UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2009

~~FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008~~


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

~~FOR THE TRANSITION PERIOD FROM~~to.

Commission File No. 1-13179

FLOWSERVE CORPORATION

(Exact name of registrant as specified in its charter)


New York		31-0267900

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

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

(Address of principal executive offices)		(Zip Code)

(972) 443-6500

(Registrant’s telephone number, including area code)

Indicate by check mark whether the ~~registrant:~~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.þYeso 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).oYeso 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 the definitions of ~~“accelerated filer”,~~ “large accelerated ~~filer”~~filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filerþ	Accelerated filero	Non-accelerated filero	Smaller reporting companyo
		(Do not check if a smaller reporting company)

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

As of ~~October 23, 2008,~~April 24, 2009, there were ~~56,540,605~~56,027,538 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~~Statements.

Condensed Consolidated Statements of Income — Three Months Ended ~~September 30,~~March 31, 2009 and 2008 ~~and 2007~~ (unaudited)		1

Condensed Consolidated Statements of Comprehensive Income — Three Months Ended ~~September 30,~~March 31, 2009 and 2008 ~~and 2007~~ (unaudited)		1

Condensed Consolidated ~~Statements of Income~~Balance Sheets — ~~Nine Months Ended September 30,~~March 31, 2009 and December 31, 2008 ~~and 2007~~ (unaudited)		2

~~Condensed Consolidated Statements of Comprehensive Income — Nine Months Ended September 30, 2008 and 2007 (unaudited)~~		2

~~Condensed Consolidated Balance Sheets — September 30, 2008 and December 31, 2007 (unaudited)~~		3

Condensed Consolidated Statements of Cash Flows — ~~Nine Months~~Three months Ended ~~September 30,~~March 31, 2009 and 2008 ~~and 2007~~ (unaudited)		4
		3
Notes to Condensed Consolidated Financial Statements		5
		4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations~~Operations.		18

Item 3. Quantitative and Qualitative Disclosures About Market ~~Risk~~Risk.		33
		30
Item 4. Controls and ~~Procedures~~Procedures.		34
		31
PART II — OTHER INFORMATION

Item 1. Legal ~~Proceedings~~Proceedings.		35
		32
Item 1A. Risk ~~Factors~~Factors.		37
		32
Item 2. Unregistered Sales of Equity Securities and Use of ~~Proceeds~~Proceeds.		37
		32
Item 3. Defaults Upon Senior ~~Securities~~Securities.		38
		33
Item 4. Submission of Matters to a Vote of Security ~~Holders~~Holders.		38
		33
Item 5. Other ~~Information~~Information.		38
		33
Item 6. ~~Exhibits~~Exhibits.		38
		33
SIGNATURES
		34
~~Exhibit 31.1~~EX-31.1
~~Exhibit 31.2~~EX-31.2
~~Exhibit 32.1~~EX-32.1
~~Exhibit 32.2~~EX-32.2

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

FLOWSERVE CORPORATION
(Unaudited)

CONDENSED CONSOLIDATED STATEMENTS OF INCOME


	Three Months Ended September 30,						Three Months Ended March 31,
(Amounts in thousands, except per share data)	2008			2007			2009			2008

Sales	$	1,153,592		$	919,247		$	1,024,726		$	993,319
Cost of sales		(748,668	)		(605,664	)		(656,953	)		(647,473	)

Gross profit		404,924			313,583			367,773			345,846
Selling, general and administrative expense		(244,673	)		(210,135	)		(225,311	)		(232,501	)
Net earnings from affiliates		3,389			4,781			4,675			5,972

Operating income		163,640			108,229			147,137			119,317
Interest expense		(13,105	)		(15,332	)		(10,109	)		(12,858	)
Interest income		2,152			919			1,075			2,855
Other (expense) income, net		(8,690	)		1,224			(9,295	)		16,477

Earnings before income taxes		143,997			95,040			128,808			125,791
Provision for income taxes		(26,948	)		(31,985	)		(35,983	)		(37,099	)

Net earnings	$	117,049		$	63,055
Net earnings, including noncontrolling interests								92,825			88,692
Less: Net earnings attributable to noncontrolling interests								(520	)		(627	)

Net earnings of Flowserve Corporation							$	92,305		$	88,065


Earnings per share:
Net earnings per share of Flowserve Corporation common shareholders:
Basic	$	2.06		$	1.12		$	1.65		$	1.53
Diluted		2.04			1.10			1.64			1.52

Cash dividends declared per share	$	0.25		$	0.15		$	0.27		$	0.25

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


	Three Months Ended September 30,						Three Months Ended March 31,
(Amounts in thousands)	2008			2007			2009			2008

Net earnings	$	117,049		$	63,055		$	92,305		$	88,065

Other comprehensive (expense) income:
Foreign currency translation adjustments, net of tax		(105,060	)		24,637			(40,017	)		33,951
Pension and other postretirement effects, net of tax		2,665			(646	)		884			(819	)
Cash flow hedging activity, net of tax		901			(2,159	)		883			(3,267	)

Other comprehensive (loss) income		(101,494	)		21,832			(38,250	)		29,865

Comprehensive income	$	15,555		$	84,887		$	54,055		$	117,930

See accompanying notes to condensed consolidated financial statements.

~~FLOWSERVE CORPORATION~~
~~(Unaudited)~~

~~CONDENSED CONSOLIDATED STATEMENTS OF INCOME~~

Nine Months Ended September 30,
(Amounts in thousands, except per share data) 2008 2007

Sales $ 3,304,516 $ 2,653,325
Cost of sales (2,135,776 ) (1,771,852 )

Gross profit 1,168,740 881,473
Selling, general and administrative expense (728,702 ) (623,253 )
Net earnings from affiliates 13,873 14,341

Operating income 453,911 272,561
Interest expense (38,695 ) (45,164 )
Interest income 6,612 2,490
Other income, net 8,365 2,159

Earnings before income taxes 430,193 232,046
Provision for income taxes (102,212 ) (72,172 )

Net earnings $ 327,981 $ 159,874

Earnings per share:
Basic $ 5.77 $ 2.83
Diluted 5.71 2.79

Cash dividends declared per share $ 0.75 $ 0.45

~~CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME~~

Nine Months Ended September 30,
(Amounts in thousands) 2008 2007

Net earnings $ 327,981 $ 159,874

Other comprehensive (expense) income:
Foreign currency translation adjustments, net of tax (70,535 ) 44,769
Pension and other postretirement effects, net of tax 1,952 (433 )
Cash flow hedging activity, net of tax 531 (2,020 )

Other comprehensive (loss) income (68,052 ) 42,316

Comprehensive income $ 259,929 $ 202,190

~~See accompanying notes to condensed consolidated financial statements.~~

FLOWSERVE CORPORATION
(Unaudited)

CONDENSED CONSOLIDATED BALANCE SHEETS


	September 30,			December 31,			March 31,			December 31,
(Amounts in thousands, except per share data)	2008			2007			2009			2008

ASSETS
Current assets:
Cash and cash equivalents	$	153,431		$	370,575		$	201,539		$	472,056
Restricted cash		519			2,663
Accounts receivable, net of allowance for doubtful accounts of $17,883 and $14,219, respectively		912,042			666,733
Accounts receivable, net of allowance for doubtful accounts of $23,606 and $23,667, respectively								828,445			808,522
Inventories, net		859,289			680,199			884,033			834,612
Deferred taxes		86,666			105,221			119,126			126,890
Prepaid expenses and other		92,665			71,380			92,137			90,345

Total current assets		2,104,612			1,896,771			2,125,280			2,332,425
Property, plant and equipment, net of accumulated depreciation of $602,429 and $575,280, respectively		493,711			488,892
Property, plant and equipment, net of accumulated depreciation of $595,175 and $594,991, respectively								533,784			547,235
Goodwill		842,772			853,265			824,526			828,395
Deferred taxes		54,594			13,816			31,427			32,561
Other intangible assets, net		125,855			134,734			118,605			121,919
Other assets, net		123,763			132,943			160,040			161,159

Total assets	$	3,745,307		$	3,520,421		$	3,793,662		$	4,023,694


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	470,580		$	513,169		$	445,414		$	598,498
Accrued liabilities		936,601			723,026			854,781			967,099
Debt due within one year		21,695			7,181			25,178			27,731
Deferred taxes		7,906			6,804			15,491			14,668

Total current liabilities		1,436,782			1,250,180			1,340,864			1,607,996
Long-term debt due after one year		547,191			550,795			544,101			545,617
Retirement obligations and other liabilities		351,368			426,469			495,210			495,883
Shareholders’ equity:
Common shares, $1.25 par value		73,474			73,394			73,547			73,477
Shares authorized — 120,000
Shares issued — 58,779 and 58,715, respectively
Shares issued — 58,838 and 58,781, respectively
Capital in excess of par value		579,009			561,732			583,924			586,371
Retained earnings		1,059,258			774,366			1,236,723			1,159,634

		1,711,741			1,409,492			1,894,194			1,819,482
Treasury shares, at cost — 2,977 and 2,406 shares, respectively		(219,881	)		(101,781	)
Treasury shares, at cost — 3,596 and 3,566 shares, respectively								(245,880	)		(248,073	)
Deferred compensation obligation		7,542			6,650			7,588			7,678
Accumulated other comprehensive loss		(89,436	)		(21,384	)		(249,570	)		(211,320	)
Noncontrolling interest								7,155			6,431

Total shareholders’ equity		1,409,966			1,292,977			1,413,487			1,374,198

Total liabilities and shareholders’ equity	$	3,745,307		$	3,520,421		$	3,793,662		$	4,023,694

See accompanying notes to condensed consolidated financial statements.

FLOWSERVE CORPORATION
(Unaudited)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Nine Months Ended September 30,						Three Months Ended March 31,
(Amounts in thousands)	2008			2007			2009			2008

Cash flows — Operating activities:
Net earnings	$	327,981		$	159,874
Adjustments to reconcile net earnings to net cash (used) provided by operating activities:
Net earnings of Flowserve Corporation							$	92,305		$	88,065
Adjustments to reconcile net earnings to net cash used by operating activities:
Depreciation		54,414			49,029			18,145			18,134
Amortization of intangible and other assets		7,519			7,408			2,430			2,503
Amortization of deferred loan costs		1,265			1,694			397			454
Net gain on disposition of assets		(6,200	)		(2,018	)
Net loss (gain) on disposition of assets								270			(666	)
Gain on bargain purchase		(3,400	)		—			—			(3,400	)
Excess tax benefits from stock-based compensation arrangements		(16,414	)		(8,177	)		(290	)		(8,278	)
Stock-based compensation		23,981			19,213			10,070			6,972
Net earnings from affiliates, net of dividends received		(5,911	)		(6,339	)		(2,914	)		(4,690	)
Change in assets and liabilities:
Accounts receivable, net		(280,343	)		(119,022	)		(43,979	)		(80,937	)
Inventories, net		(190,292	)		(147,729	)		(75,700	)		(108,882	)
Prepaid expenses and other		(26,763	)		(34,831	)		(10,571	)		(8,772	)
Other assets, net		7,571			(4,665	)		6,509			(8,991	)
Accounts payable		(32,599	)		(24,111	)		(107,975	)		(58,320	)
Accrued liabilities and income taxes payable		212,336			152,866			(93,693	)		(15,557	)
Retirement obligations and other liabilities		(46,034	)		12,531			9,455			10,659
Net deferred taxes		(31,914	)		(10,623	)		15,434			(725	)

Net cash flows (used) provided by operating activities		(4,803	)		45,100
Net cash flows used by operating activities								(180,107	)		(172,431	)


Cash flows — Investing activities:
Capital expenditures		(72,506	)		(60,941	)		(44,251	)		(14,256	)
Proceeds from disposal of assets		7,556			3,906
Change in restricted cash		2,144			(274	)

Net cash flows used by investing activities		(62,806	)		(57,309	)		(44,251	)		(14,256	)


Cash flows — Financing activities:
Net borrowings under lines of credit		—			58,000
Excess tax benefits from stock-based compensation arrangements		16,414			8,177			290			8,278
Payments on long-term debt		(4,261	)		(1,420	)		(1,420	)		(1,420	)
Borrowings (payments) under other financing arrangements		9,644			(4,486	)		(2,264	)		612
Repurchase of common shares		(134,997	)		(44,798	)		(7,071	)		—
Payments of dividends		(37,348	)		(17,176	)		(13,970	)		(8,592	)
Proceeds from stock option activity		11,214			13,341			202			8,232

Net cash flows (used) provided by financing activities		(139,334	)		11,638			(24,233	)		7,110
Effect of exchange rate changes on cash		(10,201	)		4,678			(21,926	)		5,733

Net change in cash and cash equivalents		(217,144	)		4,107			(270,517	)		(173,844	)
Cash and cash equivalents at beginning of year		370,575			67,000			472,056			373,238

Cash and cash equivalents at end of period	$	153,431		$	71,107		$	201,539		$	199,394

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 ~~September 30, 2008,~~March 31, 2009, and the related condensed consolidated statements of income and comprehensive income for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2009 and 2008, ~~and 2007,~~ and the condensed consolidated statements of cash flows for the ~~nine~~three months ended ~~September 30,~~March 31, 2009 and 2008, ~~and 2007,~~ 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 ~~September 30, 2008~~March 31, 2009 (“Quarterly Report”) are presented as permitted by Regulation S-X ~~as promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”),~~ 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, ~~2007~~2008 (“~~2007~~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 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 three months ended ~~September 30, 2008,~~March 31, 2009, are detailed in Note 1 of our ~~2007~~2008 Annual Report.

Accounting Developments

Pronouncements Implemented

In September 2006, the ~~Financial Accounting Standards Board (“FASB”)~~FASB issued ~~Statement of Financial Accounting Standards (“SFAS”)~~SFAS No. 157, “Fair Value ~~Measurements.~~Measurements,” ~~SFAS No. 157~~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. ~~SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007.~~ In February 2008, the FASB issued Staff Position (“FSP”) No. FAS 157-2, “Effective Date of FASB Statement No. 157,” which ~~amends~~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 ~~SFAS~~FSP No. ~~157, as amended,~~FAS 157-2, effective January 1, 2009, did not have a material impact on our consolidated financial condition or results of operations. ~~We do not expect the adoption of SFAS No. 157 in 2009 for nonfinancial assets and nonfinancial liabilities to have a material impact on our consolidated financial condition or results of operations.~~

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

~~Pronouncements Not Yet Implemented~~

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. ~~Early adoption is not permitted. We do not expect the~~Our adoption of SFAS No. 141(R) to, 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, ~~“Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51.” 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 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, is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Early adoption is not permitted. SFAS No. 160 shall be applied prospectively as of the beginning of the fiscal year inJanuary 1, 2009, which ~~it is initially applied, except for the presentation and disclosure requirements. The presentation and disclosure requirements shall be~~has been applied retrospectively for all periods ~~presented. We are still evaluating the~~presented, did not have a material impact ~~of SFAS No. 160~~ on our consolidated financial condition and 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 ~~current~~ 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 on 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 ~~statements~~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 SFAS No. 141(R), effective January 1, 2009 did not impact 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 ~~beginning~~ending after ~~November~~December 15, ~~2008.~~2009. We do not expect the adoption of ~~SFAS~~FSP No. ~~161~~FAS 132(R)-1 to have a material impact on our consolidated financial condition or results of operations.

In ~~May 2008,~~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. ~~162, “The Hierarchy~~107, “Disclosures about Fair Value of ~~Generally Accepted Accounting Principles.” SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation~~Financial Instruments”, to require disclosures about fair value of financial ~~statements that~~instruments for interim reporting periods of publicly-traded companies, as well as in annual financial statements. The disclosure requirements of FSP No. FAS 107-1 and APB 28-1 are ~~presented in conformity with GAAP. SFAS No. 162 is~~ effective 60 days following approval by the Securities and Exchange Commission (“SEC”) of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of ‘Present Fairly in Conformity With Generally Accepted Accounting Principles’.”for interim reporting

periods ending after June 15, 2009. We do not expect the adoption of ~~SFAS~~FSP No. ~~162~~FAS 107-1 and APB 28-1 to have a material impact on our consolidated financial condition or results of operations.

In ~~May 2008,~~April 2009, the FASB issued ~~SFAS~~FSP No. ~~163, “Accounting~~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 ~~Financial Guarantee Insurance Contracts.” SFAS~~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. FSP No. ~~163 requires that an insurance enterprise recognize a claim liability prior to an event of default~~FAS 115-2 and ~~clarifies how SFAS No. 60, “Accounting and Reporting by Insurance Enterprises,” applies to financial guarantee insurance contracts. SFAS No. 163 is~~FAS 124-2 are effective for ~~financial statements issued for fiscal years,~~interim and ~~all interim~~annual reporting periods ~~within those fiscal years, beginning~~ending after ~~December~~June 15, ~~2008, except for some disclosures about the insurance enterprise’s risk-management activities.~~2009. We do not expect the adoption of ~~SFAS~~FSP No. ~~163~~FAS 115-2 and FAS 124-2 to have a material impact on our consolidated financial condition or results of operations.

