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FLOWSERVE CORPORATION INDEX

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2003

OR

FOR THE TRANSITION PERIOD FROM                               TO                              .

Commission file number 1-13179

FLOWSERVE CORPORATION
(Exact name of registrant as specified in its charter)

Registrant's telephone number, including area code: (972) 443-6500

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12B-2 of the Exchange Act). Yes ý    No o

FLOWSERVE CORPORATION
INDEX

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Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

FLOWSERVE CORPORATION
(Unaudited)

CONSOLIDATED STATEMENTS OF INCOME

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

See accompanying notes to consolidated financial statements.

3

FLOWSERVE CORPORATION
(Unaudited)

CONSOLIDATED STATEMENTS OF INCOME

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

See accompanying notes to consolidated financial statements.

4

FLOWSERVE CORPORATION

CONSOLIDATED BALANCE SHEETS

See accompanying notes to consolidated financial statements.

5

FLOWSERVE CORPORATION
(Unaudited)

CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes to consolidated financial statements.

6

FLOWSERVE CORPORATION
(Unaudited)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)

1. Basis of Presentation and Accounting Policies

Basis of Presentation

The accompanying consolidated balance sheet as of September 30, 2003, and the related consolidated statements of income and comprehensive income for the three months and nine months ended September 30, 2003 and 2002, and the consolidated statements of cash flows for the nine months ended September 30, 2003 and 2002, are unaudited. In management's opinion, all adjustments comprising normal recurring adjustments necessary for a fair presentation of such consolidated financial statements have been made.

The accompanying consolidated financial statements and notes in this Form 10-Q are presented as permitted by Regulation S-X and do not contain certain information included in the Company's annual financial statements and notes to the financial statements. Accordingly, the accompanying consolidated financial information should be read in conjunction with the Company's 2002 Annual Report on Form 10-K. Interim results are not necessarily indicative of results to be expected for a full year.

Stock-Based Compensation

The Company has several stock-based employee compensation plans. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Currently, 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. However, as discussed more fully in Note 2, the Company is evaluating whether to adopt during the fourth quarter of 2003 a transition option under FASB Statement (SFAS) No. 148, "Accounting for Stock-Based Compensation" to include certain stock option compensation in income.

Awards of restricted stock are generally valued at the market price of the Company's common stock on the date of grant and recorded as unearned compensation within shareholder's equity. The unearned compensation is amortized to compensation expense over the vesting period of the restricted stock.

The following table illustrates the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation", to all stock-based employee

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compensation, calculated using the Black-Scholes option-pricing model.

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

Other Accounting Policies

The Company's accounting policies, for which no significant changes have occurred in the quarter or nine months ended September 30, 2003, are detailed in Note 1 of its 2002 Annual Report on Form 10-K.

2. Recent Accounting Developments

Pronouncements Implemented

In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. Generally, this pronouncement requires companies to recognize the fair value of liabilities for retiring their facilities at the point that legal obligations associated with their retirement are incurred, with an offsetting increase to the carrying value of the facility. The expense associated with the retirement becomes a component of a facility's depreciation, which is recognized over its useful life. The Company adopted SFAS No. 143 on January 1, 2003, however the adoption did not have a significant effect on its consolidated financial position or results of operations due to limited abandonment and retirement obligations associated with its facilities.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." The most significant impact of SFAS No. 145 is to eliminate the requirement that gains and losses from the extinguishment of debt be classified as extraordinary items unless they are infrequent and unusual in nature. The

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Company adopted SFAS No. 145 on January 1, 2003 and has reclassified its previously reported extraordinary items from the second, third and fourth quarters of 2002, which relate to early extinguishment of debt, to become a component of earnings before income taxes.

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized initially at fair value when the liability is incurred. Under previous accounting rules, costs to exit or dispose of an activity were generally recognized at the date that the exit or disposal plan was committed to and communicated. The Company adopted SFAS No. 146 on January 1, 2003 to account for exit and disposal activities arising after that date. See Note 11, "Restructuring and Integration of IFC", for a detailed discussion of the Company's current restructuring initiatives.

In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain Financial Institutions", which became effective for the Company upon issuance. SFAS No. 147 does not have applicability to the Company and therefore its implementation did not impact the financial position or results of operations.

