable. The various agreements have different terms, including options for renewal and mutual termination clauses. Our Credit Facilities, which are fully described in

Note 11 to our consolidated financial statements, included in our 2006 Annual Report, limit factoring volume to $75.0 million at any given point in time as defined by our Credit Facilities.

Debt Covenants and Other Matters

Our Credit Facilities contain leverage and interest coverage financial covenants. Under the leverage covenant, the maximum permitted leverage ratio stepped down in the fourth quarter of 2006, with a further step-down beginning in the fourth quarter of 2007. Under the interest coverage covenant, the minimum required interest coverage ratio stepped up in the fourth quarter of 2006, with a further step-up beginning in the fourth quarter of 2007. Compliance with these financial covenants under our Credit Facilities is tested quarterly.

Our Credit Facilities include events of default usual for these types of credit facilities, including nonpayment of principal or interest, violation of covenants, incorrectness of representations and warranties, cross defaults and cross acceleration, bankruptcy, material judgments, ERISA events, actual or asserted invalidity of the guarantees or the security documents, and certain changes of control of our company. The occurrence of any event of default could result in the acceleration of our and the guarantors’ obligations under the Credit Facilities. We complied with the covenants through March 31, 2007.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management’s discussion and analysis of financial condition and results of operations are based on our condensed consolidated financial statements and related footnotes contained within this Quarterly Report. Our more critical accounting policies used in the preparation of the consolidated financial statements were discussed in our 2006 Annual Report. These critical policies, for which no significant changes have occurred in the first three months of 2007, include:

	•		Revenue Recognition;

	•		Deferred Taxes, Tax Valuation Allowances and Tax Reserves;

	•		Reserves for Contingent Loss;

	•		Retirement and Postretirement Benefits; and

	•		Valuation of Goodwill, Indefinite-Lived Intangible Assets and Other Long-Lived Assets.

The process of preparing financial statements in conformity with GAAP requires the use of estimates and assumptions to determine certain of the assets, liabilities, revenues and expenses. These estimates and assumptions are based upon what we believe is the best information available at the time of the estimates or assumptions. The estimates and assumptions could change materially as conditions within and beyond our control change. Accordingly, actual results could differ materially from those estimates. The significant estimates are reviewed quarterly with the Audit Committee of our Board of Directors.

Based on an assessment of our accounting policies and the underlying judgments and uncertainties affecting the application of those policies, we believe that our condensed consolidated financial statements provide a meaningful and fair perspective of our consolidated financial condition and results of operations. This is not to suggest that other general risk factors, such as changes in worldwide demand, changes in material costs, performance of acquired businesses and others, could not adversely impact our consolidated financial condition, results of operations and cash flows in future periods. See “Cautionary Note Regarding Forward-Looking Statements” below.

ACCOUNTING DEVELOPMENTS

We have presented the information about accounting pronouncements not yet implemented in Note 1 to our condensed consolidated financial statements included in this Quarterly Report.

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements include statements concerning future financial performance, future debt and financing levels, investment objectives, implications of litigation and regulatory investigations, and other plans and objectives of management for future operations or economic performance, or assumptions or forecasts related thereto. These statements are only predictions. We caution that forward-looking statements are not guarantees. Actual events or our results of operations could differ materially from those expressed or implied, but not limited to, in forward-looking statements. Forward-looking statements are typically identified by the use of terms such as, “may,” “should,” “expect,”

“could,” “intend,” “plan,” “anticipate,” “estimate,” “believe,” “continue,” “predict,” “potential” or the negative of such terms and other comparable terminology.

The forward-looking statements included in this Quarterly Report are based on our current expectations, plans, estimates, assumptions and beliefs that involve numerous risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Any of the assumptions underlying forward-looking statements could be inaccurate. To the extent that our assumptions differ from actual results, our ability to meet such forward-looking statements may be significantly hindered.

The following are some of the risks and uncertainties, although not all of the risks and uncertainties, which could cause actual results to differ materially from those presented in certain forward-looking statements:

	•		potential adverse consequences resulting from securities class action litigation and other litigation to which we are a party, such as litigation involving asbestos-containing material claims;

	•		the domestic and foreign government investigations regarding our participation in the United Nations Oil-for-Food Program;

	•		our potential non-compliance with U.S. export/re-export control, economic sanctions and import laws and regulations;

	•		our risk 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;

	•		increased tax liabilities resulting from a recent audit of our tax returns by the U.S. Internal Revenue Service, as well as potential costs and liabilities that may be associated with likely future audits;

	•		a portion of our bookings may not lead to completed sales, and we may not be able to convert bookings into revenues at acceptable profit margins, since such profit margins cannot be assured nor can they be necessarily assumed to follow historical trends;

	•		the recording of increased deferred tax asset valuation allowances in the future;

	•		an impairment in the carrying value of goodwill or other intangibles could adversely impact our consolidated financial condition and results of operations;

	•		economic, political and other risks associated with our international operations, including military actions or trade embargoes that could affect customer markets, including the continuing conflict in Iraq and its potential impact on Middle Eastern markets and global petroleum producers;

	•		our sales are substantially dependent upon the petroleum, chemical, power and water industries and any significant down turn in any one of these industries could adversely impact such sales;

	•		our operations are dependent 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;

	•		risks associated with cost overruns on fixed-fee projects;

	•		the highly competitive markets in which we operate;

	•		environmental compliance costs and liabilities;

	•		work stoppages and other labor matters;

	•		our inability to protect our intellectual property in the U.S., as well as in foreign countries;

	•		difficulties in obtaining raw materials at favorable prices;

	•		obligations under our defined benefit pension plans;

	•		liabilities that result from product liability and warranty claims;

	•		our outstanding indebtedness and the restrictive covenants in the agreements governing our indebtedness limit our operating and financial flexibility; and

	•		our inability to continue to expand our market presence through acquisitions, and unforeseen integration difficulties or costs resulting from acquisitions we do complete.

These risks are more fully discussed in, and all forward-looking statements should be read in light of, all of the factors discussed in Part I. “Item 1A. Risk Factors” included in this Quarterly Report and in our 2006 Annual Report. The updated risk factors included in this Quarterly Report are presented in addition to the risk factors disclosed in the 2006 Annual Report, except to the extent modified in this Quarterly Report.

You are cautioned not to place undue reliance on any forward-looking statements included in this Quarterly Report. All forward-looking statements are made as of the date of this Quarterly Report and the risk that actual results will differ materially from the expectations expressed in this Quarterly Report may increase with the passage of time. In light of the significant uncertainties inherent in the forward-looking statements included in this Quarterly Report, the inclusion of such forward-looking statements should not be regarded as a representation by us or any other person that the objectives and plans set forth in this Quarterly Report will be achieved. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by reference to these risks and uncertainties. Each forward-looking statement speaks only as of the date of the particular statement, and we do not undertake to update any forward-looking statement.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

We have market risk exposure arising from changes in interest rates and foreign currency exchange rate movements.

Our earnings are impacted by changes in short-term interest rates as a result of borrowings under our Credit Facilities, which bear interest based on floating rates. At March 31, 2007, after the effect of interest rate swaps, we had $208.2 million of variable rate debt obligations outstanding under our Credit Facilities with a weighted average interest rate of 6.91%. A hypothetical change of 100-basis points in the interest rate for these borrowings, assuming constant variable rate debt levels, would have changed interest expense by $0.5 million for the three months ended March 31, 2007.

