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

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

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

     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. þYes o No

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þYes o No

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company 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 July 24, 2009, there were 55,926,750 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 June 30, 2009 and 2008 (unaudited)			1
Condensed Consolidated Statements of Comprehensive Income — Three Months Ended June 30, 2009 and 2008 (unaudited)			1
Condensed Consolidated Statements of Income — Six Months Ended June 30, 2009 and 2008 (unaudited)			2
Condensed Consolidated Statements of Comprehensive Income — Six Months Ended June 30, 2009 and 2008 (unaudited)			2
Condensed Consolidated Balance Sheets — June 30, 2009 and December 31, 2008 (unaudited)			3
Condensed Consolidated Statements of Cash Flows — Six months Ended June 30, 2009 and 2008 (unaudited)			4
Notes to Condensed Consolidated Financial Statements			5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.			23
Item 3. Quantitative and Qualitative Disclosures About Market Risk.			40
Item 4. Controls and Procedures.			41
PART II — OTHER INFORMATION
Item 1. Legal Proceedings.			42
Item 1A. Risk Factors.			42
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.			43
Item 3. Defaults Upon Senior Securities.			43
Item 4. Submission of Matters to a Vote of Security Holders.			43
Item 5. Other Information.			44
Item 6. Exhibits.			45
SIGNATURES
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

FLOWSERVE CORPORATION
(Unaudited)

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

		Three Months Ended June 30,
(Amounts in thousands, except per share data)		2009				2008
Sales		$	1,090,399			$	1,157,605
Cost of sales			(704,078	)			(739,635	)
Gross profit			386,321				417,970
Selling, general and administrative expense			(231,345	)			(250,152	)
Net earnings from affiliates			3,777				4,512
Operating income			158,753				172,330
Interest expense			(9,931	)			(12,732	)
Interest income			457				1,605
Other (expense) income, net			(71	)			575
Earnings before income taxes			149,208				161,778
Provision for income taxes			(40,604	)			(38,165	)
Net earnings including noncontrolling interests			108,604				123,613
Less: Net earnings attributable to noncontrolling interests			(386	)			(749	)
Net earnings of Flowserve Corporation		$	108,218			$	122,864
Net earnings per share of Flowserve Corporation common shareholders:
Basic		$	1.94			$	2.14
Diluted			1.92				2.12
Cash dividends declared per share		$	0.27			$	0.25

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

		Three Months Ended June 30,
(Amounts in thousands)		2009				2008
Net earnings		$	108,218			$	122,864
Other comprehensive income (expense):
Foreign currency translation adjustments, net of tax			75,215				573
Pension and other postretirement effects, net of tax			(4,484	)			105
Cash flow hedging activity, net of tax			954				2,897
Other comprehensive income			71,685				3,575
Comprehensive income		$	179,903			$	126,439

See accompanying notes to condensed consolidated financial statements.

FLOWSERVE CORPORATION
(Unaudited)

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

		Six Months Ended June 30,
(Amounts in thousands, except per share data)		2009				2008
Sales		$	2,115,125			$	2,150,924
Cost of sales			(1,361,031	)			(1,387,108	)
Gross profit			754,094				763,816
Selling, general and administrative expense			(456,656	)			(482,655	)
Net earnings from affiliates			8,452				10,484
Operating income			305,890				291,645
Interest expense			(20,040	)			(25,591	)
Interest income			1,532				4,460
Other (expense) income, net			(9,365	)			17,055
Earnings before income taxes			278,017				287,569
Provision for income taxes			(76,587	)			(75,264	)
Net earnings including noncontrolling interests			201,430				212,305
Less: Net earnings attributable to noncontrolling interests			(905	)			(1,374	)
Net earnings of Flowserve Corporation		$	200,525			$	210,931
Net earnings per share of Flowserve Corporation common shareholders:
Basic		$	3.59			$	3.67
Diluted			3.56				3.65
Cash dividends declared per share		$	0.54			$	0.50

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

		Six Months Ended June 30,
(Amounts in thousands)		2009				2008
Net earnings		$	200,525			$	210,931
Other comprehensive income (expense):
Foreign currency translation adjustments, net of tax			35,197				34,524
Pension and other postretirement effects, net of tax			(3,600	)			(713	)
Cash flow hedging activity, net of tax			1,836				(370	)
Other comprehensive income			33,433				33,441
Comprehensive income		$	233,958			$	244,372

See accompanying notes to condensed consolidated financial statements.

FLOWSERVE CORPORATION
(Unaudited)

CONDENSED CONSOLIDATED BALANCE SHEETS

		June 30,				December 31,
(Amounts in thousands, except per share data)		2009				2008
ASSETS
Current assets:
Cash and cash equivalents		$	251,538			$	472,056
Accounts receivable, net of allowance for doubtful accounts of $20,999 and $23,667, respectively			853,139				808,522
Inventories, net			891,610				834,612
Deferred taxes			124,509				126,890
Prepaid expenses and other			100,254				90,345
Total current assets			2,221,050				2,332,425
Property, plant and equipment, net of accumulated depreciation of $635,855 and $594,991, respectively			550,511				547,235
Goodwill			863,309				828,395
Deferred taxes			31,185				32,561
Other intangible assets, net			129,069				121,919
Other assets, net			158,211				161,159
Total assets		$	3,953,335			$	4,023,694
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	437,655			$	598,498
Accrued liabilities			859,160				967,099
Debt due within one year			28,344				27,731
Deferred taxes			17,805				14,668
Total current liabilities			1,342,964				1,607,996
Long-term debt due after one year			542,634				545,617
Retirement obligations and other liabilities			486,183				495,883
Shareholders’ equity:
Common shares, $1.25 par value			73,547				73,477
Shares authorized — 120,000
Shares issued — 58,838 and 58,781, respectively
Capital in excess of par value			594,011				586,371
Retained earnings			1,329,739				1,159,634
			1,997,297				1,819,482
Treasury shares, at cost — 3,715 and 3,566 shares, respectively			(254,184	)			(248,073	)
Deferred compensation obligation			8,654				7,678
Accumulated other comprehensive loss			(177,887	)			(211,320	)
Noncontrolling interest			7,674				6,431
Total shareholders’ equity			1,581,554				1,374,198
Total liabilities and shareholders’ equity		$	3,953,335			$	4,023,694

See accompanying notes to condensed consolidated financial statements.