In December 2002, the FASB issued SFAS No. 148, which became effective for the Company upon its issuance. SFAS No. 148 provides three transition options for companies that account for stock-based compensation, such as stock options, under the intrinsic-value method to convert to the fair value method. SFAS No. 148 also revised the prominence and character of the disclosures related to companies' stock-based compensation. The Company is evaluating whether to adopt during the fourth quarter of 2003 a transition option to include all stock-based compensation in income under the provisions of SFAS No. 148. The Company has included the disclosures prescribed by SFAS No. 148 within Note 1 of these consolidated financial statements.

During November 2002, the FASB issued FASB Interpretation (FIN) No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". FIN No. 45 generally requires a guarantor to recognize a liability for obligations arising from guarantees. FIN No. 45 also requires new disclosures for guarantees meeting certain criteria outlined in that pronouncement. The disclosure requirements of FIN No. 45 became effective for the Company at December 31, 2002 and were implemented as of that date. The recognition and measurement provisions of FIN No. 45 became effective on January 1, 2003 and have been implemented for guarantees issued after that date.

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies the accounting and reporting for derivative contracts, including hedges. The amendments and clarifications under SFAS No. 149 generally serve to codify the conclusions reached by the Derivatives Implementation Group, to incorporate other FASB projects on financial instruments, and to clarify other implementation issues. SFAS No. 149 became effective prospectively for the Company for derivative contracts entered into or modified after June 30, 2003. During the third quarter ended September 30, 2003, the implementation of SFAS No. 149 did not have a material effect on the Company's consolidated financial position or results of operations.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150 generally requires the recognition as liabilities in the balance sheet for obligations under financial instruments possessing both liability and equity characteristics, such as mandatorily redeemable instruments, obligations to

9

repurchase equity shares by transferring assets and obligations to issue a variable number of shares. SFAS No. 150 became effective for the Company beginning July 1, 2003 at which time the Company had no instruments governed by the pronouncement to be incorporated into its liabilities. Thus the implementation of SFAS No. 150 had no material effect on the Company's consolidated financial position or results of operations.

Pronouncement Not Yet Implemented

During January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest Entities". FIN No. 46 provides guidance for companies having ownership of variable interest entities, which includes entities typically referred to as special purpose entities, in determining whether to consolidate such variable interest entities. FIN No. 46 has immediate applicability for variable interest entities created after January 31, 2003 or interests in variable interest entities obtained after that date. For interests in variable interest entities obtained prior to February 1, 2003, FIN No. 46 becomes effective on December 31, 2003. The Company has completed the evaluation for its significant joint ventures and continues to evaluate the impact of this pronouncement, but does not believe that its adoption will have a significant effect on the Company's consolidated financial position or results of operations.

3. Allowance for Doubtful Accounts

Accounts receivable are stated net of the allowance for doubtful accounts of $17.7 million and $21.0 million at September 30, 2003 and December 31, 2002, respectively. The reduction in the allowance for doubtful accounts reflects a lower level of overall receivables, including lower past due receivables.

4. Goodwill

The changes in the carrying amount of goodwill for the nine months ending September 30, 2003 follow:

⁽¹⁾

As previously disclosed in the most recent annual report, the Company expected to make refinements to the purchase price allocation of IFC. The above refinements during 2003 relate primarily to changes in estimated deferred taxes, additional pension obligations, changes to acquired working capital components and reductions to allocated fair value of certain facilities. As of June 30, 2003, the Company completed its allocation of the purchase price of the flow control division of Invensys plc, which yielded total goodwill of approximately $370 million.

5. Derivative Instruments and Hedges

The Company enters into forward contracts to hedge its risk associated with transactions denominated in foreign currencies. The Company's risk management and derivatives policy specify the conditions in which the Company enters into derivative contracts. As of September 30, 2003, the Company had approximately $73.0 million of notional amount in outstanding contracts with third parties. As of September 30, 2003, the maximum length of any forward contract in place was 20 months. The fair value of outstanding forward contracts entered into by the Company at September 30, 2003 was $1.9 million and $3.3 million at December 31, 2002. During the quarters ended

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September 30, 2003 and 2002, respectively, the Company recognized changes in fair value, net of reclassifications, for gains of $0.1 million and for losses of $0.9 million, before income taxes, in comprehensive income related to its forward contracts.