We are exposed to credit-related losses in the event of non-performance by counterparties to financial instruments including interest rate swaps, but we currently expect all counterparties will continue to meet their obligations given their creditworthiness. As of both March 31, 2007 and December 31, 2006, we had $435.0 million of notional amount in outstanding interest rate swaps with third parties with maturities through December 2009.

We employ a foreign currency hedging strategy to minimize potential losses in earnings or cash flows from unfavorable foreign currency exchange rate movements. These strategies also minimize potential gains from favorable exchange rate movements. Foreign currency exposures arise from transactions, including firm commitments and anticipated transactions, denominated in a currency other than an entity’s functional currency and from translation of foreign-denominated assets and liabilities into U.S. dollars. Based on a sensitivity analysis at March 31, 2007, a 10% adverse change in the foreign currency exchange rates could impact our results of operations for the three months ended March 31, 2007 by $3.4 million as shown below:


(Amounts in millions)
Euro	$	1.8
Indian rupee		0.3
Australian dollar		0.2
Venezuelan bolivar		0.2
All other		0.9

Total	$	3.4

Exposures are hedged primarily with foreign currency forward contracts that generally have maturity dates of less than one year. Our policy allows foreign currency coverage only for identifiable foreign currency exposures and, therefore, we do not enter into foreign currency contracts for trading purposes where the objective would be to generate profits. As of March 31, 2007, we had a U.S.

dollar equivalent of $337.6 million in outstanding forward contracts with third parties, compared with $433.7 million at December 31, 2006.

Generally, we view our investments in foreign subsidiaries from a long-term perspective, and therefore, do not hedge these investments. We use capital structuring techniques to manage our investment in foreign subsidiaries as deemed necessary.

We realized gains (losses) associated with foreign currency translation of $4.8 million and $5.4 million for the three months ended March 31, 2007 and 2006, respectively, which are included in other comprehensive income. Transactional currency gains and losses arising from transactions outside of our sites’ functional currencies and changes in fair value of certain forward contracts are included in our consolidated results of operations. We realized foreign currency (losses) gains of $(0.7) million and $2.0 million for the three months ended March 31, 2007 and 2006, respectively, which is included in other (expense) income, net in the accompanying condensed consolidated statements of income.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are controls and other procedures that are designed to ensure that the information that we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

In connection with the preparation of this Quarterly Report, our management, under the supervision of and with the participation of our Chief Executive Officer and our Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2007. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of March 31, 2007.

Changes in Internal Control Over Financial Reporting

There have been no material changes in our internal control over financial reporting during the quarter ended March 31, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

We are party to the legal proceedings that are described in Note 8 to our condensed consolidated financial statements included in “Item 1. Financial Statements.” In addition to the foregoing, we and our subsidiaries are named defendants in certain other lawsuits incidental to our business and are involved from time to time as parties to governmental proceedings all arising in the ordinary course of business. Although the outcome of lawsuits or other proceedings involving us and our subsidiaries cannot be predicted with certainty and the amount of any liability that could arise with respect to such lawsuits or other proceedings cannot be predicted accurately, management does not expect these matters to have a material effect on our financial position, operating results or cash flows.

On March 14, 2006, a shareholder derivative lawsuit was filed purportedly on our behalf in federal court in the Northern District of Texas. The lawsuit named as defendants Mr. Greer, Ms. Hornbaker, and the following board members Mr. Coble, Mr. Haymaker, Mr. Kling, Mr. Rusnack, Mr. Johnston, Mr. Rampacek, Mr. Sheehan, Ms. Harris, Mr. Rollans and Mr. Bartlett. We were named as a nominal defendant. Based primarily on certain of the purported misstatements alleged in the above-described federal securities case, the plaintiff asserted claims against the defendants for breaches of fiduciary duty. The plaintiff alleged that the purported breaches of fiduciary duty occurred between 2000 and 2004. The plaintiff sought on our behalf an unspecified amount of damages, disgorgement by Mr. Greer and Ms. Hornbaker of salaries, bonuses, restricted stock and stock options, and recovery of attorneys’ fees and costs. Pursuant to a motion filed by us, the federal court dismissed that case on March 14, 2007, primarily on the basis that the case was not properly filed in federal court. On or about March 27, 2007, the same plaintiff re-filed essentially the same lawsuit naming the same defendants in the Supreme Court of the State of New York. We strongly believe that this new lawsuit was improperly filed in the Supreme Court of the State of New York as well and have filed a motion seeking dismissal of the case.

violation of the federal securities laws. We subsequently learned that the United States Department of Justice is investigating the same allegations. In addition, two foreign subsidiaries have been contacted by governmental authorities in their respective countries concerning their involvement in the United Nations Oil-for-Food Program. These investigations include periods prior to, as well as subsequent to, our acquisition of certain of the foreign operations involved in the investigations. We may be subject to certain liabilities if violations are found regardless of whether they relate to periods before or subsequent to our acquisition.

We believe that both the domestic and foreign governmental authorities are investigating other companies connection with the United Nations Oil-for-Food Program.

apportioned among all liable parties, including site owners and waste transporters, according to the volumes and/or toxicity of the wastes shown to have been disposed of at the sites. We believe that our exposure for existing disposal sites will be less than $100,000.

Item 1A. Risk Factors.

There are numerous factors that affect our business and results of operations, many of which are beyond our control. In addition to other information set forth in this Quarterly Report, you should carefully read and consider “Item 1A. Risk Factors” in Part I, and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II of our 2006 Annual Report, which contain a description of significant factors that might cause the actual results of operations in future periods to differ materially from those currently expected or desired. Set forth below are two risk factors that have been modified or have materially changed from the risk factors discussed in our 2006 Annual Report. The risks described in this Quarterly Report and in our 2006 Annual Report are not the only risks facing our Company. Additional risks and uncertainties are currently deemed immaterial based on management’s assessment of currently available information, which remains subject to change, however, new risks that are currently unknown to us may surface in the future which materially adversely affect our business, financial condition, operating results or cash flow in the future.

The ongoing domestic and foreign government investigations regarding our participation in the United Nations Oil-for-Food Program could materially adversely affect our Company.

We believe that both the domestic and foreign governmental authorities are investigating other companies connection with the United Nations Oil-for-Food Program.

Nations Oil-for-Food Program and were not properly documented in the subsidiaries’ accounting records, but were expensed as paid. During the course of the investigation, certain other potential issues involving non-U.S. personnel were identified at one of the foreign subsidiaries, which are currently under review.

We will continue to fully cooperate in the domestic and foreign governmental investigations. These investigations are in progress but, at this-point, are incomplete. Accordingly, we cannot predict the outcome of these investigations at this time. If the domestic or foreign authorities take enforcement action with regard to these investigations, we may be required to pay fines, disgorge profits, consent to injunctions against future conduct or suffer other penalties which could have material affect our business, financial condition, results of operations and cash flows.

Potential noncompliance with U.S. export control laws could materially adversely affect our business

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Submission of Matters to a Vote of Security Holders.

None.

Item 5. Other Information.

Flowserve Corporation Officer Severance Plan

As previously disclosed, on December 14, 2006 our Board of Directors and its Organization and Compensation Committee approved a revised severance plan for our senior executive officers and other corporate officers (“Officers”). In May 2007, we finalized and executed the Flowserve Corporation Officer Severance Plan (the “Plan”) that, among other things, provides for certain benefits to our Officers if their employment is terminated as a result of a reduction in force or without cause. The Officers covered under the Plan will receive the following benefits, where eligible: (i) two years of then base salary, not including any other financial perquisites, payable bi-weekly in accordance with the Company’s regular payroll schedule; and (ii) an amount equivalent to one year annual incentive payment (“AIP”) at target payable when the next AIP bonus is payable to continuing Officers. In addition, in order to receive such payments, the Officers covered under the Plan must comply with one year “non-competition” agreements and must execute a release agreement that contains certain cooperation clauses. The Plan will automatically expire in five years from the adoption date unless renewed by the Organization and Compensation Committee. The Plan may be earlier modified or terminated by the Organization and Compensation Committee, subject to certain restrictions.

