UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q/A

Amendment No. 1

(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, 2004

OR

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

Commission File No. 1-13179

FLOWSERVE CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

New York		31-0267900
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
5215 N. O’Connor Blvd., Suite 2300, Irving Texas (Address of Principal Executive Offices)		75039 (Zip code)

(972) 443-6500
(Registrant’s Telephone Number, Including Area Code)

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

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

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

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

     As of April 21, 2006, there were 56,522,193 shares of the issuer’s common stock outstanding.

 

 

FLOWSERVE CORPORATION
FORM 10-Q/A
Amendment No. 1



TABLE OF CONTENTS

						Page
						No.
EXPLANATORY NOTE							3
PART I — FINANCIAL INFORMATION
		Item 1.		Financial Statements (as restated)
				Condensed Consolidated Statements of Income – Three Months Ended March 31, 2004 and 2003 (unaudited)			4
				Condensed Consolidated Statements of Comprehensive (Loss) Income– Three Months Ended March 31, 2004 and 2003 (unaudited)			5
				Condensed Consolidated Balance Sheets - March 31, 2004 and December 31, 2003 (unaudited)			6
				Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 2004 and 2003 (unaudited)			7
				Notes to Condensed Consolidated Financial Statements			8
		Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			31
		Item 3.		Quantitative and Qualitative Disclosures About Market Risk			45
		Item 4.		Controls and Procedures			46
PART II — OTHER INFORMATION
		Item 1.		Legal Proceedings			48
		Item 6.		Exhibits			50
SIGNATURES							51
Certification Pursuant to Section 302
Certification Pursuant to Section 302
Certification Pursuant to Section 906
Certification Pursuant to Section 906

EXPLANATORY NOTE

     As previously reported in our Annual Report on Form 10-K for the year ended December 31, 2004 (“2004 Annual Report”), we have restated our previously issued financial statements for 2002, 2003 and the first quarter of 2004. We refer to this restatement as the “2004 Restatement.”

     This Amendment No. 1 to our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2004 (“Amended Quarterly Report”) includes the condensed consolidated financial statements for the three months ended March 31, 2004 and 2003, and all amounts referenced in this Amended Quarterly Report for prior periods and prior period comparisons, are presented on a restated basis. For a description of the restatement, see Note 2 to the accompanying consolidated financial statements and Note 2 to the consolidated financial statements included in our 2004 Annual Report.

     This Amended Quarterly Report is being filed to correct errors made in the application of accounting principles generally accepted in the United States. The following items have been amended as a result of the 2004 Restatement:

	(i)		Part I, Item 1, “Financial Statements,” has been revised to correct amounts included in our condensed consolidated financial statements for the three months ended March 31, 2004 and 2003 (See also Note 2 to our condensed consolidated financial statements for discussion of significant changes);
	(ii)		Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” has been revised to reflect the restatement of our condensed consolidated financial statements for the three months ended March 31, 2004 and 2003;
	(iii)		Part I, Item 3, “Quantitative and Qualitative Disclosures About Market Risk,” has been revised to reflect the restatement of our condensed consolidated financial statements for the three months ended March 31, 2004 and 2003;
	(iv)		Part I, Item 4, “Controls and Procedures,” has been revised to disclose certain matters identified in connection with the audit of our consolidated financial statements and internal controls over financial reporting for the year ended December 31, 2004; and
	(v)		Part II, Item 1, “Legal Proceedings,” has been revised to disclose our current legal matters as of the date of filing this Amended Quarterly Report.

     This Amended Quarterly Report should be read in conjunction with our 2004 Annual Report.

     On February 13, 2006, we filed our 2004 Annual Report and included therein our consolidated financial statements as of December 31, 2004 and for the year then ended and our restated consolidated financial statements as of December 31, 2003 and for the years ended December 31, 2003 and 2002. We did not amend our Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for periods affected by the restatement that ended on or prior to December 31, 2003, and the financial statements and related financial information contained in such reports should no longer be relied upon.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

FLOWSERVE CORPORATION
(Unaudited)

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

		Three Months Ended March 31,
		2004				2003
(Amounts in thousands, except per share data)		(As restated)				(As restated)
Sales		$	605,148			$	557,218
Cost of sales			426,269				389,826
Gross profit			178,879				167,392
Selling, general and administrative expense			140,113				128,930
Integration expense			—				6,410
Restructuring expense			—				1,012
Operating income			38,766				31,040
Interest expense			(20,086	)			(21,136	)
Interest income			256				913
Loss on optional prepayments of debt			—				(159	)
Other (expense) income, net			(3,677	)			(1,611	)
Earnings before income taxes			15,259				9,047
Provision for income taxes			8,190				4,035
Income from continuing operations			7,069				5,012
Discontinued operations, net of tax			75				256
Net earnings		$	7,144			$	5,268
Earnings per share:
Basic:
Continuing operations		$	0.13			$	0.10
Discontinued operations			—				—
Net earnings		$	0.13			$	0.10
Diluted:
Continuing operations		$	0.13			$	0.10
Discontinued operations			—				—
Net earnings		$	0.13			$	0.10

See accompanying notes to condensed consolidated financial statements.

FLOWSERVE CORPORATION
(Unaudited)

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

		Three Months Ended March 31,
		2004				2003
(Amounts in thousands)		(As restated)				(As restated)
Net earnings		$	7,144			$	5,268
Other comprehensive income (expense):
Foreign currency translation adjustments, net of tax			(6,688	)			14,841
Cash flow hedging activity, net of tax			(2,784	)			(75	)
Other comprehensive (loss) income			(9,472	)			14,766
Comprehensive (loss) income		$	(2,328	)		$	20,034

See accompanying notes to condensed consolidated financial statements.

FLOWSERVE CORPORATION
(Unaudited)

CONDENSED CONSOLIDATED BALANCE SHEETS

		March 31,				December 31,
		2004				2003
(Amounts in thousands, except per share data)		(As restated)
ASSETS
Current assets:
Cash and cash equivalents		$	39,674			$	53,522
Accounts receivable, net of allowance for doubtful accounts of $15,997 and $18,641			500,288				505,949
Inventories, net			415,683				412,374
Deferred taxes			67,872				64,585
Prepaid expenses and other			32,107				26,091
Total current assets			1,055,624				1,062,521
Property, plant and equipment, net of accumulated depreciation of $423,430 and $411,836			440,894				443,864
Goodwill			872,826				871,960
Deferred taxes			32,161				31,741
Other intangible assets, net			166,013				169,084
Other assets, net			96,201				101,342
Total assets		$	2,663,719			$	2,680,512
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	249,109			$	250,614
Accrued liabilities			280,929				286,433
Debt due within one year			82,327				71,035
Total current liabilities			612,365				608,082
Long-term debt due after one year			857,694				879,766
Retirement obligations and other liabilities			373,541				370,201
Shareholders’ equity:
Serial preferred stock, $1.00 par value, 1,000 shares authorized, no shares issued			—				—
Common shares, $1.25 par value			72,018				72,018
Shares authorized – 120,000
Shares issued – 57,614
Capital in excess of par value			477,617				477,443
Retained earnings			417,272				410,128
			966,907				959,589
Treasury stock, at cost – 2,789 and 2,775 shares			(62,825	)			(62,575	)
Deferred compensation obligation			7,505				7,445
Accumulated other comprehensive loss			(91,468	)			(81,996	)
Total shareholders’ equity			820,119				822,463
Total liabilities and shareholders’ equity		$	2,663,719			$	2,680,512

See accompanying notes to condensed consolidated financial statements.