The Company, also as part of its risk management program, enters into interest rate swap agreements to hedge its exposure to floating interest rates on certain portions of its debt. As of September 30, 2003, the Company had $215.0 million of notional amount in outstanding interest rate swaps with third parties. As of September 30, 2003, the maximum remaining length of any interest rate contract in place was approximately 39 months. At September 30, 2003, the fair value of the interest rate swap agreements was a liability of $9.2 million and $9.8 million at December 31, 2002. During the quarters ended September 30, 2003 and 2002, respectively, the Company recognized changes in fair value, net of reclassifications, for gains of $1.6 million and for losses of $3.7 million, before income taxes, in comprehensive income related to its interest rate swap agreements.

The Company is exposed to risk from credit-related losses resulting from nonperformance by counterparties to its financial instruments. The Company performs credit evaluations of its counterparties under forward contracts and interest rate swap agreements and expects all counterparties to meet their obligations and has experienced no credit losses from its counterparties. Hedging related transactions recorded in comprehensive income are presented net of deferred taxes calculated at 35%.

6. Acquisition of Invensys Flow Control

On May 2, 2002, the Company completed its acquisition of Invensys plc's flow control division (IFC) for an aggregate purchase price of $535 million, subject to adjustment pursuant to the terms of the purchase and sale agreement. IFC manufactures valves, actuators and associated flow control products, and provides the Company with a more balanced mix of revenue among pumps, valves and seals as well as a more diversified geographic and end market mix. The Company financed the acquisition and associated transaction costs with a combination of bank financing and net proceeds of approximately $276 million received from the issuance of 9.2 million shares of common stock in April 2002.

The operating results of IFC are included in the consolidated statement of income from the date of acquisition.

The table below reflects unaudited nine months ended September 30, 2002 pro forma results of the Company and IFC as if the acquisition had taken place at the beginning of 2002, including estimated purchase accounting adjustments and financing costs.

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7. Debt

Debt, including capital lease obligations, consisted of:

Senior Credit Facilities

As of September 30, 2003 and December 31, 2002, the Company's senior credit facilities are composed of Tranche A and Tranche C term loans and a revolving credit facility. Tranche A consists of a U.S. Dollar denominated tranche and a Euro denominated tranche, the latter of which is a term note due in 2006. During the nine months ended September 30, 2003, the Company made optional debt prepayments of $121 million, including $36 million during the third quarter after consideration of $4 million of incremental borrowings under the revolving credit facility. In 2002, the Company made $33.8 million of mandatory and $170 million of optional prepayments on the term loans. As a consequence of the optional prepayments begun in 2002, the Company has no scheduled payments due until December 31, 2003, when $0.9 million is due. As of September 30, 2003, the Company has total scheduled principal payments of $78.3 million due in 2004.

The term loans, which were amended and restated in connection with the IFC acquisition, originally required scheduled principal payments beginning in 2001 for the Tranche A loan and in 2002 for the Tranche C loan. The Tranche A and Tranche C loans have ultimate maturities of June 2006 and June 2009, respectively. The term loans bear floating interest rates based on LIBOR plus a borrowing spread, or the prime rate plus a borrowing spread, at the option of the Company. 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 the Company's public debt ratings.

As part of the senior credit facilities, the Company also has a $300 million revolving credit facility that expires in June 2006. The revolving credit facility also allows the Company to issue up to $200 million in letters of credit. As of September 30, 2003, the Company had $4.0 million outstanding under the revolving credit facility, whereas no amounts were outstanding thereunder at December 31, 2002. The Company had issued $44.7 million in letters of credit under the facility, which reduced borrowing capacity of the facility to $251.3 million at September 30, 2003. This compares with a borrowing capacity of $248.2 million at December 31, 2002.

The Company is required, under certain circumstances as defined in the credit facility, 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

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at December 31, 2002 and 2001, no additional principal payments became due in 2003 or 2002 under this provision.

Senior Subordinated Notes

At September 30, 2003, the Company had $188.5 million and EUR 65 million (equivalent to $75.8 million) 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%. Approximately one-third of these Senior Subordinated Notes were repurchased at a premium in 2001 utilizing proceeds from an equity offering, in accordance with the provisions of the Company's indenture.

Beginning in August 2005, all remaining Senior Subordinated Notes outstanding become callable by the Company at 106.125% of face value. Interest on the Notes is payable semi-annually in February and August.

Debt Covenants

The provisions of the Company's senior credit facilities require it to meet or exceed specified defined financial covenants, including a leverage ratio, an interest coverage ratio, and a fixed charge coverage ratio. Further, the provisions of these and other debt agreements generally limit or restrict indebtedness, liens, sale and leaseback transactions, asset sales and payment of dividends, capital expenditures and other activities.