Employment Agreement with Mark A. Blinn

As previously disclosed, in December 2006 we reached an agreement in principle with Mark A. Blinn, our Senior Vice President and Chief Financial Officer, subject to the finalization of a mutually agreeable written contract. On May 7, 2007, we entered into an Employment Agreement with Mr. Blinn (the “Agreement”). The Agreement, among other things, provides that if Mr. Blinn is not promoted to Chief Executive Officer upon the departure of Lewis M. Kling, our current President and Chief Executive Officer, or if another person is appointed Chief Operations Officer prior to Mr. Kling’s departure, then he may elect, within 30 days of receiving notification from us that he will not be so promoted, to resign and (i) Mr. Blinn’s then unvested stock options and restricted stock grants will immediately vest and (ii) Mr. Blinn will be eligible for severance benefits as if he was terminated without cause under the Plan. However, Mr. Blinn is obligated, if he elects to so resign, to continue to furnish up to an additional 120 days of transitional support to us, in his then current job function and at his then current salary, if requested by us. Additionally, the Agreement provides that, if Mr. Blinn dies or becomes “disabled,” as that term is defined in the Employment Agreement, and we terminate his employment, Mr. Blinn’s unvested stock options and restricted stock will immediately vest and Mr. Blinn (or his estate) would become eligible for severance benefits under the Plan.

Retirement of Messrs. Hugh K. Coble and George T. Haymaker, Jr.

As previously disclosed, Messrs. Hugh K. Coble and George T. Haymaker, Jr., current members of our board of directors whose terms expire at the upcoming annual shareholder meeting, having reached the ages of 72 and 69, respectively, will not stand for re-election at the meeting. Mr. Coble has served as a director since 1994 and Mr. Haymaker has served as a director since 1997. They will retire from the board upon expiration of their terms at the upcoming annual shareholder meeting, pursuant to the board of directors’ corporate governance guidelines regarding term limits.

Item 6. Exhibits.

Set forth below is a list of exhibits included as part of this Quarterly Report:


Exhibit No.		Description
3.1		Restated Certificate of Incorporation of Flowserve Corporation, filed as Exhibit 3(i) to Flowserve Corporation’s Current Report on Form 8-K/A, dated August 16, 2006.

3.6		Amended and Restated By-Laws of Flowserve Corporation, as amended, filed as Exhibit 3.9 to Flowserve Corporation’s Annual Report on Form 10-K for the year ended December 31, 2003.

10.1		Flowserve Corporation Officer Severance Plan, effective January 1, 2007, dated as of May 7, 2007.

10.2		Employment Agreement between Flowserve Corporation and Mark A. Blinn, dated as of May 7, 2007.

31.1		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	FLOWSERVE CORPORATION (Registrant)
Date: May 9, 2007	/s/ Lewis M. Kling
	Lewis M. Kling
	President, Chief Executive Officer and Director


Date: May 9, 2007	/s/ Mark A. Blinn
	Mark A. Blinn
	Senior Vice President and Chief Financial Officer

Exhibits Index


Exhibit No.		Description
3.1		Restated Certificate of Incorporation of Flowserve Corporation, filed as Exhibit 3(i) to the Flowserve Corporation’s Current Report on Form 8-K/A, dated August 16, 2006.

3.6		Amended and Restated By-Laws of Flowserve Corporation, as amended, filed as Exhibit 3.9 to Flowserve Corporation’s Annual Report on Form 10-K for the year ended December 31, 2003.

10.1		Flowserve Corporation Officer Severance Plan, effective January 1, 2007, dated as of May 7, 2007.

10.2		Employment Agreement between Flowserve Corporation and Mark A. Blinn, dated as of May 7, 2007.

31.1		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

EX-10.1 2 d46447exv10w1.htm OFFICER SEVERANCE PLAN exv10w1

Exhibit 10.1

FLOWSERVE CORPORATION
OFFICER SEVERANCE PLAN

Article I
Introduction

Effective January 1, 2007 (the “Effective Date”), Flowserve Corporation (the “Company”) hereby establishes the Flowserve Corporation Officer Severance Plan (the “Plan”) to provide financial and transitional assistance to Eligible Officers who separate from the Company or an Affiliate due to a Reduction-in-Force or due to a termination of employment without Cause (as defined herein) in order to assure the Company of the continued attention and dedication to duty of Eligible Officers and to ensure the continued availability of service by Eligible Officers during periods of work force reduction or reorganization. This Plan is intended to constitute an “employee welfare benefit plan,” as defined in Section 3(1) of the Employee Retirement Income Security Act of 1974, as amended.

Except as otherwise provided below, as of the Effective Date, the Plan replaces any and all severance pay plans, policies, practices, arrangements or programs, written or unwritten, that the Company may have had in effect for its Eligible Officers from time to time prior to the Effective Date; any Eligible Officer whose employment is terminated on or after the Effective Date shall not be entitled to any severance benefits other than those set forth herein. Notwithstanding the foregoing, nothing in this Plan shall adversely affect the rights an individual Eligible Officer may have to severance payments under the Flowserve Corporation Executive Officer Change in Control Severance Plan (or any successor plan thereto) (the “CIC Plan”) or any written agreement executed by and between the Employer and that Eligible Officer (a “Severance Agreement”), including, without limitation, any Restrictive Covenant Agreement by and between the Company and an Eligible Officer; provided, however, that in the event any Eligible Officer that is a party to a Severance Agreement or who is eligible for benefits under the CIC Plan suffers a termination of employment and is entitled to and is receiving the severance benefits intended to be provided under his or her Severance Agreement or the CIC Plan, such Eligible Officer shall not be entitled to receive severance benefits pursuant to this Plan, unless such Eligible Officer is entitled to severance benefits pursuant to a Restrictive Covenant Agreement, in which case, such Eligible Officer shall receive benefits under such agreement first, and then shall be eligible for benefits under this Plan to the extent such benefits are not duplicative of the benefits previously paid pursuant to such agreement, with the maximum severance benefits payable to such Eligible Officer under both the Plan and such agreement equal to the maximum aggregate benefit payable to such Eligible Officer under this Plan.

Article II
Definitions

The words used in this Plan shall have the respective meanings set forth below unless the context clearly indicates otherwise. Except as otherwise indicated by the context, any masculine terminology used herein also includes the feminine and vice versa, and the definition of any term herein in the singular shall also include the plural, and vice versa.

Section 2.1 Administrator means the Senior Vice President, Human Resources, or, if the claim for benefits hereunder affects the Senior Vice President, Human Resources, such entity or individual as may be designated by the Organization and Compensation Committee.

Section 2.2 Affiliate means any Subsidiary or Parent of the Company that has been designated to participate in the Plan by the Administrator, and has adopted the Plan pursuant to Article V hereof.

Section 2.3 Appeals Administrator means the Chief Executive Officer of the Company, or, if the claim for benefits hereunder affects the Chief Executive Officer, such entity or individual as may be designated by the Organization and Compensation Committee.

Section 2.4 Cause means any of the following events, as determined by the Administrator in its sole and absolute discretion:

(a) the Eligible Officer’s willful and continued failure to perform his or her basic duties with the Company or an Affiliate, provided the Company has provided the Eligible Officer with written notice of such failure and the Eligible Officer has failed to correct the failure within thirty (30) days of such notice; or

(b) the Eligible Officer’s material violation of the Company’s Code of Business Conduct.