FLOWSERVE CORPORATION
(Unaudited)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

		Three Months Ended March 31,
		2004				2003
(Amounts in thousands)		(As restated)				(As restated)
Cash flows — Operating activities:
Net earnings		$	7,144			$	5,268
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation			15,349				15,309
Amortization of intangible and other assets			2,763				2,578
Amortization of deferred loan costs and discount			1,243				1,242
Loss on optional prepayments of debt			—				159
Net loss (gain) on the disposition of assets			(1,293	)			753
Change in assets and liabilities, net of acquisitions:
Accounts receivable			781				1,623
Inventories			(1,408	)			3,566
Prepaid expenses and other			(292	)			(9,279	)
Other assets			(667	)			(3,783	)
Accounts payable			86				(17,240	)
Accrued liabilities and income taxes payable			5,952				4,030
Retirement obligations and other liabilities			(6,586	)			(2,108	)
Net deferred taxes			(15,139	)			10,172
Net cash flows provided by operating activities			7,933				12,290
Cash flows — Investing activities:
Capital expenditures			(6,918	)			(5,536	)
Cash received for disposal of assets			3,626				—
Cash paid for acquisition			(9,429	)			—
Net cash flows used by investing activities			(12,721	)			(5,536	)
Cash flows — Financing activities:
Net (repayments) borrowings under lines of credit			(702	)			1,539
Payments on long-term debt			(8,022	)			(20,000	)
Net cash flows used by financing activities			(8,724	)			(18,461	)
Effect of exchange rate changes on cash			(336	)			1,183
Net change in cash and cash equivalents			(13,848	)			(10,524	)
Cash and cash equivalents at beginning of year			53,522				48,991
Cash and cash equivalents at end of period		$	39,674			$	38,467

See accompanying notes to condensed consolidated financial statements.

FLOWSERVE CORPORATION

(Unaudited)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation and Accounting Policies

Basis of Presentation

     The accompanying condensed consolidated balance sheet as of March 31, 2004, and the related condensed consolidated statements of income and comprehensive income (loss) for the three months ended March 31, 2004 and 2003, and the condensed consolidated statements of cash flows for the three months ended March 31, 2004 and 2003, 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 Amended Quarterly Report are presented as permitted by Regulation S-X and do not contain certain information included in our annual financial statements and notes to the financial statements. Accordingly, the accompanying condensed consolidated financial information should be read in conjunction with the restated consolidated financial statements for the year ended December 31, 2003 presented in our 2004 Annual Report, which was filed with the Securities and Exchange Commission (“SEC”) on February 13, 2006.

Stock-Based Compensation

     We have several stock-based employee compensation plans, which we account for under the recognition and measurement principles of Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. For 2004 and prior years, no stock-based employee compensation cost is reflected in net earnings for stock option grants, as all options granted under those plans had an exercise price equal to or in excess of the market value of the underlying common stock on the date of grant. Should we elect to modify any of our existing stock option awards, APB No. 25, as interpreted by Financial Accounting Standards Board (“FASB”) Financial Interpretation (“FIN”) No. 44, “Accounting for Certain Transactions Involving Stock Compensation,” requires us to recognize the intrinsic value of the underlying options at the date the modification becomes effective. Modifications could include accelerated vesting, a reduction in exercise prices or extension of the exercise period.

     Awards of restricted stock are valued at the market price of our common stock on the grant date and recorded as unearned compensation within shareholders’ equity. The unearned compensation is amortized to compensation expense over the vesting period of the restricted stock. We had unearned compensation of $0.7 million and $0.9 million at March 31, 2004 and December 31, 2003, respectively. These amounts will be recognized into net earnings in prospective periods.

     The following table illustrates the effect on net earnings and earnings per share if we had applied the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” to all stock-based employee compensation, calculated using the Black-Scholes option-pricing model.

		Quarter Ended March 31,
		2004				2003
(Amounts in thousands, except per share data)		(As restated)				(As restated)
Net earnings, as reported		$	7,144			$	5,268
Restricted stock compensation expense (income) included in net earnings, net of related tax effects			(39	)			62
Less: Stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects			(419	)			(588	)
Pro forma net earnings		$	6,686			$	4,742
Net earnings per share — basic:
As reported		$	0.13			$	0.10
Pro forma			0.12				0.09
Net earnings per share — diluted:
As reported		$	0.13			$	0.10
Pro forma			0.12				0.09

     The above pro forma disclosures may not be representative of effects for future years, since the determination of the fair value of stock options granted includes an expected volatility factor and additional option grants are expected to be made each year.

Other Accounting Policies

     Our significant accounting policies, for which no significant changes have occurred in the quarter ended March 31, 2004, are detailed in Note 1 of our 2004 Annual Report.

Accounting Developments

Pronouncements Implemented

     In December 2003, the FASB revised FIN No. 46, “Consolidation of Variable Interest Entities,” which addresses the consolidation of variable interest entities (“VIEs”) by business enterprises that are the primary beneficiaries. A VIE is an entity that does not have sufficient equity investment at risk to permit it to finance its activities without additional subordinated financial support, or whose equity investors lack the characteristics of a controlling financial interest. The primary beneficiary of a VIE is the enterprise that has the majority of the risks or rewards associated with the VIE. We have no interests in VIEs that require disclosure or consolidation under FIN 46, and therefore its implementation had no significant effect on our results of operations or financial position.

Pronouncements Not Yet Implemented

     During December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) was enacted in the United States. The Act generally permits plan sponsors that provide retiree prescription drug benefits that are “actuarially equivalent” to the benefits of Medicare Part D to be eligible for a non-taxable federal subsidy. As permitted by FASB Staff Position No. 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003,” we have elected to defer accounting for any effects of the Act until December 31, 2004. We are evaluating the impact of the Act, including the emergence of specific authoritative guidance regarding the accounting treatment afforded the provisions of the Act, which could require us to change information previously reported.

     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 which 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. Restatement

     For the errors discussed below, we restated our condensed consolidated financial statements as of March 31, 2004 and for the three months ended March 31, 2004 and 2003 presented herein.