In ~~June 2008,~~April 2009, the FASB issued FSP No. ~~EITF 03-6-1,~~FAS 157-4, “Determining ~~Whether Instruments Granted in Share-Based Payment~~Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are ~~Participating Securities.~~Not Orderly.” FSP ~~EITF~~ No. ~~03-6-1 addresses whether instruments granted~~FAS 157-4 provides additional guidance for estimating fair value in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method described in paragraphs 60 and 61 ofaccordance with SFAS No. ~~128, “Earnings per Share.”~~157 when the volume and level of activity for the asset or liability have significantly decreased. It also includes guidance on identifying circumstances that indicate a transaction is not orderly. FSP ~~EITF~~ No. ~~03-6-1~~FAS 157-4 is effective for ~~fiscal years,~~interim and ~~interim~~annual reporting periods ~~within those years, beginning~~ending after ~~December~~June 15, ~~2008,~~2009, and ~~all prior period earnings per share data presented should~~shall be ~~retrospectively adjusted.~~applied prospectively. We ~~are still evaluating~~do not expect the ~~impact~~adoption of FSP No. ~~EITF 03-6-1~~FAS 157-4 to have a material impact on our consolidated financial condition ~~and~~or results of operations.

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

2. Acquisition

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. Upon consolidation as of the effective date of the acquisition of the remaining 50% interest in Niigata, our balance sheet reflected an increase in cash and debt of $5.7 million and $5.8 million, respectively. The purchase price ~~has been~~was allocated ~~on a preliminary basis~~ to the assets acquired and liabilities assumed based on ~~initial~~ estimates of fair values at the date of the acquisition. ~~We continue to evaluate the initial purchase price allocation, which will be adjusted as additional information relative to the fair values of the assets and liabilities becomes available.~~ The ~~initial~~ 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 ~~condensed~~ consolidated statement of income ~~for the nine months ended September 30, 2008~~ due to immateriality. No pro forma information has been provided due to immateriality.

3. Stock-Based Compensation Plans

~~Our stock-based compensation includes~~ 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 ~~stock~~shares and other equity-based ~~awards, and~~awards. Of the 3,500,000 shares of common stock that have been authorized under the 2004 Plan, 667,119 remain available for issuance as of March 31, 2009. Our stock-based compensation is accounted for under SFAS No. 123(R), “Share-Based Payment.” Under this method, we recorded stock-based compensation ~~expense~~ as follows:


	Three Months Ended September 30,																		Three Months Ended March 31,
	2008									2007									2009								2008
	Stock			Restricted						Stock			Restricted						Stock		Restricted						Stock			Restricted
(Amounts in millions)	Options			Stock			Total			Options			Stock			Total			Options		Shares			Total			Options			Shares			Total
Stock-based compensation expense	$	0.3		$	7.3		$	7.6		$	0.7		$	6.7		$	7.4
Stock—based compensation expense																			$	0.2	$	9.9		$	10.1		$	0.5		$	6.5		$	7.0
Related income tax benefit		(0.1	)		(2.2	)		(2.3	)		(0.1	)		(2.1	)		(2.2	)		—		(3.0	)		(3.0	)		(0.2	)		(2.0	)		(2.2	)

Net stock-based compensation expense	$	0.2		$	5.1		$	5.3		$	0.6		$	4.6		$	5.2
Net stock—based compensation expense																			$	0.2	$	6.9		$	7.1		$	0.3		$	4.5		$	4.8

Nine Months Ended September 30,
2008 2007
Stock Restricted Stock Restricted
(Amounts in millions) Options Stock Total Options Stock Total
Stock-based compensation expense $ 1.2 $ 22.8 $ 24.0 $ 2.9 $ 16.3 $ 19.2
Related income tax benefit (0.3 ) (6.9 ) (7.2 ) (0.8 ) (5.1 ) (5.9 )

Net stock-based compensation expense $ 0.9 $ 15.9 $ 16.8 $ 2.1 $ 11.2 $ 13.3

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 ~~2007~~2008 Annual Report is presented in the following table:

Nine Months Ended September 30, 2008
Weighted Average Remaining Contractual Aggregate Intrinsic
Shares Exercise Price Life (in years) Value (in millions)
Number of shares under option:
Outstanding — January 1, 2008 677,193 $ 36.19
Exercised (347,322 ) 33.16
Cancelled (5,633 ) 47.47

Outstanding — September 30, 2008 324,238 $ 39.24 6.5 $ 16.1

Exercisable — September 30, 2008 209,354 $ 33.43 6.0 $ 11.6


	Three Months Ended March 31, 2009
				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		(9,467	)		25.29

Outstanding — March 31, 2009		293,633		$	40.04		6.1	$	4.8

Exercisable — March 31, 2009		250,634		$	37.73		5.9	$	4.6

No options were granted during the ~~nine~~three months ended ~~September 30, 2008~~March 31, 2009 or ~~2007.~~2008. The total fair value of stock options vested during the three months ended ~~September 30,~~March 31, 2009 and 2008 ~~and 2007~~ was ~~$1.3~~$1.6 million and ~~$2.6 million, respectively. The total fair value of stock options vested during the nine months ended September 30, 2008 and 2007 was $3.9 million and $5.4~~$2.1 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 ~~September 30, 2008,~~March 31, 2009, we had ~~$0.6~~$0.2 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 ~~September 30,~~March 31, 2009 and 2008 ~~and 2007~~ was ~~$4.9~~$0.3 million and ~~$5.6 million, respectively. The total intrinsic value of stock options exercised during the nine months ended September 30, 2008 and 2007 was $27.0 million and $21.5~~$16.9 million, respectively.

Restricted ~~Stock~~Shares —Awards of restricted ~~stock~~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 ~~stock.~~shares. We ~~have~~had unearned compensation of ~~$42.7~~$52.4 million and ~~$25.9~~$34.1 million at ~~September 30, 2008~~March 31, 2009 and December 31, ~~2007,~~2008, respectively, which is expected to be recognized over a weighted-average period of ~~less than~~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 ~~and units~~ vested during the three months ended ~~September 30,~~March 31, 2009 and 2008 ~~and 2007~~ was ~~$4.1~~$13.6 million and ~~$3.4 million, respectively. The total fair value of restricted shares and units vested during the nine months ended September 30, 2008 and 2007 was $14.9 million and $10.9~~$9.3 million, respectively.

The following table summarizes information regarding restricted ~~stock~~share activity:


	Nine Months Ended September 30, 2008					Three Months Ended March 31, 2009
				Weighted Average					Weighted Average
				Grant-Date Fair					Grant-Date Fair
	Shares			Value		Shares			Value
Number of unvested shares:
Outstanding — January 1, 2008		1,092,178		$	47.87
Outstanding — January 1, 2009							1,080,237		$	71.11
Granted		425,073			101.96		544,466			54.20
Vested		(376,612	)		39.52		(219,489	)		61.76
Cancelled		(48,951	)		66.95		(29,569	)		72.92

Unvested restricted stock — September 30, 2008		1,091,688		$	70.96
Unvested restricted shares — March 31, 2009							1,375,645		$	65.87

Unvested restricted ~~stock~~shares outstanding as of ~~September 30, 2008,~~March 31, 2009, includes ~~290,000~~a total of 540,000 shares granted in three annual grants since January 1, 2007 with performance-based vesting provisions. Performance-based restricted ~~stock vests~~shares vest upon the achievement of pre-defined performance targets, and isare issuable in common ~~shares.~~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 ~~580,000~~1,040,000 shares based on ~~pre-defined~~ performance targets. As of ~~September 30, 2008,~~March 31, 2009, we estimate vesting of ~~580,000~~800,000 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 under SFAS No. 133 and our overall risk management strategies. We enter into forward exchange contracts to ~~manage~~hedge our risks associated with transactions denominated in currencies other than the local currency of the operation engaging in the transaction. ~~Our risk management and derivatives policy specifies the conditions under which we may enter into derivative contracts.~~ At ~~September 30, 2008~~March 31, 2009 and December 31, ~~2007,~~2008, we had ~~$713.5~~$754.0 million and ~~$464.9~~$555.7 million, respectively, of ~~aggregate~~ notional amount in outstanding forward exchange contracts with third parties. At ~~September 30, 2008,~~March 31, 2009, the length of forward exchange contracts currently in place ranged from 1 day to 2721 months.

The fair market value adjustments of our forward exchange contracts are recognized directly in our current period earnings. The fair value of these outstanding forward contracts at September 30, 2008 and December 31, 2007 was a net liability of $16.5 million and a net asset of $6.6 million, respectively. Net realized and unrealized (losses) gains from the changes in the fair value of these forward contracts of $(19.0) million and $3.5 million, for the three months ended September 30, 2008 and 2007, respectively, and $(0.4) million and $5.1 million, for the nine months ended September 30, 2008 and 2007, respectively, are included in other (expense) income, net in the condensed consolidated statements of income. The significant weakening of the Euro exchange rate versus the United States (“U.S.”) Dollar during the three months ended September 30, 2008 is the primary driver of the net loss from the changes in fair value of forward exchange contracts.

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 ~~September 30, 2008~~both March 31, 2009 and December 31, ~~2007,~~2008, we had $385.0 million ~~and $395.0 million, respectively,~~ of notional amount in outstanding interest rate swaps with third parties. All interest rate swaps are 100% effective. At ~~September 30, 2008,~~March 31, 2009, the maximum remaining length of any interest rate swap contract in place was approximately 27 months. The fair value of the interest rate swap agreements was a net liability of $3.4 million and $4.1 million at September 30, 2008 and December 31, 2007, respectively. Unrealized net gains (losses) from the changes in fair value of our interest rate swap agreements, net of reclassifications, of $1.0 million and $(2.0) million, net of tax, for the three months ended September 30, 2008 and 2007, respectively, and $3.9 million and $(1.9) million, net of tax, for the nine months ended September 30, 2008 and 2007, respectively, are included in other comprehensive (loss) income.

We are exposed to risk from credit-related losses resulting from nonperformance by counterparties to our financial instruments. We perform credit evaluations of our counterparties under forward ~~exchange~~ contracts and interest rate swap agreements and expect all counterparties to meet their obligations. ~~Our counterparties consist~~If material, we would adjust the values of ~~a diversified group of financial institutions with high~~our derivative contracts for our or our counterparties’ credit ~~ratings.~~risks. We have not experienced credit losses from our counterparties.

The fair value of forward exchange contracts not designated as hedging instruments under SFAS No. 133 are summarized below:


	March 31,		December 31,
(Amounts in thousands)	2009		2008
Current derivative assets		6,245		12,172
Noncurrent derivative assets		15		264
Current derivative liabilities		13,327		15,350
Noncurrent derivative liabilities		793		314

The fair value of interest rate swaps in SFAS No. 133 cash flow hedging relationships are summarized below:


	March 31,		December 31,
(Amounts in thousands)	2009		2008
Current derivative liabilities		7,553		8,213
Noncurrent derivative liabilities		1,880		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 under SFAS No. 133 are summarized below:


	Three Months Ended March 31,
(Amounts in thousands)	2009			2008
(Loss) gain recognized in income		(8,338	)		17,915

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 March 31,
(Amounts in thousands)	2009			2008
Loss reclassified from accumulated other comprehensive income into income for settlements, net of tax		(1,268	)		(27	)
Loss recognized in other comprehensive income, net of tax		(385	)		(3,398	)

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 of Financial Instruments

Our financial instruments ~~shown below,~~ are presented at fair ~~value.~~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.

~~Beginning January 1, 2008, assets~~ Assets and liabilities recorded at fair value in our condensed consolidated balance ~~sheet~~sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Hierarchical levels, as defined by SFAS No. 157 ~~and~~are directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and ~~liabilities, are as follows:~~

~~Level I — Inputs are unadjusted, quoted prices in active markets~~liabilities. Our application of SFAS No. 157 for ~~identical assets or liabilities at the measurement date.~~

Level II — Inputs (other than quoted prices included in Level I) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.

Level III — Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

~~An asset or a liability’s categorization within the~~recurring fair value ~~hierarchy is based on the lowest level of significant input to its valuation.~~

~~The fair values of our financial instruments at September 30, 2008 were:~~

(Amounts in thousands) Total Level I Level II Level III
Derivative assets $ 2,987 $ — $ 2,987 $ —
Deferred compensation assets and other investments 15,718 7,404 — 8,314

Total assets $ 18,705 $ 7,404 $ 2,987 $ 8,314

(Amounts in thousands) Total Level I Level II Level III
Derivative liabilities $ 23,111 $ — $ 23,111 $ —
Deferred compensation liabilities 3,778 — — 3,778

Total liabilities $ 26,889 $ — $ 23,111 $ 3,778

Our Level III inputs are assets and liabilities related to investments and deferred compensation arrangements. When quoted market prices are unavailable, varying valuation techniques are used that reflect our best estimates of the assumptions used by market participants. Common inputs in valuing these assets include securities trade prices, recently reported trades or broker quotes. The value of all Level III assets was $8.3 million, $8.4 million and $9.9 million at September 30, 2008, June 30, 2008 and December 31, 2007, respectively. The value of all Level III liabilities was $3.8 million, $4.0 million, and $4.4 million at September 30, 2008, June 30, 2008 and December 31, 2007, respectively. Changes in these assets and liabilities and their related impact on our condensed consolidated statements of income for the three and nine months ended September 30, 2008 were immaterial.

measurements is 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 as defined in SFAS No. 157. The fair values of our derivatives are included above in Note 4. The fair value measurements of our equity securities are determined using quoted market prices. The fair values of our equity securities, and changes thereto, are immaterial to our condensed consolidated financial position and results of operations.

6. Debt

Debt, including capital lease obligations, consisted of:


	September 30,		December 31,		March 31,		December 31,
(Amounts in thousands)	2008		2007		2009		2008

Term Loan, interest rate of 5.22% in 2008 and 6.40% in 2007	$	551,118	$	555,379
Term Loan, interest rate of 2.77% in 2009 and 2.99% in 2008					$	548,277	$	549,697
Capital lease obligations and other		17,768		2,597		21,002		23,651


Debt and capital lease obligations		568,886		557,976		569,279		573,348
Less amounts due within one year		21,695		7,181		25,178		27,731

Total debt due after one year	$	547,191	$	550,795	$	544,101	$	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 ~~committed~~ revolving line of credit, which can be utilized to provide up to $300.0 million in letters of credit, expiring on August ~~12,~~10, 2012. We hereinafter refer to these credit facilities collectively as our ~~“Credit~~Credit Facilities.” At both ~~September 30, 2008~~March 31, 2009 and December 31, ~~2007,~~2008, we had no amounts outstanding under the revolving line of credit. We had outstanding letters of credit of ~~$95.2~~$97.6 million and ~~$115.1~~$104.2 million at ~~September 30, 2008~~March 31, 2009 and December 31, ~~2007,~~2008, respectively, which reduced borrowing capacity to ~~$304.8~~$302.4 million and ~~$284.9~~$295.8 million, respectively.

Borrowings under our Credit Facilities bear interest at a rate equal to, at our option, either (1) the base rate (which is based on the greater of the prime rate most recently announced by the administrative agent under our Credit Facilities or the Federal Funds rate plus 0.50%) or (2) 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 ~~September 30, 2008~~March 31, 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 ~~at any time~~ in whole or in part, without premium or penalty. During the three ~~and nine~~ months ended ~~September 30, 2008,~~March 31, 2009, we made scheduled repayments under our Credit Facilities of $1.4 ~~million and $4.3 million, respectively.~~million. We have scheduled repayments under our Credit Facilities of $1.4 million due in ~~the~~ each of the next four quarters.

European Letter of Credit Facility

On September 14, 2007, we entered into ana 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~~€150.0 million at any time. The initial commitment of ~~€80.0~~€80.0 million was increased to ~~€110.0~~€110.0 million ~~effective~~upon renewal in September ~~12,~~ 2008. The aggregate commitment of the European LOC Facility may be increased up to ~~€150.0~~€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 ~~€87.2~~€93.5 million ($~~122.8~~124.2 million) and ~~€35.0~~€104.0 million ($~~51.1~~145.2 million) as of ~~September 30, 2008~~March 31, 2009 and December 31, ~~2007,~~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 ~~September 30, 2008,~~March 31, 2009, the annual fees equaled 0.875% plus a fronting fee of 0.1%.

7. ~~Factoring~~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 ~~Accounts Receivable~~

~~Through our European subsidiaries, we engaged in non-recourse factoring~~both restructuring and non-restructuring costs. Restructuring charges incurred to date represent charges associated with the expected relocation of certain accounts receivable. The various agreements had different terms, including options for renewal and mutual termination clauses. Our Credit Facilities, which are described in Note 6 above, limit factoring volume to $75.0 million at any given point in time as defined by our Credit Facilities. During the fourth quarter of 2007, we gave noticeactivities from two of our ~~intent~~Flowserve Pump Division facilities, which will be closed, to terminate our major factoring agreements during 2008. All factoring agreements were terminated by the end of the third quarter of 2008. In the aggregate, the cash received from factored receivables outstanding at September 30, 2008 and December 31, 2007 totaled $0 and $63.9 million, respectively,other existing

Flowserve Pump Division facilities. Non-restructuring charges, which represent the ~~factor’s purchase~~majority of $0the Realignment Program, are charges incurred to improve operating efficiency and ~~$68.4~~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 is expected to include costs related to employee relocation, asset relocation, vacant facility costs (i.e., taxes and insurance) and other charges.

Restructuring charges incurred by Flowserve Pump Division and total restructuring charges expected to be incurred by Flowserve Pump Division are as follows:


			Contract		Asset write-
(Amounts in thousands)	Severance		termination		downs		Other		Total
Three Months ended March 31, 2009 (1)
COS	$	1,663	$	—	$	121	$	—	$	1,784
SG&A		215		—		—		—		215

	$	1,878		—	$	121		—	$	1,999


Total Expected Restructuring Charges for 2009 (2)
COS	$	1,761	$	600	$	5,620	$	2,424	$	10,405
SG&A		215		—		—		—		215

	$	1,976	$	600	$	5,620	$	2,424	$	10,620


(1)		Charges for the three months ended March 31, 2009 are equal to charges incurred from inception of the program as the program began in 2009.