FLOWSERVE CORPORATION
(Unaudited)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

		Six Months Ended June 30,
(Amounts in thousands)		2009				2008
Cash flows — Operating activities:
Net earnings including noncontrolling interests		$	201,430			$	212,305
Adjustments to reconcile net earnings to net cash used by operating activities:
Depreciation			42,282				36,501
Amortization of intangible and other assets			4,827				5,021
Amortization of deferred loan costs			839				908
Net loss (gain) on disposition of assets			448				(1,018	)
Gain on bargain purchase			—				(3,400	)
Excess tax benefits from stock-based compensation arrangements			(415	)			(10,066	)
Stock-based compensation			21,495				16,392
Net earnings from affiliates, net of dividends received			(3,207	)			(4,763	)
Change in assets and liabilities:
Accounts receivable, net			(28,426	)			(211,047	)
Inventories, net			(39,952	)			(165,242	)
Prepaid expenses and other			(9,673	)			(9,376	)
Other assets, net			5,933				(4,169	)
Accounts payable			(159,619	)			(45,690	)
Accrued liabilities and income taxes payable			(108,939	)			42,914
Retirement obligations and other liabilities			(19,375	)			(49,587	)
Net deferred taxes			15,305				12,063
Net cash flows used by operating activities			(77,047	)			(178,254	)
Cash flows — Investing activities:
Capital expenditures			(64,261	)			(37,706	)
Proceeds from disposal of assets			—				2,178
Payments for acquisitions, net of cash acquired			(28,369	)			—
Net cash flows used by investing activities			(92,630	)			(35,528	)
Cash flows — Financing activities:
Excess tax benefits from stock-based compensation arrangements			415				10,066
Payments on long-term debt			(2,841	)			(2,841	)
(Payments) borrowings under other financing arrangements			768				10,816
Repurchase of common shares			(16,154	)			(34,980	)
Payments of dividends			(29,077	)			(22,997	)
Proceeds from stock option activity			627				9,929
Net cash flows used by financing activities			(46,262	)			(30,007	)
Effect of exchange rate changes on cash			(4,579	)			7,653
Net change in cash and cash equivalents			(220,518	)			(236,136	)
Cash and cash equivalents at beginning of year			472,056				373,238
Cash and cash equivalents at end of period		$	251,538			$	137,102

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 June 30, 2009, and the related condensed consolidated statements of income and comprehensive income for the three and six months ended June 30, 2009 and 2008, and the condensed consolidated statements of cash flows for the six months ended June 30, 2009 and 2008, 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 June 30, 2009 (“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 presented in our Annual Report on Form 10-K for the year ended December 31, 2008 (“2008 Annual Report”).

     Certain reclassifications and retrospective adjustments have been made to prior period information to conform to current period presentation. These reclassifications and retrospective adjustments primarily result from our adoption of Statement of Financial Accounting Standards (“SFAS”) No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51,” and Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities,” respectively, which are discussed more fully below.

Accounting Policies

     Significant accounting policies, for which no significant changes have occurred in the six months ended June 30, 2009, are detailed in Note 1 of our 2008 Annual Report.

          Subsequent Events — We evaluate subsequent events through the date of filing of our interim and annual reports.

Accounting Developments

     Pronouncements Implemented

     In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which 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. In February 2008, the FASB issued Staff Position (“FSP”) No. FAS 157-2, “Effective Date of FASB Statement No. 157,” which amended SFAS No. 157 by delaying the adoption of SFAS No. 157 for our nonfinancial assets and nonfinancial liabilities, except those items recognized or disclosed at fair value on an annual or more frequently recurring basis, until January 1, 2009. Our adoption of FSP No. FAS 157-2, effective January 1, 2009, did not have a material impact on our consolidated financial condition or results of operations.

     In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations.” SFAS No. 141(R) establishes principles and requirements for how the acquirer in a business combination recognizes and measures identifiable assets acquired, liabilities assumed, noncontrolling interest in the acquiree and goodwill acquired, and expands disclosures about business combinations. SFAS No. 141(R) requires the acquirer to recognize changes in valuation allowances on acquired deferred tax assets in operations. These changes in deferred tax benefits were previously recognized through a corresponding reduction to goodwill. With the exception of the provisions regarding acquired deferred taxes and tax contingencies, which are applicable to all business combinations, SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Our adoption of SFAS No. 141(R), effective January 1, 2009 did not have a material impact on our consolidated financial condition or results of operations.

     In December 2007, the FASB issued SFAS No. 160, which establishes accounting and reporting standards that require:

•

the ownership interests in subsidiaries held by parties other than the parent to be clearly identified, labeled and presented in the consolidated balance sheet within equity, but separate from the parent’s equity;

•

the amount of consolidated net income attributable to the parent and to the noncontrolling interest to be clearly identified and presented on the face of the consolidated statement of income;

•

changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary to be accounted for consistently;

•

when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary to be initially measured at fair value; and

•

entities to provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners.

     Our adoption of SFAS No. 160, effective January 1, 2009, which has been applied retrospectively for all periods presented, did not have a material impact on our consolidated financial condition or results of operations.

     In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133.” SFAS No. 161 enhances the disclosure framework in SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” by requiring entities to provide detailed disclosures about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations and how derivative instruments and related hedged items affect an entity’s financial condition, results of operations and cash flows. Our adoption of SFAS No. 161, effective January 1, 2009, did not impact our consolidated financial condition or results of operations.

     In April 2008, the FASB issued FSP No. FAS 142-3, “Determination of the Useful Life of Intangible Assets.” FSP No. FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142 “Goodwill and Other Intangible Assets.” FSP No. FAS 142-3 is intended to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(R) and other GAAP. Our adoption of FSP No. FAS 142-3, effective January 1, 2009 did not impact our consolidated financial condition or results of operations.