     The following table sets forth the nature of significant 2004 Restatement errors and their impact on the previously reported net earnings:

Summary of Restatement Issues Affecting Net Earnings
For the Three Months Ended March 31, 2004 and 2003

(Amounts in thousands)		2004				2003
Net earnings, as previously reported		$	10,287			$	7,479
Financial derivatives			(3,936	)			(556	)
Intercompany reconciliations			331				(1,190	)
Pension expense			(388	)			51
Fixed assets and intangibles			(86	)			(823	)
Other			3,016				553
Tax matters			(2,080	)			(246	)
Net earnings, as restated		$	7,144			$	5,268

     Financial Derivatives — We identified errors in our accounting for financial derivatives related to foreign currency forward exchange contracts, which consisted of incorrectly recording unrealized gains and losses in other comprehensive loss for certain contracts that did not meet the criteria for hedge accounting. We also identified errors related to the recording of balances underlying the financial derivatives.

     Intercompany Reconciliations — Our accounting for intercompany transactions was adversely affected by information technology system conversions, acquisitions, and changes in corporate processes for recording intercompany transactions. Our initial analysis of intercompany transactions was expanded to include an assessment of intercompany balance differences at each of the reporting dates. Certain reconciling items were identified through this assessment that required adjustment to the consolidated statements of operations.

     Pension Expense — As part of a comprehensive review of our pension plans, we identified errors in the accounting for non-U.S. pension plans. Certain plan obligations had not been measured at the actuarially determined present value, which resulted in errors in our annual pension expense and related liabilities.

     Fixed Assets and Intangibles — As part of a comprehensive physical observation and assessment of fixed assets, we identified errors in our fixed asset processes related to disposals and abandonments that were not recorded in our accounting records necessitating adjustments to report the gains or losses on disposal in the appropriate periods. We also identified errors that resulted from not adjusting for the impact of purchase accounting within the general ledgers at certain locations of recently acquired businesses, amortization of leasehold improvements over periods in excess of the related lease terms, and errors in the amortization of intangible assets. These errors affected amounts reported for fixed assets, goodwill, other intangible assets, depreciation and amortization, loss on disposals, and foreign currency translation accounts.

     Other — We identified other errors as part of the restatement where the individual impact on net earnings was not as significant, which resulted from the following:

	•		errors in the original allocation of the purchase price for acquired businesses to property, plant and equipment, goodwill, accrued liabilities and deferred income taxes;
	•		errors in reconciliations of account balances;
	•		errors in accounting for equity investments that were based on foreign accounting standards rather than accounting principles generally accepted in the United States of America (“GAAP”); and
	•		other errors which were not deemed individually significant for separate disclosure.

     Tax Matters — Due to significant employee turnover, information technology system limitations, corporate legal restructurings, several multinational acquisitions, and inadequate reconciliations, we identified errors in the amounts recorded in current and deferred income taxes. We undertook a process to identify our tax basis amounts, for both domestic and international locations, and performed a comprehensive review of our purchase accounting for recent acquisitions. This process included a detailed compilation of our book and tax differences at each of the reporting dates, as well as reconciliations of our income tax payable accounts to tax returns, as filed or as amended.

     We also identified errors that occurred in applying purchase accounting to businesses acquired, including income tax liabilities arising in years prior to the acquisitions, which were corrected in the related balance sheet accounts. We also identified errors in our U.S. federal income tax returns filed for 1999 through 2001 as a result of an Internal Revenue Service examination of those years. We amended our tax returns for those years and reflected the impact of those amendments within current and deferred domestic income tax balance sheet accounts at each of the annual reporting dates through December 31, 2004.

     Tax matters also includes the results of assessing the other restatement entries to determine which amounts had a corresponding impact on our provision for income taxes.

     Discontinued operations — We corrected our financial statements for presentation of discontinued operations. Our Government Marine Business Unit met the criteria for classification as a discontinued operation in the first quarter of 2004, as described further in Note 3.

     The following table presents the impact of the restatement adjustments, further described below, and of the business classified as discontinued operations in 2004 that is described in Note 3, on our consolidated statements of operations for the three months ended March 31, 2004 and 2003:

Condensed Consolidated Statements of Operations Information
For the Three Months Ended March 31, 2004 and 2003

		2004												2003
										As Restated												As Restated
										with												with
(Amounts in thousands,		As Previously								Discontinued				As Previously								Discontinued
except per share data)		Reported				As Restated				Operations				Reported				As Restated				Operations
Sales		$	611,350			$	610,869			$	605,148			$	564,269			$	562,334			$	557,218
Cost of sales			433,275				431,072				426,269				395,715				393,878				389,826
Gross profit			178,075				179,797				178,879				168,554				168,456				167,392
Selling, general and administrative expense			142,400				140,916				140,113				128,539				129,586				128,930
Integration expense			—				—				—				6,410				6,410				6,410
Restructuring expense			—				—				—				1,012				1,012				1,012
Operating income			35,675				38,881				38,766				32,593				31,448				31,040
Interest expense			(20,086	)			(20,086	)			(20,086	)			(21,136	)			(21,136	)			(21,136	)
Interest income			256				256				256				889				913				913
Loss on debt repayment and extinguishment			—				—				—				(159	)			(159	)			(159	)
Other (expense) income, net			592				(3,677	)			(3,677	)			(769	)			(1,613	)			(1,611	)
Earnings before income taxes			16,437				15,374				15,259				11,418				9,453				9,047
Provision for income taxes			6,150				8,230				8,190				3,939				4,185				4,035
Income from continuing operations			10,287				7,144				7,069				7,479				5,268				5,012
Discontinued operations, net of tax			—				—				75				—				—				256
Net earnings		$	10,287			$	7,144			$	7,144			$	7,479			$	5,268			$	5,268
Net earnings per share — basic:
Continuing operations		$	0.19			$	0.13			$	0.13			$	0.14			$	0.10			$	0.10
Discontinued operations			—				—				—				—				—				—
Net earnings		$	0.19			$	0.13			$	0.13			$	0.14			$	0.10			$	0.10
Net earnings per share — diluted:
Continuing operations		$	0.19			$	0.13			$	0.13			$	0.14			$	0.10			$	0.10
Discontinued operations			—				—				—				—				—				—
Net earnings		$	0.19			$	0.13			$	0.13			$	0.14			$	0.10			$	0.10

     Our restatement corrects the consolidated statements of operations for the following errors:

•

Sales decreased $0.5 million and $1.9 million for the three months ended March 31, 2004 and 2003, respectively, primarily due to errors that reported sales in a period later than determined in accordance with GAAP for which there is no significant impact on net earnings in the periods presented ($0.3 million decrease in 2004 and $1.9 million decrease in 2003) and other individually insignificant errors.