(2)		As the execution of the Realignment Program is in its early stages, total charges incurred could vary from total charges expected to be incurred, which represent management’s best estimate based on initiatives identified to date. Accordingly, actual results may differ materially from these estimates.

We established a restructuring reserve of $1.9 million in the first quarter of ~~our receivables, respectively.~~2009. 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
Cash Expenditures		—		—		—		—

Balance at March 31, 2009	$	1,878	$	—	$	—	$	1,878

Total Realignment Program Charges

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

Three Months Ended March 31, 2009


							Subtotal -
	Flowserve		Flow		Flow		Reportable				Consolidated
(Amounts in millions)	Pump		Control		Solutions		Segments		All Other		Total
Restructuring Charges
COS	$	1.8	$	—	$	—	$	1.8	$	—	$	1.8
SG&A		0.2		—		—		0.2		—		0.2

	$	2.0	$	—	$	—	$	2.0	$	—	$	2.0


Non-Restructuring Charges
COS	$	1.0	$	0.2	$	3.1	$	4.3	$	—	$	4.3
SG&A		0.4		0.3		2.7		3.4		0.2		3.6

	$	1.4	$	0.5	$	5.8	$	7.7	$	0.2	$	7.9


Total Realignment Program Charges
COS	$	2.8	$	0.2	$	3.1	$	6.1	$	—	$	6.1
SG&A		0.6		0.3		2.7		3.6		0.2		3.8

	$	3.4	$	0.5	$	5.8	$	9.7	$	0.2	$	9.9

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	$	10.4	$	—	$	—	$	10.4	$	—	$	10.4
SG&A		0.2		—		—		0.2		—		0.2

	$	10.6	$	—	$	—	$	10.6	$	—	$	10.6


Total Expected Non-restructuring Charges
COS	$	3.7	$	7.6	$	3.2	$	14.5	$	—	$	14.5
SG&A		5.9		2.3		3.0		11.2		0.2		11.4

	$	9.6	$	9.9	$	6.2	$	25.7	$	0.2	$	25.9


Expected Total Realignment Program Charges (1)
COS	$	14.1	$	7.6	$	3.2	$	24.9	$	—	$	24.9
SG&A		6.1		2.3		3.0		11.4		0.2		11.6

	$	20.2	$	9.9	$	6.2	$	36.3	$	0.2	$	36.5


(1)		As the execution of the Realignment Program is in its early stages, total charges incurred could vary from total charges expected to be incurred, which represent management’s best estimate based on initiatives identified to date. The amounts disclosed above do not include approximately $4 million anticipated to be incurred by Flow Solutions Division for initiatives that are currently under consideration. Accordingly, actual results may differ materially from these estimates.

The majority of the remaining charges are expected to be incurred in the second quarter.

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:


	September 30,			December 31,				March 31,			December 31,
(Amounts in thousands)	2008			2007				2009			2008
Raw materials	$	254,571		$	221,265			$	260,353		$	241,953
Work in process		675,491			499,656				682,705			635,490
Finished goods		271,235			246,832				261,344			264,746
Less: Progress billings		(277,413	)		(223,980	)			(263,696	)		(250,289	)
Less: Excess and obsolete reserve		(64,595	)		(63,574	)			(56,673	)		(57,288	)

Inventories, net	$	859,289		$	680,199			$	884,033		$	834,612

9. Equity Method Investments

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

								Three Months Ended March 31,
(Amounts in thousands)								2009			2008 (1)
Revenues								$	60,767		$	110,339
Gross profit									23,128			32,917
Income before provision for income taxes									16,426			22,551
Provision for income taxes									(5,216	)		(6,576	)

Net income								$	11,210		$	15,975

~~9. Equity Method Investments~~

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

Three Months Ended September 30,
(Amounts in thousands) 2008 (1) 2007
Revenues $ 71,365 $ 102,805
Gross profit 16,318 23,695
Income before provision for income taxes 11,481 16,307
Provision for income taxes (3,101 ) (5,586 )

Net income $ 8,380 $ 10,721

Nine Months Ended September 30,
(Amounts in thousands) 2008 (1) 2007
Revenues $ 259,187 $ 281,207
Gross profit 70,020 71,041
Income before provision for income taxes 49,788 46,874
Provision for income taxes (14,776 ) (14,820 )

Net income $ 35,012 $ 32,054


(1)		As discussed in Note 2, 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. As a result, Niigata’s income statement information presented herein includes only the first two months of 2008.

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

~~Basic~~ As discussed in Note 1, effective January 1, 2009, we adopted FSP No. EITF 03-6-1, “Participating Securities and the Two-Class Method under FASB Statement No. 128.” 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. As concluded in FSP No. EITF 03-6-1, unvested restricted share awards that earn non-forfeitable dividend rights qualify as participating securities under SFAS No. 128, “Earnings per Share,” 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 and weighted average shares for calculating basic net earnings per common share.

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


	Three Months Ended September 30,					Three Months Ended March 31,
(Amounts in thousands, except per share data)	2008		2007			2009		2008
Net earnings	$	117,049	$	63,055
Net earnings of Flowserve Corporation						$	92,305	$	88,065
Dividends on restricted shares not expected to vest							8		11

Denominator for basic earnings per share — weighted average shares		56,726		56,421
Earnings attributable to common and participating shareholders						$	92,313	$	88,076

					��
Weighted average shares:
Common stock							55,519		56,840
Participating securities							445		585

Denominator for basic earnings per common share							55,964		57,425
Effect of potentially dilutive securities		554		799			361		392

Denominator for diluted earnings per share — weighted average shares		57,280		57,220
Denominator for diluted earnings per common share							56,325		57,817

Earnings per share:

Earnings per common share:
Basic	$	2.06	$	1.12		$	1.65	$	1.53
Diluted		2.04		1.10			1.64		1.52

Nine Months Ended September 30,
(Amounts in thousands, except per share data) 2008 2007
Net earnings $ 327,981 $ 159,874

Denominator for basic earnings per share — weighted average shares 56,843 56,401
Effect of potentially dilutive securities 646 849

Denominator for diluted earnings per share — weighted average shares 57,489 57,250

Earnings per share:
Basic $ 5.77 $ 2.83
Diluted 5.71 2.79
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 ~~both~~ the three ~~and nine~~ months ended both ~~September 30,~~March 31, 2009 and 2008, ~~and 2007,~~ we had no options to purchase common stock that were excluded from the ~~computations~~computation of potentially dilutive securities. ~~For both~~

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 for the three ~~and nine~~ months ended ~~both September 30,~~March 31, 2008 ~~and 2007, restricted shares excluded from the computations were less than 0.1% of potentially dilutive securities.~~are as follows:


	Basic			Diluted
As previously reported	$	1.55		$	1.53
Effect of adoption of FSP No. EITF 03-6-1		(0.02	)		(0.01	)

As retrospectively adjusted	$	1.53		$	1.52

11. Legal Matters and Contingencies

Asbestos-Related Claims

We are a defendant in a large number of pending lawsuits (which include, in many cases, multiple claimants) that seek to recover damages for personal injury allegedly caused by exposure to asbestos-containing products manufactured and/or distributed by us in the past. While the aggregate number of asbestos-related claims ~~against us~~ has declined in recent years, there can be no assurance that this trend will ~~continue.~~continue, and the average cost per claim has increased. Asbestos-containing materials incorporated into any such products ~~was~~were primarily encapsulated and used ~~only~~ 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 — Appeal of Dismissed Class Action Case; Derivative Case Dismissals

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 court denied the plaintiffs’ motion for class certification and granted summary judgment in favor of the defendants on all claims. The plaintiffs have appealed both rulings to the federal Fifth Circuit Court of Appeals. The appellate briefing is complete and oral argument was held on February 2, 2009 and, to date, there have been no further developments. We will defend vigorously this appeal or any other effort by the plaintiffs to overturn the court’s denial of class certification or its entry of judgment in favor of us and the other defendants.

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~~Securities Exchange Commission (“SEC”) filings the material details of settlements with the SEC, the Department of Justice (the “DOJ”) and the Dutch authorities in 2008 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 ismay 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~~us 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.~~United States (“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 ~~have~~ conducted a voluntary systematic process to further review, validate and voluntarily disclose export violations discovered as part of this review process. We ~~have~~ completed ~~the global site visits scheduled as part of this voluntary disclosure process, and we are nearing completion of~~ our comprehensive disclosures to the appropriate U.S. government regulatory authorities at the end of 2008, although these disclosures may ~~continue to~~ be refined or ~~supplemented after our initial submittal.~~supplemented. Based on our review of the data collected, ~~to date,~~ 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 ~~apparently~~ 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 ~~change~~revision as ~~our voluntary reporting process is finalized and~~ 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. Although companies making voluntary export violation disclosures, as we are currently doing, have historically received reduced penalties and certain mitigating credits, legislation enacted on October 16, 2007 increased the maximum civil penalty for certain export control violations (assessed on a per-shipment basis) to the greater of $250,000 or twice the value of the transaction. While the Department of Commerce has stated that companies, such as us, that had initiated voluntary self-disclosures prior to the enactment of this legislation generally would not be subjected to enhanced penalties retroactively, we are unable to determine at this time how other U.S. government agencies will apply this enhanced penalty legislation. Accordingly, weWe 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.

Other

We are currently involved as a potentially responsible party at ~~four~~two 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 ~~be less than $100,000.~~

In addition to the above public disposal sites, we received a Clean Up Notice on September 17, 2007 with respect to a site in Australia. The site was used for disposal of spent foundry sand. A risk assessment of the site is currently underway, but it will be several months before the assessment is completed. We currently believe that additional remediation costs at the site will not be material.

We are also a defendant in ~~several~~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 ~~operating~~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.

1415

12. Retirement and Postretirement Benefits

Components of the net periodic cost for retirement and postretirement benefits for the three months ended ~~September 30,~~March 31, 2009 and 2008 ~~and 2007~~ were as follows:


	U.S.						Non-U.S.						Postretirement						U.S.						Non-U.S.						Postretirement
	Defined Benefit Plans						Defined Benefit Plans						Medical Benefits						Defined Benefit Plans						Defined Benefit Plans						Medical Benefits
(Amounts in millions)	2008			2007			2008			2007			2008			2007			2009			2008			2009			2008			2009			2008
Service cost	$	4.3		$	4.9		$	0.9		$	1.0		$	0.1		$	—		$	4.2		$	4.4		$	0.9		$	0.9		$	—		$	—
Interest cost		4.5			4.1			3.4			2.9			0.6			1.0			4.9			4.4			2.9			3.5			0.7			0.9
Expected return on plan assets		(5.1	)		(4.2	)		(1.4	)		(1.8	)		—			—			(5.6	)		(4.7	)		(1.0	)		(1.4	)		—			—
Amortization of unrecognized net loss		1.0			1.7			0.1			0.4			—			0.3
Amortization of unrecognized net loss (gain)																				1.6			1.1			0.6			0.1			(0.6	)		—
Amortization of prior service benefit		(0.3	)		(0.3	)		—			—			(0.6	)		(1.1	)		(0.3	)		(0.3	)		—			—			(0.5	)		(0.6	)

Net periodic cost recognized	$	4.4		$	6.2		$	3.0		$	2.5		$	0.1		$	0.2
Net periodic cost (gain) recognized																			$	4.8		$	4.9		$	3.4		$	3.1		$	(0.4	)	$	0.3

~~Components of the net periodic cost for retirement and postretirement benefits for the nine months ended September 30, 2008 and 2007 were as follows:~~

U.S. Non-U.S. Postretirement
Defined Benefit Plans Defined Benefit Plans Medical Benefits
(Amounts in millions) 2008 2007 2008 2007 2008 2007
Service cost $ 12.9 $ 12.3 $ 2.7 $ 3.1 $ 0.1 $ 0.1
Interest cost 13.4 12.3 10.3 8.7 2.6 2.9
Expected return on plan assets (15.2 ) (12.8 ) (4.3 ) (5.5 ) — —
Amortization of unrecognized net loss 3.2 4.6 0.3 1.3 0.1 0.8
Amortization of prior service benefit (1.0 ) (1.0 ) — — (1.9 ) (3.2 )

Net periodic cost recognized $ 13.3 $ 15.4 $ 9.0 $ 7.6 $ 0.9 $ 0.6

See additional discussion of our retirement and postretirement benefits in Note 1213 to our consolidated financial statements included in our ~~2007~~2008 Annual Report.

13. Shareholders’ Equity

On February ~~26, 2008,~~23, 2009, our Board of Directors authorized an increase in our quarterly cash dividend to ~~$0.25~~$0.27 per share from ~~$0.15~~$0.25 per share, effective for the first quarter of ~~2008.~~2009. Generally, our dividend date-of-record is in the last month of the quarter, and the dividend is paid the following month.

14. Income Taxes

For the three months ended ~~September 30, 2008,~~March 31, 2009, we earned ~~$144.0~~$128.8 million before taxes and provided for income taxes of ~~$26.9~~$36.0 million, resulting in an effective tax rate of ~~18.7%~~27.9%. The effective tax rate varied from the U.S. federal statutory rate for the three months ended ~~September 30, 2008~~March 31, 2009 primarily due to the net impact of foreign operations, as well as a net tax benefit of $12.4 million arising from our permanent reinvestment in foreign subsidiaries, the release of certain reserves related to the closure of the statute of limitations in various jurisdictions and repatriation of cash.operations.

For the ~~nine~~three months ended ~~September 30,~~March 31, 2008, we earned ~~$430.2~~$125.8 million before taxes and provided for income taxes of ~~$102.2~~$37.1 million, resulting in an effective tax rate of 23.8%. The effective tax rate varied from the U.S. federal statutory rate for the nine months ended September 30, 2008 primarily due to the net impact of foreign operations, a favorable tax ruling in Luxembourg, our permanent reinvestment in foreign subsidiaries, the release of certain reserves related to the closure of the statute of limitations in various jurisdictions and repatriation of cash.

For the three months ended September 30, 2007, we earned $95.0 million before taxes and provided for income taxes of $32.0 million, resulting in an effective tax rate of 33.7%. For the nine months ended September 30, 2007, we earned $232.0 million before taxes and provided for income taxes of $72.2 million, resulting in an effective tax rate of 31.1%29.5%. The effective tax rate varied from the U.S. federal statutory rate for the three ~~and nine~~ months ended ~~September 30, 2007~~March 31, 2008 primarily due to the net impact of foreign ~~operations, changes in tax law, changes in valuation allowances and net favorable results from various tax audits.~~

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

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

As of ~~September 30, 2008,~~March 31, 2009, the amount of unrecognized tax benefits has decreased by ~~$11.8~~$2.2 million ~~as compared with~~from December 31, ~~2007,~~2008, due primarily ~~due~~ to ~~the closure of the statute of limitations in various jurisdictions, including the tax years 2002 through 2004 in the U.S.~~currency translation adjustments. With limited exception, we are no longer subject to U.S. federal, state and local income tax audits for years through 2004 or non-U.S. income tax audits for years through ~~2002.~~2003. We are currently under examination for various years in Argentina, France, Germany, India, Italy, the ~~U.S., Italy, Canada, Venezuela~~United States and ~~Argentina.~~Venezuela.

It is reasonably possible that within the next 12 months the effective tax rate will be impacted by the resolution of some or all of the matters audited by various taxing authorities. It is also reasonably possible that we will have the statute of limitations close in various taxing jurisdictions within the next 12 months. As such, we estimate we could record a reduction in our tax expense of up to approximately ~~$15 million within the next 12 months.~~$11 million.

15. Segment Information

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

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

Flowserve Pump Division (“FPD”);

	•		~~Flowserve Pump Division (“FPD”);~~

	•		Flow Control Division (“FCD”); and

	•		Flow Solutions Division (“FSD”).

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

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

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

Three Months Ended ~~September 30, 2008~~March 31, 2009


							Subtotal -													Subtotal -
	Flowserve		Flow		Flow		Reportable					Consolidated		Flowserve		Flow		Flow		Reportable					Consolidated
(Amounts in thousands)	Pump		Control		Solutions		Segments		All Other			Total		Pump		Control		Solutions		Segments		All Other			Total
Sales to external customers	$	638,767	$	363,417	$	149,904	$	1,152,088	$	1,504		$	1,153,592	$	598,883	$	296,009	$	128,411	$	1,023,303	$	1,423		$	1,024,726
Intersegment sales		398		1,778		20,966		23,142		(23,142	)		—		719		1,146		15,314		17,179		(17,179	)		—
Segment operating income		99,334		60,963		32,708		193,005		(29,365	)		163,640		103,577		47,583		20,699		171,859		(24,722	)		147,137

Three Months Ended March 31, 2008

																				Subtotal -
														Flowserve		Flow		Flow		Reportable					Consolidated
(Amounts in thousands)														Pump		Control		Solutions		Segments		All Other			Total
Sales to external customers														$	560,536	$	298,801	$	132,604	$	991,941	$	1,378		$	993,319
Intersegment sales															576		1,517		17,990		20,083		(20,083	)		—
Segment operating income															78,484		43,131		26,923		148,538		(29,221	)		119,317

~~Three Months Ended September 30, 2007~~

Subtotal -
Flowserve Flow Flow Reportable Consolidated
(Amounts in thousands) Pump Control Solutions Segments All Other Total
Sales to external customers $ 496,171 $ 293,352 $ 127,671 $ 917,194 $ 2,053 $ 919,247
Intersegment sales 278 1,689 13,035 15,002 (15,002 ) —
Segment operating income 68,895 41,101 30,413 140,409 (32,180 ) 108,229

~~Nine Months Ended September 30, 2008~~

Subtotal -
Flowserve Flow Flow Reportable Consolidated
(Amounts in thousands) Pump Control Solutions Segments All Other Total
Sales to external customers $ 1,831,936 $ 1,030,811 $ 437,623 $ 3,300,370 $ 4,146 $ 3,304,516
Intersegment sales 1,564 4,931 57,871 64,366 (64,366 ) —
Segment operating income 281,153 166,920 96,562 544,635 (90,724 ) 453,911

~~Nine Months Ended September 30, 2007~~

Subtotal -
Flowserve Flow Flow Reportable Consolidated
(Amounts in thousands) Pump Control Solutions Segments All Other Total
Sales to external customers $ 1,439,006 $ 844,071 $ 365,915 $ 2,648,992 $ 4,333 $ 2,653,325
Intersegment sales 1,294 4,652 38,458 44,404 (44,404 ) —
Segment operating income 175,871 118,583 81,417 375,871 (103,310 ) 272,561

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 ~~2007~~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 more than 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 significantly invested 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, ~~includes~~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.