     In June 2008, the FASB issued FSP No. EITF 03-6-1, which concluded that all outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends participate in undistributed earnings with common shareholders and, therefore, are considered participating securities for purposes of computing earnings per share. Entities that have participating securities are required to use the “two-class” method of computing earnings per share. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. Our adoption of FSP No. EITF 03-6-1, effective January 1, 2009, which has been applied retrospectively for all periods presented, did not have a material impact on our consolidated financial condition or results of operations (see Note 10).

     In April 2009, the FASB issued FSP No. FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies.” FSP No. FAS 141(R)-1 amends and clarifies SFAS No. 141(R) to address application on initial recognition and measurement, subsequent measurement and accounting and disclosure of assets and liabilities arising from contingencies in a business combination. FSP No. FAS 141(R)-1 applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Our adoption of FSP No. FAS 141(R)-1, effective January 1, 2009, did not have a material impact our consolidated financial condition or results of operations.

     In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments.” FSP No. FAS 107-1 and APB 28-1 amend SFAS No. 107, “Disclosures about Fair Value of Financial Instruments”, to require disclosures about fair value of financial instruments for interim reporting periods of publicly-traded companies, as well as in annual financial statements. Our adoption of FSP No. FAS 107-1 and APB 28-1, effective April 1, 2009, did not impact our consolidated financial condition or results of operations (see Note 6).

     In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments.” FSP No. FAS 115-2 and FAS 124-2 amends the other-than-temporary impairment guidance in GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments of debt and equity securities in the financial statements. This FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. Our adoption of FSP No. FAS 115-2 and FAS 124-2, effective April 1, 2009, did not have a material impact on our consolidated financial condition or results of operations.

     In May 2009, the FASB issued SFAS No. 165, “Subsequent Events.” SFAS No. 165 establishes the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. Our adoption of SFAS No. 165, effective April 1, 2009, did not have a material impact on our consolidated financial condition or results of operations.

     Pronouncements Not Yet Implemented

     In December 2008, the FASB issued FSP No. FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets.” FSP No. FAS 132(R)-1 amends SFAS No. 132 (R), “Employers’ Disclosures about Pensions and Other Postretirement Benefits,” to provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. The disclosure requirements of FSP No. FAS 132(R)-1 are effective for fiscal years ending after December 15, 2009. Our adoption of FSP No. FAS 132(R)-1 will not have a material impact on our consolidated financial condition or results of operations.

     In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140.” SFAS No. 166 removes the concept of a qualifying special-purpose entity (“QSPE”) and clarifies the determination of whether a transferor and all of the entities included in the transferor’s financial statements being presented have surrendered control over transferred financial assets. It also defines the term “participating interest” to establish specific conditions for reporting a transfer of a portion of a financial asset as a sale and removes special provisions for guaranteed mortgage securitizations. SFAS No. 166 requires that a transferor recognize and initially measure at fair value all assets obtained (including a transferor’s beneficial interest) and liabilities incurred as a result of a transfer of financial assets accounted for as a sale. Enhanced disclosures are required to provide financial statement users with greater transparency about transfers of financial assets and a transferor’s continuing involvement with transferred financial assets. The requirements of SFAS No. 166 are effective for fiscal years beginning after November 15, 2009. We do not expect our adoption of SFAS No. 166 to have a material impact on our consolidated financial condition or results of operations.

     In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R).” SFAS No. 167 amends FASB Interpretation (“FIN”) No. 46(R), “Consolidation of Variable Interest Entities (revised December 2003) — an interpretation of ARPB No. 51,” to eliminate the exclusion of QSPEs from consideration for consolidation and revises the determination of the primary beneficiary of a variable interest entity (“VIE”) to require a qualitative assessment of whether a company has a controlling financial interest through (1) the power to direct the activities that most significantly impact the VIE’s economic performance and (2) the right to receive benefits from or obligation to absorb losses of the VIE that could potentially be significant to the VIE. The determination of the primary beneficiary must be reconsidered on an ongoing basis. The requirements of SFAS No. 167 are effective for fiscal years beginning after January 1, 2010. We do not expect our adoption of SFAS No. 167 to have a material impact on our consolidated financial condition or results of operations.

     In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles.” SFAS No. 168 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements that are presented in conformity with GAAP. SFAS No. 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. Our adoption of SFAS No. 168 will not have a material impact on our consolidated financial condition or results of operations.

2. Acquisition

     Effective April 21, 2009, Flowserve Pump Division acquired Calder AG, a private Swiss company and a supplier of energy recovery technology for use in the global desalination market, for up to $44.1 million, net of cash acquired. Of the total purchase price, $28.4 million was paid at closing and $2.4 million was paid after the valuation of the working capital was completed in early July 2009. The remaining $13.3 million of the total purchase price is contingent upon Calder AG achieving certain performance metrics after closing, and, to the extent achieved, is expected to be paid in cash within 12 months of the acquisition date. We recognized a liability of $4.4 million as an estimate of the acquisition date fair value of the contingent consideration, which is based on the weighted probability of achievement of the performance metrics as of the date of the acquisition. Failure to meet the performance

metrics would reduce this liability to $0, while complete achievement would increase this liability to the full remaining purchase price of $13.3 million. Any change in the fair value of the acquisition-related contingent consideration subsequent to the acquisition date will be recognized in earnings in the period the estimated fair value changes. The purchase price was allocated to the assets acquired and liabilities assumed based on estimates of fair values at the date of acquisition. The preliminary allocation of the purchase price is summarized below:

(amounts in millions)
Purchase price, net of cash acquired		$	30.8
Fair value of contingent consideration (recorded as a liability)			4.4
Total expected purchase price at date of acquisition		$	35.2
Current assets		$	4.7
Intangible assets (expected useful life of approximately 10 years)			10.5
Property, plant and equipment			0.1
Current liabilities			(4.2	)
Noncurrent liabilities			(1.1	)
Net tangible and intangible assets			10.0
Goodwill			25.2
		$	35.2

     The excess of the acquisition date fair value of the total purchase price over the estimated fair value of the net tangible and intangible assets was recorded as goodwill. No pro forma information has been provided due to immateriality.