		2004				2003
Intercompany reconciliations		$	154			$	1,190
Pension expense			(62	)			(388	)
Other (mainly errors in account reconciliations)			(2,295	)			(2,639	)
Total cost of sales		$	(2,203	)		$	(1,837	)

•

Selling, general and administrative expense decreased for the three months ended March 31, 2004 and increased for the three months ended March 31, 2003, primarily due to errors in the following (in thousands):

		2004				2003
Intercompany reconciliations		$	(486	)		$	—
Pension expense			451				337
Fixed assets and intangibles			117				836
Other (mainly errors in account reconciliations)			(1,566	)			(126	)
Total selling, general and administrative expense		$	(1,484	)		$	1,047

	•		Other expense, net increased $4.3 million and $0.8 million for the three months ended March 31, 2004 and 2003, respectively, primarily due to errors in the accounting for foreign currency forward contracts that did not meet the criteria for hedge accounting ($3.9 million in 2004 and $0.6 million in 2003) and other individually insignificant errors.
	•		Provision for income taxes increased $2.1 million and $0.2 million for the three months ended March 31, 2004 and 2003, respectively, primarily due to corrections in deferred tax accounts and the income tax effect of the errors described above. Included in this was $0.4 million and $0.7 million for the three months ended March 31, 2004 and 2003, respectively, due to the tax impact on the restatement items.

     The following table presents the impact of the restatement adjustments on our consolidated statements of comprehensive income (loss) for the three months ended March 31, 2004 and 2003:

Condensed Consolidated Statements of Comprehensive Income (Loss) Information
For the Three Months Ended March 31, 2004 and 2003

		2004								2003
		As Previously								As Previously
(Amounts in thousands)		Reported				As Restated				Reported				As Restated
Net earnings		$	10,287			$	7,144			$	7,479			$	5,268
Other comprehensive income (expense):
Foreign currency translation adjustments, net of tax			4,480				(6,688	)			5,556				14,841
Cash flow hedging activity, net of tax			(565	)			(2,784	)			(216	)			(75	)
Other comprehensive income (loss)			3,915				(9,472	)			5,340				14,766
Comprehensive income (loss)		$	14,202			$	(2,328	)		$	12,819			$	20,034

     The errors in the consolidated statements of comprehensive income (loss) mainly result from accounting for foreign currency translations relating to the IDP acquisition in 2000 where fair value step-ups for property, plant and equipment were not pushed down to the local entity, which impacted recording subsequent asset disposals, depreciation and the related foreign currency translation effects and financial derivatives.

     The errors identified in the consolidated balance sheet at March 31, 2004, described below, mainly resulted from (i) misapplication of purchase accounting for businesses acquired; (ii) not recording adjustments resulting from reconciling intercompany balances; (iii) not actuarially determining non-U.S. pension obligations and accounting for them in accordance

with GAAP; (iv) incorrect deferred tax asset and liability balances; (v) not recording liabilities (including liabilities for purchased intellectual property, litigation and tax penalties); (vi) recording the effect of the foreign currency translations relating to the restatement; and (vii) recording the adjustments to the consolidated statements of operations set forth above. The errors in applying purchase accounting resulted from incorrectly accounting for deferred taxes in the acquisitions of Ingersoll Dresser Pump Co. (“IDP”) in 2000 and the Flow Control Division of Invensys plc (“IFC”) in 2002 and accounting for foreign currency translations relating to the IDP acquisition in 2000 where fair value step-ups for property, plant and equipment were not pushed down to the local entity, which impacted recording subsequent asset disposals, depreciation and the related foreign currency translation effects.

     The following table presents the impact of the restatement adjustments, further described below, and of the business classified as discontinued operations that is described in Note 3, on our consolidated balance sheet as of March 31, 2004:

Condensed Consolidated Balance Sheet Information

		March 31, 2004
										As Restated
										with
		As Previously								Discontinued
(Amounts in thousands)		Reported				As Restated				Operations
ASSETS
Current assets:
Cash and cash equivalents		$	39,674			$	39,674			$	39,674
Accounts receivable, net			497,499				502,867				500,288
Inventories, net			440,212				422,700				415,683
Deferred taxes			81,208				67,872				67,872
Prepaid expenses and other			29,112				22,511				32,107
Total current assets			1,087,705				1,055,624				1,055,624
Property, plant and equipment, net			438,326				442,424				440,894
Goodwill			872,482				872,826				872,826
Deferred taxes			144,937				32,161				32,161
Other intangible assets, net			163,865				166,013				166,013
Other assets, net			88,265				94,671				96,201
Total assets		$	2,795,580			$	2,663,719			$	2,663,719
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	258,582			$	251,131			$	249,109
Accrued liabilities			286,877				278,907				280,929
Debt due within one year			78,579				82,327				82,327
Deferred taxes			20,019				—				—
Total current liabilities			644,057				612,365				612,365
Long-term debt due after one year			857,694				857,694				857,694
Retirement obligations and other liabilities			458,894				373,541				373,541
Shareholders’ equity			834,935				820,119				820,119
Total liabilities and shareholders’ equity		$	2,795,580			$	2,663,719			$	2,663,719

     The restatement of the condensed consolidated balance sheet corrects for the following errors:

•

Accounts receivable, net, increased $5.4 million at March 31, 2004, primarily from recording an accounts receivable factoring arrangement in one foreign location, previously reported as a sale, as a secured borrowing ($3.7 million), and errors in accounting for one long-term contract that was accounted for using the percentage of completion method in which we did not include the estimated cost of the work performed by subcontractors as part of our total estimated

•		Cost of sales decreased for the three months ended March 31, 2004 and 2003, primarily due to errors in the following (in thousands):
		costs in determining the percentage of completion accounting for the overall contract ($4.0 million). Neither of these items had a significant impact on net earnings in the periods presented. These errors were partially offset by errors in account reconciliations and other individually insignificant items ($2.3 million).
•		Inventories, net decreased $17.5 million at March 31, 2004, primarily due to errors in the following (in thousands):

Long-term contract accounting		$	(9,724	)
Inventory valuation — obsolete and slow moving			(2,383	)
Inventory valuation — LIFO			(1,947	)
Inventory valuation — lower of cost or market adjustment			(1,295	)
Intercompany reconciliations			(943	)
Other adjustments to correct reconciliation of underlying records			(1,220	)
Total inventories, net		$	(17,512	)

