Summary of FLOWSERVE CORP - Yahoo! Finance

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 2008 Annual Report.
EXECUTIVE OVERVIEW
We are an established industry leader with a strong product portfolio of pumps, valves, seals, automation and aftermarket services in support of global infrastructure industries, including oil and gas, chemical, power generation and water management, as well as general industrial markets where our products add value. Our products are integral to the movement, control and protection of the flow of materials in our customers' critical processes. We currently employ approximately 15,000 employees in more than 55 countries who are focused on key strategies that reach across the business. Our business model is influenced by the capital spending of these industries for the placement of new products into service and aftermarket services for existing operations. The worldwide installed base of our products is an important source of aftermarket revenue, where products are expected to ensure the maximum operating time of many key industrial processes. Over the past several years, we have invested significantly in our aftermarket strategy to provide local support to maximize our customers' investment in our offerings, as well as to provide business stability during various economic periods. The aftermarket business, which is served by more than 150 of our Quick Response Centers ("QRCs") located around the globe, provides a variety of service offerings for our customers including spare 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 strategy.
The favorable conditions we experienced in much of 2008 in our key industries moderated in the last quarter of 2008 and the first quarter of 2009. In the second and third quarters of 2009, we experienced some stabilization in business conditions. Although we have experienced increased pricing pressure in 2009, the overall demand for our products and services reflects continuing investments in oil and gas, capacity expansion and upgrade projects in power generation, global infrastructure growth in desalination, chemical manufacturing expansion in certain developing regions and aftermarket opportunities, including optimization projects of continuing operations. We have not experienced a significant level of cancellations in our backlog. Overall global demand in our key industries reflected moderate growth in the developing markets offset by weakness in the mature markets.
The global demand growth during previous years provided us the opportunity to increase our installed base of new products and drive recurring aftermarket business. We continue to build on our geographic breadth through our QRC network, with the goal to be positioned as near to our customers as possible for service and support in order to capture this important aftermarket business. Despite this, we continue to face challenges affecting many companies in our industry with a significant multinational presence, such as economic, political and other risks.
Along with ensuring that we have the local capability to sell, install and service our equipment in remote regions, it is equally imperative to continuously improve our global operations. We continue to optimize our global supply chain capability to meet global customer demands and ensure the quality and timely delivery of our products. Significant efforts are underway to improve the supply chain processes across our 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 as a percentage of sales across our global operations, through the assistance of a focused Continuous Improvement Process ("CIP") initiative. The goal of the CIP initiative, which includes lean manufacturing, six sigma business management strategy and value engineering, is to maximize service fulfillment to customers through on-time delivery, reduced cycle time and quality at the highest internal productivity. This program is a key factor in our margin improvement plans.
Ongoing effects of global financial markets and banking systems disruptions continue to make credit and capital markets difficult for companies to access, and have generally driven up the costs of newly raised debt. We continue to monitor and evaluate the implications of these factors on our current business, our customers and suppliers and the state of the global economy. While we believe that these financial market disruptions have not directly had a disproportionate adverse impact on our financial position, results of operations or liquidity as of September 30, 2009, continuing disruptions in the functioning of credit and capital markets could potentially materially impair our and our customers' ability to access these markets and increase associated costs. There can be no assurance that we will not be materially adversely affected by these financial market disruptions and global economic conditions as economic events and circumstances continue to evolve. Only 1% of our term loan is due to mature in each of 2009 and 2010, and after the effects of $385.0 million of notional interest rate swaps, approximately 71% of our term debt was at fixed rates at September 30, 2009. Our revolving line of credit and our European LOC Facility are committed and are held by a diversified group of financial institutions. Our cash balance decreased by $180.8 million to $291.2 million as of September 30, 2009 as compared with December