As of September 30, 2003 and December 31, 2002, the Company was in compliance with all covenants in effect under its debt facilities.

8. Sales of Accounts Receivable

The Company, through certain of its European subsidiaries, engages in non-recourse factoring of certain of its accounts receivable. The various agreements have different terms, including options for renewal, none of which extend beyond December 2005. Under the Company's senior credit facility, such factoring is generally limited to $50 million, based on due date of the factored receivables.

At September 30, 2003 and December 31, 2002, respectively, the Company had received, using end of period exchange rates, a U.S. dollar equivalent of approximately $33 million and $17 million in cash from the factor under its most significant factoring program, which represents the factors' purchase of $42 million and $21 million of receivables. As of these dates, the Company established a receivable from the factors for the $9 million and $4 million to be recouped upon payment by the customer. In the third quarter of 2003, the Company recognized approximately $0.3 million of loss in factoring receivables, which results in a total loss of $0.7 million to date in 2003.

Additionally, the Company maintains numerous other less significant factoring programs. In the aggregate, the total cash received from the factoring of the receivables under these agreements totaled $25.1 million at September 30, 2003 and $16.5 at December 31, 2002.

9. Inventories

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

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Inventories and the method of determining costs were:

Currency translation increased inventory balances at September 30, 2003 by an estimated 5% compared with December 31, 2002.

10. Accumulated Depreciation on Property, Plant and Equipment

Property, plant and equipment are stated net of accumulated depreciation of $393.8 million and $348.7 million at September 30, 2003 and December 31, 2002, respectively.

11. Restructuring and Integration of IFC

Restructuring Costs

In June 2002, in conjunction with the IFC acquisition, the Company initiated a restructuring program designed to reduce costs and eliminate excess capacity by consolidating facilities, closing 18 valve facilities, including 10 service facilities, and reducing sales and related support personnel. The Company's 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 920 positions and a net reduction of approximately 620 positions. Through September 30, 2003, 801 gross positions and 587 net positions had been eliminated pursuant to the program.

The Company established a restructuring program reserve of $11.0 million upon acquisition of IFC, and increased the reserve by a total of $9.6 million during the latter half of 2002. The Company recognized additional accruals, net of non-cash reductions, of $3.3 million in the first half of 2003 for this program, primarily related to the closure of certain valve service facilities and the related reductions in workforce. The Company expects to pay the majority of remaining accrued costs during the fourth quarter of 2003, 2004 and 2005. Cumulative costs associated with the closure of Flowserve facilities of $6.2 million have been recognized as restructuring expense in operating results since the date of acquisition. Cumulative costs associated with the closure of IFC facilities of $17.8 million and related deferred taxes of $6.6 million became part of the purchase price allocation of the transaction. The effect of these closure costs for IFC facilities increased the amount of goodwill otherwise recognizable as a result of the IFC acquisition.

The following illustrates activity related to the IFC restructuring reserve:

14

Integration Costs

During the third quarter of 2003, the Company incurred integration expenses of $3.8 million in conjunction with the integration of IFC, of which over 80% resulted from cash payments. During the second and first quarters of 2003, the Company incurred integration expenses of $5.7 million and $6.4 million, respectively. This compares with $8.1 million recognized in the first nine months of 2002.

Expenses classified as integration represent period costs associated with acquisition-related activities such as relocation of product lines from closing to receiving facilities, realignment of receiving facilities, performance and retention bonuses, idle manufacturing costs, costs related to the integration team, and asset impairments.

Restructuring and Integration

The Company has largely completed its restructuring and integration activities related to IFC, except for certain European activities. The Company expects to incur additional restructuring and integration costs of approximately $4.0 million in the fourth quarter of 2003. Payments from the restructuring accrual will continue into 2004 and 2005 due to the timing of severance obligations in Europe.

12. Warranty Reserve

The following is a summary of the activity in the Company's warranty reserve:

13. Earnings Per Share

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

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:

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14. Contingencies

The Company has 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 remediating these sites, as well as the Company's 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 the Company's preliminary information about the waste disposal practices at these sites and the environmental regulatory process in general, the Company believes 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.

The Company is a defendant in numerous pending lawsuits (which include, in many cases, multiple claimants) that seek to recover damages for alleged personal injury allegedly caused by exposure to asbestos-containing products manufactured and/or distributed by the Company. All such products were used within self-contained process equipment, and management does not believe that there was any emission of respirable asbestos-containing fiber during the use of this equipment.