We experienced favorable conditions in ~~2007~~much of 2008 in our key industries, which ~~have~~softened moderately in the last quarter of 2008 and continued through the first ~~nine~~two months of ~~2008.~~2009. We still have not experienced a significant level of cancellations in our backlog. The overall demand ~~growth from developing markets~~for our products and ~~the optimization and refurbishment needs from mature markets have increased~~services reflects continuing investments in oil and gas, capacity expansion projects in power generation, incremental capacity expansion projects in desalination, chemical manufacturing expansion in developing regions and ~~water infrastructure. Along with the~~aftermarket opportunities, including optimization projects of continuing operations. Overall global demand growth in ~~industrialization~~our key industries was impacted by moderate growth in the developing markets ~~this has increased~~offset by slight declines in the demand for primary chemicals, which has driven investment growth in chemical manufacturing facilities, particularly in Asia and the Middle East. In the oil and gas industry, advancements in recovery and processing technologies have created opportunities in heavy oil processing, deep water production and natural gas liquefaction and regasification, where our products are well positioned. In the power industry, we provide products and services for all forms of power generation, and we are one of a limited number of manufacturers with existing N-stamp certifications required to support the nuclear power industry.mature markets.

The global demand growth over the past several years has provided us the opportunity to increase our installed base of new products and drive recurring aftermarket business. We continue to ~~execute~~build on our ~~strategy~~geographic breadth through our QRC network with the goal to ~~increase~~be positioned as near to our ~~presence~~customers as possible for service and support in ~~all regions of the global market~~order to capture this important aftermarket ~~business through our installed base, as well as to secure new capital projects and process plant expansions.~~business. Although we have experienced strong demand for our products and services in recent periods, we face challenges affecting many companies in our industry with a significant multinational presence, such as economic, political and other risks.

We currently employ approximately 16,000 employees in more than 55 countries who are focused on executing our key strategic objectives across the globe. We continue to build on our geographic breadth through the implementation of additional Quick Response Centers (“QRCs”) 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. Along with ensuring that we have the local capability to sell, install and service our equipment in remote regions, it ~~becomes~~is equally imperative to continuously improve our global operations. ~~Our~~We continue to expand our global supply chain capability ~~is being expanded~~ to meet global customer demands and ensure the quality and timely delivery of our products. Significant efforts are underway to ~~reduce~~improve the supply ~~base and drive~~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 ~~and~~initiative, which includes lean manufacturing, ~~initiatives are~~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. ~~These programs are~~This program is a key factor in our margin expansion plans.

~~Recent~~ Ongoing disruptions in global financial markets and banking systems are making credit and capital markets ~~more~~ difficult for companies to access, and are generally driving up the costs of newly raised debt. We ~~have assessed~~continue to assess the implications of these factors on our current business and ~~determined~~the state of the global economy. While we believe that these financial market disruptions have not directly had a ~~significant~~disproportionate adverse impact on our financial position, results of operations or liquidity as of ~~September 30, 2008. However,~~March 31, 2009, continuing volatility in the credit and capital markets could potentially materially impair our and our customers’ ability to access these markets and increase associated ~~costs, and there~~costs. There can be no assurance that we will not be materially adversely affected by these financial market disruptions and the global economic recession as economic events and circumstances continue to evolve. ~~We have no scheduled loans due to mature in 2008, and only~~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 70% of our term debt was at fixed rates at ~~September 30, 2008.~~March 31, 2009. Our revolving line of credit and our European ~~LOC~~Letter of Credit Facility are committed and are held by a diversified group of financial ~~institutions~~institutions. Our cash balance decreased by $270.5 million to $201.5 million as of March 31, 2009 as compared with ~~high credit ratings, principally Bank of America. Further, during~~December 31, 2008. The cash draw was anticipated based on planned significant cash uses in the three months ended ~~September 30, 2008, we increased our cash by $16.7~~March 31, 2009, including approximately $115 million in long-term and broad-based annual incentive program payments related to ~~$153.4 million, after taking into account $100.0 million of share repurchases, $34.8~~prior period performance, $44.3 million in capital expenditures, ~~and $14.4~~$14.0 million in ~~quarterly~~ dividend ~~payments.~~payments, $7.1 million of share

repurchases and the funding of increased working capital requirements. 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,~~March 31, 2009 and 2008 ~~and 2007~~

Our operating income benefitted from strong international currencies in 2007 and through the first nine months of 2008. However, recent strength of the U.S. Dollar could reduce the benefit or result in losses in operating income related to currency in future periods.

As discussed in Note 2 to our condensed consolidated financial statements included in this Quarterly Report, FPD acquired the remaining 50% interest in 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. No pro forma information has been provided 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 incurred to date represent the expected relocation of activities from two of our FPD facilities, which will be closed, to other existing FPD facilities. 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. All expenses under the Realignment Program are expected to be recognized during 2009. 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 months ended March 31, 2009:

Three Months Ended March 31, 2009


							Subtotal -
	Flowserve		Flow		Flow		Reportable				Consolidated
(Amounts in millions)	Pump		Control		Solutions		Segments		All Other		Total
Restructuring Charges
COS	$	1.8	$	—	$	—	$	1.8	$	—	$	1.8
SG&A		0.2		—		—		0.2		—		0.2
					��
	$	2.0	$	—	$	—	$	2.0	$	—	$	2.0


Non-Restructuring Charges
COS	$	1.0	$	0.2	$	3.1	$	4.3	$	—	$	4.3
SG&A		0.4		0.3		2.7		3.4		0.2		3.6

	$	1.4	$	0.5	$	5.8	$	7.7	$	0.2	$	7.9


Total Realignment Program Charges
COS	$	2.8	$	0.2	$	3.1	$	6.1	$	—	$	6.1
SG&A		0.6		0.3		2.7		3.6		0.2		3.8

	$	3.4	$	0.5	$	5.8	$	9.7	$	0.2	$	9.9

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	$	10.4	$	—	$	—	$	10.4	$	—	$	10.4
SG&A		0.2		—		—		0.2		—		0.2

	$	10.6	$	—	$	—	$	10.6	$	—	$	10.6


Total Expected Non-restructuring Charges
COS	$	3.7	$	7.6	$	3.2	$	14.5	$	—	$	14.5
SG&A		5.9		2.3		3.0		11.2		0.2		11.4

	$	9.6	$	9.9	$	6.2	$	25.7	$	0.2	$	25.9


Expected Total Realignment Program Charges (1)
COS	$	14.1	$	7.6	$	3.2	$	24.9	$	—	$	24.9
SG&A		6.1		2.3		3.0		11.4		0.2		11.6

	$	20.2	$	9.9	$	6.2	$	36.3	$	0.2	$	36.5


(1)		As the execution of the Realignment Program is in its early stages, total charges incurred could vary from total charges expected to be incurred, which represent management’s best estimate based on initiatives identified to date. The amounts disclosed above do not include approximately $4 million anticipated to be incurred by FSD for initiatives that are currently under consideration. Accordingly, actual results may differ materially from these estimates.

The majority of the remaining charges are expected to be incurred in the second quarter.

Consolidated Results

Bookings, Sales and Backlog


	Three Months Ended September 30,				Three Months Ended March 31,
(Amounts in millions)	2008		2007		2009		2008

Bookings	$	1,373.5	$	1,061.0	$	968.2	$	1,429.3
Sales		1,153.6		919.2		1,024.7		993.3

Nine Months Ended September 30,
(Amounts in millions) 2008 2007
Bookings $ 4,113.4 $ 3,203.1
Sales 3,304.5 2,653.3

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, 2008 increased~~March 31, 2009 decreased by ~~$312.5~~$461.1 million, or ~~29.5%~~32.3%, as compared with the same period in ~~2007.~~2008. The ~~increase~~decrease includes negative currency ~~benefits~~effects of approximately ~~$53~~$102 million. The ~~increase~~decrease is also attributable to ~~strength~~decreased bookings across our divisions, primarily related to decreases in the oil and gas and general industries, ~~especially in FPD, primarily in Europe, the Middle East~~ and ~~Africa (“EMA”), as well as continued strength~~reflects our customers’ responses to concerns regarding ongoing disruptions in the ~~power~~credit and ~~chemical industries, especially~~capital markets, global economic conditions, declines in ~~FCD,~~oil and ~~$22.2~~gas prices and the re-bidding of certain projects, thereby delaying expected bookings. The decrease is also attributable to $74.0 million of thruster orders recorded in ~~bookings provided by Niigata.~~the first quarter of 2008 that did not recur.

~~Bookings~~ Sales for the ~~nine~~three months ended ~~September 30, 2008~~March 31, 2009 increased by ~~$910.3~~$31.4 million, or ~~28.4%~~3.2%, as compared with the same period in ~~2007.~~2008. The increase includes negative currency ~~benefits~~effects of approximately ~~$257~~$101 million. The increase is attributable to increased sales by FPD, which is related to the strength in ~~the chemical and power industries across all of our divisions and~~bookings during 2008. Original equipment sales showed continued strength, ~~in the oil and gas and general industries in FPD and FCD, as well as $47.7 million in bookings provided by Niigata.~~

~~Sales for the three months ended September 30, 2008 increased by $234.4 million, or 25.5%~~increasing approximately 5%, as compared with the same period in ~~2007. The increase includes currency benefits of approximately $47 million. The increase is attributable to strength~~2008, while aftermarket sales were comparable with the same period in 2008. Original equipment sales growth reflects execution against a strong order backlog, which arose predominantly from growth in the oil and gas ~~market, especially in FPD, primarily in EMA~~ and ~~Asia Pacific, including $18.0 million in sales provided by Niigata, and strength across~~power industries over the ~~power and chemical markets in FCD.~~

Sales for the nine months ended September 30, 2008 increased by $651.2 million, or 24.5%, as compared with the same period in 2007. The increase includes currency benefits of approximately $202 million. The increase is attributable to strength in the oil and gas market in FPD, primarily in EMA and Asia Pacific, including $56.2 million in sales provided by Niigata, and growth in the power and chemical markets, especially in FCD.

past two years. Net sales to international customers, including export sales from the U.S., were approximately ~~72% and 69%~~67% of consolidated sales for the three ~~and nine~~ months ended ~~September 30, 2008, respectively,~~March 31, 2009, as compared with approximately 66% ~~and 65%~~ for the same ~~periods~~period in ~~2007, respectively.~~2008.

Backlog represents the ~~aggregate~~ value of aggregate uncompleted customer orders. Backlog of ~~$3,076.0~~$2,671.6 million at ~~September 30, 2008 increased~~March 31, 2009 decreased by ~~$799.4~~$153.5 million, or ~~35.1%~~5.4%, as compared with December 31, ~~2007.~~2008. Currency effects provided a decrease of approximately ~~$95~~$79 million. The ~~net increase reflects growth~~remaining decrease in backlog is a result of the impact of cancellations of $14.8 million of orders ~~for large engineered products, which naturally have longer lead times, and $92.5 million attributable to~~booked during the ~~acquisition of Niigata.~~prior year.

1920

Gross Profit and Gross Profit Margin


	Three Months Ended September 30,						Three Months Ended March 31,
(Amounts in millions)	2008			2007			2009			2008

Gross profit	$	404.9		$	313.6		$	367.8		$	345.8
Gross profit margin		35.1	%		34.1	%		35.9	%		34.8	%

Nine Months Ended September 30,
(Amounts in millions) 2008 2007
Gross profit $ 1,168.7 $ 881.5
Gross profit margin 35.4 % 33.2 %

Gross profit for the three months ended ~~September 30, 2008~~March 31, 2009 increased by ~~$91.3~~$22.0 million, or ~~29.1%~~6.4%, as compared with the same period in ~~2007.~~2008. Gross profit margin for the three months ended ~~September 30, 2008~~March 31, 2009 of ~~35.1%~~35.9% increased from ~~34.1%~~34.8% for the same period in ~~2007.~~2008. The increase is primarily attributable to FCD, whose gross profit margin increased due primarily to improved pricing, as well as FPD, whose gross profit margin increased due to original equipment pricing implemented in 2007 and reduced warranty costs as a percentage of sales. The improvement is also attributable to CIP initiatives and increased sales in FPD, which favorably impacts our absorption of fixed ~~manufacturing costs. These improvements were slightly~~costs, improved pricing on orders booked in late 2007 and early 2008 and cost savings achieved through our CIP and supply chain initiatives, and is partially offset by $6.1 million of charges related to our Realignment Program and a sales ~~shift toward original equipment during~~mix shift. Additionally, gross profit margin for the ~~period for each~~three months ended March 31, 2009 was favorably impacted by the production of ~~our divisions. While both original equipment and aftermarket sales~~specialty pumps, which had a higher margin. As a result of increased original equipment ~~growth exceeded that of~~sales and relatively flat aftermarket ~~growth during the period. As a result,~~sales, original equipment sales increased to approximately ~~67%~~63% of total sales, as compared with approximately ~~63%~~62% of total sales ~~for~~in the same period in ~~2007. Original equipment generally carries a lower margin than aftermarket. The impact of metal price increases and transportation fuel surcharges have been minimized through supply chain initiatives.~~

Gross profit for the nine months ended September 30, 2008 increased by $287.2 million, or 32.6%, as compared with the same period in 2007. Gross profit margin for the nine months ended September 30, 2008 of 35.4% increased from 33.2% for the same period in 2007. The increase is primarily attributable to FPD, whose gross profit margin increased due primarily to improved original equipment pricing implemented in 2007, CIP initiatives and reduced warranty costs as a percentage of sales. Additionally, gross profit margin was favorably impacted by specialty pumps, which had a higher margin, produced during the second and third quarters of 2008. These improvements were slightly offset by a sales shift toward original equipment during the period for each of our divisions. While both original equipment and aftermarket sales increased, original equipment growth exceeded that of aftermarket growth during the period. As a result, original equipment sales increased to approximately 65% of total sales as compared with approximately 63% of total sales for the same period in 2007. Original equipment generally carries a lower margin than aftermarket.

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

Three Months Ended September 30,
(Amounts in millions) 2008 2007
SG&A expense $ 244.7 $ 210.1
SG&A expense as a percentage of sales 21.2 % 22.9 %


	Three Months Ended March 31,
(Amounts in millions)	2009			2008

SG&A	$	225.3		$	232.5
SG&A as a percentage of sales		22.0	%		23.4	%

SG&A for the three months ended March 31, 2009 decreased by $7.2 million, or 3.1%, as compared with the same period in 2008. Currency effects yielded a decrease of approximately $18 million, which is partially offset by $3.8 million of charges related to the Realignment Program, a decrease in selling and marketing-related expenses and other individually immaterial items. SG&A as a percentage of sales for the three months ended March 31, 2009 improved 140 basis points as compared with the same period in 2008. The improvement is primarily attributable to leverage from higher sales.

Net Earnings from Affiliates

	Three Months Ended March 31,
(Amounts in millions)	2009			2008

Net earnings from affiliates	$	4.7		$	6.0

Nine Months Ended September 30,
(Amounts in millions) 2008 2007
SG&A expense $ 728.7 $ 623.3
SG&A expense as a percentage of sales 22.1 % 23.5 %

SG&A for the three months ended September 30, 2008 increased by $34.6 million, or 16.5%, as compared with the same period in 2007. Currency effects yielded an increase of approximately $8 million. The increase in SG&A is primarily attributable to an $18.4 million increase in other employees related costs due to annual and long-term incentive compensation plans, including equity compensation, arising from improved performance and a higher stock price as of the date of grant and annual merit increases. The increase is also attributable to an $18.3 million increase in selling and marketing-related expenses in support of increased bookings and sales and overall business growth, partially offset by an $11.2 million decrease in legal fees and expenses due to expenses incurred in 2007 that did not recur. SG&A as a percentage of sales for the three months ended September 30, 2008 of 21.2% improved 170 basis points as compared with the same period in 2007. The improvement is primarily attributable to leverage from higher sales, as well as ongoing efforts to contain costs.