Section 2.5 Company means Flowserve Corporation.

Section 2.6 Disability means a long-term disability as defined in and meeting the terms and conditions of the appropriate plan of the Company that provides long-term disability benefits to the Company’s eligible employees (or, as set forth in any successor plans), as applicable to the Eligible Officer, or, if no long-term disability plan is in place or is applicable to the Eligible Officer, a physical or mental condition resulting from bodily injury, disease, or mental disorder which prevents the Eligible Officer from performing his or her duties of employment for a period of six (6) continuous months, as determined in good faith by the Administrator, based upon medical reports or other evidence satisfactory to the Administrator.

Section 2.7 Eligible Officer means an Officer who:

(a) is terminated by the Company or an Affiliate in connection with a Reduction-in-Force, or

(b) is terminated by the Company or an Affiliate without Cause.

Section 2.8 ERISA means the Employee Retirement Income Security Act of 1974, as amended.

Section 2.9 Organization and Compensation Committee means the committee designated by the Board of Directors.

Section 2.10 Officer means senior executive officers or other corporate officers of the Company or an Affiliate.

Section 2.11 Parent means an entity which directly or indirectly holds a majority of the voting power or profits or capital interest of the Company.

Section 2.12 Plan means the Flowserve Corporation Officer Severance Plan.

Section 2.13 Reduction-in-Force means the separation of an Officer from employment with the Company or an Affiliate because of a work force reduction, restructuring, or other cost containment or business decision as designated by the Administrator, in its sole and absolute discretion, from time to time.

Section 2.14 Retirement means the termination of an Eligible Officer’s employment for any reason other than for Cause, due to the Participant’s death or Disability, or due to a Reduction-in-Force, or on or after the earlier of (i) the Eligible Officer’s Early Retirement Date (as such term is defined within the retirement plan in effect and in which such Eligible Officer participates on the date of the Eligible Officer’s termination); or (ii) the Eligible Officer attaining the normal retirement date (as such term is defined within the retirement plan in effect and in which such Eligible Officer participates on the date of the Eligible Officer’s termination, or if no such plan is in effect, age 65).

Section 2.15 Severance Benefit means a benefit to which an Eligible Officer may become entitled pursuant to Article III hereof.

Section 2.16 Subsidiary means any entity in which the Company, directly or indirectly, holds a majority of the voting power or profits or capital interest of such entity.

Article III
Severance Benefits

Section 3.1 Eligibility for Severance Benefits.

(a) An Eligible Officer shall be entitled to receive a Severance Benefit in accordance with this Article III only if the Administrator, in its reasonable discretion, determines that:

(i) the Eligible Officer’s employment with the Company or an Affiliate has been involuntarily terminated as the result of a Reduction-in-Force or without Cause.

(ii) the Severance Benefit described herein is not otherwise duplicative of payments already owed to the Eligible Officer under an employment, pre-existing retention, severance, change-in-control, or other special compensation agreement or pursuant to any applicable laws.

(iii) the Eligible Officer has not otherwise received and accepted an offer of employment with (A) the Company, (B) an Affiliate, (C) another company providing services to the Company or an Affiliate, or (D) any other company that entered into an agreement with the Company or an Affiliate to purchase, acquire, or transfer the stock or assets of the Company, an Affiliate, or a group, function or part of the Company or an Affiliate.

(iv) the Eligible Officer has not otherwise declined an offer of employment, the terms of which would have permitted the Eligible Officer to continue employment within fifty (50) miles of the location in which the Eligible Officer performed substantially all of his or her services immediately prior to the Reduction-in-Force, with (A) the Company, (B) an Affiliate, (C) another company providing services to the Company or an Affiliate, or (D) any other company that entered into an agreement with

the Company or an Affiliate to purchase, acquire, or transfer the stock or assets of the Company, an Affiliate, or a group, function or part of the Company or an Affiliate.

(v) the Eligible Officer has not terminated from the Company or an Affiliate for any of the following reasons:

(A) death,

(B) Disability,

(D) Retirement, or

(E) discharge for Cause.

(vi) the Eligible Officer continues to comply with the provisions of any written agreement in effect between the Eligible Officer and the Company (or any of its Affiliates) that contains non-competition, confidentiality and/or non-solicitation provisions, including, without limitation, the terms and conditions of any Restrictive Covenant Agreement by and between the Company and the Eligible Officer.

(vii) the Eligible Officer has executed and timely provided a release and covenant not to sue in a form reasonably satisfactory to the Company.

(b) Notwithstanding anything herein to the contrary, if an Eligible Officer has otherwise satisfied the criteria described in Section 3.1(a) above and is rehired by the Company or an Affiliate, such Eligible Officer’s entitlement to further Severance Benefit payments shall cease immediately, unless the Administrator, in its sole and absolute discretion, determines that the relationship between the former Eligible Officer and the Company or Affiliate for whom services are being provided constitutes a non-employee consulting relationship and that continued payment of such benefits is permitted by applicable law without adverse consequences to either the Company or the Eligible Officer, as determined by the Administrator in its sole discretion. Regardless of the nature of a former Eligible Officer’s relationship with the Company or Affiliate, if such former Eligible Officer provides services to or for the Company or an Affiliate following a Reduction-in-Force, such former Eligible Officer shall not be obligated to repay any Severance Benefits that have been paid pursuant to this Plan.

Section 3.2 Salary Continuation.

(a) Salary continuation benefits paid to an Eligible Officer who has satisfied the applicable requirements reflected in Section 3.1 above shall be based upon the amounts determined under Section 3.2(b) below and shall continue until the earlier of:

(i) the date that is twenty-four (24) months following the Eligible Officer’s termination of employment, or

(ii) the date the Eligible Officer fails to comply with the provisions of any written agreement in effect between the Eligible Officer and the Company (or any of its Affiliates) that contains non-competition, confidentiality and/or non-solicitation

provisions, including, without limitation, the terms and conditions of any Restrictive Covenant Agreement by and between the Company and the Eligible Officer.

(b) The amount of each salary continuation benefit payment that shall be paid to an Eligible Officer during the applicable salary continuation period described in Section 3.2(a) above, shall be calculated by the Administrator, in its sole and absolute discretion, by dividing the Eligible Officer’s annual base salary (excluding all bonuses and financial perquisites) immediately prior to the Eligible Officer’s termination of employment by the number of regularly scheduled paydays on which the Eligible Officer would have otherwise been paid during the year if a termination of employment had not occurred; provided, however, that if an Eligible Officer is on an approved short-term disability leave or on designated leave pursuant to the Family and Medical Leave Act or other similar law, such Eligible Officer’s salary continuation benefits shall be based upon the Eligible Officer’s salary immediately preceding the inception of the leave

(c) Salary continuation benefits shall commence on the date that would have otherwise been the Eligible Officer’s next regularly scheduled payday following the later of (i) the Eligible Officer’s termination of employment or (ii) the expiration of the revocation period provided in the release executed by the Eligible Officer in connection with this Plan. Notwithstanding the foregoing, the Administrator may delay payment by as much as six (6) months in order to comply with the requirements of section 409A of the Code, if the Administrator, in its sole and absolute discretion, determines that the Eligible Officer is a “key employee,” as defined in section 416(i) of the Code.

