福斯 (FLS) 2002 Q1 法說會逐字稿

Good morning ladies and gentlemen and thank you for standing by. Welcome to the Flowserve first quarter conference call. At this time all participants in a listen-only mode. Following the formal presentation, instructions will be given for the question and answer session. If anyone needs to disconnect at any time during the conference, please press * followed by the 0. As a reminder this conference is being recorded today, Tuesday, April 23rd, 2002. I would now like to turn the conference over to Mr. Michael Conley, Director of Investor Relations. Please go ahead sir.

Thank you [_____]. Good morning everyone, welcome to the Flowserve first quarter conference call. I am Michael Conley, Director of Investor Relations and we certainly appreciate you being with us today. Before we get started this morning, let me remind you that the replay of this call will be available beginning at 1 o'clock Eastern Time today through 10:00 P.M. Eastern Time Thursday, April 25th. The access number is 800-405-2236 and outside US, it is 303-590-3000. The pass code for either of those numbers is 464400#. You may also access replay of this call through our website at www.flowserve.com. I will repeat this information at the end of the day's call. Joining me on the call today are Scott Greer, Chairman, President and Chief Executive Officer of Flowserve, Renee Hornbaker, Vice President and Chief Financial Officer. Scott will review our first quarter financial results, next Renee will provide some additional details, and then Scott will come back with some final comments. After that, we will move to Q & A session. Regarding forward-looking statements, I will refer you to last evening's news release for Flowserve's remarks on that topic. The safe harbor statement in that release also applies to all statements made during this conference call as well as questions and answers. And with that, I will turn it over to Scott Greer.