SG&A for the nine months ended September 30, 2008 increased by $105.4 million, or 16.9%, as compared with the same period in 2007. Currency effects yielded an increase of approximately $34 million. The increase in SG&A is primarily attributable to a $59.4 million increase in selling and marketing-related expenses in support of increased bookings and sales and overall business growth. The increase is also attributable to a $50.6 million increase in other employees related costs due to annual and long-term incentive compensation plans, including equity compensation, arising from improved performance and a higher stock price as of the date of grant and annual merit increases, partially offset by a $19.8 million decrease in legal fees and expenses due to expenses incurred in 2007 that did not recur. SG&A as a percentage of sales for the nine months ended September 30, 2008 of 22.1% improved 140 basis points as compared with the same period in 2007. The improvement is primarily attributable to leverage from higher sales, as well as ongoing efforts to contain costs.

~~Net Earnings from Affiliates~~

Three Months Ended September 30,
(Amounts in millions) 2008 2007
Net earnings from affiliates $ 3.4 $ 4.8

Nine Months Ended September 30,
(Amounts in millions) 2008 2007
Net earnings from affiliates $ 13.9 $ 14.3

Net earnings from affiliates for the three months ended ~~September 30, 2008~~March 31, 2009 decreased by ~~$1.4~~$1.3 million, or ~~29.2%~~21.7%, as compared with the same period in ~~2007.~~2008. Net earnings from affiliates represent our joint venture interests in Asia Pacific and the Middle East. The decrease in earnings is primarily attributable to ~~a slight reduction in income in FSD and~~an FCD joint ~~ventures~~venture in India, which was driven by a decline in oil and gas project sales, as well as the ~~impact of the~~ consolidation of Niigata beginning in ~~the first quarter of 2008 when we purchased the remaining 50% interest.~~

Net earnings from affiliates for the nine months ended September 30, 2008 decreased by $0.4 million, or 2.8%, as compared with the same period in 2007. The decrease in earnings is primarily attributable to the impact of the consolidation of Niigata in the first quarter of 2008 when we purchased the remaining 50% interest.

March 2008. 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, resulting in only two months of equity earnings from Niigata included herein.~~accounting.

Operating Income and Operating Margin


	Three Months Ended September 30,						Three Months Ended March 31,
(Amounts in millions)	2008			2007			2009			2008

Operating income	$	163.6		$	108.2		$	147.1		$	119.3
Operating margin		14.2	%		11.8	%		14.4	%		12.0	%

Nine Months Ended September 30,
(Amounts in millions) 2008 2007
Operating income $ 453.9 $ 272.6
Operating margin 13.7 % 10.3 %

Operating income for the three months ended ~~September 30, 2008~~March 31, 2009 increased by ~~$55.4~~$27.8 million, or ~~51.2%~~23.3%, as compared with the same period in ~~2007.~~2008. The increase includes negative currency ~~benefits~~effects of approximately $8$24 million. The increase is primarily a result of the ~~$91.3~~$22.0 million increase in gross profit ~~partially offset by~~and the ~~$34.6~~$7.2 million ~~increase~~decrease in SG&A, and includes the total impact of $9.9 million in charges related to our Realignment Program, as discussed above. Operating margin ~~of 14.2% increased~~improved 240 basis points, due to improved gross profit ~~margin~~ and the decline in SG&A as a percentage of sales, as discussed above.

Operating income for the nine months ended September 30, 2008 increased by $181.3 million, or 66.5%, as compared with the same period in 2007. The increase includes currency benefits of approximately $39 million. The increase is primarily a result of the $287.2 million increase in gross profit, partially offset by the $105.4 million increase in SG&A, as discussed above. Operating margin of 13.7% increased 340 basis points, due to improved gross profit margin and the decline in SG&A as a percentage of sales, as discussed above.

Interest Expense and Interest Income


	Three Months Ended September 30,						Three Months Ended March 31,
(Amounts in millions)	2008			2007			2009			2008

Interest expense	$	(13.1	)	$	(15.3	)	$	(10.1	)	$	(12.9	)
Interest income		2.2			0.9			1.1			2.9

Nine Months Ended September 30,
(Amounts in millions) 2008 2007
Interest expense $ (38.7 ) $ (45.2 )
Interest income 6.6 2.5

Interest expense for the three ~~and nine~~ months ended ~~September 30, 2008~~March 31, 2009 decreased by ~~$2.2~~$2.8 million, ~~and $6.5 million, respectively,~~ as compared with the same ~~periods~~period in ~~2007.~~2008. The ~~decreases are~~decrease is primarily attributable to ~~lower~~a decrease in the average ~~outstanding debt and decreased~~ interest ~~rates.~~rate. Approximately 70% of our ~~term~~ debt was at fixed rates at ~~September 30, 2008,~~March 31, 2009, including the effects of $385.0 million of notional interest rate swaps.

Interest income for the three ~~and nine~~ months ended ~~September 30, 2008 increased~~March 31, 2009 decreased by ~~$1.3~~$1.8 million, ~~and $4.1 million, respectively,~~ as compared with the same ~~periods~~period in ~~2007.~~2008. The ~~increases are~~decrease is primarily attributable to a ~~higher~~decrease in the average ~~cash balance.~~interest rate.

Other (Expense) Income, net


	Three Months Ended September 30,					Three Months Ended March 31,
(Amounts in millions)	2008			2007		2009			2008

Other (expense) income, net	$	(8.7	)	$	1.2	$	(9.3	)	$	16.5

Nine Months Ended September 30,
(Amounts in millions) 2008 2007
Other income, net $ 8.4 $ 2.2

Other (expense) income, net for the three months ended ~~September 30, 2008~~March 31, 2009 decreased ~~by $9.9 million~~ to annet expense of ~~$8.7~~$9.3 million, as compared with ~~2007,~~income of $16.5 million for the same period in 2008, primarily due to a ~~$22.5~~$8.3 million ~~increase in losses~~net loss on forward exchange contracts ~~due to the strengthening of the U.S. Dollar exchange rate versus our significant currencies, partially offset by a $10.4 million increase~~ in ~~transaction gains arising from transactions in currencies other than our sites’ functional currencies.~~

~~Other income, net for the nine months ended September 30, 2008 increased by $6.2 million to $8.4 million~~2009 as compared with ~~2007, primarily due to~~ a net gain on forward exchange contracts of $17.9 million in 2008, reflecting volatility in foreign exchange rates, as well as the $3.4 million gain on the bargain purchase of Niigata, which was recorded in the ~~remaining 50% interest in Niigata, as discussed in Note 2 to our condensed consolidated financial statements included in this Quarterly Report, as well as other individually immaterial items.~~first quarter of 2008.

Tax Expense and Tax Rate


	Three Months Ended September 30,						Three Months Ended March 31,
(Amounts in millions)	2008			2007			2009			2008

Provision for income tax	$	26.9		$	32.0		$	36.0		$	37.1
Effective tax rate		18.7	%		33.7	%		27.9	%		29.5	%

Nine Months Ended September 30,
(Amounts in millions) 2008 2007
Provision for income tax $ 102.2 $ 72.2
Effective tax rate 23.8 % 31.1 %

Our effective tax rate of ~~18.7%~~27.9% for the three months ended ~~September 30, 2008~~March 31, 2009 decreased from ~~33.7%~~29.5% for the same period in ~~2007.~~2008. The decrease is primarily due to the net impact of foreign operations, as well as a net tax benefit of $12.4 million in the third quarter of 2008 arising from our permanent reinvestment in foreign subsidiaries, the release of certain reserves related to the closure of the statute of limitations in various jurisdictions and repatriation of cash.

Our effective tax rate of 23.8% for the nine months ended September 30, 2008 decreased from 31.1% for the same period in 2007. The decrease is primarily due to the net impact of foreign operations, a favorable tax ruling in Luxembourg, our permanent reinvestment in foreign subsidiaries, the release of certain reserves related to the closure of the statute of limitations in various jurisdictions and repatriation of cash.operations.

Other Comprehensive (Loss) Income


	Three Months Ended September 30,					Three Months Ended March 31,
(Amounts in millions)	2008			2007		2009			2008

Other comprehensive (loss) income	$	(101.5	)	$	21.8	$	(38.3	)	$	29.9

Nine Months Ended September 30,
(Amounts in millions) 2008 2007
Other comprehensive (loss) income $ (68.1 ) $ 42.3

Other comprehensive (loss) income for the three ~~and nine~~ months ended ~~September 30, 2008, respectively,~~March 31, 2009 decreased ~~by $123.3 million and $110.4~~to a loss of $38.3 million, as compared with income of $29.9 million for the same period in ~~2007. The decreases~~2008, primarily ~~relate to currency translation adjustments, which reflect the strengthening of the U.S. Dollar exchange rate versus our significant currencies for the three months ended September 30, 2008, and~~reflecting the strengthening of the U.S. Dollar exchange rate versus the Euro ~~for~~during the ~~nine~~three months ended ~~September 30, 2008,~~March 31, 2009, as compared with ~~the~~a weakening ~~of the U.S. Dollar exchange rate for~~during the same ~~periods~~period in ~~2007.~~2008.

Business Segments

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

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

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

	•		FSD for precision mechanical seals and related products and services.

We evaluate segment performance and allocate resources based on each segment’s operating income. See Note 15 to our condensed consolidated financial statements included in this Quarterly Report for further discussion of our segments. The key operating results for our three business segments, FPD, FCD and FSD are discussed below.

Flowserve Pump Division

Through FPD, we design, manufacture, distribute and service engineered and industrial pumps and pump systems and submersible motors (collectively referred to as “original equipment”). primarily in the oil and gas, chemical and power generation industries. FPD also manufactures replacement parts and related equipment, and provides a full array of support services (collectively referred to as “aftermarket”). FPD has 2930 manufacturing facilities worldwide, eight of which are located in North America, 1112 in Europe, four in Latin America and six in Asia. FPD also has 7679 service centers, including those co-located in a manufacturing facility, in 28 countries.

As discussed in Note 2 to our condensed consolidated financial statements included in this Quarterly Report, FPD acquired the remaining 50% interest in 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.


	Three Months Ended September 30,						Three Months Ended March 31,
(Amounts in millions)	2008			2007			2009			2008

Bookings	$	858.3		$	594.9		$	550.3		$	890.2
Sales		639.2			496.4			599.6			561.1
Gross profit		194.8			147.9			198.7			174.6
Gross profit margin		30.5	%		29.8	%		33.1	%		31.1	%
Operating income		99.3			68.9			103.6			78.5
Operating margin		15.5	%		13.9	%		17.3	%		14.0	%

Nine Months Ended September 30,
(Amounts in millions) 2008 2007
Bookings $ 2,484.9 $ 1,869.3
Sales 1,833.5 1,440.3
Gross profit 575.5 408.9
Gross profit margin 31.4 % 28.4 %
Operating income 281.2 175.9
Operating margin 15.3 % 12.2 %

Bookings for the three months ended ~~September 30, 2008 increased~~March 31, 2009 decreased by ~~$263.4~~$339.9 million, or ~~44.3%~~38.2%, as compared with the same period in ~~2007.~~2008. The ~~increase~~decrease includes a negative currency ~~benefits~~effect of approximately ~~$32~~$58 million. Bookings for original equipment ~~increased~~decreased approximately ~~60%~~51% and represented ~~approximately 83%~~more than 90% of the total bookings ~~increase. Aftermarket bookings increased approximately 17%. Original~~decrease. The decrease in overall original equipment bookings ~~strength~~ was driven by ~~the~~a decline across all industries, but primarily oil and gas ~~power~~ and general ~~industries. Niigata provided an increase~~industries, including $74.0 million of ~~$22.2~~thruster orders recorded in the first quarter of 2008 that did not recur. Aftermarket bookings decreased approximately 13%, including a $13.1 million decrease in ~~bookings.~~commissioning spare parts for major projects. Europe, Middle East and Africa (“EMA”) and North America bookings decreased $226.6 million and $105.8 million, respectively. The ~~increase~~decrease in bookings reflects our customers’ responses to concerns regarding ongoing disruptions in the credit and capital markets, global economic conditions and declines in oil and gas was primarily driven by a significant project of approximately $85 million to supply a variety of pumps to build the Abu Dhabi Crude Oil Pipeline. These pumps will largely be supplied from our European operationsprices and ~~are scheduled to ship in 2010.~~demand.

~~Bookings~~ Sales for the ~~nine~~three months ended ~~September 30, 2008~~March 31, 2009 increased by ~~$615.6~~$38.5 million, or ~~32.9%~~6.9%, as compared with the same period in ~~2007.~~2008. The increase includes negative currency ~~benefits~~effects of approximately ~~$161~~$53 million, partially offset by incremental sales provided by Niigata of $15.5 million. ~~Bookings for original equipment~~North America, Asia Pacific and Latin America sales increased ~~approximately 40%~~$16.8 million, $16.4 million and ~~represented approximately 77% of the total bookings increase. Aftermarket bookings increased approximately 20%.~~$13.5 million, respectively. Original equipment ~~bookings~~sales show continued strength, ~~was driven by~~increasing approximately 14%, while aftermarket sales were relatively comparable with the same period in 2008. Original equipment sales growth reflects execution against a strong order backlog, which predominantly resulted from growth in the oil and gas and power ~~water and general industries. The increase in oil and gas was primarily driven by~~markets over the ADCOP project discussed above. EMA and North America bookings increased $390.9 million (including currency benefits of approximately $133 million) and $113.7 million, respectively. Niigata provided an increase of $47.7 million in bookings.past two years.

~~Sales~~ Gross profit for the three months ended ~~September 30, 2008~~March 31, 2009 increased by ~~$142.8~~$24.1 million, or ~~28.8%~~13.8%, as compared with the same period in ~~2007. The increase~~2008, and includes currency benefits of approximately $27 million. Both original equipment and aftermarket sales show continued strength, increasing approximately 42% and 11%, respectively, compared with the same period in 2007. The primary driver of the improvement in original equipment sales was the continued strength of the oil and gas and power industries over the past year and the delivery of the related backlog. The increase is also attributable to increased throughput resulting from capacity expansion, price increases implemented in 2007 and sales of $18.0 million provided by Niigata.

Sales for the nine months ended September 30, 2008 increased by $393.2 million, or 27.3%, as compared with the same period in 2007. The increase includes currency benefits of approximately $119 million. Both original equipment and aftermarket sales showed continued strength, increasing approximately 29% and 24%, respectively, as compared with the same period in 2007, driven primarily by the continued strength of the oil and gas industry. The increase is also attributable to increased throughput resulting from capacity expansion, price increases implemented in 2007 and sales of $56.2 million provided by Niigata.

~~Gross profit for the three months ended September 30, 2008 increased by $46.9 million, or 31.7%, as compared with the same period in 2007, and includes~~incremental gross profit attributable to Niigata of ~~$5.6~~$3.6 million. Gross profit margin for the three months ended ~~September 30, 2008~~March 31, 2009 of ~~30.5%~~33.1% increased from ~~29.8%~~31.1% for the same period in ~~2007.~~2008. The increase is attributable to higher volumes, improved ~~original equipment pricing implemented in 2007, increased throughput~~capacity utilization, improved operating efficiencies and ~~increased sales, which favorably impacts our~~order execution, improved absorption of fixed manufacturing costs resulting from higher sales, improved pricing on orders booked in late 2007 and ~~reduced warranty costs as a percentage of sales, as well as the impact~~early 2008 and focused execution of CIP ~~initiatives.~~programs and implementation of supply chain initiatives, slightly offset by $2.0 million of charges related to our Realignment Program and a sales mix shift. Additionally, gross profit margin for the three months ended March 31, 2009 was favorably impacted by the production of specialty pumps, which had a higher ~~margin, produced during the period. These improvements were slightly offset by~~margin. As a ~~sales shift toward original equipment during the period. While both original equipment and aftermarket sales~~result of increased original equipment ~~growth exceeded that of~~sales and relatively flat aftermarket ~~growth during the period. As a result,~~sales, original equipment sales increased to approximately ~~64%~~61% of total sales, as compared with approximately ~~58%~~57% of total sales ~~for~~in the same period in ~~2007.~~2008. Original equipment generally carries a lower margin than aftermarket.

~~Gross profit~~ Operating income for the ~~nine~~three months ended ~~September 30, 2008~~March 31, 2009 increased by ~~$166.6~~$25.1 million or ~~40.7%~~32.0%, as compared with the same period in 2007, and includes gross profit attributable to Niigata of $14.1 million. Gross profit margin for the nine months ended September 30, 2008 of 31.4% increased from 28.4% for the same period in 2007. The increase is attributable to improved original equipment pricing implemented in 2007, increased throughput and increased sales, which favorably impacts our absorption of fixed manufacturing costs and reduced warranty costs as a percentage of sales, as well as the impact of CIP initiatives. Additionally, gross profit margin was favorably impacted by specialty pumps, which had a higher margin, produced during the second and third quarters of 2008. These improvements were slightly offset by a sales shift toward original equipment during the period. While both original equipment and aftermarket sales increased, original equipment growth exceeded that of aftermarket growth during the period. As a result, original equipment sales increased to approximately 60% of total sales as compared with approximately 59% of total sales for the same period in 2007. Original equipment generally carries a lower margin than aftermarket.

~~Operating income for the three months ended September 30, 2008 increased by $30.4 million, or 44.1%, as compared with the same period in 2007.~~ The increase includes negative currency ~~benefits~~effects of approximately $4$14 million. The increase was due primarily to ~~increased~~improved gross profit of ~~$46.9~~$24.1 million. Although we have placed additional expense discipline around our discretionary SG&A levels through focused reduction and the Realignment Program, we are continuing to invest and have expanded our spending in research and development, information systems and training.