(d) Notwithstanding anything in Section 3.2(b) above to the contrary, to the extent an Eligible Officer is on an approved short-term disability leave or on designated leave pursuant to the Family and Medical Leave Act or other similar law, such Eligible Officer’s salary continuation benefits shall be based upon the Eligible Officer’s salary or regular hourly wage immediately preceding the inception of the leave.

Section 3.3 Annual Incentive Plan Bonus.

(a) In addition to the salary continuation benefit described in Section 3.2 above, each Eligible Officer who is terminated by the Company or an Affiliate in connection with a Reduction-in-Force or without Cause shall be entitled to receive a lump-sum payment substantially equivalent to the annual incentive payment such Eligible Officer would have otherwise received under the Company’s annual incentive plan if (i) the Company satisfied the targeted performance results established under the Flowserve Corporation annual incentive plan for the performance period in which the Eligible Officer’s termination of employment occurs, and (ii) the Eligible Officer had been employed at the end of such performance period and otherwise eligible for a payment under the Company’s annual incentive plan.

(b) Payment of annual target incentive payments described in Section 3.3(a) above, shall be made at the same time as payments are made under the Company’s annual incentive plan; provided, however that the Administrator may delay payment by as much as six (6) months in order to comply with the requirements of section 409A of the Code, if the Administrator, in its sole and absolute discretion, determines that the Eligible Officer is a “key employee,” as defined in section 416(i) of the Code.

Article IV
Claims Procedures

Section 4.1 Initial Claim. If an individual makes a written request alleging a right to receive benefits under this Plan or alleging a right to receive an adjustment in benefits being paid under the Plan, the Administrator shall treat it as a claim for benefits. All claims for benefits under the Plan shall be sent in writing to the Administrator and must be received within thirty (30) days after the effective date of the Eligible Officer’s termination of employment. If the Administrator, in its sole and absolute discretion, determines that a claimant is not entitled to receive all or any part of the benefits claimed, the Administrator will inform the claimant in writing of its determination and an explanation regarding the reason for its determination.

Section 4.2 Initial Claim Determination.

(a) Once the Administrator makes a determination regarding a claim, the Administrator will send, by means of the U.S. mail, hand delivery or e-mail, a written notice providing:

(i) the Administrator’s determination,

(ii) the basis for the determination (along with appropriate references to pertinent provisions on which the denial is based),

(iii) a description of any additional material or information necessary to perfect the claim and an explanation of why such material is necessary, and

(iv) the procedure that must be followed to obtain a review of the determination, including a description of the appeals procedure and how to bring a civil action for benefits under section 502(a) of ERISA.

(b) The initial claim determination notice described above will be provided within a reasonable period of time, but no later than 90 days from the day the Administrator received the claim, unless grounds for an extension (reflected in Section 4.2(c) below) exist.

(c) Grounds for an extension may arise in certain instances when the Administrator, for reasons beyond its control, cannot make a determination within the initial 90-day period. In such situations, the Administrator, acting in its sole and absolute discretion, may extend the initial 90-day period for up to an additional 90 days (for a total of 180 days); provided the Administrator:

(i) determines that an extension is necessary due to matters beyond its control, and

(ii) provides the claimant with written notice (which may be communicated by mail, hand delivery, or e-mail) prior to the expiration of the initial determination period that:

(A) an extension is necessary,

(B) the reason for the extension, and

Section 4.3 Appeal of a Denied Claim.

(a) If a claim for benefits is denied, either in whole or in part, and the claimant wants to contest such denial, the claimant must appeal the Administrator’s denial by requesting a review of the claim by the Appeals Administrator. A claimant has the following rights if a claim for benefits is denied (whether in whole or in part):

(i) an opportunity to request an appeal,

(ii) the ability to submit written comments, documents, records and other information in connection with the appeal, and

(iii) reasonable access to, and copies of, all documents, records, and other information relevant to the denied claim at no charge.

(b) If a claimant chooses to file an appeal of a claim that was denied in whole or in part, the request for review must be received within 60 days of the date in which the claimant received notice from the Administrator indicating that the initial claim was denied.

(c) The review of an initial adverse determination by the Appeals Administrator will take into account all comments, documents, records and other information that has been submitted, without regard to whether such information was submitted and considered by the Administrator in the initial determination.

(d) In reviewing appeals, no deference will be given to an initial adverse benefit determination by the Administrator, and the review itself will be conducted by an appropriate named fiduciary who is neither the individual who made the adverse benefit determination that is the subject of the appeal nor the subordinate of such individual.

(e) If, following an appeal, a claim is denied, either in whole or in part, after a review of the appeal and any additional information that a claimant has submitted, a notice containing the following information (which will be provided in writing by U.S. mail, hand delivery, or e-mail) will be provided within a reasonable period of time, but not later than sixty (60) days from the date that a request for a review was received, unless grounds for an extension reflected in Section 4.3(f) below exist:

(i) the specific reason or reasons for the decision, including any adverse determinations,

(ii) references to the specific provisions on which the determination was based,

(iii) a statement describing how to request reasonable access to, and copies of, all documents, records, and other information that is relevant to the denied claim (free of charge),

(iv) a description of any voluntary appeals procedure, if any, and how to obtain information about such procedure, and

(v) the ability to bring a cause of action for benefits under section 502(a) of ERISA.

(f) Grounds for an extension may arise in certain instances when, due to events beyond the Appeals Administrator’s control, a decision cannot be made within the initial 60-day period. In such situations, the initial 60-day period may be extended for up to an additional 60 days (for a total of 120 days); provided:

(i) a determination is made that an extension is necessary due to matters beyond the Appeals Administrator’s control, and

(ii) the claimant is provided with written notice (which may be communicated by mail, hand delivery, or e-mail) prior to the expiration of the initial determination period that:

(A) an extension is necessary,

(B) the reason for the extension, and

Article V
Adoption of the Plan by Affiliates

This Plan may be adopted by any Affiliate of the Company if the Organization and Compensation Committee or its delegate approves such adoption. Upon such adoption, the provisions of the Plan shall be fully applicable to the Eligible Officers of that Affiliate. At any time that an Affiliate ceases to qualify as an Affiliate, it shall no longer be eligible to participate hereunder and any Eligible Officers in its employ shall no longer be eligible to receive benefits under this Plan.

Article VI
Duration, Amendment and Termination

Section 6.1 Duration. This Plan shall continue in full force and effect from the Effective Date until December 31, 2011 unless extended or earlier terminated by action of the Organization and Compensation Committee or its delegate.

Section 6.2 Termination and Amendment. Although the Company hopes and expects to continue the Plan for a five (5) year period, the Plan may be amended, changed, replaced, extended or terminated by the Organization and Compensation Committee or its delegate at any time, in its sole and absolute discretion. The Organization and Compensation Committee or its delegate shall have full authority to amend any provision of the Plan to reduce, eliminate or alter benefits payable hereunder, or to alter, in any way, the criteria for eligibility to participate herein.

Section 6.3 Form of Amendment. The form of any Amendment of the Plan shall be a written instrument signed by any person authorized to sign by the Organization and Compensation Committee or its delegate. An Amendment of the Plan in accordance with the terms hereof shall automatically effect a corresponding amendment to the rights of all Eligible Officers hereunder.

Article VII
Miscellaneous

Section 7.1 Employment Status. This Plan does not constitute a contract of employment or impose upon the Company or any Affiliate any obligation to retain the Eligible Officer as an employee, to change or not change the status of the Eligible Officer’s employment, or to change the Company’s policies or those of its Affiliates regarding termination of employment.

Section 7.2 Validity and Severability. The invalidity or unenforceability of any provision of the Plan shall not affect the validity or enforceability of any other provision of the Plan, which shall remain in full force and effect, and any prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.