		Long-Term Contract Accounting — We identified a long-term contract in which costs related to the contracts were not recorded in the appropriate periods and resulted in corrections to inventories in prior periods. This error did not have a significant impact on net earnings in the periods presented.
		Inventory Valuation — We corrected our financial statements for inconsistencies in the application of our accounting policy for obsolete and slow moving inventory, errors in our last-in, first-out (“LIFO”) calculations, and errors in adjusting for lower-of-cost-or-market considerations. The inconsistencies related to (i) obsolete and slow moving inventory mainly resulting from limitations in our systems and processes that did not effectively identify excess inventory quantities; and (ii) the inventories of acquired businesses where our identification of slow moving items was not performed timely. The errors in LIFO and lower-of-cost-or-market resulted from inaccurate calculations. This error did not have a significant impact on net earnings in the periods presented.
•		Prepaid expenses and other decreased $6.6 million at March 31, 2004, primarily due to reclassification in tax matters ($7.0 million) partially offset by other reconciling items ($0.4 million).
•		Current and non-current deferred tax assets decreased $13.3 million and $112.8 million at March 31, 2004, respectively, to correct errors in recording deferred taxes for purchase accounting, the tax effects of restatement errors, and the tax effects of errors in accumulated other comprehensive loss. Non-current deferred tax assets have been primarily restated to properly net assets and liabilities. See also decrease in non-current deferred tax liability.
•		Property, plant and equipment, net increased $4.1 million at March 31, 2003, to correct the accounting for foreign currency translations relating to the IDP acquisition where fair value was not pushed down to the local entities’ general ledgers, disposals and abandonment of assets, depreciation and amortization due to disposals and excessive amortization periods for leasehold improvements and errors in account reconciliations. These corrections were due to errors in the following (in thousands):

Currency translation impact of push-down accounting		$	10,990
Disposals and abondonments			(7,874	)
Depreciation and amortization			1,387
Other reconciling items			(405	)
Total property, plant and equipment, net		$	4,098

•

Goodwill increased $0.3 million at March 31, 2004 primarily to correct purchase accounting related to the acquisitions of IDP in 2000 and IFC in 2002. These corrections were due to errors in the following (in thousands):

Intercompany reconciliations		$	(7,133	)
Fixed assets			3,133
Deferred income taxes			4,007
Other			337
Total goodwill		$	344

•		Other intangibles, net increased $2.1 million at March 31, 2004, primarily to correct the accounting for purchased intellectual property ($1.8 million) and other reconciling items.
•		Other assets, net increased $6.4 million at March 31, 2004, to reclassify over-funded pension plans to assets ($11.5 million), partially offset by the write down of the value of equity investments based on GAAP conforming adjustments ($4.5 million) and other reconciling items ($0.6 million).
•		Accounts payable decreased $7.5 million at March 31, 2004, to record the adjustments resulting from intercompany account reconciliations ($8.5 million) and other reconciling items ($0.7 million) partially offset by an accrual on long-term contract costs ($1.7 million).
•		Accrued liabilities decreased $8.0 million at March 31, 2004, to correct errors in the following (in thousands):

Tax matters		$	(14,781	)
Intercompany reconciliations			(702	)
Long-term contract accounting			(1,016	)
Purchased intellectual property			3,389
Unclaimed property			3,327
Financial derivatives			(527	)
Other accruals			2,340
Total accrued liabilities		$	(7,970	)

		Unclaimed Property — We identified errors in accounting for unclaimed property primarily for unapplied cash and customer credits related to accounts receivable and for checks issued to vendors and to other payees that were not presented for payment. We previously recorded such items as income and removed these amounts from our balance sheet accounts. The correction reinstates such amounts within accrued liabilities as we began a process of filing with various states under voluntary disclosure agreements. This error did not have a significant impact on net earnings in the periods presented.
•		Debt due within one year increased $3.7 million at March 31, 2004, to correct the accounts receivable factoring arrangement as a secured borrowing rather than as a sale.
•		Current and non-current deferred tax liabilities decreased $20.0 million and $95.2 million, respectively, at March 31, 2004, to correct errors in deferred taxes, the tax effects of errors in the restatement and the tax effects of errors in accumulated other comprehensive loss. Non-current deferred tax liabilities have been primarily restated to properly net assets and liabilities. See also decrease in non-current deferred tax assets.
•		Retirement obligations and other liabilities increased by $9.9 million at March 31, 2004, excluding the decrease of $95.2 million in non-current deferred tax liabilities discussed above, primarily to reclassify over-funded pension plans to other assets, net as described above ($11.5 million) and other reconciling items ($4.2 million) offset by correcting the actuarially determined obligations and accounting for several non-U.S. pension plans in accordance with GAAP and the related liabilities that meet the criteria of a defined benefit plan ($5.8 million).

     Our consolidated statements of cash flows for the three months ended March 31, 2004 and 2003, were also restated for the items discussed above. The following table presents the major subtotals in our 2004 and 2003 consolidated statements of cash flows and the related impact of the restatement adjustments discussed above:

Condensed Consolidated Statements of Cash Flows Information
For the Three Months Ended March 31, 2004 and 2003

		2004								2003
		As Previously								As Previously
(Amounts in thousands)		Reported				As Restated				Reported				As Restated
Net cash flows provided (used) by:
Operating activities		$	7,207			$	7,933			$	13,575			$	12,290
Investing activities			(12,697	)			(12,721	)			(5,536	)			(5,536	)
Financing activities			(8,022	)			(8,724	)			(20,000	)			(18,461	)
Effect of exchange rate changes on cash			(336	)			(336	)			1,183				1,183
Net change in cash and cash equivalents			(13,848	)			(13,848	)			(10,778	)			(10,524	)
Cash and cash equivalents at beginning of year			53,522				53,522				49,245				48,991
Cash and cash equivalents at end of period		$	39,674			$	39,674			$	38,467			$	38,467

     The footnotes contained in these condensed consolidated financial statements also reflect the impact of the restatement discussed in this footnote.

3. Discontinued Operations

     In the first quarter of 2004, we made a definitive decision to sell our Government Marine Business Unit (“GMBU”), a business within our Flowserve Pump Division (“FPD”). As a result, we reclassified the operation to discontinued operations in the first quarter of 2004. In November 2004, we sold GMBU to Curtiss-Wright Electro-Mechanical Corporation for approximately $28 million, generating a pre-tax gain of $7.4 million after the allocation of approximately $8 million of FPD goodwill and $1 million of intangible assets. GMBU, which provided pump technology and service for U.S. Navy submarines and aircraft carriers, did not serve our core market and represented only a small part of our total pump business. We used net proceeds from the disposition of GMBU to reduce our outstanding indebtedness. As a result of this sale, we have presented the assets, liabilities and results of operations of the GMBU as discontinued operations for all periods included.