Backlog of $2,120.5 million ~~partially offset~~at March 31, 2009 decreased by a $15.9 million increase in SG&A (including negative currency effects of approximately $4 million) primarily related to increased selling and marketing-related expenses in support of increased bookings and sales, $2.8 million of SG&A incurred by Niigata and related integration costs and increased incentive compensation arising from improved performance. Operating margin increased 160 basis points as compared with the same period in 2007. Gross profit margin, as discussed above, contributed 70 basis points while SG&A as a percentage of sales improved 110 basis points, resulting primarily from increased sales.

~~Operating income for the nine months ended September 30, 2008 increased by $105.3~~$132.6 million, or 59.9%, as compared with the same period in 2007. The increase includes currency benefits of approximately $21 million. The increase was due primarily to increased gross profit of $166.6 million, partially offset by a $59.3 million increase in SG&A (including negative currency effects of approximately $16 million) primarily related to increased selling and marketing-related expenses in support of increased bookings and sales and $7.1 million of SG&A incurred by Niigata and related integration costs and increased incentive compensation arising from improved performance. Operating margin increased 310 basis points as compared with the same period in 2007 due primarily to the increase in gross profit margin of 300 basis points.

~~Backlog of $2,438.9 million at September 30, 2008 increased by $663.6 million, or 37.4%~~5.9%, as compared with December 31, ~~2007.~~2008. Currency effects provided a decrease of approximately ~~$80~~$65 million. ~~Backlog growth~~The remaining decrease in backlog is a result of ~~an extended period~~the impact of ~~bookings growth, primarily in original equipment, combined with longer supplier and customer lead times, growth in~~cancellations of $14.1 million of orders booked during the ~~size of projects and $92.5 million related to the acquisition of Niigata.~~prior year.

Flow Control Division

Our second largest business segment is FCD, through which ~~designs, manufactures~~we design, manufacture and ~~distributes~~distribute a broad portfolio of engineered and industrial valves, control valves, actuators, controls and related services. FCD leverages its experience and application know-how by offering a complete menu of engineered services to complement its expansive product portfolio. FCD has a total of 4348 manufacturing facilities and ~~service facilities~~QRCs in 1923 countries around the world, with only five of its 19 manufacturing operations located in the U.S. Based on independent industry sources, we believe that we are the third largest industrial valve supplier on a global basis.

Three Months Ended September 30,
(Amounts in millions) 2008 2007
Bookings $ 367.6 $ 324.0
Sales 365.2 295.0
Gross profit 132.5 101.1
Gross profit margin 36.3 % 34.3 %
Operating income 61.0 41.1
Operating margin 16.7 % 13.9 %


	Nine Months Ended September 30,						Three Months Ended March 31,
(Amounts in millions)	2008			2007			2009			2008

Bookings	$	1,187.0		$	948.1		$	302.8		$	389.8
Sales		1,035.7			848.7			297.2			300.3
Gross profit		371.6			295.6			107.2			106.2
Gross profit margin		35.9	%		34.8	%		36.1	%		35.4	%
Operating income		166.9			118.6			47.6			43.1
Operating margin		16.1	%		14.0	%		16.0	%		14.4	%

Bookings for the three months ended ~~September 30, 2008 increased $43.6~~March 31, 2009 decreased $87.0 million, or ~~13.5%~~22.3%, as compared with the same period in ~~2007.~~2008. This ~~increase~~decrease includes negative currency ~~benefits~~effects of approximately ~~$14~~$32 million. ~~The growth~~Bookings in ~~bookings is primarily attributable to continued strength in~~North America and EMA ~~and Asia Pacific, which increased~~decreased approximately ~~$39~~$35 million and ~~approximately $6~~$32 million, respectively, driven by weakness in the chemical and ~~power markets.~~general industries.

~~Bookings~~ Sales for the ~~nine~~three months ended ~~September 30, 2008 increased $238.9~~March 31, 2009 decreased $3.1 million, or ~~25.2%~~1.0%, as compared with the same period in ~~2007. This increase~~2008. The decrease includes negative currency ~~benefits~~effects of approximately ~~$71~~$34 million. ~~The~~Sales in Europe and the U.S. decreased approximately $24 million and $9 million, respectively, attributable to general industries. These decreases were partially offset by sales growth of approximately $22 million in ~~bookings is~~Asia Pacific, which was primarily attributable to ~~EMA~~strength in the petrochemical, power and ~~Asia Pacific, which increased by approximately $103 million~~oil and ~~approximately $79 million, respectively. Additionally, North~~gas markets in China, as well as other increases in Canada, the Middle East and Latin ~~America increased approximately $57 million. Key growth markets include chemical and nuclear power.~~America.

~~Sales~~ Gross profit for the three months ended ~~September 30, 2008~~March 31, 2009 increased ~~$70.2~~by $1.0 million, or ~~23.8%~~0.9%, as compared with the same period in 2007. This increase includes currency benefits of approximately $15 million. Sales in EMA increased approximately $31 million and were driven by power and chemical markets. Asia Pacific increased approximately $25 million primarily due to projects in coal gasification and chemical markets. Sales in Latin America increased approximately $10 million, which was driven by strength in the paper markets.

~~Sales~~2008. Gross profit margin for the ~~nine~~three months ended ~~September 30, 2008~~March 31, 2009 of 36.1% increased ~~$187.0~~from 35.4% for the same period in 2008. This improvement reflects material costs savings, favorable product mix, manufacturing efficiencies and improved utilization of low cost regions.

Operating income for the three months ended March 31, 2009 increased by $4.5 million, or ~~22.0%~~10.4%, as compared with the same period in ~~2007.~~2008. This increase includes negative currency ~~benefits~~effects of approximately $60 million. Sales across our markets in EMA demonstrated solid growth of approximately $82 million. Sales in the power markets in North America demonstrated solid growth of approximately $25 million. Asia Pacific, which increased approximately $52 million, continues to show substantial sales growth in the chemical market, especially in China. Oil and gas market sales reflect steady increases in all regions, especially in EMA. Latin America sales increased due primarily to growth in the paper markets.

Gross profit for the three months ended September 30, 2008 increased by $31.4 million, or 31.1%, as compared with the same period in 2007. Gross profit margin for the three months ended September 30, 2008 of 36.3% increased from 34.3% for the same period in 2007. This improvement reflects the implementation of price increases and higher sales volumes, which favorably impact our absorption of fixed manufacturing costs, as well as the implementation of various CIP and supply chain initiatives, which continue to gain traction. These gains were partially offset by the inflation in our materials costs.

Gross profit for the nine months ended September 30, 2008 increased by $76.0 million, or 25.7%, as compared with the same period in 2007. Gross profit margin for the nine months ended September 30, 2008 of 35.9% increased from 34.8% for the same period in 2007. This increase reflects higher sales levels, which favorably impacts our absorption of fixed manufacturing costs. Price increases, CIP, investment in new products and increased absorption continue to drive margin improvement and offset the inflationary impact of our other raw materials. The impact of metal price increases and transportation fuel surcharges have been minimized through supply chain initiatives.

Operating income for the three months ended September 30, 2008 increased by $19.9 million, or 48.4%, as compared with the same period in 2007. This increase includes currency benefits of approximately $2$7 million. The increase is principally attributable to the ~~$31.4~~$1.0 million improvement in gross profit ~~offset in part by higher~~and reduced SG&A, which ~~increased $11.1~~decreased $4.5 million (including ~~negative~~ currency ~~effects~~benefits of approximately $2$7 million) as compared with the same period in ~~2007. Increased SG&A is primarily due to $5.9~~2008.

Backlog of $475.9 million ~~in higher selling costs. SG&A as a percentage of sales improved 100 basis points, resulting primarily from increased sales.~~

~~Operating income for the nine months ended September 30, 2008 increased~~at March 31, 2009 decreased by ~~$48.3~~$7.0 million, or ~~40.7%~~1.4%, as compared with the same period in 2007. This increase includes currency benefits of approximately $11 million. The increase is principally attributable to the $76.0 million improvement in gross profit, offset in part by higher SG&A, which increased $29.7 million (includingDecember 31, 2008, including negative currency effects of approximately $11 million) as compared with the same period in 2007. Increased SG&A is primarily due to $17.8 million in higher selling costs and $4.0 million in increased research and development costs. Partially offsetting these cost increases is the reversal of a net $2.3 million accrual due to a contract settlement and a $1.9 million increase in net earnings from affiliates generated by our joint venture in India, which is driven by growth in the oil and gas markets in the Middle East. SG&A as a percentage of sales improved 100 basis points, resulting primarily from increased sales, as well as the reversal of the accrual for the settlement.

~~Backlog of $542.5 million at September 30, 2008 increased by $127.8 million, or 30.8%, as compared with December 31, 2007. Currency effects provided a decrease of approximately $12~~ million. ~~The increase in backlog is primarily attributable to bookings growth and larger project business with longer lead times.~~

Flow Solutions Division

Through FSD, we engineer, manufacture and sell mechanical seals, auxiliary systems and parts, and provide related services, principally to process industries and general industrial markets, with similar products sold internally in support of FPD. FSD has ~~nine~~added to its global operations and has ten manufacturing operations, four of which are located in the U.S. FSD operates 7274 QRCs worldwide (including ~~five~~six that are co-located in a manufacturing facility), including 24 sites in North America, 2019 in ~~Europe,~~EMA, and the remainder in Latin America and Asia. Our ability to rapidly deliver mechanical sealing technology through global engineering tools, ~~locally-sited~~locally sited QRCs and on-site engineers represents a significant competitive advantage. This business model has enabled FSD to establish a large number of alliances with multi-national customers. Based on independent industry sources, we believe that we are the second largest mechanical seal supplier in the world.


	Three Months Ended March 31,
(Amounts in millions)	2009			2008

Bookings	$	133.2		$	171.3
Sales		143.7			150.6
Gross profit		62.3			66.0
Gross profit margin		43.4	%		43.8	%
Operating income		20.7			26.9
Operating margin		14.4	%		17.9	%

Three Months Ended September 30,
(Amounts in millions) 2008 2007
Bookings $ 173.0 $ 159.4
Sales 170.9 140.7
Gross profit 77.7 64.5
Gross profit margin 45.5 % 45.8 %
Operating income 32.7 30.4
Operating margin 19.1 % 21.6 %

Nine Months Ended September 30,
(Amounts in millions) 2008 2007
Bookings $ 513.7 $ 438.4
Sales 495.5 404.4
Gross profit 223.3 182.9
Gross profit margin 45.1 % 45.2 %
Operating income 96.6 81.4
Operating margin 19.5 % 20.1 %

Bookings for the three months ended ~~September 30, 2008 increased~~March 31, 2009 decreased by ~~$13.6~~$38.1 million, or ~~8.5%~~22.2%, as compared with the same period in ~~2007.~~2008. This ~~increase~~decrease includes negative currency ~~benefits~~effects of approximately $6$12 million. The ~~increase~~decrease is due primarily to ~~increased~~a $34.7 million decrease in customer bookings primarily attributable to decreased original equipment bookings in EMA and North America and increased aftermarket bookings in Latin America, slightly offset by a decrease in bookings in Asia Pacific, which was attributable to a certain large project booking in Japan of $2.1 million recorded in the third quarter of 2007 that did not recur,across all regions, as well as a ~~$3.6~~$3.4 million ~~increase~~decrease in interdivision bookings (which are eliminated and are not included in consolidated bookings as disclosed above). ~~The oil~~These decreases are partially offset by increased aftermarket bookings in Asia Pacific and ~~gas and chemical markets continue to be our strongest markets.~~Latin America.

~~Bookings~~ Sales for the ~~nine~~three months ended ~~September 30, 2008 increased~~March 31, 2009 decreased by ~~$75.3~~$6.9 million, or ~~17.2%~~4.6%, as compared with the same period in ~~2007.~~2008. This ~~increase~~decrease includes negative currency ~~benefits~~effects of approximately ~~$25~~$14 million. The increase is due primarily to increased original equipment bookings in EMA, North America and Latin America and increased aftermarket bookings in all regions, as well as a $12.6 million increase in interdivision bookings (which are eliminated and are not included in consolidated bookings as disclosed above). The oil and gas and chemical markets continue to be our strongest markets.

Sales for the three months ended September 30, 2008 increased by $30.2 million, or 21.5%, as compared with the same period in 2007. This increase includes currency benefits of approximately $5 million. The increasedecrease is due primarily to a ~~$22.2~~$4.3 million ~~increase~~decrease in customer sales, ~~across all regions. The increase~~which is primarily attributable to ~~increased aftermarket sales in Asia and Latin America and increased~~decreased original equipment sales in EMA and North America, ~~where growth in the chemical and oil and gas markets continued to provide solid bookings and sales,~~ as well as ~~an $8.0~~a $2.6 million ~~increase~~decrease in interdivision sales (which are eliminated and are not included in consolidated sales as disclosed above). These decreases are partially offset by increased original equipment and aftermarket sales in Latin America and Asia Pacific.

~~Sales~~ Gross profit for the ~~nine~~three months ended ~~September 30, 2008 increased~~March 31, 2009 decreased by ~~$91.1~~$3.7 million, or ~~22.5%~~5.6%, as compared with the same period in 2007. This increase includes currency benefits of approximately $23 million. The increase is due primarily to a $71.7 million increase in customer sales, which is primarily attributable to increased aftermarket sales in Asia and Latin America, increased original equipment sales in EMA and North America, where growth in the chemical and oil and gas markets continued to provide solid bookings and sales, as well as a $19.4 million increase in interdivision sales (which are eliminated and are not included in consolidated sales as disclosed above).

2008. Gross profit margin for the three months ended ~~September 30,~~March 31, 2008 ~~increased~~of 43.4% decreased from 43.8% for the same period in 2008. The decrease in gross profit includes a $3.1 million charge related to our Realignment Program, partially offset by ~~$13.2~~a sales mix shift to higher margin aftermarket business, which favorably impacts gross profit margins.

Operating income for the three months ended March 31, 2009 decreased by $6.2 million, or ~~20.5%~~23.0%, as compared with the same period in 2007. Gross profit margin for the three months ended September 30, 2008 of 45.5% decreased from 45.8% for the same period in 2007. A sales mix shift to lower margin original equipment business in EMA and North America negatively impacted gross margins.2008. This decrease ~~was partially offset by increased sales, which favorably impacts our absorption~~includes negative currency effects of fixed manufacturing costs, as well as the impact of cost savings initiatives. Increases in materials costs have been largely offset through supply chain management efforts and price increases in mid-2007 and early 2008.

Gross profit for the nine months ended September 30, 2008 increased by $40.4 million, or 22.1%, as compared with the same period in 2007. Gross profit margin for the nine months ended September 30, 2008 of 45.1% was comparable to the same period in 2007. A sales mix shift to lower margin original equipment business in EMA and North America was offset by increased sales, which favorably impacts our absorption of fixed manufacturing costs, as well as the impact of cost savings initiatives. Increases in materials costs have been largely offset through supply chain management efforts and price increases in mid-2007 and early 2008.

Operating income for the three months ended September 30, 2008 increased by $2.3 million, or 7.6%, as compared with the same period in 2007. This increase includes currency benefits of approximately $1$3 million. The ~~increase~~decrease is due to the ~~$13.2~~$3.7 million ~~increase~~decrease in gross profit ~~mentioned~~discussed above ~~partially offset by~~and a ~~net $10.5~~$1.5 million increase in SG&A (including ~~negative~~ currency ~~effects~~benefits of approximately $2$4 million) due primarily to ~~continued investment in~~$2.7 million of charges related to our ~~global engineering and sales teams~~Realignment Program and increases in infrastructure to support ~~the global growth of our business. SG&A as a percentage of sales increased 170 basis points, resulting primarily from investment in~~ our global ~~selling footprint and engineering support in anticipation~~footprint.

Backlog of ~~future sales.~~

~~Operating income for the nine months ended September 30, 2008 increased~~$104.7 million at March 31, 2009 decreased by ~~$15.2~~$13.5 million, or 18.7%, as compared with the same period in 2007. This increase includes currency benefits of approximately $7 million. The increase is due to the $40.4 million increase in gross profit mentioned above, partially offset by a net $24.9 million increase in SG&A (including negative currency effects of approximately $7 million) due primarily to continued investment in our global engineering and sales teams and increases in infrastructure to support the global growth of our business. The increase in SG&A was partially offset by the receipt of a $1.3 million legal settlement, as well as a reduction in other legal fees and expenses.

~~Backlog of $123.8 million at September 30, 2008 increased by $14.4 million, or 13.2%~~11.4%, as compared with December 31, ~~2007. Currency~~2008. The decrease includes negative currency effects ~~provided a decrease~~ of approximately $3 million. Backlog at ~~September 30, 2008~~March 31, 2009 and December 31, ~~2007~~2008 includes ~~$19.5~~$18.4 million and ~~$18.1~~$18.6 million, respectively, of interdivision backlog (which is eliminated and not included in consolidated backlog as disclosed above). ~~Backlog growth~~The decrease in backlog is primarily a result of ~~growth~~the decrease in original equipment bookings with longer lead times. Capacity expansions were completed in 2007, and additional capacity expansions continued through the first nine months of 2008 to support increased throughput in all regions.bookings.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flow Analysis


	Nine Months Ended September 30,						Three Months Ended March 31,
(Amounts in millions)	2008			2007			2009			2008
Net cash flows (used) provided by operating activities	$	(4.8	)	$	45.1

Net cash flows used by operating activities							$	(180.1	)	$	(172.4	)
Net cash flows used by investing activities		(62.8	)		(57.3	)		(44.3	)		(14.3	)
Net cash flows (used) provided by financing activities		(139.3	)		11.6			(24.2	)		7.1

Existing cash, cash generated by operations and borrowings available under our existing revolving credit facility are our primary sources of short-term liquidity. Our cash balance at ~~September 30, 2008~~March 31, 2009 was ~~$153.4~~$201.5 million, as compared with ~~$370.6~~$472.1 million at December 31, 2007. The decrease in cash primarily reflects a $144.8 million decrease in cash flows from working capital, a $50.4 million contribution to our U.S. pension plan, capital expenditures of $72.5 million and share repurchases of $135.0 million, partially offset by a $168.1 million increase in net income.2008.