Section 7.3 Governing Law. To the extent not preempted by ERISA, the validity, interpretation, construction and performance of the Plan shall in all respects be governed by the laws of Texas, without reference to principles of conflict of law.

Section 7.4 Funding. The Plan is funded through the general assets of the Company and all payments of Severance Benefits with respect to a particular Eligible Officer shall be paid from the general assets of the Company. Neither the Company nor the Administrator shall have any obligation to establish a trust or fund for the payment of benefits under the Plan or to insure any of the benefits under the Plan. None of the officers, members of the Board of Directors, or agents of the Company, any Affiliate or the Administrator guarantees in any manner the payment of benefits hereunder.

Article VIII
General Information


Section 8.1	Official Plan Name.	Flowserve Corporation Officer
		Severance Plan

Section 8.2	Plan Sponsor and Plan Administrator.	Flowserve Corporation
		5215 N. O’Connor Blvd.
		Irving, TX 75039
		(972) 443-6500

Section 8.3	Employer Identification Number.	31-0267900

Section 8.4	Plan Number.	504

Section 8.5	Plan Year.	January 1 through December 31

Section 8.6	Type of Plan.	Welfare benefit plan providing
		severance benefits to certain
		officers in the event of a
		reduction-in-force or
		termination without Cause.

Section 8.7	Type of Administration.	The Plan is administered by the
		Plan Administrator.


Section 8.8	Claims Administrator.	Plan Administrator for the
		Flowserve Corporation Officer
		Severance Plan
		Flowserve Corporation
		5215 N. O’Connor Blvd. Suite 2300 Irving, TX 75039
		(972) 443-6500

Section 8.9	Agent for Service of Legal Process.	Flowserve Corporation
		General Counsel
		5215 N. O’Connor Blvd.
		Irving, TX 75039 (972) 443-6500

Section 8.10	Funding.	The Plan is funded through the
		general assets of the Company.

IN WITNESS WHEREOF, the Company has caused this instrument to be executed May 7, 2007.


		FLOWSERVE CORPORATION

		/s/ Ronald F. Shuff Ronald F. Shuff Vice President, Secretary and General Counsel

EX-10.2 3 d46447exv10w2.htm EMPLOYMENT AGREEMENT - MARK A. BLINN exv10w2

EXHIBIT 10.2

EMPLOYMENT AGREEMENT

This EMPLOYMENT AGREEMENT (this “Agreement”) dated and effective May 7, 2007 (the “Effective Date”), is made and entered into between Flowserve Corporation (the “Company”) and Mark Blinn (“Executive”).

RECITALS

A. The Company desires to continue to employ Executive and secure his services for the period provided in this Agreement upon the terms and conditions provided herein and Executive desires to be so employed.

D. As a condition to the Company’s employment of Executive, the Company desires to receive from Executive certain covenants and agreements.

E. The Company and Executive desire to set forth in writing the terms and conditions of their agreement and understandings with respect to the employment of Executive.

AGREEMENT

NOW, THEREFORE, in consideration of the mutual promises and agreements herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and Executive (collectively “Parties”) agree as follows:

1. Employment.

(a) Position and Duties of the Executive. During Executive’s employment pursuant to this Agreement, Executive will serve as a Senior Vice President and the Chief Financial Officer of the Company. As Chief Financial Officer, Executive is responsible for the overall financial management and operation of the Company and Affiliated Companies. For purposes of this Agreement, “Affiliated Companies” means any entity in which the Company, directly or indirectly, holds a majority of the voting power or profits or capital interest of such entity. The title, powers, and duties of Executive will be more specifically determined by the Company and may be modified by the Company from time to time in its sole discretion. Executive will report to the Chief Executive Officer (“CEO”).

(b) Performance. During the Term (as defined below), Executive will use his best efforts in performing his duties and will devote on a full-time basis all necessary time, energy and skill in performing his duties. Executive will comply with all the employee policies and written manuals of the Company and Affiliated Companies including the Code of Business Conduct and the Flowserve Financial Management Code of Ethics. Executive will not work for any other business or enterprise during the Term. Executive further agrees that he will not, directly or indirectly, engage or participate in any activity during the Term which may injure the interests of the Company or the Affiliated Companies, whether such interests are business-related, financial or otherwise. Executive may serve on corporate, civic, or charitable boards or committees and manage Executive’s personal investments and affairs, provided that: (1) such activities do not interfere with the performance of Executive’s duties under this Agreement; (2) such activities do not cause Executive to breach his obligations in Section 7 of this Agreement; and (3) Executive keeps the Company informed of Executive’s commitments. Additionally, Executive must notify and seek permission from the Company’s Board of Directors before he can serve as a director on a corporate board of directors. If the Company determines that any of Executive’s

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corporate, civic or charitable activities are interfering with the performance of Executive’s duties, the Company will notify Executive in writing and provide him thirty (30) days in which to remedy the issue.

2. Term of Employment and Agreement. Executive’s employment with the Company is on an at-will basis, meaning that either Executive or the Company may terminate the employment relationship at any time and for any reason not expressly prohibited by law and in accordance with the provisions of Sections 4, 5 and 6 of this Agreement. The at-will nature of Executive’s employment cannot be modified orally, but may only be modified by a written agreement approved by the Company’s Board of Directors. The actual period of Executive’s employment hereunder is referred to herein as the “Term.” This Agreement will terminate on December 14, 2010 regardless of Executive’s employment status with the Company at the time.

3. Compensation for Employment.

(a) Salary. During the Term, the Company will pay to Executive a salary to be agreed upon between Executive and the Company, less applicable payroll taxes and normal withholdings, (the “Salary”) for all services rendered by Executive under this Agreement. The payment of the Salary will be made only during the Term, and any termination of employment pursuant to Section 4, 5 or 6 of this Agreement will terminate the Company’s obligation to pay the Salary for periods following the date of such termination of employment. The Company will pay the Salary to Executive in equal installments every other week on the same days of the month the Company pays its other employees, subject to applicable deductions for withholding tax amounts, all in accordance with the normal payroll policies of the Company.

(b) Stock. On December 14, 2006, the Company granted Executive 30,000 restricted shares of the Company’s common stock (the “Common Stock”) and an option to purchase 30,000 shares of Common Stock, with an exercise price equal to the fair market value of a share of the Common Stock on December 14, 2006 (collectively the grant of restricted shares and the option are referred to herein as the “Equity Grants”). The Equity Grants are subject to the terms and conditions of the applicable award agreements and applicable stock plan(s) and include, without limitation, the following terms: (i) 100% vesting on December 14, 2009, if Executive is still employed by the Company on such date; and (ii) immediate vesting of all shares subject to each Equity Grant if, prior to December 14, 2009, either (x) Executive is not promoted to the Company’s CEO position immediately following the date the Company’s current President and CEO, Mr. Lewis M. Kling, terminates his employment with the Company for any reason, or (y) an individual, other than Executive, is appointed as the Chief Operations Officer (“COO”) of the Company prior to the date that Mr. Kling’s employment with the Company terminates for any reason. If Executive is, however, so promoted to the CEO or COO position, the parties agree that the Equity Grants will be considered part of any grant the Executive receives as a result of the promotion.

(c) Benefits. During the Term, Executive will be entitled to participate in the employee benefit plans and programs, including paid vacations, generally available to other similarly situated Company employees, subject to the terms, conditions and overall administration of such plans, as such plans may be modified, amended, terminated or replaced from time to time in the sole discretion of the Company.