     Flowserve Pump Division acquired the remaining 50% interest in Niigata Worthington Company, Ltd. (“Niigata”), a Japanese manufacturer of pumps and other rotating equipment, effective March 1, 2008, for $2.4 million in cash. The incremental interest acquired was accounted for as a step acquisition and Niigata’s results of operations have been consolidated since the date of acquisition. Prior to this transaction, our 50% interest in Niigata was recorded using the equity method of accounting. The purchase price was allocated to the assets acquired and liabilities assumed based on estimates of fair values at the date of the acquisition. The estimate of the fair value of the net assets acquired exceeded the cash paid and, accordingly, no goodwill was recognized. This acquisition was accounted for as a bargain purchase, resulting in a gain of $3.4 million recorded in the first quarter of 2008, which was reduced by $0.6 million to $2.8 million in the fourth quarter of 2008 when the purchase accounting was finalized. This gain is included in other income, net in the consolidated statement of income due to immateriality. No pro forma information has been provided due to immateriality.

3. Stock-Based Compensation Plans

     The Flowserve Corporation 2004 Stock Compensation Plan (the “2004 Plan”), which was established on April 21, 2004, authorized the issuance of up to 3,500,000 shares of common stock through grants of stock options, restricted shares and other equity-based awards. Of the 3,500,000 shares of common stock that have been authorized under the 2004 Plan, 663,165 shares remain available for issuance as of June 30, 2009. We recorded stock-based compensation as follows:

		Three Months Ended June 30,
		2009												2008
		Stock				Restricted								Stock				Restricted
(Amounts in millions)		Options				Shares				Total				Options				Shares				Total
Stock-based compensation expense		$	—			$	11.4			$	11.4			$	0.4			$	9.1			$	9.5
Related income tax benefit			—				(3.5	)			(3.5	)			—				(2.7	)			(2.7	)
Net stock-based compensation expense		$	—			$	7.9			$	7.9			$	0.4			$	6.4			$	6.8

		Six Months Ended June 30,
		2009												2008
		Stock				Restricted								Stock				Restricted
(Amounts in millions)		Options				Shares				Total				Options				Shares				Total
Stock-based compensation expense		$	0.2			$	21.3			$	21.5			$	0.9			$	15.5			$	16.4
Related income tax benefit			(0.1	)			(6.5	)			(6.6	)			(0.2	)			(4.7	)			(4.9	)
Net stock-based compensation expense		$	0.1			$	14.8			$	14.9			$	0.7			$	10.8			$	11.5

     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 2008 Annual Report is presented in the following table:

		Six Months Ended June 30,
						Weighted Average				Remaining Contractual				Aggregate Intrinsic
		Shares				Exercise Price				Life (in years)				Value (in millions)
Number of shares under option:
Outstanding — January 1, 2009			303,100			$	39.58
Exercised			(28,134	)			26.84
Outstanding — June 30, 2009			274,966			$	40.89				6.0			$	8.0
Exercisable — June 30, 2009			241,133			$	39.28				5.8			$	7.4

     No options were granted during the six months ended June 30, 2009 or 2008. The total fair value of stock options vested during the three months ended June 30, 2009 and 2008 was $0.3 million and $0.5 million, respectively. The total fair value of stock options vested during the six months ended June 30, 2009 and 2008 was $1.9 million and $2.6 million, respectively. The fair value of each option award was estimated on the date of grant using the Black-Scholes option pricing model.

     As of June 30, 2009, we had $0.1 million of unrecognized compensation cost related to outstanding unvested stock option awards, which is expected to be recognized over a weighted-average period of less than 1 year. The total intrinsic value of stock options exercised during the three months ended June 30, 2009 and 2008 was $0.9 million and $5.3 million, respectively. The total intrinsic value of stock options exercised during the six months ended June 30, 2009 and 2008 was $1.2 million and $22.2 million, respectively.

     Restricted Shares — Awards of restricted shares 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 shares. We had unearned compensation of $53.8 million and $34.1 million at June 30, 2009 and December 31, 2008, respectively, which is expected to be recognized over a weighted-average period of approximately 2 years. These amounts will be recognized into net earnings in prospective periods as the awards vest. The total fair value of restricted shares vested during the three months ended June 30, 2009 and 2008 was $1.3 million and $1.5 million, respectively. The total fair value of restricted shares vested during the six months ended June 30, 2009 and 2008 was $14.8 million and $10.8 million, respectively.

     The following table summarizes information regarding restricted share activity:

		Six Months Ended June 30, 2009
						Weighted Average
						Grant-Date Fair
		Shares				Value
Number of unvested shares:
Outstanding — January 1, 2009			1,080,237			$	71.11
Granted			800,491				54.56
Vested			(229,508	)			64.68
Cancelled			(53,936	)			69.94
Unvested restricted shares — June 30, 2009			1,597,284			$	63.78

     Unvested restricted shares outstanding as of June 30, 2009, includes a total of 540,000 shares granted in three annual grants since January 1, 2007 with performance-based vesting provisions. Performance-based restricted shares vest upon the achievement of pre- defined performance targets, and are issuable in common stock. Our performance targets are based on our average annual return on net assets over a rolling three-year period as compared with the same measure for a defined peer group for the same period. Compensation expense is recognized over a 36-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, earned and unearned compensation expense is adjusted based on changes in the expected achievement of the performance targets. Vesting provisions range from 0 to 1,030,000 shares based on performance targets. As of June 30, 2009, we estimate vesting of 1,030,000 shares based on expected achievement of performance targets.