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31, 2008. The cash draw was anticipated based on planned significant cash uses in the nine months ended September 30, 2009, including approximately $115 million in long-term and broad-based annual incentive program payments related to prior period performance, $87.1 million in capital expenditures, $44.2 million in dividend payments, $82.5 million in contributions to our U.S. pension plan, $27.5 million of share repurchases and the funding of increased working capital requirements, as well as $30.8 million for the acquisition of Calder AG. We monitor the depository institutions that hold our cash and cash equivalents on a regular basis, and we believe that we have placed our deposits with creditworthy financial institutions. See the "Liquidity and Capital Resources" section of this "Management's Discussion and Analysis of Financial Condition and Results of Operations" for further discussion.
RESULTS OF OPERATIONS - Three and nine months ended September 30, 2009 and 2008 Throughout this discussion of our results of operations, we discuss the impact of fluctuations in foreign currency exchange rates. We have calculated currency effects by translating current year results on a monthly basis at prior year exchange rates for the same periods.
As discussed in Note 2 to our condensed consolidated financial statements included in this Quarterly Report, FPD acquired Calder AG, a Swiss supplier of energy recovery technology, effective April 21, 2009, and Calder AG's results of operations have been consolidated since the date of acquisition. Additionally, FPD acquired the remaining 50% interest in Niigata, a Japanese manufacturer of pumps and other rotating equipment, effective March 1, 2008. 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. No pro forma information has been provided for either acquisition due to immateriality.
As discussed in Note 7 to our condensed consolidated financial statements included in this Quarterly Report, in February 2009, we announced our Realignment Program 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 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, which includes a reduction in headcount. Expenses are reported in COS or SG&A, as applicable, in our condensed consolidated statement of income.
The following is a summary of Realignment Program charges included in operating income for the three and nine months ended September 30, 2009:
Three Months Ended September 30, 2009

                                                                                        Subtotal -
                                 Flowserve           Flow              Flow             Reportable                            Consolidated
(Amounts in millions)              Pump             Control          Solutions           Segments           All Other             Total
Restructuring Charges
COS                             $       0.8        $       -        $       0.1        $        0.9        $         -        $         0.9
SG&A                                      -                -                  -                   -                  -                    -

                                $       0.8        $       -        $       0.1        $        0.9        $         -        $         0.9


Non-Restructuring Charges
COS                             $       0.4        $     0.6        $       0.2        $        1.2        $         -        $         1.2
SG&A                                    0.2                -                0.7                 0.9                0.6                  1.5

                                $       0.6        $     0.6        $       0.9        $        2.1        $       0.6        $         2.7


Total Realignment Program
Charges
COS                             $       1.2        $     0.6        $       0.3        $        2.1        $         -        $         2.1
SG&A                                    0.2                -                0.7                 0.9                0.6                  1.5

                                $       1.4        $     0.6        $       1.0        $        3.0        $       0.6        $         3.6

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Nine Months Ended September 30, 2009

                                                                                       Subtotal -
                                 Flowserve           Flow              Flow            Reportable                             Consolidated
(Amounts in millions)              Pump             Control          Solutions          Segments           All Other             Total
Restructuring Charges
COS                             $       9.0        $     0.5        $       0.8        $      10.3        $         -        $         10.3
SG&A                                    0.2              0.2                0.1                0.5                  -                   0.5

                                $       9.2        $     0.7        $       0.9        $      10.8        $         -        $         10.8


Non-Restructuring Charges
COS                             $       2.4        $     3.8        $       3.9        $      10.1        $         -        $         10.1
SG&A                                    2.8              3.8                4.8               11.4                0.9                  12.3

                                $       5.2        $     7.6        $       8.7        $      21.5        $       0.9        $         22.4


Total Realignment Program
Charges
COS                             $      11.4        $     4.3        $       4.7        $      20.4        $         -        $         20.4
SG&A                                    3.0              4.0                4.9               11.9                0.9                  12.8

                                $      14.4        $     8.3        $       9.6        $      32.3        $       0.9        $         33.2

The following is a summary of total expected Realignment Program charges:
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                             $      13.6        $     0.4        $       1.3        $      15.3        $         -        $         15.3
SG&A                                    0.2              0.2                0.1                0.5                  -                   0.5

                                $      13.8        $     0.6        $       1.4        $      15.8        $         -        $         15.8


Total Expected
Non-restructuring Charges
COS                             $       3.0        $     5.8        $       3.8        $      12.6        $         -        $         12.6
SG&A                                    2.8              4.2                4.8               11.8                0.9                  12.7

                                $       5.8        $    10.0        $       8.6        $      24.4        $       0.9        $         25.3


Total Expected Realignment
Program Charges
COS                             $      16.6        $     6.2        $       5.1        $      27.9        $         -        $         27.9
SG&A                                    3.0              4.4                4.9               12.3                0.9                  13.2

                                $      19.6        $    10.6        $      10.0        $      40.2        $       0.9        $         41.1