4. Termination for Cause.

Termination by the Company with Cause. The Company may terminate the employment of Executive at any time without notice for cause. For purposes of Section 4 of this Agreement, cause means any of the following as determined in the Company’s sole discretion:(i) the Executive’s continuing

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substantial failure to perform his duties for the Company (other than as a result of incapacity due to mental or physical illness) after a written demand is delivered to the Executive by the Company’s Board of Directors; (ii) the Executive’s willful engaging in illegal conduct or gross misconduct that is materially and demonstrably injurious to the Company; (iii) the Executive’s conviction of a felony or his plea of guilty or nolo contendere to a felony, (iv) the Executive’s willful and material breach of his confidentiality obligations under Flowserve’s Code of Business Conduct and/or local law.

(b) The Company Obligations to the Executive. If Executive is terminated for cause as defined in Section 4, the Company will have no further liability or obligation to the Executive under this Agreement or in connection with his employment, except for (i) any unpaid Salary accrued through the date of termination, (ii) any accrued but unused and unpaid vacation time, (iii) any unreimbursed expenses properly incurred by Executive prior to his last date of employment; and (iv) the Company’s obligations under the Consolidated Omnibus Budget Reconciliation Act (“COBRA”). Additionally, the Executive will retain the right to exercise any vested stock options in accordance with the terms and conditions in the Flowserve Corporation 2004 Stock Compensation Plan and any Incentive Stock Agreements and/or Nonqualified Stock Option Agreements to which Executive and the Company are parties. Any rights or benefits Executive has vested under the Flowserve Corporation Retirement Savings Plan (401k Plan), the Flowserve Corporation Cash Balance Plan and/or any other benefit plan of the Company which is not specifically addressed in this Agreement will be governed by the applicable plan documents.

5. Termination Without Cause.

(a) Termination. The Company may terminate the employment of the Executive upon thirty (30) days written notice without cause, as defined in Section 4(a), for any reason whatsoever, including, without limitation, the death or Disability of the Executive. For purposes hereof, “Disability” means a mental or physical condition which prevents the Executive from performing the essential functions of Executive’s position with the Company, even with reasonable accommodation, for a period of not less than 90 consecutive days.

(b) The Company’s Obligations to the Executive. Upon termination without cause, as defined in Section 4(a), the Company will have no further liability or obligation to Executive under this Agreement or in connection with his employment, except for (i) any unpaid Salary accrued through the date of termination, (ii) any accrued but unused and unpaid vacation time, (iii) any unreimbursed expenses properly incurred prior to the date of termination, (iv) the Company’s obligations under the Consolidated Omnibus Budget Reconciliation Act (“COBRA”) and (v) severance benefits under the Officer Severance Plan in effect at the time this Agreement is executed, subject to the requirements of the Plan. Additionally, all unvested restricted stock and stock options granted to Executive from the Company, including the Equity Grants, will automatically vest upon termination, but any unvested performance shares or restricted stock units which are contingent upon specified levels of financial performance by the Company will then expire. Executive’s right to exercise any vested stock options will be governed by the Flowserve Corporation 2004 Stock Compensation Plan and any Incentive Stock Agreements and/or Nonqualified Stock Option Agreements to which Executive and the Company are parties. Any rights or benefits Executive has vested under the Flowserve Corporation Retirement Savings Plan (401k Plan), the Flowserve Corporation Cash Balance Plan and/or any other benefit plan of the Company which is not specifically addressed in this Agreement will be governed by the applicable plan documents.

(c) Transition Services. In the event the Company terminates Executive without cause as defined in Section 4, the Company may request Executive to perform transitional services from Executive for a period of time, not to exceed 120 days, following notification of his termination without cause,

Page 3

provided that the Company will continue to pay compensation and provide benefits (as described in Section 3(a) and 3(c) above) to Executive during such period.

6. Resignation by Executive.

(a) Without Good Reason. Executive may resign his employment with the Company for any reason whatsoever so long as he provides thirty (30) days written notice of his intent to resign his employment to the Company prior to his last date of employment. In the event that Executive resigns without good reason, the Company will have no further liability or obligation to Executive under this Agreement or in connection with his employment hereunder, except for (i) any unpaid Salary accrued through Executive’s last date of employment, (ii) any accrued but unused and unpaid vacation time, and (iii) any unreimbursed expenses Executive properly incurred prior to his last date of employment; and (iv) the Company’s obligations under the Consolidated Omnibus Budget Reconciliation Act (“COBRA”). Additionally, the Executive will retain the right to exercise any vested stock options in accordance with the terms and conditions in the Flowserve Corporation 2004 Stock Compensation Plan and any Incentive Stock Agreements and/or Nonqualified Stock Option Agreements to which Executive and the Company are parties. . Any rights or benefits Executive has vested under the Flowserve Corporation Retirement Savings Plan (401k Plan), the Flowserve Corporation Cash Balance Plan and/or any other benefit plan of the Company which is not specifically addressed in this Agreement will be governed by the applicable plan documents.

(b) With Good Reason. Executive may resign his employment with the Company with good reason under the following circumstances: (i) if the Company has materially breached this Agreement and has failed to cure the breach after Executive has provided the Company at least thirty (30) days written notice of the alleged breach, (ii) Executive is not promoted to the Company’s CEO position immediately following the date Mr. Kling terminates his employment with the Company for any reason, or (iii) an individual, other than Executive, is appointed as the Chief Operations Officer of the Company prior to the date that Mr. Kling’s employment with the Company’s terminates for any reason. In order for Executive’s resignation to be treated as with good reason for purposes of Section 6(b)(ii) or Section 6(b)(iii) of this Agreement, he must resign his employment with the Company and its Affiliated Companies within thirty (30) days following the date he becomes aware of either of these events.

(c) The Company’s Obligations to the Executive if Executive Resigns With Good Reason.. If Executive resigns his employment with good reason as defined in Section 6(b), the Company will have no further liability or obligation to Executive under this Agreement or in connection with his employment except for (i) any unpaid Salary accrued through Executive’s last date of employment, (ii) any accrued but unused and unpaid vacation time, (iii) any unreimbursed expenses Executive properly incurred prior to Executive’s last date of employment, (iv) the Company’s obligations under the Consolidated Omnibus Budget Reconciliation Act (“COBRA”); (v) severance benefits under the Officer Severance Plan in effect at the time this Agreement is executed, subject to the requirements of the Plan; and all unvested restricted stock and stock options granted to Executive from the Company, including the Equity Grants, will automatically vest upon termination, but any unvested performance shares or restricted stock units which are contingent upon specified levels of financial performance by the Company will then expire. The Executive will retain the right to exercise any vested stock options in accordance with the terms and conditions in the Flowserve Corporation 2004 Stock Compensation Plan and any Incentive Stock Agreements and/or Nonqualified Stock Option Agreements to which Executive and the Company are parties. Any rights or benefits Executive has vested under the Flowserve Corporation Retirement Savings Plan (401k Plan), the Flowserve Corporation Cash Balance Plan and/or any other benefit plan of the Company which is not specifically addressed in this Agreement will be governed by the applicable plan documents.

Page 4

(d) Transitional Services. If the Executive resigns his employment with good reason as defined in Section 6(b), the Company may request Executive to perform transitional services for a period of time, not to exceed 120 days, following notification of his resignation with good reason, provided that the Company will continue to pay compensation and provide benefits (as described in Section 3(a) and 3(c) above) to Executive during such period.