     GMBU generated the following results of operations:

		Three Months Ended March 31,
		2004				2003
(Amounts in millions)		(As restated)				(As restated)
Sales		$	5.7			$	5.1
Cost of sales			4.8				4.1
Selling, general and administrative expense			0.8				0.6
Earnings before income taxes			0.1				0.4
Provision for income taxes			—				0.2
Results for discontinued operations, net of tax		$	0.1			$	0.2

     GMBU’s assets and liabilities have been reclassified to prepaid expenses and other, property, plant and equipment, net, accounts payable and accrued liabilities to reflect discontinued operations. As of March 31, 2004 and December 31, 2003, GMBU’s assets and liabilities consisted of the following:

(Amounts in millions)

		March 31,				December 31,
		2004				2003
		(As restated)
Accounts receivable, net		$	2.6			$	3.9
Inventory, net			7.0				5.7
Property, plant and equipment, net			1.5				1.6
Goodwill			7.8				7.8
Other intangible assets, net			1.4				1.4
Total assets		$	20.3			$	20.4
Accounts payable		$	2.0			$	3.3
Accrued liabilities			1.0				2.0
Total liabilities		$	3.0			$	5.3

4. Acquisitions

     We acquired the remaining 75% interest in Thompsons, Kelly and Lewis, Pty. Ltd (“TKL”) an Australian manufacturer and supplier of pumps, during March 2004. The incremental interests acquired were accounted for as a step acquisition and TKL’s results of operations have been consolidated since the date of acquisition. The estimated fair value of the net assets acquired (including approximately $2.2 million of cash acquired) exceeded the cash paid of $12 million and, accordingly, no goodwill was recognized.

5. Goodwill

     The changes in the carrying amount of goodwill for the three months ending March 31, 2004 follow:

		Flowserve				Flow				Flow
(Amounts in thousands)		Pump				Solutions				Control				Total
Balance as of December 31, 2003		$	473,554			$	32,266			$	366,140			$	871,960
Resolution of other contingencies			528				—				(713	)			(185	)
Currency translation			(531	)			(372	)			1,954				1,051
Balance as of March 31, 2004 (as restated)		$	473,551			$	31,894			$	367,381			$	872,826

6. Derivative Instruments and Hedges

     We enter into forward contracts to hedge our risk associated with transactions denominated in currencies other than the local currency of the operation engaging in the transaction. Our risk management and derivatives policy specify the conditions in which we enter into derivative contracts. As of March 31, 2004, we have approximately $119.2 million of notional amount in outstanding contracts with third parties. As of March 31, 2004, the maximum length of any forward contract in place was 15 months.

     Certain of our forward contracts do not qualify for hedge accounting. The fair value of these outstanding forward contracts at March 31, 2004 was an asset of $1.4 million and an asset of $4.7 million at December 31, 2003. Unrealized losses from the changes in the fair value of these forward contracts of $3.9 million and $0.6 million for the quarters ended March 31, 2004 and 2003, respectively, are included in other (expense) income, net in the consolidated statements of operations. The fair value of outstanding forward contracts qualifying for hedge accounting at March 31, 2004 was an asset of $0.4 million and a liability of $2.3 million at December 31, 2003. Unrealized gains from the changes in the fair value of qualifying forward contracts and the associated underlying exposures of $84,000 and $30,000, net of tax, for the quarters ended March 31, 2004 and 2003, respectively, are included in other comprehensive income (loss).

     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. As of March 31, 2004, we have $175 million of notional amount in outstanding interest rate swaps with third parties. As of March 31, 2004, the maximum remaining length of any interest rate contract in

place was approximately 32 months. The fair value of the interest rate swap agreements was a liability of $7.7 million and $7.6 million at March 31, 2004 and December 31, 2003, respectively. Unrealized gains (losses) from the changes in fair value of our interest rate swap agreements, net of reclassifications, were $1.7 million and $(0.3) million, net of tax, for the quarters ended March 31, 2004 and 2003, respectively, and are included in other comprehensive income (loss).

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

7. Debt

     Debt, including capital lease obligations, consisted of:

(Amounts in thousands)

		March 31,				December 31,
		2004				2003
		(As restated)
Term Loan Tranche A:
U.S. Dollar Tranches, interest rate of 3.63% in 2004 and 3.74% in 2003		$	191,982			$	200,004
Euro Tranche, interest rate of 4.63% in 2004 and 4.65% in 2003			12,022				12,292
Term Loan Tranche C, interest rate of 3.88% in 2004 and 4.00% in 2003			465,473				465,473
Senior Subordinated Notes, net of discount, coupon of 12.25%:
U.S. Dollar denominated			186,805				186,739
Euro denominated			79,249				80,998
Receivable factoring obligations			3,748				4,543
Capital lease obligations and other			742				752
Debt and capital lease obligations			940,021				950,801
Less amounts due within one year			82,327				71,035
Total debt due after one year		$	857,694			$	879,766

2000 Credit Facilities

     As of March 31, 2004 and December 31, 2003, our 2000 Credit Facilities were composed of Tranche A and Tranche C term loans and a revolving line of credit. Tranche A consisted of a U.S. dollar denominated tranche and a Euro denominated tranche, the latter of which was a term note due in 2006. During the three months ended March 31, 2004, we made scheduled debt payments of $8.0 million. During the remainder of 2004, we made scheduled, mandatory and optional principal payments of $19.5 million, $167.9 million and $160.0 million, respectively.

     The Tranche A and Tranche C loans had ultimate maturities of June 2006 and June 2009, respectively. The term loans bore floating interest rates based on the London Interbank Offered Rate (“LIBOR”) plus a borrowing spread, or the prime rate plus a borrowing spread, at our option. The borrowing spread for the senior credit facilities can increase or decrease based on the leverage ratio as defined in the credit facility and on our public debt ratings.

     As part of the 2000 Credit Facilities, we also had a $300 million revolving line of credit that was set to expire in June 2006. The revolving line of credit allows us to issue up to $200 million in letters of credit. No amounts were outstanding under the revolving line of credit at March 31, 2004 or December 31, 2003. We had outstanding letters of credit of $45.7 million under the revolving line of credit, which reduced borrowing capacity to $254.3 million at March 31, 2004, compared with a borrowing capacity of $257.3 million at December 31, 2003.

     We were required, under certain circumstances as defined in the 2000 Credit Facilities, to use a percentage of excess cash generated from operations to reduce the outstanding principal of the term loans in the following year. Based upon the annual calculations performed at December 31, 2003, no additional principal payments became due in 2004 under this provision.

Senior Subordinated Notes

     At March 31, 2004, we had $188.5 million and €65 million (equivalent to $80.0 million at March 31, 2004) face value of Senior Subordinated Notes outstanding. The Senior Subordinated Notes were originally issued in 2000 at a discount to yield 12.5%, but have a coupon interest rate of 12.25%. Interest on these notes was payable semi-annually in February and August. In August 2005, all remaining Senior Subordinated Notes outstanding were called by us at 106.125% of face value as specified in the loan agreement and repaid, along with accrued interest.