The cash flows used by operating activities for the first ~~nine~~three months of ~~2008~~2009 primarily reflect a ~~$168.1 million increase in net income, offset by a $144.8~~$59.5 million decrease in cash flows from working capital. Working capital declined for the three months ended March 31, 2009 due primarily ~~due~~ to ~~our investment in~~lower accounts payable of $108.0 million, lower accrued liabilities of $93.7 million and higher inventory of ~~$190.3~~$75.7 million, especially project-related inventory required to support future shipments of products in backlog, and higher accounts receivable of $280.3 million, resulting primarily from increased sales and a $63.9 million reduction in factored receivables. These increases were partially offset by higher accrued liabilities, reflecting increases in advanced cash received from our customers.backlog. During the ~~nine~~three months ended ~~September 30, 2008,~~March 31, 2009, we ~~contributed $50.4 million~~made no contributions to our U.S. pension plan. However, we currently anticipate that our contributions in 2009 will be between $55 million and $75 million, including $25.0 million that was contributed in April 2009.

2825

~~Our goal~~ Increases in accounts receivable used $44.0 million of cash flow for the three months ended March 31, 2009 compared with $80.9 million for the same period in 2008. As of March 31, 2009, we achieved a days’ sales receivables outstanding (“DSO”) ~~is 60 days. As~~ of ~~September 30, 2008, we achieved a DSO of 71~~73 days as compared with 6971 days as of September 30, 2007. The increase in DSO is attributable to the termination of our major factoring agreements, as discussed below in “Accounts Receivable Factoring” and in Note 7 to our condensed consolidated financial statements included in this Quarterly Report, partially offset by increased sales. Factoring provided a decrease in DSO of 7 days as of September 30, 2007.March 31, 2008. For reference purposes based on ~~2008~~2009 sales, an improvement of one day could provide approximately ~~$13~~$11 million in cash flow. Increases in inventory used ~~$190.3~~$75.7 million of cash flow for the ~~nine~~three months ended ~~September 30, 2008~~March 31, 2009 compared with ~~$147.7~~$108.9 million for the same period in ~~2007.~~2008. Inventory turns were ~~3.5~~3.0 times as of ~~September 30, 2008, compared with 3.3 times as of September 30, 2007, reflecting the increase in inventory, which was more than offset by the increase in sales.~~both March 31, 2009 and 2008. Our calculation of inventory turns does not reflect the impact of advanced cash received from our customers. For reference purposes based on ~~2008~~2009 data, an improvement of one turn could yield approximately ~~$192~~$223 million in cash flow.

Cash flows used by investing activities during the ~~nine~~three months ended ~~September 30, 2008~~March 31, 2009 were ~~$62.8~~$44.3 million, as compared with ~~$57.3~~$14.3 million for the same period in ~~2007.~~2008. Capital expenditures during the ~~nine~~three months ended ~~September 30, 2008~~March 31, 2009 were ~~$72.5~~$44.3 million, an increase of ~~$11.6~~$30.0 million as compared with the same period in ~~2007.~~2008, reflecting payments made on strategic projects committed to during 2008. Capital expenditures in 2009 and 2008 have focused on capacity expansion, enterprise resource planning application upgrades, information technology infrastructure and cost reduction opportunities. For the full year 2009, our capital expenditures are expected to be approximately $100 million. Investing cash outflows in the second quarter of 2009 will include cash paid for the acquisition of Calder AG. See “Acquisitions and Dispositions” below.

Cash flows used by financing activities during the ~~nine~~three months ended ~~September 30, 2008~~March 31, 2009 were ~~$139.3~~$24.2 million, as compared with ~~$11.6~~$7.1 million ~~of cash flows provided in~~for the same period in ~~2007.~~2008. Cash outflows during the three months ended March 31, 2009 resulted primarily from the payment of $14.0 million in dividends and $7.1 million for the repurchase of common shares. Cash inflows for the same period in 2008 resulted primarily from ~~the repurchase~~$8.2 million in exercise of ~~common shares~~stock options, and were offset by outflows for ~~$135.0 million and~~ the payment of ~~$37.3~~$8.6 million in dividends. These were partially offset by inflows of $11.2 million from the exercise of stock options. Cash inflows in 2007 were due primarily to $58.0 million in borrowings under our revolving line of credit. The borrowings were used primarily to fund increased working capital needs, share repurchases and increased capital spending. Cash outflows in 2007 included repurchase of common shares for $44.8 million and the payment of dividends of $17.2 million.

The general credit and capital markets have ~~recently~~ experienced ~~disruption.~~ongoing disruptions. Continuing volatility in these markets could potentially impair our ability to access these markets and increase associated costs. Notwithstanding these adverse market conditions, considering our current debt structure and cash needs, we currently believe cash flows from operating activities combined with availability under our existing revolving credit agreement and our existing cash balance will be sufficient to enable us to meet our cash flow needs for the next 12 months. Cash flows from operations could be adversely affected by economic, political and other risks associated with sales of our products, operational factors, competition, fluctuations in foreign exchange rates and fluctuations in interest rates, among other factors. See “Liquidity Analysis” and “Cautionary Note Regarding Forward-Looking Statements” below.

On February 26, 2008 our Board of Directors authorized a program to repurchase up to $300.0 million of our outstanding common stock over an unspecified time period. The program commenced in the second quarter of 2008, and we repurchased ~~0.8 million~~150,000 shares for ~~$100.0 million and 1.1 million shares for $135.0~~$7.1 million during the three ~~and nine~~ months ended ~~September 30, 2008, respectively. While~~March 31, 2009. To date, we ~~currently intend to continue our share repurchase program~~have repurchased a total of 1.9 million shares for $172.1 million under ~~its previously disclosed terms for the foreseeable future, any future repurchases will be evaluated in light of our current financial condition and business outlook.~~this program.

On February ~~26, 2008,~~23, 2009 our Board of Directors ~~authorized an increase in~~increased our quarterly cash dividend to $0.27 per share. We declared cash dividends of $0.27 and $0.25 per share ~~from $0.15 per share, effective for~~during the ~~first quarter of 2008. Generally, our dividend date-of-record is~~three months ended March 31, 2009 and 2008, respectively, which were paid in ~~the last month of the quarter,~~April 2009 and ~~the dividend is paid the following month.~~2008, respectively. While we currently intend to pay regular quarterly dividends in the foreseeable future, any future dividends will be reviewed individually and declared by our Board of Directors at its discretion, dependent on its assessment of our financial condition and business outlook at the applicable time.

Acquisitions and Dispositions

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

As discussed in Note 2 to our condensed consolidated financial statements included in this Quarterly Report, we acquired the remaining 50% interest in Niigata, effective March 1, 2008, for $2.4 million in cash.

~~Capital Expenditures~~

~~Capital expenditures were $72.5~~ On April 21, 2009, FPD acquired Calder AG, a private Swiss company, for up to approximately $45 million, 70% of which was paid in cash at closing. The balance of the purchase price, which will be paid in cash, is contingent upon Calder AG achieving certain defined performance metrics after closing. Calder AG is a supplier of energy recovery technology for the nine months ended September 30, 2008 compared with $60.9 million for the same period in 2007. Capital expenditures in 2008 and 2007 have focused on capacity expansion, enterprise resource planning application upgrades, information technology infrastructure and cost reduction opportunities. For the full year 2008, our capital expenditures are expected to be between approximately $115 million and approximately $125 million. Certain of our facilities may face capacity constraintsuse in the ~~foreseeable future, which may lead~~global desalination market, and its acquisition will enable us to ~~higher capital expenditure levels.~~expand the products and advanced technologies we offer to the growing desalination market.

Financing

Credit Facilities

Our ~~Credit Facilities~~credit facilities, as amended, are comprised of a $600.0 million term loan expiring on August 10, 2012 and a $400.0 million ~~committed~~ revolving line of credit, which can be utilized to provide up to $300.0 million in letters of credit, expiring on August ~~12,~~10, 2012. We hereinafter refer to these credit facilities collectively as our Credit Facilities. At both ~~September 30, 2008~~March 31, 2009 and December 31, ~~2007,~~2008, we had

no amounts outstanding under the revolving line of credit. We had outstanding letters of credit of ~~$95.2~~$97.6 million and ~~$115.1~~$104.2 million at ~~September 30, 2008~~March 31, 2009 and December 31, ~~2007,~~2008, respectively, which reduced borrowing capacity to ~~$304.8~~$302.4 million and ~~$284.9~~$295.8 million, respectively.

Borrowings under our Credit Facilities bear interest at a rate equal to, at our option, either (1) the base rate (which is based on the greater of the prime rate most recently announced by the administrative agent under our Credit Facilities or the Federal Funds rate plus 0.50%) or (2) ~~LIBOR~~London Interbank Offered Rate (“LIBOR”) plus an applicable margin determined by reference to the ratio of our total debt to consolidated ~~EBITDA,~~Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”), which as of ~~September 30, 2008~~March 31, 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 ~~at any time~~ in whole or in part, without premium or penalty. During the three ~~and nine~~ months ended ~~September 30, 2008,~~March 31, 2009, we made scheduled repayments under our Credit Facilities of $1.4 ~~million and $4.3 million, respectively.~~million. We have scheduled repayments ~~under our Credit Facilities~~ of $1.4 million due in the each of the next four quarters.

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

Additional discussion of our Credit Facilities, including amounts outstanding and applicable interest rates, is included in Note 6 to our condensed consolidated financial statements included in this Quarterly Report.

We have entered into interest rate swap agreements to hedge our exposure to ~~cash flows~~variable interest payments related to our Credit Facilities. These agreements are more fully described in Note 4 to our condensed consolidated financial statements included in this Quarterly Report, and in “Item 3. Quantitative and Qualitative Disclosures about Market Risk” below.

European Letter of Credit Facility

On September 14, 2007, we entered into ana 364-day unsecured European Letter of Credit Facility (“European LOC ~~Facility~~Facility”) to issue letters of credit in an aggregate face amount not to exceed€150.0 million at ~~any time.~~anytime. The initial commitment of€80.0 million was increased to€110.0 million ~~effective~~upon renewal in September ~~12,~~ 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€~~87.2~~93.5 million ($~~122.8~~124.2 million) and€~~35.0~~104.0 million ($~~51.1~~145.2 million) as of ~~September 30, 2008~~March 31, 2009 and December 31, ~~2007,~~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 ~~September 30, 2008,~~March 31, 2009, the annual fees equaled 0.875% plus a fronting fee of 0.1%.

See Note 1112 to our consolidated financial statements included in our ~~2007~~2008 Annual Report for a discussion of covenants related to our Credit Facilities and our European LOC Facility. We complied with all covenants through ~~September 30, 2008.~~March 31, 2009.

~~Accounts Receivable Factoring~~

Through our European subsidiaries, we engaged in non-recourse factoring of certain accounts receivable. The various agreements had different terms, including options for renewal and mutual termination clauses. Our Credit Facilities, which are fully described in Note 11 to our consolidated financial statements included in our 2007 Annual Report, limit factoring volume to $75.0 million at any given point in time as defined by our Credit Facilities.

During the fourth quarter of 2007, we gave notice of our intent to terminate our major factoring agreements during 2008. All factoring agreements were terminated by the end of the third quarter of 2008. See Note 7 to our condensed consolidated financial statements included in this Quarterly Report for additional information on our accounts receivable factoring.

Liquidity Analysis

~~Recent~~ Ongoing disruptions in global financial markets and banking systems are making credit and capital markets more difficult for companies to access, and are generally driving up the costs of newly raised debt. We ~~have assessed~~continue to assess the implications of these factors on our current business and ~~determined~~the state of the global economy. While we believe that these financial market disruptions have not directly had a ~~significant~~disproportionate adverse impact on our financial position, results of operations or ~~liquidity. However,~~liquidity, continuing volatility in the credit and capital markets could potentially materially impair our and our customers’ ability to access these markets and increase associated costs, ~~and there~~as well as our customers’ ability to pay in full and/or on a timely basis. There can be no assurance that we will not be materially adversely affected by ~~these~~the financial market disruptions and the global economic recession as economic events and circumstances continue to evolve. ~~We have no scheduled loans due to mature in 2008, and only~~

Only 1% of our term loan is due to mature in each of 2009 and 2010. As noted above, our term loan and our revolving line of credit both mature in August 2012. After the effects of $385.0 million of notional interest rate swaps, approximately 70% of our term debt was at fixed rates at ~~September 30, 2008.~~

March 31, 2009. As of ~~September 30, 2008,~~March 31, 2009, we ~~have~~had a borrowing capacity of ~~$304.8~~$302.4 million on our $400.0 million revolving line of credit, and in September 2008 we renewed our unsecured European LOC Facility and increased it from an initial commitment of€80.0 million to a commitment of€110.0 million. We had outstanding letters of credit drawn on the European LOC Facility of€~~87.2~~93.5 million as of ~~September 30, 2008.~~March 31, 2009. Our revolving line of credit and our European LOC Facility are committed and are held by a diversified group of financial ~~institutions with high credit ratings.~~institutions.

~~Further, during the three months ended September 30, 2008, we increased~~

Our cash balance decreased by ~~$16.7~~$270.5 million to ~~$153.4~~$201.5 million ~~after taking into account $100.0~~as of March 31, 2009 as compared with December 31, 2008. The cash draw was anticipated based on planned significant cash uses in 2009, including approximately $115 million in long-term and broad-based annual incentive program payments related to prior period performance, $44.3 million in capital expenditures, $14.0 million in dividend payments, $7.1 million of share repurchases ~~$34.8 million in~~and the funding of increased working capital ~~expenditures and $14.4 million in quarterly dividend payments.~~requirements. 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.

We utilize a variety of insurance carriers for a wide range of insurance coverage and continuously monitor their creditworthiness. Based on current credit ratings by industry rating experts, we currently believe that our carriers have the ability to pay on claims.

~~Although we have~~ We experienced significant declines in the values of our U.S. pension plan assets ~~our U.S. pension plan remains well-funded,~~in 2008 resulting primarily from recent declines in global equity markets, and we currently anticipate that our contribution to our U.S. pension plan in 2009 will ~~not~~ be ~~materially greater than the $50.4~~between $55 million and $75 million, including $25.0 million that wewas contributed in ~~the second quarter of 2008. The decline in our U.S. pension plan asset values of approximately $48 million, or 17%, will be recognized into earnings over the actuarially-determined life.~~April 2009. We continue to maintain an asset allocation consistent with our strategy to maximize total return, while reducing portfolio risks through asset class diversification.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management’s discussion and analysis of financial condition and results of operations are based on our condensed consolidated financial statements and related footnotes contained within this Quarterly Report. ~~Critical~~Our more critical accounting policies used in the preparation of the consolidated financial statements were discussed in our ~~2007~~2008 Annual Report. These critical policies, for which no significant changes have occurred in the three months ended ~~September 30, 2008,~~March 31, 2009, include:

	•		Revenue Recognition;

	•		Deferred Taxes, Tax Valuation Allowances and Tax Reserves;

	•		Reserves for Contingent Loss;

	•		Retirement and Postretirement Benefits; and

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

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

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

ACCOUNTING DEVELOPMENTS

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

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended. Words or phrases such as, “may,” “should,” “expects,” “could,” “intends,” “plans,” “anticipates,” “estimates,” “believes,” “predicts” or other similar expressions are intended to identify forward-looking statements, which include, without limitation, statements concerning our future financial performance, future debt and financing levels, investment objectives, implications of litigation and regulatory investigations and other management plans for future operations and performance.

The forward-looking statements included in this Quarterly Report are based on our current expectations, projections, estimates and assumptions. These statements are only predictions, not guarantees. Such forward-looking statements are subject to numerous risks and uncertainties that are difficult to predict. These risks and uncertainties may cause actual results to differ materially from what is forecast in such forward-looking statements, and include, without limitation, the following:

	•		a portion of our bookings may not lead to completed sales, and our ability to convert bookings into revenues at acceptable profit margins;

	•		risks associated with cost overruns on fixed fee projects and in taking customer orders for large complex custom engineered products requiring sophisticated program management skills and technical expertise for completion;

	•		the substantial dependence of our sales on the success of the petroleum, chemical, power and water industries;

	•		the adverse impact of volatile raw materials prices on our products and operating margins;

	•		economic, political and other risks associated with our international operations, including military actions or trade embargoes that could affect customer markets, particularly Middle Eastern markets and global petroleum producers, and non-compliance with U.S. export/reexport control, foreign corrupt practice laws, economic sanctions and import laws and regulations;

	•		our furnishing of products and services to nuclear power plant facilities;

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

	•		a foreign government investigation regarding our participation in the United Nations Oil-for-Food Program;

	•		risks associated with certain of our foreign subsidiaries conducting business operations and sales in certain countries that have been identified by the U.S. State Department as state sponsors of terrorism;

	•		our relative geographical profitability and its impact on our utilization of deferred tax assets, including foreign tax credits, and tax liabilities that could result from audits of our tax returns by regulatory authorities in various tax jurisdictions;

	•		the potential adverse impact of an impairment in the carrying value of goodwill or other intangibles;

	•		our dependence upon third-party suppliers whose failure to perform timely could adversely affect our business operations;

	•		changes in the global financial markets and the availability of ~~capital;~~capital and the potential for unexpected cancellations or delays of customer orders in our reported backlog;

	•		our dependence on our customers’ ability to make required capital investment and maintenance expenditures;


	•		the highly competitive nature of the markets in which we operate;

	•		environmental compliance costs and liabilities;

	•		potential work stoppages and other labor matters;

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

	•		obligations under our defined benefit pension plans.