7. Restrictive Covenants. Executive reaffirms his obligations set forth in the Restrictive Covenants Agreement between the Company and Executive executed by the Parties in 2006, as may be amended from time to time, and any other agreements between the Company and Executive which impose restrictions on Executive’s use of the Company’s confidential information and/or restrictions on Executive’s ability to work for a competitor of the Company, solicit the Company’s employees to leave the Company and/or solicit business from the Company’s customers, as those agreements may be amended from time to time (“Restrictive Covenants Agreements”). The parties agree that nothing in this Agreement nullifies Executive’s obligations as set forth in the Restrictive Covenants Agreements.

8. Delay of Severance Payments. To the extent (i) any post-termination payments to which Executive becomes entitled under this Agreement or any agreement or plan referenced herein constitute deferred compensation subject to Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”) and (ii) Executive is deemed at the time of such termination of employment to be a “specified employee” under Section 409A of the Code, then such payment will not be made or commence until the earliest of (x) the expiration of the six (6) month period measured from the date of Executive’s “separation from service” (as such term is defined in Proposed Treasury Regulations under Section 409A of the Code and any other guidance issued under Section 409A of the Code) with the Company; (y) the date Executive becomes “disabled” (as defined in Section 409A of the Code); and (z) the date of Executive’s death following such separation from service. Upon the expiration of the applicable deferral period, any payments which would have otherwise been made during that period (whether in a single sum or in installments) in the absence of this Section 8 (together with reasonable accrued interest) will be paid to Executive or Executive’s beneficiary in one lump sum.

9. Severability. Should a court determine that any portion of this Agreement is invalid, unenforceable, or void, this determination will not have the effect of invalidating the remainder of the Agreement. Further, the court should construe this Agreement by limiting and reducing it only to the extent necessary to be enforceable under applicable law.

10. Controlling Law. Any dispute in the meaning, effect, or validity of this Agreement will be resolved in accordance with the laws of the State of Texas without regard to any conflict of laws. This Agreement will be governed by and construed under the laws of the State of Texas. Venue of any litigation arising from this Agreement will be in a federal or state court of competent jurisdiction in Dallas County, Texas.

11. Successors. This Agreement will be binding upon and inure to the benefit of the Parties and their respective heirs, successors and permitted assigns. The Company may assign this Agreement to any individual, business, firm, company, partnership, joint venture, organization or other entity who or which may acquire substantially all of the Company’s assets or business or with or into which the Company may be liquidated, consolidated, merged or otherwise combined. This Agreement is personal to Executive and may not be assigned or delegated by him, and any such purported assignment or delegation will be null and void.

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12. No Waiver. The failure of either party to insist in any one or more instances upon performance of any terms or conditions of this Agreement will not be construed as a waiver of future performance of any such term, covenant or condition, but the obligations of either party will continue in full force and effect.

13. Non-Disparagement. Executive agrees that the Company’s goodwill and reputation are assets of great value to the Company which were obtained through great costs, time and effort. Therefore, Executive agrees that during his employment and after the termination of his employment, Executive will not in any way disparage, libel or defame the Company, its business or business practices, its products or services, or its current or past employees.

14. Notices. Any notice given hereunder will be in writing and be delivered or mailed by Registered or Certified Mail, Return Receipt Requested:


(a)	to the Company:	General Counsel
		Flowserve Corporation
		5215 North O’Connor Boulevard, Suite 2300
		Irving, Texas 75039

(b)	to Executive:	Mark Blinn
		To Be Sent to the Home Address Most Recently on File With the
		Company’s EAS Department for Payroll Purposes

Any party may, by notice given as provided for above, designate a different address. Any notice given hereunder will be effective on the date of receipt.

15. Entire Agreement. There are no oral representations, understanding or agreements with the Company, the Affiliated Companies or any of their officers, directors or representatives covering the same subject matter as this Agreement. Except for the Restrictive Covenants Agreement and any restricted stock, stock option, and/or any restricted stock unit agreements executed by Executive, this Agreement supersedes all previous employment agreements between Executive and the Company and contains the final, complete and exclusive understanding and agreement between the Parties with respect to the subject matter hereof and cannot be amended, modified or supplemented in any respect except by subsequent written agreement entered into by both Parties; provided, however, that in the event the Company determines, in its sole discretion, that an amendment, modification or supplement is necessary for purposes of compliance with or exemption from the requirements of Section 409A of the Code and to avoid the imposition of additional tax on Executive, Executive agrees not to unreasonably withhold his consent to such amendment, modification or supplement or to unreasonably condition his consent on the renegotiation by the Company of any other provision of this Agreement.

16. Counterparts. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original copy of this Agreement, and all of which, when taken together, will be deemed to constitute one and the same Agreement. The exchange of copies of this Agreement and of signature pages by facsimile transmission will constitute effective execution and delivery of this Agreement as to the Parties and may be used in lieu of the original Agreement for all purposes. Signatures of the Parties transmitted by facsimile will be deemed to be their original signatures for any purpose whatsoever.

17. Change in Control. If Executive becomes eligible to receive severance benefits or accelerated vesting of stock option or restricted stock awards under a Company change in control plan or program,

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Executive will not be entitled, as the case may be, to severance benefits and/or the acceleration of vesting of stock option or restricted stock awards under this Agreement.

18. Captions. The captions herein are for the convenience of reference of the Parties and are not to be construed as part of the terms of this Agreement.

IN WITNESS WHEREOF, the Parties hereto have executed this Agreement the day and year first above written.


		Flowserve Corporation

		By:		/s/ Mark A. Blinn

		Name:		Mark A. Blinn

		Title:		Senior Vice President and Chief Financial Officer



		May 7, 2007

Page 7

EX-31.1 4 d46447exv31w1.htm CERTIFICATION PURSUANT TO SECTION 302 exv31w1

EXHIBIT 31.1

CERTIFICATION BY PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002

I, Lewis M. Kling, certify that:

1. I have reviewed this quarterly report on Form 10-Q for the fiscal quarter ended March 31, 2007 of Flowserve Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the consolidated financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


/s/ Lewis M. Kling
Lewis M. Kling
President, Chief Executive Officer and Director

Date: May 9, 2007

EX-31.2 5 d46447exv31w2.htm CERTIFICATION PURSUANT TO SECTION 302 exv31w2

EXHIBIT 31.2

CERTIFICATION BY PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002

I, Mark A. Blinn, certify that:

1. I have reviewed this quarterly report on Form 10-Q for the fiscal quarter ended March 31, 2007 of Flowserve Corporation;

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


/s/ Mark A. Blinn
Mark A. Blinn
Senior Vice President and Chief Financial Officer

Date: May 9, 2007

EX-32.1 6 d46447exv32w1.htm CERTIFICATION PURSUANT TO SECTION 906 exv32w1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Lewis M. Kling, President and Chief Executive Officer of Flowserve Corporation (the “Company”), certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(1) the quarterly report of the Company on Form 10-Q for the period ended March 31, 2007, as filed with the Securities and Exchange Commission on the date hereof (the “Quarterly Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) the information contained in the Quarterly Report fairly presents, in all material respects, the consolidated financial condition and results of operations of the Company.


/s/ Lewis M. Kling
Lewis M. Kling
President, Chief Executive Officer and Director

Date: May 9, 2007

EX-32.2 7 d46447exv32w2.htm CERTIFICATION PURSUANT TO SECTION 906 exv32w2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Mark A. Blinn, Senior Vice President and Chief Financial Officer of Flowserve Corporation (the “Company”), certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(2) the information contained in the Quarterly Report fairly presents, in all material respects, the consolidated financial condition and results of operations of the Company.


/s/ Mark A. Blinn
Mark A. Blinn
Senior Vice President and Chief Financial Officer

Date: May 9, 2007

-----END PRIVACY-ENHANCED MESSAGE-----

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