4. Derivative Instruments and Hedges

     Our risk management and derivatives policy specifies the conditions under which we may enter into derivative contracts. See Notes 1 and 8 to our consolidated financial statements included in our 2008 Annual Report and Note 5 of this Quarterly Report for additional information on our purpose for entering into derivatives not designated as hedging instruments and our overall risk management strategies. 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. At June 30, 2009 and December 31, 2008, we had $566.4 million and $555.7 million, respectively, of notional amount in outstanding forward exchange contracts with third parties. At June 30, 2009, the length of forward exchange contracts currently in place ranged from 1 day to 20 months. 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 June 30, 2009 and December 31, 2008, we had $385.0 million of notional amount in outstanding interest rate swaps with third parties. All interest rate swaps are 100% effective. At June 30, 2009, the maximum remaining length of any interest rate swap contract in place was approximately 24 months.

     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. If material, we would adjust the values of our derivative contracts for our or our counterparties’ credit risks. We have not experienced credit losses from our counterparties.

     The fair value of forward exchange contracts not designated as hedging instruments are summarized below:

		June 30,				December 31,
(Amounts in thousands)		2009				2008
Current derivative assets		$	9,922			$	12,172
Noncurrent derivative assets			86				264
Current derivative liabilities			4,004				15,350
Noncurrent derivative liabilities			125				314

     The fair value of interest rate swaps in cash flow hedging relationships are summarized below:

		June 30,				December 31,
(Amounts in thousands)		2009				2008
Current derivative liabilities		$	7,371			$	8,213
Noncurrent derivative liabilities			490				2,407

     Current and noncurrent derivative assets are reported in our condensed consolidated balance sheets in prepaid expenses and other and other assets, net, respectively. Current and noncurrent derivative liabilities are reported in our condensed consolidated balance sheets in accrued liabilities and retirement obligations and other liabilities, respectively.

     The impact of net changes in the fair values of forward exchange contracts not designated as hedging instruments are summarized below:

		Three Months Ended June 30,								Six Months Ended June 30,
(Amounts in thousands)		2009				2008				2009				2008
Gain recognized in income			10,544				735				2,206				18,650

     The impact of net changes in the fair values of interest rate swaps in SFAS No. 133 cash flow hedging relationships are summarized below:

		Three Months Ended June 30,								Six Months Ended June 30,
(Amounts in thousands)		2009				2008				2009				2008
(Loss) gain reclassified from accumulated other comprehensive income into income for settlements, net of tax			(1,399	)			1,283				(2,667	)			1,256
(Loss) gain recognized in other comprehensive income, net of tax			(446	)			4,136				(830	)			737

     Gains and losses recognized in our condensed consolidated statements of income for forward exchange contracts and interest rate swaps are classified as other income (expense), net, and interest expense, respectively.

5. Fair Value

     Our financial instruments are presented at fair value in our condensed consolidated balance sheets. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models may be applied. Assets and liabilities recorded at fair value in our condensed consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Hierarchical levels are directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities. Recurring fair value measurements are limited to investments in derivative instruments and some equity securities. The fair value measurements of our derivative instruments are determined using models that maximize the use of the observable market inputs including interest rate curves and both forward and spot prices for currencies, and are classified as Level II under the fair value hierarchy. The fair values of our derivatives are included above in Note 4. The fair value measurements of our investments in equity securities are determined using quoted market prices. The fair values of our investments in equity securities, and changes thereto, are immaterial to our condensed consolidated financial position and results of operations.

     As discussed in Note 2 above, a liability of $4.4 million was recognized as an estimate of the acquisition date fair value of the contingent consideration. This liability is classified as Level III under the fair value hierarchy as it is based on the weighted probability as of the date of the acquisition of achievement of performance metrics, which is not observable in the market. As of June 30, 2009, there has been no material change in this liability.

6. Debt

     Debt, including capital lease obligations, consisted of:

		June 30,				December 31,
(Amounts in thousands)		2009				2008
Term Loan, interest rate of 2.12% in 2009 and 2.99% in 2008		$	546,857			$	549,697
Capital lease obligations and other			24,121				23,651
Debt and capital lease obligations			570,978				573,348
Less amounts due within one year			28,344				27,731
Total debt due after one year		$	542,634			$	545,617

Credit Facilities

     Our credit facilities, as amended, are 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 10, 2012. We hereinafter refer to these credit facilities collectively as our Credit Facilities. At both June 30, 2009 and December 31, 2008, we had no amounts outstanding under the revolving line of credit. We had outstanding letters of credit of $112.1 million and $104.2 million at June 30, 2009 and December 31, 2008, respectively, which reduced borrowing capacity to $287.9 million and $295.8 million, respectively. The interbank market for our Term Loan implied a fair value of approximately $525 million at June 30, 2009 and $495 million at December 31, 2008, as compared with a carrying value of $546.9 million and $549.7 million at June 30, 2009 and December 31, 2008, 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) London Interbank Offered Rate (“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 June 30, 2009 was 0.875% and 1.50% for borrowings under our revolving line of credit and term loan, respectively.

     We may prepay loans under our Credit Facilities in whole or in part, without premium or penalty. During the three and six months ended June 30, 2009, we made scheduled repayments under our Credit Facilities of $1.4 million and $2.8 million, respectively. We have scheduled repayments under our Credit Facilities of $1.4 million due in each of the next four quarters.

European Letter of Credit Facility

     On September 14, 2007, we entered into a 364-day unsecured European Letter of Credit Facility (“European LOC Facility”), to issue letters of credit in an aggregate face amount not to exceed €150.0 million at any time. The initial commitment of €80.0 million was increased to €110.0 million upon renewal in September 2008. The aggregate commitment of the European LOC Facility may be increased up to €150.0 million as may be agreed among the parties, and may be decreased by us at our option without any premium, fee or penalty. The European LOC Facility is used for contingent obligations solely in respect of surety and performance bonds, bank guarantees and similar obligations. We had outstanding letters of credit drawn on the European LOC Facility of €82.9 million ($116.3 million) and €104.0 million ($145.2 million) as of June 30, 2009 and December 31, 2008, respectively. We pay certain fees for the letters of credit written against the European LOC Facility based upon the ratio of our total debt to consolidated EBITDA. As of June 30, 2009, the annual fees equaled 0.875% plus a fronting fee of 0.1%.