Based on actions under our Realignment Program, we have realized savings of approximately $10 million and $17 million for the three and nine months ended September 30, 2009, respectively, and we expect to realize savings in 2009 of approximately $30 million. Upon completion of our Realignment Program, we expect annual cost savings of approximately $60 million. Approximately two-thirds of savings were and will be realized in COS and the remainder in SG&A.
Most of the charges presented above are expected to be paid in cash in 2009, except for asset write-downs, which are non-cash restructuring charges. Asset write-down charges (including accelerated depreciation of fixed assets, accelerated amortization of intangible assets and inventory write-downs) of $0.2 million and $5.0 million were recorded during the three and nine months ended September 30, 2009, respectively. Additional asset write-down charges of $0.2 million are expected to be recorded during the remainder of 2009.
In the fourth quarter of 2009, we plan to commence additional realignment initiatives that will expand our efforts to optimize assets and reduce our overall cost structure. The additional initiatives are planned to occur in the remainder of 2009 and continue into 2010. We currently expect to incur approximately $45 million in additional charges, which are not reflected above, and expect to generate approximately $50 million in additional annual cost savings. We view the additional initiatives as a long-term investment that should improve our operating platform, better support our customers and have lower execution risk with higher expected return than other investments currently available.

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Consolidated Results
Bookings, Sales and Backlog

                                       Three Months Ended September 30,
            (Amounts in millions)          2009                 2008

            Bookings                 $        975.3        $      1,373.5
            Sales                           1,051.1               1,153.6



                                        Nine Months Ended September 30,
            (Amounts in millions)          2009                 2008

            Bookings, net            $      2,946.0        $      4,113.4
            Sales                           3,166.2               3,304.5

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 September 30, 2009 decreased by $398.2 million, or 29.0%, as compared with the same period in 2008. The decrease includes negative currency effects of approximately $37 million. The decrease is attributable to declines in original equipment bookings in FPD, including the impact of the $85 million project to supply a variety of pumps to build the Abu Dhabi Crude Oil Pipeline recorded in the same period in 2008 that did not recur, as well as declines in original equipment bookings by FSD. These decreases are primarily related to declines in the oil and gas and general industries and reflect our customers' responses to general global economic conditions and declines in oil and gas prices as compared with 2008. The decrease is also attributable to declines in the chemical industry and distributor business in FCD, partially offset by orders of more than $45 million in FCD to supply valves to four Westinghouse Electric Co. nuclear power units in North America.
Bookings for the nine months ended September 30, 2009 decreased by $1,167.4 million, or 28.4%, as compared with the same period in 2008. The decrease includes negative currency effects of approximately $264 million. The decrease is primarily attributable to declines in original equipment bookings in FPD, including the impacts of $110.9 million of thruster orders and the impact of the $85 million Abu Dhabi Crude Oil Pipeline order that were recorded in the same period in 2008 and did not recur, as well as declines in original equipment bookings by FSD. These decreases are primarily attributable to declines in the oil and gas and general industries and reflect our customers' responses to general global economic conditions and declines in oil and gas prices as compared with 2008. The decrease is also attributable to declines in the chemical industry and distributor business in FCD, partially offset by orders of more than $45 million in FCD to supply valves to four Westinghouse Electric Co. nuclear power units in North America. Bookings recorded and subsequently canceled within the year-to-date period are excluded from year-to-date bookings.
Sales for the three months ended September 30, 2009 decreased by $102.5 million, or 8.9%, as compared with the same period in 2008. The decrease includes negative currency effects of approximately $47 million. The decrease is attributable to decreased chemical and general industries and distributor business in FCD and decreased original equipment sales by FSD. Net sales to international customers, including export sales from the U.S., were approximately 74% of consolidated sales for the three months ended September 30, 2009, as compared with approximately 72% for the same period in 2008.
Sales for the nine months ended September 30, 2009 decreased by $138.3 million, or 4.2%, as compared with the same period in 2008. The decrease includes negative currency effects of approximately $277 million. The overall net decrease is primarily attributable to decreased chemical and general industries and distributor business in FCD and decreased original equipment sales by FPD and FSD. Net sales to international customers, including export sales from the U.S., were approximately 72% of consolidated sales for the nine months ended September 30, 2009, as compared with approximately 69% for the same period in 2008.
Backlog represents the value of aggregate uncompleted customer orders. Backlog of $2,664.9 million at September 30, 2009 decreased by $160.2 million, or 5.7%, as compared with December 31, 2008. Currency effects provided an increase of approximately $90 million. The overall net decrease includes the impact of cancellations of $35.4 million of orders booked during the prior year. The acquisition of Calder AG resulted in a $4.7 million increase in backlog.