These and other risks and uncertainties are more fully discussed in the risk factors identified in “Item 1A. Risk Factors” in Part I of our ~~2007~~2008 Annual Report, and may be identified in our other filings with the SEC and/or press releases from time to time. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any forward-looking statement.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

We have market risk exposure arising from changes in interest rates and foreign currency exchange rate movements. We are exposed to credit-related losses in the event of non-performance by counterparties to financial instruments, including interest rate swaps and forward exchange contracts, but we currently expect all counterparties will continue to meet their obligations given their current creditworthiness.

Interest Rate Risk

Our earnings are impacted by changes in short-term interest rates as a result of borrowings under our Credit Facilities, which bear interest based on floating rates. At ~~September 30, 2008,~~March 31, 2009, after the effect of interest rate swaps, we had ~~$166.1~~$163.3 million of variable rate debt obligations outstanding under our Credit Facilities with a weighted average interest rate of ~~5.22%~~2.77%. A hypothetical change of 100 basis points in the interest rate for these borrowings, assuming constant variable rate debt levels, would have changed interest expense by ~~$1.2~~$0.4 million for the ~~nine~~three months ended ~~September 30, 2008. As of September 30, 2008~~March 31, 2009. At both March 31, 2009 and December 31, ~~2007,~~2008, we had $385.0 million ~~and $395.0 million, respectively,~~ of notional amount in outstanding interest rate swaps with third parties with varying maturities through ~~December 2010.~~June 2011.

Foreign Currency Exchange Rate Risk

A substantial portion of our operations are conducted by our subsidiaries outside of the U.S. in currencies other than the U.S. ~~Dollar.~~dollar. Almost all of our non-U.S. subsidiaries conduct their business primarily in their local currencies, which are also their functional currencies. Foreign currency exposures arise from translation of foreign-denominated assets and liabilities into U.S. ~~Dollars~~dollars and from transactions, including firm commitments and anticipated transactions, denominated in a currency other than a non-U.S. subsidiary’s functional currency. Generally, we view our investments in foreign subsidiaries from a long-term perspective and, therefore, do not hedge these investments. We use capital structuring techniques to manage our investment in foreign subsidiaries as deemed necessary. We realized net (losses) gains associated with foreign currency translation of ~~$(105.1)~~$(40.0) million and ~~$24.6~~$34.0 million for the three months ended ~~September 30,~~March 31, 2009 and 2008, ~~and 2007, respectively, and $(70.5) million and $44.8 million for the nine months ended September 30, 2008 and 2007,~~ respectively, which are included in other comprehensive ~~(loss)~~(expense) income.

Based on a sensitivity analysis at September 30, 2008, a 10% change in the foreign currency exchange rates for the nine months ended September 30, 2008 would have impacted our net earnings by approximately $26 million, due primarily to the Euro. This calculation assumes that all currencies change in the same direction and proportion relative to the U.S. Dollar and that there are no indirect effects, such as changes in non-U.S. Dollar sales volumes or prices. This calculation does not take into account the impact of the foreign currency forward exchange contracts discussed below.

We employ a foreign currency risk management strategy to minimize potential changes in cash flows from unfavorable foreign currency exchange rate movements. The use of forward exchange contracts allows us to mitigate transactional exposure to exchange rate fluctuations as the gains or losses incurred on the forward exchange contracts will offset, in whole or in part, losses or gains on the underlying foreign currency exposure. Our policy allows foreign currency coverage only for identifiable foreign currency ~~exposures, and changes in the fair values of these instruments are included in other (expense) income, net in the accompanying condensed consolidated statements of income.~~exposures. As of ~~September 30, 2008,~~March 31, 2009, we had a U.S. ~~Dollar~~dollar equivalent of ~~$713.5~~$754.0 million in aggregate notional amount outstanding in forward exchange contracts with third parties, compared with ~~$464.9~~$555.7 million at December 31, ~~2007.~~

2008. Transactional currency gains and losses arising from transactions outside of our sites’ functional currencies and changes in fair value of certain forward exchange contracts are included in our consolidated results of operations. We ~~realized~~recognized foreign currency net (losses) gains of ~~$(9.6)~~$(9.9) million and ~~$2.6~~$12.4 million for the three months ended ~~September 30,~~March 31, 2009 and 2008, ~~and 2007, respectively, and $2.8 million and $3.4 million for the nine months ended September 30, 2008 and 2007,~~ respectively, which is included in other (expense) income, net in the accompanying condensed consolidated statements of income. ~~The significant strengthening of~~

Based on a sensitivity analysis at March 31, 2009, a 10% change in the ~~U.S. Dollar~~foreign currency exchange ~~rate versus our significant currencies during~~rates for the three months ended ~~September 30, 2008 is~~March 31, 2009 would have impacted our net earnings by approximately $10 million, due primarily to the ~~primary driver~~Euro. This calculation assumes that all currencies change in the same direction and proportion relative to the U.S. dollar and that there are no indirect effects, such as changes in non-U.S. dollar sales volumes or prices. This calculation does not take into account the impact of the ~~net loss from the changes in fair values of~~foreign currency forward exchange ~~contracts.~~contracts discussed below.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

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

In connection with the preparation of this Quarterly Report, our management, under the supervision and with the participation of our Chief Executive Officer and ~~our~~ Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of ~~September 30, 2008.~~March 31, 2009. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of ~~September 30, 2008.~~March 31, 2009.

Changes in Internal Control Over Financial Reporting

There have been no material changes in our internal control over financial reporting during the quarter ended ~~September 30, 2008~~March 31, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

3431

PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

~~Asbestos-Related Claims~~

We are ~~a defendant~~party to the legal proceedings that are described in ~~a large number of pending lawsuits (which include,~~Note 11 to our consolidated financial statements included 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 aggregate number of asbestos-related claims against us has declined in recent years, there can be no assurance that this trend will continue. Asbestos-containing materials incorporated into any such products was primarily encapsulated and used only as components of process equipment, and we do not believe that any significant emission of asbestos-containing fibers occurred during the use“Item 1. Financial Statements” of this ~~equipment. We believe that a high percentage of the claims are covered~~Quarterly Report, and such disclosure is incorporated by ~~applicable insurance or indemnities from other companies.~~

~~Shareholder Litigation — Appeal of Dismissed Class Action Case; Derivative Case Dismissals~~

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 Exchange Act, and Rule 10b-5 thereunder, and Sections 11 and 15 of 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 court denied the plaintiffs’ motion for class certification and granted summary judgment in favor of the defendants on all claims. The plaintiffs have appealed both rulings to the federal Fifth Circuit Court of Appeals. We will defend vigorouslyreference into this ~~appeal or any other effort by the plaintiffs to overturn the court’s denial of class certification or its entry of judgment in favor of the defendants.~~

~~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 is still 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.

“Item 1. Legal Proceedings.” 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 Flowserveforegoing, we and our ~~two foreign~~ subsidiaries ~~that participated~~are named defendants in ~~the program. We intend~~certain other ordinary routine lawsuits incidental to ~~vigorously contest the suit,~~our business and ~~we believe that we have valid defenses~~are involved from time 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~~as parties 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 have conducted a voluntary systematic process to further review, validate and voluntarily disclose export violations discovered as part of this review process. We have completed the global site visits scheduled as part of this voluntary disclosure process, and we are nearing completion of our comprehensive disclosures to the appropriate U.S. government regulatory authorities, although these disclosures may continue to be refined or supplemented after our initial submittal. Based on our review of the data collected to date, 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 apparently were exported, in limited circumstances, without required export or reexport licenses or without full compliance withgovernmental proceedings, all applicable rules and regulations to a number of different countries throughout the world, including certain sanctioned countries. The foregoing information is subject to change as our voluntary reporting process is finalized and we review this submittal with applicable regulatory authorities.

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. Although companies making voluntary export violation disclosures, as we are currently doing, have historically received reduced penalties and certain mitigating credits, legislation enacted on October 16, 2007 increased the maximum civil penalty for certain export control violations (assessed on a per-shipment basis) to the greater of $250,000 or twice the value of the transaction. While the Department of Commerce has stated that companies, such as us, that had initiated voluntary self-disclosures prior to the enactment of this legislation generally would not be subjected to enhanced penalties retroactively, we are unable to determine at this time how other U.S. government agencies will apply this enhanced penalty legislation. Accordingly, 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 export control laws and regulations.

~~Other~~

We are currently involved as a potentially responsible party at four 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 be less than $100,000.

~~We are also a defendant in several other lawsuits, including product liability claims, that are insured, subject to the applicable deductibles,~~ arising in the ordinary course of ~~business,~~business. Although the outcome of lawsuits or other proceedings involving us and ~~we are also involved in ordinary routine litigation incidental~~our subsidiaries cannot be predicted with certainty, and the amount of any liability that could arise with respect to ~~our business, none of which,~~such lawsuits or other proceedings cannot be predicted accurately, management does not currently expect these matters, either individually or in the aggregate, ~~we believe~~ to behave a material toeffect on our ~~business,~~financial position, results of 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 operating results or cash ~~flows for the reporting period in which any such resolution or disposition occurs.~~

Item 1A. Risk Factors.

~~None.~~ There have been no material changes in the risk factors discussed in our 2008 Annual Report. In addition to other information set forth in this Quarterly Report, “Item 1A. Risk Factors” in Part I, and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II of our 2008 Annual Report, which contain descriptions of significant factors that might cause the actual results of operations in future periods to differ materially from those currently expected or desired, should be carefully read and considered.

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

On February ~~26,~~27, 2008, our Board of Directors announced the approval of a program to repurchase up to $300.0 million of our outstanding common stock, which commenced in the second quarter of 2008. The share repurchase program does not have an expiration date, and we reserve the right to limit or terminate the repurchase program at any time without notice.

During the quarter ended ~~September 30, 2008,~~March 31, 2009, we repurchased a total of ~~861,600~~150,000 shares of our common stock under the program for ~~$100.0~~approximately $7.1 million (representing an average cost of ~~$116.08~~$47.14 per share). Since the adoption of this program, we have repurchased a total of ~~1,129,100~~1,891,100 shares of our common stock under the program for ~~$135.0~~$172.1 million (representing an average cost of ~~$119.58~~$90.96 per share). We may repurchase up to an additional ~~$165.0~~$127.9 million of our common stock under the stock repurchase program. ~~As of September 30, 2008, we had 55.8 million shares issued and outstanding.~~ The following table sets forth the repurchase data for each of the three months during the quarter ended ~~September 30, 2008:~~March 31, 2009:

Maximum Number of
Shares (or Approximate
Total Number of Shares Dollar Value) That May
Purchased as Part of Yet Be Purchased Under
Total Number of Average Price Publicly Announced the
Period Shares Purchased Paid per Share Plan Plan (in millions)
July 1 – 31 45,812 (1) $ 134.25 — $ 265.0
August 1 – 31 396,168 (2) 126.59 395,000 215.0
September 1 – 30 466,600 107.17 466,600 165.0

Total 908,580 $ 117.01 861,600


								Maximum Number of
								Shares (or Approximate
						Total Number of		Dollar Value) That May
						Shares Purchased as		Yet Be Purchased Under
	Total Number of			Average Price		Part of Publicly		the
Period	Shares Purchased			Paid per Share		Announced Plan		Plan (in millions)
January 1 — 31		219	(1)	$	47.50		—	$	135.0
February 1 — 28		42,861	(2)		51.62		—		135.0
March 1 — 31		165,571	(3)		46.89		150,000		127.9

Total		208,651		$	47.86		150,000


(1)		~~Includes a total of 45,812~~Represents shares that were tendered by employees to satisfy minimum tax withholding amounts for restricted stock awards at an average price per share of ~~$134.25.~~$47.50.

(2)		~~Includes a total of 45~~Represents shares that were tendered by employees to satisfy minimum tax withholding amounts for restricted stock awards at an average price per share of ~~$127.38,~~$51.62.

(3)		Includes a total of 13,576 shares that were tendered by employees to satisfy minimum tax withholding amounts for restricted stock awards at an average price per share of $44.58, and includes ~~1,123~~1,995 shares of common stock purchased at a price of ~~$121.80~~$43.95 per share by a rabbi trust that we established in connection with our director deferral plans pursuant to which non-employee directors may elect to defer directors’ quarterly cash compensation to be paid at a later date in the form of common stock.

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Item 3. Defaults Upon Senior Securities.

None.

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

None.

Item 5. Other Information.

None.

Item 6. Exhibits.

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


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

	3.2			Amended and Restated By-Laws of Flowserve Corporation, effective as of November 20, 2008 (incorporated by reference to Exhibit ~~2.1~~3.1 to the Registrant’s Current Report on Form 8-K ~~as filed with the SEC on March 12,~~dated November 21, 2008).

	10.1			~~First Amendment to Letter of Credit Agreement, dated as of September 11, 2008 among~~Amended and Restated Flowserve Corporation ~~Flowserve B.V. and other subsidiaries of Flowserve Corporation party thereto, ABN AMRO Bank, N.V., as Administrative Agent and an Issuing Bank, and the other financial institutions party thereto~~Director Cash Deferral Plan, effective January 1, 2009 (incorporated by reference to Exhibit ~~10.1~~10.7 to the Registrant’s ~~Current~~Annual Report on Form ~~8-K as filed with~~10-K for the ~~SEC on September 16,~~year ended December 31, 2008).

10.2		Amended and Restated Flowserve Corporation Director Stock Deferral Plan, effective January 1, 2009 (incorporated by reference to Exhibit 10.8 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008).

	~~31.1~~10.3		Flowserve Corporation Officer Severance Plan, amended and restated effective January 1, 2009 (incorporated by reference to Exhibit 10.30 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008).

10.4		Amendment Number Two to the Mark Blinn Employment Agreement between Flowserve Corporation and Mark A. Blinn, dated February 23, 2009 (incorporated by reference to Exhibit 10.38 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008).

31.1		Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	31.2			Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	32.1			Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	32.2			Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

3833

SIGNATURES

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


		FLOWSERVE CORPORATION
~~Date: October 28, 2008~~	~~/s/ Lewis M. Kling~~
	~~Lewis M. Kling~~
	~~President, Chief Executive Officer and Director~~

Date: ~~October 28, 2008~~April 29, 2009		/s/ Lewis M. Kling
		Lewis M. Kling President, Chief Executive Officer and Director

Date: April 29, 2009		/s/ Mark A. Blinn
		Mark A. Blinn
		Senior Vice President, Chief Financial Officer and Latin America Operations

3934

Exhibits Index


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

	3.2			Amended and Restated By-Laws of Flowserve Corporation, effective as of November 20, 2008 (incorporated by reference to Exhibit ~~2.1~~3.1 to the Registrant’s Current Report on Form 8-K ~~as filed with the SEC on March 12,~~dated November 21, 2008).

	10.1			~~First Amendment to Letter of Credit Agreement, dated as of September 11, 2008 among~~Amended and Restated Flowserve Corporation ~~Flowserve B.V. and other subsidiaries of Flowserve Corporation party thereto, ABN AMRO Bank, N.V., as Administrative Agent and an Issuing Bank, and the other financial institutions party thereto~~Director Cash Deferral Plan, effective January 1, 2009 (incorporated by reference to Exhibit ~~10.1~~10.7 to the Registrant’s ~~Current~~Annual Report on Form ~~8-K as filed with~~10-K for the ~~SEC on September 16,~~year ended December 31, 2008).

10.2		Amended and Restated Flowserve Corporation Director Stock Deferral Plan, effective January 1, 2009 (incorporated by reference to Exhibit 10.8 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008).

	~~31.1~~10.3		Flowserve Corporation Officer Severance Plan, amended and restated effective January 1, 2009 (incorporated by reference to Exhibit 10.30 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008).

10.4		Amendment Number Two to the Mark Blinn Employment Agreement between Flowserve Corporation and Mark A. Blinn, dated February 23, 2009 (incorporated by reference to Exhibit 10.38 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008).

31.1		Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	31.2			Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	32.1			Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	32.2			Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

4035


(Amounts in thousands)	Total		Level I		Level II		Level III
Derivative assets	$	2,987	$	—	$	2,987	$	—
Deferred compensation assets and other investments		15,718		7,404		—		8,314

Total assets	$	18,705	$	7,404	$	2,987	$	8,314


								Maximum Number of
								Shares (or Approximate
						Total Number of Shares		Dollar Value) That May
						Purchased as Part of		Yet Be Purchased Under
	Total Number of			Average Price		Publicly Announced		the
Period	Shares Purchased			Paid per Share		Plan		Plan (in millions)
July 1 – 31		45,812	(1)	$	134.25		—	$	265.0
August 1 – 31		396,168	(2)		126.59		395,000		215.0
September 1 – 30		466,600			107.17		466,600		165.0

Total		908,580		$	117.01		861,600