7. Realignment Program

     In February 2009, we announced our plan to incur up to $40 million in realignment costs to reduce and optimize certain non-strategic manufacturing facilities and our overall cost structure by improving our operating efficiency, reducing redundancies, maximizing global consistency and driving improved financial performance (the “Realignment Program”). The Realignment Program consists of both restructuring and non-restructuring costs. Restructuring charges represent charges associated with the relocation of certain business activities, outsourcing of some business activities and facility closures. Non-restructuring charges, which represent the majority of the Realignment Program, are charges incurred to improve operating efficiency and reduce redundancies and primarily represent employee severance. All expenses under the Realignment Program are expected to be recognized during 2009. Expenses are reported in cost of sales (“COS”) or selling, general and administrative expense (“SG&A”), as applicable, in our condensed consolidated statement of income.

Restructuring Charges

     Restructuring charges include costs related to employee severance at closed facilities, contract termination costs, asset write-downs and other exit costs. Severance costs primarily include costs associated with involuntary termination benefits. Contract termination costs include costs related to termination of operating leases or other contract termination costs. Asset write-downs include accelerated depreciation of fixed assets, accelerated amortization of intangible assets and inventory write-downs. Other includes costs related to employee relocation, asset relocation, vacant facility costs (i.e., taxes and insurance) and other charges.

     Restructuring charges incurred for the three and six months ended June 30, 2009 and total restructuring charges expected to be incurred are as follows:

						Contract				Asset
(Amounts in thousands)		Severance				termination				write-downs				Other				Total
Three Months ended June 30, 2009
COS
Flowserve Pump Division		$	1,826			$	—			$	4,281			$	333			$	6,440
Flow Control Division			122				—				360				—				482
Flow Solutions Division			575				33				—				42				650
SG&A
Flowserve Pump Division			—				—				—				—				—
Flow Control Division			152				—				—				—				152
Flow Solutions Division			127				—				—				—				127
Total		$	2,802			$	33			$	4,641			$	375			$	7,851
Six Months ended June 30, 2009 (1)
COS
Flowserve Pump Division		$	3,489			$	—			$	4,400			$	333			$	8,222
Flow Control Division			122				—				360				—				482
Flow Solutions Division			575				33				—				42				650
SG&A
Flowserve Pump Division			215				—				—				—				215
Flow Control Division			152				—				—				—				152
Flow Solutions Division			127				—				—				—				127
Total		$	4,680			$	33			$	4,760			$	375			$	9,848
Total Expected Restructuring Charges for 2009
COS
Flowserve Pump Division		$	3,521			$	842			$	5,825			$	4,173			$	14,361
Flow Control Division			122				—				360				—				482
Flow Solutions Division			576				197				—				414				1,187
SG&A
Flowserve Pump Division			215				—				—				—				215
Flow Control Division			152				—				—				—				152
Flow Solutions Division			127				—				—				—				127
Total		$	4,713			$	1,039			$	6,185			$	4,587			$	16,524

     The following represents the activity related to the restructuring reserve:

						Contract
(Amounts in thousands)		Severance				Termination				Other				Total
Balance at December 31, 2008		$	—			$	—			$	—			$	—
Charges			1,878				—				—				1,878
Balance at March 31, 2009			1,878				—				—				1,878
Charges			2,802				33				375				3,210
Cash Expenditures			(1,067	)			(33	)			(289	)			(1,389	)
Balance at June 30, 2009		$	3,613			$	—			$	86			$	3,699

Total Realignment Program Charges

     The following is a summary of total charges incurred related to the Realignment Program:

Three Months Ended June 30, 2009

														Subtotal —
		Flowserve				Flow				Flow				Reportable								Consolidated
(Amounts in millions)		Pump				Control				Solutions				Segments				All Other				Total
Restructuring Charges
COS		$	6.4			$	0.5			$	0.7			$	7.6			$	—			$	7.6
SG&A			—				0.2				0.1				0.3				—				0.3
		$	6.4			$	0.7			$	0.8			$	7.9			$	—			$	7.9
Non-Restructuring Charges
COS		$	1.1			$	2.9			$	0.6			$	4.6			$	—			$	4.6
SG&A			2.1				3.5				1.4				7.0				0.1				7.1
		$	3.2			$	6.4			$	2.0			$	11.6			$	0.1			$	11.7
Total Realignment Program Charges
COS		$	7.5			$	3.4			$	1.3			$	12.2			$	—			$	12.2
SG&A			2.1				3.7				1.5				7.3				0.1				7.4
		$	9.6			$	7.1			$	2.8			$	19.5			$	0.1			$	19.6

Six Months Ended June 30, 2009

														Subtotal —
		Flowserve				Flow				Flow				Reportable								Consolidated
(Amounts in millions)		Pump				Control				Solutions				Segments				All Other				Total
Restructuring Charges
COS		$	8.2			$	0.5			$	0.7			$	9.4			$	—			$	9.4
SG&A			0.2				0.2				0.1				0.5				—				0.5
		$	8.4			$	0.7			$	0.8			$	9.9			$	—			$	9.9
Non-Restructuring Charges
COS		$	2.0			$	3.2			$	3.7			$	8.9			$	—			$	8.9
SG&A			2.6				3.8				4.1				10.5				0.3				10.8
		$	4.6			$	7.0			$	7.8			$	19.4			$	0.3			$	19.7
Total Realignment Program Charges
COS		$	10.2			$	3.7			$	4.4			$	18.3			$	—			$	18.3
SG&A			2.8				4.0				4.2				11.0				0.3				11.3
		$	13.0			$	7.7			$	8.6			$	29.3			$	0.3			$	29.6

     The following is a summary of total charges expected to be incurred related to the Realignment Program:

Total Expected Charges for 2009

														Subtotal —
		Flowserve				Flow				Flow				Reportable								Consolidated
(Amounts in millions)		Pump				Control				Solutions				Segments				All Other				Total
Total Expected Restructuring Charges
COS		$	14.4			$	0.5			$	1.2			$	16.1			$	—			$	16.1
SG&A			0.2				0.2				0.1				0.5				—				0.5
		$	14.6			$	0.7			$	1.3			$	16.6			$	—			$	16.6
Total Expected Non-restructuring Charges
COS		$	3.3			$	4.2			$	4.5			$	12.0			$	0.1			$	12.1
SG&A			2.6				3.9				4.1				10.6				0.3				10.9
		$	5.9			$	8.1			$	8.6			$	22.6			$	0.4			$	23.0
Expected Total Realignment Program Charges
COS		$	17.7			$	4.7			$	5.7			$	28.1			$	0.1			$	28.2
SG&A			2.8				4.1				4.2				11.1				0.3				11.4
		$	20.5			$	8.8			$	9.9			$	39.2			$	0.4			$	39.6

8. 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:

		June 30,				December 31,
(Amounts in thousands)		2009				2008
Raw materials		$	270,623			$	241,953
Work in process			757,956				635,490
Finished goods			261,860				264,746
Less: Progress billings			(336,361	)			(250,289	)
Less: Excess and obsolete reserve			(62,468	)			(57,288	)
Inventories, net		$	891,610			$	834,612

9. Equity Method Investments

     As of June 30, 2009, we had investments in seven joint ventures (one located in each of China, Japan, Korea, Saudi Arabia and the United Arab Emirates and two located in India) that were accounted for using the equity method. Summarized below is combined income statement information, based on the most recent financial information, for those investments:

		Three Months Ended June 30,
(Amounts in thousands)		2009				2008
Revenues		$	52,255			$	84,595
Gross profit			17,988				23,682
Income before provision for income taxes			12,729				17,042
Provision for income taxes			(3,961	)			(5,074	)
Net income		$	8,768			$	11,968

		Six Months Ended June 30,
(Amounts in thousands)		2009				2008 (1)
Revenues		$	113,022			$	187,822
Gross profit			41,116				53,702
Income before provision for income taxes			29,155				38,307
Provision for income taxes			(9,177	)			(11,675	)
Net income		$	19,978			$	26,632

     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.

10. Earnings Per Share

     As discussed in Note 1, effective January 1, 2009, we adopted FSP No. EITF 03-6-1. We have retrospectively adjusted earnings per common share for all prior periods presented. We now use the “two-class” method of computing earnings per share. The “two-class” method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security as if all earnings for the period had been distributed. Unvested restricted share awards that earn non-forfeitable dividend rights qualify as participating securities and, accordingly, are now included in the basic computation as such. Our unvested restricted shares participate on an equal basis with common shares; therefore, there is no difference in undistributed earnings allocated to each participating security. Accordingly, the presentation below is prepared on a combined basis and is presented as earnings per common share. Previously, such unvested restricted shares were not included as outstanding within basic earnings per common share and were included in diluted earnings per common share pursuant to the treasury stock method. The following is a reconciliation of net earnings of Flowserve Corporation and weighted average shares for calculating basic net earnings per common share.

     Earnings per weighted average common share outstanding was calculated as follows:

		Three Months Ended June 30,
(Amounts in thousands, except per share data)		2009				2008
Net earnings of Flowserve Corporation		$	108,218			$	122,864
Dividends on restricted shares not expected to vest			5				7
Earnings attributable to common and participating shareholders		$	108,223			$	122,871
Weighted average shares:
Common stock			55,460				56,962
Participating securities			442				551
Denominator for basic earnings per common share			55,902				57,513
Effect of potentially dilutive securities			496				329
Denominator for diluted earnings per common share			56,398				57,842
Earnings per common share:
Basic		$	1.94			$	2.14
Diluted			1.92				2.12

		Six Months Ended June 30,
(Amounts in thousands, except per share data)		2009				2008
Net earnings of Flowserve Corporation		$	200,525			$	210,931
Dividends on restricted shares not expected to vest			13				18
Earnings attributable to common and participating shareholders		$	200,538			$	210,949
Weighted average shares:
Common stock			55,489				56,926
Participating securities			443				568
Denominator for basic earnings per common share			55,932				57,494
Effect of potentially dilutive securities			429				365
Denominator for diluted earnings per common share			56,361				57,859
Earnings per common share:
Basic		$	3.59			$	3.67
Diluted			3.56				3.65

     Diluted earnings per share above is based upon the weighted average number of shares as determined for basic earnings per share plus shares potentially issuable in conjunction with stock options, restricted share units and performance share units.

     For the three and six months ended both June 30, 2009 and 2008, we had no options to purchase common stock that were excluded from the computation of potentially dilutive securities.

     We have retrospectively adjusted the prior period to reflect the results that would have been reported had we applied the provisions of FSP No. EITF 03-6-1 for computing earnings per common share for all periods presented. The effects of the change as it relates to our earnings per common share are as follows:

		Three Months Ended June 30, 2008
		Basic				Diluted
As previously reported		$	2.16			$	2.13
Effect of adoption of FSP No. EITF 03-6-1			(0.02	)			(0.01	)
As retrospectively adjusted		$	2.14			$	2.12
		Six Months Ended June 30, 2008
		Basic				Diluted
As previously reported		$	3.71			$	3.66
Effect of adoption of FSP No. EITF 03-6-1			(0.04	)			(0.01	)
As retrospectively adjusted		$	3.67			$	3.65

11. Legal Matters and Contingencies

Asbestos-Related Claims

     We are a defendant in a 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. While the overall number of asbestos-related claims has generally declined in recent years, there can be no assurance that this trend will continue, or that the average cost per claim will not increase. Asbestos-containing materials incorporated into any such products were primarily encapsulated and used as components of process equipment, and we do not believe that any significant emission of asbestos-containing fibers occurred during the use of this equipment. We believe that a high percentage of the claims are covered by applicable insurance or indemnities from other companies.