EIB Credit Facility

     On April 14, 2004, we and one of our European subsidiaries, Flowserve B.V., entered into an agreement with European Investment Bank (“EIB”), pursuant to which EIB agreed to loan us up to €70 million, with the ability to draw funds in multiple currencies, to finance in part specified research and development projects undertaken by us in Europe. Borrowings under the EIB credit facility bear interest at a fixed or floating rate of interest agreed to by us and EIB with respect to each borrowing under the facility. Loans under the EIB credit facility are subject to mandatory prepayment, at EIB’s discretion, upon the occurrence of certain events, including a change of control or prepayment of certain other indebtedness. In addition, the EIB credit facility contains covenants that, among other things, limit our ability to dispose of assets related to the financed project and require us to deliver to EIB our audited annual financial statements within 30 days of publication. In August 2004, we borrowed $85 million at a floating interest rate based on 3-month U.S. LIBOR that resets quarterly. The maturity of the loan is June 15, 2011, but may be repaid at any time without penalty. Our obligations under the EIB credit facility are guaranteed by a letter of credit outstanding under our New Credit Facilities.

Debt Covenants

     Our 2000 Credit Facilities that have now been refinanced, the letter of credit facility guaranteeing our obligations under the EIB credit facility, and the agreements governing our domestic receivables program each required us to deliver to creditors thereunder our audited annual consolidated financial statements within a specified number of days following the end of each fiscal year. In addition, the indentures governing our 12.25% Senior Subordinated Notes required us to timely file with the SEC our annual and quarterly reports.

8. Accounts Receivable Factoring

     Through our European subsidiaries, we engage in non-recourse factoring of certain accounts receivable. The various agreements have different terms, including options for renewal and mutual termination clauses. Under our 2000 Credit Facilities as described in Note 7, such factoring was generally limited to $50 million, based on the due date of the factored receivables. The limit on factoring was raised to $75 million under the New Credit Facilities, which were entered into in August 2005, and are fully described in Note 7.

     At March 31, 2004 and December 31, 2003, respectively, we had received, using end of period exchange rates, a U.S. dollar equivalent of approximately $23 million and $24 million, respectively, in cash from our most significant factoring agreement, which represents the factor’s purchase of approximately $28 million and $30 million of our receivables, respectively.

     Additionally, we maintain numerous other individually less significant factoring agreements. In the aggregate, the total cash received from the factoring of receivables under these agreements totaled approximately $23 million and $25 million at March 31, 2004 and December 31, 2003, respectively. One of these agreements was determined to represent a leveraged borrowing, as opposed to a sale of receivables. Accordingly, we have reported the aggregate cash received from this facility as a component of short-term debt in the amount of $3.7 million and $4.5 million at March 31, 2004 and December 31, 2003, respectively.

     In the first quarter of 2004, under all of our factoring agreements globally, we recognized, using quarter-end exchange rates, losses of approximately $0.4 million in factoring receivables, which compares with a total loss of $1.6 million in 2003.

9. Inventories

     Inventories are stated at lower of cost or market. Cost is determined for principally all U.S. inventories by the LIFO method and for other inventories by the first-in, first-out (“FIFO”) method.

     Inventories and the method of determining costs were:

		March 31,				December 31,
		2004				2003
(Amounts in thousands)		(As restated)
Raw materials		$	123,147			$	115,695
Work in process			233,635				229,049
Finished goods			232,013				230,234
Less: Progress billings			(99,430	)			(92,490	)
Less: Excess and obsolete reserve			(46,454	)			(43,354	)
			442,911				439,134
LIFO reserve			(27,228	)			(26,760	)
Net inventory		$	415,683			$	412,374
Percent of inventory accounted for by:
LIFO			50	%			50	%
FIFO			50	%			50	%

10. Restructuring Costs — IFC

Restructuring Costs

     In conjunction with the acquisition of IFC during 2002, we initiated a restructuring program designed to reduce costs and eliminate excess capacity by closing 18 valve facilities, including 10 service facilities, and reducing sales and related support personnel. Our actions, some of which were approved and committed to in 2002 with the remaining actions approved and committed to in 2003, are expected to result in a gross reduction of approximately 889 positions and a net reduction of approximately 662 positions. Net position eliminations represent the gross positions eliminated from the closed facilities offset by positions added at the receiving facilities, which are required to produce the products transferred into the receiving facilities.

     We established a restructuring program reserve upon acquisition of IFC, and recognized additional accruals of $4.5 million in 2003 for this program, including $2.0 million during the first quarter, primarily related to the closure of certain valve service facilities and the related reductions in workforce. Cash expenditures against the accrual were $11.6 million in 2003, including $4.1 million during the first quarter, and $1.3 million during the first quarter of 2004. The remaining accrual of $8.0 million reflects payments to be made in 2004 and beyond for severance obligations due to terminated personnel in Europe of $4.8 million as well as lease and other contract termination and exit costs of $3.2 million.

     Cumulative costs associated with the closure of Flowserve facilities of $7.2 million through December 31, 2003, have been recognized as restructuring expense in operating results, whereas cumulative costs associated with the closure of IFC facilities of $17.9 million, including related deferred taxes of $6.2 million, became part of the purchase price allocation of the transaction. The effect of these closure costs increased the amount of goodwill otherwise recognizable as a result of the IFC acquisition.

     The following illustrates activity related to the IFC restructuring reserve:

		Other Exit
(Amounts in millions)		Severance				Costs				Total
Balance at January 1, 2003		$	10.7			$	5.7			$	16.4
Additional accruals			3.8				0.7				4.5
Cash expenditures			(8.8	)			(2.8	)			(11.6	)
Balance at December 31, 2003			5.7				3.6				9.3
Cash expenditures			(0.9	)			(0.4	)			(1.3	)
Balance at March 31, 2004		$	4.8			$	3.2			$	8.0

Integration Costs – IFC

     We did not incur acquisition-related integration expenses in 2004. During the first quarter of 2003, we incurred acquisition-related integration expense in conjunction with IFC, which is summarized below:

(Amounts in millions)		2003
Personnel and related costs		$	3.7
Transfer of product lines			1.7
Asset impairments			0.2
Other			0.8
IFC integration expense		$	6.4
Cash expense		$	6.2
Non-cash expense			0.2
IFC integration expense		$	6.4

     The acquisition-related activities resulted in integration costs as categorized above and further defined as follows. Personnel and related costs include payroll, benefits, consulting fees, and retention and integration performance bonuses paid to our employees and contractors for the development, management and execution of the integration plan. Transfer of product lines includes costs associated with the transfer of product lines as well as realignment required in the receiving facilities. Asset impairments reflect the loss on disposal of property, plant and equipment at the facilities closed and disposal of inventory for discontinued product lines when the facilities were combined. The other category includes costs associated with information technology integration, legal entity consolidations, legal entity name changes, signage, new product literature and others. None of these items individually amounted to greater than $0.5 million.