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Gross Profit and Gross Profit Margin

                                       Three Months Ended September 30,
           (Amounts in millions)          2009                   2008

           Gross profit              $       385.2           $       404.9
           Gross profit margin                36.6 %                  35.1 %



                                        Nine Months Ended September 30,
            (Amounts in millions)          2009                 2008

            Gross profit             $      1,139.3        $      1,168.7
            Gross profit margin                36.0 %                35.4 %

Gross profit for the three months ended September 30, 2009 decreased by $19.7 million, or 4.9%, as compared with the same period in 2008. The decrease includes the effect of $2.1 million in charges resulting from our Realignment Program in 2009. Gross profit margin for the three months ended September 30, 2009 of 36.6% increased from 35.1% for the same period in 2008. The increase is primarily attributable to improved pricing on original equipment orders booked by FPD in 2008, a sales mix shifts toward higher margin aftermarket sales and savings realized from our Realignment Program.
Gross profit for the nine months ended September 30, 2009 decreased by $29.4 million, or 2.5%, as compared with the same period in 2008. The decrease includes the effect of $20.4 million in charges resulting from our Realignment Program in 2009. Gross profit margin for the nine months ended September 30, 2009 of 36.0% increased from 35.4% for the same period in 2008. A sales mix shift toward higher margin aftermarket sales by FCD and FSD, improved pricing on original equipment orders booked by FPD in late 2007 and early 2008 and savings realized from our Realignment Program were partially offset by a sales mix shift toward lower margin original equipment in FPD. Selling, General and Administrative Expense ("SG&A")

                                           Three Months Ended September 30,
       (Amounts in millions)                  2009                   2008

       SG&A                              $       227.3           $       243.8
       SG&A as a percentage of sales              21.6 %                  21.1 %



                                            Nine Months Ended September 30,
       (Amounts in millions)                  2009                   2008

       SG&A                              $       683.9           $       726.5
       SG&A as a percentage of sales              21.6 %                  22.0 %

SG&A for the three months ended September 30, 2009 decreased by $16.5 million, or 6.8%, as compared with the same period in 2008. Currency effects yielded a decrease of approximately $7 million. Recoveries of bad debts, decreased annual incentive compensation expense, commissions and travel and savings realized from our Realignment Program were partially offset by a $7.5 million increase in legal fees and accrued costs related to the pending resolution of the 2003 shareholder class action litigation, which remains contingent upon the resolution of certain closure issues (see Note 11 to our condensed consolidated financial statements included in this Quarterly Report).
SG&A for the nine months ended September 30, 2009 decreased by $42.6 million, or 5.9%, as compared with the same period in 2008. The decrease includes the effect of $12.8 million in charges resulting from our Realignment Program in 2009. Currency effects yielded a decrease of approximately $42 million. Recoveries of bad debts, decreased annual incentive compensation expense, commissions and travel and savings realized from our Realignment Program were partially offset by an increase in legal fees and accrued resolution costs related to shareholder litigation and charges resulting from our Realignment Program.

Net Earnings from Affiliates

                                           Three Months Ended September 30,
         (Amounts in millions)                2009                  2008

         Net earnings from affiliates     $       3.3           $       3.4

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Nine Months Ended September 30, (Amounts in millions) 2009 2008

Net earnings from affiliates $ 11.7 $ 13.9

Net earnings from affiliates represents our net income from 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 are accounted for using the equity method of accounting. Net earnings from affiliates for the three months ended September 30, 2009 was comparable to the same period in 2008.
Net earnings from affiliates for the nine months ended September 30, 2009 decreased by $2.2 million, or 15.8%, as compared with the same period in 2008. The decrease in earnings is primarily attributable to our FCD joint venture in India and the impact of the consolidation of Niigata in the first quarter of 2008 when we purchased the remaining 50% interest. As discussed above, effective March 1, 2008, we purchased the remaining 50% interest in Niigata, resulting in the full consolidation of Niigata as of that date. Prior to this transaction, our 50% interest was recorded using the equity method of accounting. Operating Income and Operating Margin

                                       Three Months Ended September 30,
           (Amounts in millions)          2009                   2008

           Operating income          $       161.2           $       164.5
           Operating margin                   15.3 %                  14.3 %



                                        Nine Months Ended September 30,
           (Amounts in millions)          2009                   2008

           Operating income          $       467.1           $       456.2
           Operating margin                   14.8 %                  13.8 %

Operating income for the three months ended September 30, 2009 decreased by $3.3 million, or 2.0%, as compared with the same period in 2008. The decrease includes the effect of approximately $10 million in savings, partially offset by . . .