The Company is 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. Management believes that the Company has adequately accrued estimated losses for such lawsuits. No insurance recovery has been projected for any of the insured claims, because management currently believes that all will be resolved within applicable deductibles. The Company is also a party to other noninsured litigation that is incidental to its business, and, in management's opinion, will be resolved without a material adverse impact on the Company's financial statements.

During the quarter ended September 30, 2003, related class action lawsuits were filed in federal court, in the Northern District of Texas, alleging that the Company violated federal securities law during a period beginning on October 23, 2001 and ending September 27, 2002. The complaints have been consolidated and generally seek unspecified compensatory damages and recovery of costs. The complaints also named Mr. C. Scott Greer, Chairman, President and Chief Executive Officer and Ms. Renee J. Hornbaker, Vice President and Chief Financial Officer as individual defendants. The Company strongly believes that the lawsuits are without any merit and plans to vigorously defend the case.

Although none of the aforementioned potential liabilities can be quantified with absolute certainty, the Company has established reserves covering these possible exposures, which management believes are reasonable based on past experience and available facts. While additional exposures beyond these reserves could exist, none gives rise to any additional liability that can now be reasonably estimated, and the Company believes any such costs will not have a material adverse impact on the Company. The Company 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.

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15. Segment Information

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

The Company has the following three divisions, each of which constitutes a business segment:

•

Flowserve Pump Division;

•

Flow Solutions Division; and

•

Flow Control 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 the Chief Executive Officer, and a Division Controller, who reports directly to the Division President and the Chief Financial Officer. For decision-making purposes, the Chief Executive Officer and other members of upper management use financial information generated and reported at the division level. The Company's corporate headquarters does not constitute a separate division or business segment.

Amounts classified as All Other include the corporate headquarters costs and other minor entities that are not considered separate segments. The Company generally evaluates its segments' performance and determines certain performance-based compensation on operating profit excluding integration and restructuring expenses. These expenses, while indicative of efforts to integrate businesses, do not reflect ongoing business results. Intersegment sales and transfers are recorded at cost plus a profit margin.

⁽¹⁾

Special items reflect costs associated with the IFC Acquisition including integration expense of $3.8 million.

⁽²⁾

Special items reflect costs associated with the IFC Acquisition including a negative purchase accounting adjustment associated with the required write-up and sale of inventory of $2.6 million (recorded as a component of cost of sales), integration expense of $6.1 million and restructuring expense of $2.2 million.

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A reconciliation of total consolidated operating income before special items to consolidated earnings before income taxes follows:

⁽³⁾

Special items reflect costs associated with the IFC Acquisition including integration expense of $15.9 million and restructuring expense of $1.8 million.

⁽⁴⁾

Special items reflect costs associated with the IFC Acquisition including a negative purchase accounting adjustment associated with the required write-up and sale of inventory of $5.2 million (recorded as a component of cost of sales), integration expense of $8.1 million and restructuring expense of $2.9 million.

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A reconciliation of total consolidated operating income before special items to consolidated earnings before income taxes follows:

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16. Guarantor and Nonguarantor Financial Statements

Under the Company's Senior Subordinated Notes, Flowserve Corporation, the parent, guarantees the Senior Subordinated Notes issued by Flowserve Finance, B.V., the named borrower. Because of this parent guarantee, the Company is required to present the following consolidating financial information including the consolidating balance sheet as of September 30, 2003 and December 31, 2002, and the related statements of operations for nine months and three months ended September 30, 2003 and 2002 and cash flows for the nine months ended September 30, 2003 and 2002 for:

•

Flowserve Corporation, the parent;

•

Flowserve Finance B.V.;

•

the guarantor subsidiaries;

•

the nonguarantor subsidiaries; and

•

the Company on a consolidated basis.

The information includes elimination entries necessary to consolidate Flowserve Corporation, the parent, with Flowserve Finance, B.V., and guarantor and nonguarantor subsidiaries.

Investments in subsidiaries are accounted for by the parent using the equity method of accounting. The guarantor and nonguarantor subsidiaries are presented on a combined basis. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions. Separate financial statements for the guarantor subsidiaries and the nonguarantor subsidiaries are omitted because management believes that such financial statements would not be meaningful to readers of the financial statements.

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FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands)
CONSOLIDATING STATEMENT OF OPERATIONS
For The Three Months Ended September 30, 2003
(unaudited)