Shareholder Litigation

     In 2003, related lawsuits were filed in federal court in the Northern District of Texas, alleging that we violated federal securities laws. After these cases were consolidated, the lead plaintiff amended its complaint several times. The lead plaintiff’s last pleading was the fifth consolidated amended complaint (the “Complaint”). The Complaint alleged that federal securities violations occurred between February 6, 2001 and September 27, 2002 and named 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 asserted claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”), and Rule 10b-5 thereunder, and Sections 11 and 15 of the Securities Act of 1933 (the “Securities Act”). The lead plaintiff sought 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. By orders dated November 13, 2007 and January 4, 2008, the District Court denied the plaintiffs’ motion for class certification and granted summary judgment in favor of the defendants on all claims. The plaintiffs appealed both rulings to the federal Fifth Circuit Court of Appeals (“Court of Appeals”), and on June 19, 2009, the Court of Appeals issued an opinion vacating the District Court’s denial of class certification, reversing in part and vacating in part the District Court’s entry of summary judgment, and remanding the case to the District Court for further proceedings consistent with the Court of Appeals’ opinion. As a result of the Court of Appeals’ opinion, the case will be returned to the District Court for further consideration of certain issues, including whether the plaintiffs can demonstrate that the case should be certified as a class action. We continue to believe we have valid defenses to the claims asserted, and we will continue to vigorously defend this case.

     In 2005, a shareholder derivative lawsuit was filed purportedly on our behalf in the 193rd Judicial District of Dallas County, Texas. The lawsuit originally named as defendants Mr. Greer, Ms. Hornbaker, and former 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 were named as a nominal defendant. Based primarily on the purported misstatements alleged in the above-described federal securities case, the original lawsuit in this action asserted claims against the defendants for breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets and unjust enrichment. The plaintiff alleged that these purported violations of state law occurred between April 2000 and the date of suit. The plaintiff sought 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 filed a motion seeking dismissal of the case, and the court thereafter ordered the plaintiffs to replead. On October 11, 2007, the plaintiffs filed an amended petition adding new claims against the following additional defendants: Kathy Giddings, our former Vice-President and Corporate Controller; Bernard G. Rethore, our former Chairman and Chief Executive Officer; Banc of America Securities, LLC and Credit Suisse First Boston, LLC, which served as underwriters for our public stock offerings in November 2001 and April 2002, and PricewaterhouseCoopers, LLP, our independent registered public accounting firm. On April 2, 2008, the lawsuit was dismissed by the court without prejudice at the plaintiffs’ request.

     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 former and current board members Mr. Coble, Mr. Haymaker, Mr. Lewis M. 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 that purportedly 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 believed that this new lawsuit was improperly filed in the Supreme Court of the State of New York and filed a motion seeking dismissal of the case. On January 2, 2008, the court entered an order granting our motion to dismiss all claims and allowed the plaintiffs an opportunity to replead. A notice of entry of the dismissal order was served on the plaintiff on January 15, 2008. To date, the plaintiff has neither filed an amended complaint nor appealed the dismissal order.

United Nations Oil-for-Food Program

     We have entered into and disclosed previously in our SEC filings the material details of settlements with the SEC, the Department of Justice (the “DOJ”) and the Dutch authorities relating 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 a confidential French investigation may still be ongoing, and, accordingly, we cannot predict the outcome of the French investigation at this time. We currently do not expect to incur additional case resolution costs of a material amount in this matter; however, if the French authorities take enforcement action against us regarding its investigation, we may be subject to additional monetary and non-monetary penalties.

     In addition to the settlements and governmental investigation referenced above, on June 27, 2008, the Republic of Iraq filed a civil suit in federal court in New York against 93 participants in the United Nations Oil-for-Food Program, including Flowserve and our two foreign subsidiaries that participated in the program. We intend to vigorously contest the suit, and we believe that we have

valid defenses to the claims asserted. However, we cannot predict the outcome of the suit at the present time or whether the resolution of this suit will have a material adverse financial impact on our company.

Export Compliance

     In March 2006, we initiated a voluntary process to determine our compliance posture with respect to U.S. export control and economic sanctions laws and regulations. Upon initial investigation, it appeared that some product transactions and technology transfers were not handled in full compliance with U.S. export control laws and regulations. As a result, in conjunction with outside counsel, we conducted a voluntary systematic process to further review, validate and voluntarily disclose export violations discovered as part of this review process. We completed our comprehensive disclosures to the appropriate U.S. government regulatory authorities at the end of 2008, although these disclosures may be refined or supplemented. Based on our review of the data collected, during the self-disclosure period of October 1, 2002 through October 1, 2007, a number of process pumps, valves, mechanical seals and parts related thereto were exported, in limited circumstances, without required export or reexport licenses or without full compliance with all applicable rules and regulations to a number of different countries throughout the world, including certain U.S. sanctioned countries. The foregoing information is subject to revision as we further review this submittal with applicable U.S. regulatory authorities.

     We have taken a number of actions to increase the effectiveness of our global export compliance program. This has included increasing the personnel and resources dedicated to export compliance, providing additional export compliance tools to employees, improving our export transaction screening processes and enhancing the content and frequency of our export compliance training programs.

     Any self-reported violations of U.S. export control laws and regulations may result in civil or criminal penalties, including fines and/or other penalties. We are currently unable to definitively determine the full extent or nature or total amount of penalties to which we might be subject as a result of any such self-reported violations of the U.S. export control laws and regulations. However, based on our current information and analysis, which remains subject to change pending further developments, we presently believe that this matter will be resolved without material adverse impact on our company.

Other

     We are currently involved as a potentially responsible party at three 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, will remain uncertain 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 not be material.

     We are also a defendant in a number of other lawsuits, including product liability claims, that are insured, subject to the applicable deductibles, arising in the ordinary course of business, and we are also involved in ordinary routine litigation incidental to our business, none of which, either individually or in the aggregate, we believe to be material to our business, operations or overall financial condition. However, litigation is inherently unpredictable, and resolutions or dispositions of claims or lawsuits by settlement or otherwise could have an adverse impact on our financial position, results of operations or cash flows for the reporting period in which any such resolution or disposition occurs.

     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 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.