Remaining Restructuring and Integration Costs – IFC

     At December 31, 2003, we largely completed restructuring and integration activities related to IFC, except for payments to be made for certain European activities. We expect to incur no additional restructuring and integration costs related to this integration program. Payments from the restructuring accrual will continue throughout 2004 and into 2005 due to the timing of severance obligations in Europe.

11. Warranty Reserve

     The following is a summary of the activity in our warranty reserve:

		2004				2003
(Amounts in thousands)		(As restated)				(As restated)
Balance at January 1,		$	19,233			$	15,899
Accruals for warranty expense			7,210				4,653
Settlements made			(5,844	)			(5,108	)
Balance as of March 31,		$	20,599			$	15,444

12. Earnings Per Share

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

		Quarter Ended March 31,
		2004				2003
(Amounts in thousands, except per share amounts)		(As restated)				(As restated)
Income from continuing operations		$	7,069			$	5,012
Net earnings		$	7,144			$	5,268
Denominator for basic earnings per share — weighted average shares			55,171				55,151
Effect of potentially dilutive securities			258				82
Denominator for diluted earnings per share — weighted average shares			55,429				55,233
Net earnings per share:
Basic:
Continuing operations		$	0.13			$	0.10
Net earnings			0.13				0.10
Diluted:
Continuing operations		$	0.13			$	0.10
Net earnings			0.13				0.10

     Options outstanding with an exercise price greater than the average market price of the common stock were not included in the computation of diluted earnings per share.

     The following summarizes options to purchase common stock that were excluded from the computations of potentially dilutive securities:

		Quarter Ended March 31,
		2004				2003
Total number excluded			1,175,307				2,855,340
Weighted average exercise price		$	27.18			$	22.33

13. Legal Matters and Contingencies

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

     On February 4, 2004, we received an informal inquiry from the SEC requesting the voluntary production of documents and information related to our February 3, 2004 announcement that we would restate our financial results for the nine months ended September 30, 2003 and the full years 2002, 2001 and 2000. On June 2, 2004, we were advised that the SEC had issued

a formal order of private investigation into issues regarding this restatement and any other issues that arise from the investigation. We continue to cooperate with the SEC in this matter.

     During the quarter ended September 30, 2003, related lawsuits were filed in federal court in the Northern District of Texas (the “Court’’), alleging that we violated federal securities laws. Since the filing of these cases, which have been consolidated, the lead plaintiff has amended its complaint several times. The lead plaintiff’s current pleading is the fifth consolidated amended complaint (“Complaint’’). The Complaint alleges that federal securities violations occurred between February 6, 2001 and September 27, 2002 and names as defendants Mr. C. Scott Greer, our former Chairman, President and Chief Executive Officer, Ms. 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 two of our public stock offerings during the relevant period. The Complaint asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder, and Sections 11 and 15 of the Securities Act of 1933. The lead plaintiff seeks unspecified compensatory damages, forfeiture by Mr. Greer and Ms. Hornbaker of unspecified incentive-based or equity-based compensation and profits from any stock sales, and recovery of costs. On November 22, 2005, the Court entered an order denying the defendants’ motions to dismiss the Complaint on the pleadings in their entirety. The case is currently set for trial on March 27, 2007. We continue to believe that the lawsuit is without merit and are vigorously defending the case.

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

     We are also a defendant in several other lawsuits, including product liability claims, that are insured, subject to the applicable deductibles, arising in the ordinary course of business. Based on currently available information, we believe that we have adequately accrued estimated probable losses for such lawsuits. We are also involved in a substantial number of labor claims, including one case where we had a confidential settlement reflected in our results of operations for the second quarter of 2004.

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

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

14. Retirement and Postretirement Benefits

     Components of the net periodic cost (benefit) for the quarters ended March 31, 2004 and 2003 were as follows:

		U.S.								Non-U.S.								Postretirement
(Amounts in millions)		Defined Benefit Plans								Defined Benefit Plans								Medical Benefits
		2004				2003				2004				2003				2004				2003
Net periodic cost (benefit)
Service cost		$	3.5			$	3.4			$	0.9			$	0.6			$	0.1			$	—
Interest cost			3.8				3.9				2.2				1.9				1.3				1.5
Expected return on plan assets			(4.3	)			(4.3	)			(1.1	)			(0.9	)			—				—
Curtailments/settlements			—				(0.1	)			—				—				—				—
Amortization of unrecognized net loss			0.6				0.2				0.3				0.4				0.4				0.3
Amortization of prior service costs			(0.3	)			(0.3	)			—				—				(0.8	)			(0.8	)
Net cost recognized		$	3.3			$	2.8			$	2.3			$	2.0			$	1.0			$	1.0

15. Income taxes

     For the three months ended March 31, 2004, we earned $15.3 million before taxes and provided for income taxes of $8.2 million, resulting in an effective tax rate of 53.7%. The effective tax rate varied from the U.S. federal statutory rate primarily as a result of the impact of increased foreign earnings repatriation used to pay down U.S. debt.

16. Segment Information

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

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

	•		Flowserve Pump Division;
	•		Flow Control Division; and
	•		Flow Solutions Division.

     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 Controller, 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 excluding special items, such as restructuring and integration costs related to the IFC acquisition. We believe that special items, while indicative of efforts to integrate acquired companies such as IFC and IDP into our business, do not reflect ongoing business results. We believe investors and other users of our financial statements can better evaluate and analyze historical and future business trends if special items are excluded from each segment’s operating income. Operating income before special items is not a recognized measure under GAAP and should not be viewed as an alternative to, or a better indicator of, GAAP measures of performance.

     Amounts classified as All Other include the corporate headquarters costs and other minor entities that do not constitute separate segments. Intersegment sales and transfers are recorded at cost plus a profit margin, with the margin on such sales eliminated with consolidation.

     Effective January 1, 2004, we realigned certain small sites between segments. Accordingly, the segment information for all periods presented herein has been reported under our revised organizational structure.

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

Three Months Ended March 31, 2004														Subtotal –
(As restated)		Flowserve				Flow				Flow				Reportable								Consolidated
(amounts in thousands)		Pump				Solutions				Control				Segments				All Other				Total
Sales to external customers		$	295,572			$	87,838			$	220,438			$	603,848			$	1,300			$	605,148
Intersegment sales			1,657				7,000				1,335				9,992				(9,992	)			—
Segment operating income			18,596				17,187				12,259				48,042				(9,276	)			38,766

Three Months Ended March 31, 2003														Subtotal –
(As restated)		Flowserve				Flow				Flow				Reportable								Consolidated
(amounts in thousands)		Pump				Solutions				Control				Segments				All Other				Total
Sales to external customers		$	276,653			$	78,961			$	200,490			$	556,104			$	1,114			$	557,218
Intersegment sales			2,975				6,111				2,496				11,582				(11,582	)			—
Segment operating income (before special items) (1)			20,795				15,890				10,669				47,354				(8,892	)			38,462