Thank you Michael, and good morning everyone. Last evening we announced first quarter net income of $0.28 per share, in line with our previous guidance. We're pleased with this performance we continue to make headway in a difficult but improving business environment. The announced results represent 180% increase compared with last year's first quarter excluding integration expense, and a 47% increase excluding goodwill and amortization in both periods. Looking back at the first quarter, the main operating aspects that are readily apparent are the positive year-over-year effect of the [IDP] synergies, the benefits of de-leveraging, and the improving conditions in some of our key end markets. The former we've been talking to you about for some time, but it bears repeating because our results are showing the pronounced and ongoing benefits of this acquisition. The latter, the improving market conditions, we alluded to in our last conference call. We began seeing some improvements in booking at the latter part of January and they held pretty well through the remainder of the quarter, mainly led by our seal group and to a lesser extent our pump business. Sequentially, first quarter 2001 bookings were up 5% over fourth quarter 2001 bookings and were split pretty much fifty-fifty between early- and after-market. Keep in mind that I am referring to what is currently a sequential trend. Versus last year's first quarter, bookings were about flat with absent currency translation. While we are optimistic that business conditions will continue to improve, we don't want to jump the gun into clear victory yet. Our business mix remains less favorable than we normally see in better business conditions. Overall MRO, while improving, still isn't back to first half 2001 levels. Among our various businesses our seal group did see stronger MRO business in the first quarter versus the fourth quarter of last year, much of that in the chemical sector. This is encouraging, especially since seals are among our highest-margin products. Should this trend manifest itself in a chemical-related business for our pumps and valves, this would be especially encouraging as these markets are our most lucrative. Pump bookings also improved versus fourth quarter 2001, mainly in our engineered pump line. Our quick turnaround [manual] valve in service business did not see much improvement. However, earlier in Q2 we began to see some marginal improvement. Now, I'll make a few comments about some of our key end markets. Petroleum activity remains relatively strong during the first quarter, we're seeing decent upstream project activity, principally due to the faster than expected depletion and long-term demand requirement. Some of our major petroleum customers continue to tell us that they plan to hold steady, if not increase their spending budget, in 2002 and 2003. And the recent upward movement in oil prices works in their favor. As oil prices stabilize or work their way higher, we continue to expect to see incremental production spending. Our upstream outlook continues to remain positive. As for downstream, or the refinery business, it has not been a major driver to date, but we are seeing increased activity in this area due to cleaner air mandates and desulfurization spending. We've heard [_____] two-thirds of all US refineries will have to modify their existing facilities to confirm with the new requirements at a cost of approximately $6 billion, though of course only a portion of that would be for pumps, valves and seals. We are beginning to see some early signs of desulfurization activity in our bookings. Many refineries are planning to combine various de-bottlenecking and productivity improvement program with their desulfurization projects, since these clean air projects do not generate any payback on their own. As a result we continue to expect to see incremental sales, over and above the desulfurization spending. The chemical industry remains weak and I don't anticipate much near-term recovery. That said, the recent uptake in capacity utilization could suggest that the chemical cycle has bottomed out. We continue to believe that on the whole this sector will move in tandem with the overall economy. One thing to keep in mind is that, as we said earlier, chemical-related business traditionally has been among our most profitable. It has a large MRO component, and it has the best conversion to growth profits on incremental sales. So when the industry turns up, we expect to see significant incremental benefits to our operating results. As for the general industrial sector, while our overall economic activity appears to be improving, it's too early to say if we are seeing any meaningful upturn in this industry. The power industry should continue to be a good market for us. While we expect the growth rate in power-related bookings in the US [pull back] somewhere in the near term, we have a good backlog and we are a significant beneficiary of a large [_____] project in Taiwan. So we continue to expect our power-related sales to be up over the next few years. From a long-term perspective, our outlook for power remains bright. Recent studies indicate that power shortages seen just last year will return unless additional investments are made. This clearly suggests a strong need for additional facilities and expansion over the next decade. In our water-related business, activity remains relatively stronger in the first quarter. We haven't shifted from our view that demographic shifts, economic development and the need to improve our existing infrastructure should continues to drive spending regardless of any voluntary government tax receipts. Also, the Clean Water Act should continue to help drive spending in this area. And now I'll make a few comments about our business segment. The pump division reported first quarter 2002 operating income of $26.1 million, a 44% increase compared with the $18.1 million before integration expense in last year's first quarter. Sales decreased 4% to $233.3 million. Operating margins improved more than 300 basis points to 11.2%. These improved results were nearly driven by the synergy savings of [IDP] acquisitions, the non-amortization of goodwill and certain intangibles, and improved business activity in the petroleum and water markets. Not surprisingly, continued weakness in our chemical and general industry business partially offset these improvements. This has had a particularly unfavorable impact on margin. As we reduced production levels, we stand impacted by these markets in order to reduce bridge inventory and thus improve working capital. In the Flow Solutions division, improvements in our seals business were offset by softness in their service arena. Operating income of $17 million was unchanged compared with last year's first quarter before integration expenses. Sales were about flat $147.1 million and operating margin was unchanged at $11.6 million. Unfavorable currency translations offset the benefits of the FAZ 141 and 142. While seals saw increases in its MRO business, particularly the chemical, service business activity continues to languish as some customers bring back business in-house to avoid employee redundancy cost during periods of economic instability or uncertainty. The flow control division reported first quarter 2002 operating results of $5.2 million versus $9.5 million in last year's first quarter. Sales declined to $73.5 million from $78.7 million last year. Operating margin was 7.1% versus 12.1% in last year's first quarter. FCD's results were impacted by fourth quarter 2001 and early first quarter of 2002 downturn and quick turnaround business. Weak conditions in the chemical sector compared to first quarter 2001, its major market, a mix in favor of OE business, and underabsorption resulting from the lower production throughput as finished goods inventories were reduced to improve working capital. Now I'll turn it over to Renee for a look at the numbers.

Thank you Scott, good morning everyone. My comments will primarily focus on the comparison of Flowserve's first quarter 2002 results with the results for the year-ago period before integration expenses. As a reminder, reported results for the first quarter of last year include expenses related to the IDP integration which was completed in the fourth quarter 2001, while results for 2002 contain no such expenses. I also want to mention that the 2002 implementation SFAS 141 and 142, is playing havoc with apples-to-apples comparison to financial information from year to year. This change in accounting standards results in about $19.7 million of goodwill and other intangible amortization reductions. For Q1, this is $4.7 million or about $0.09 per share, keep in mind its quarterly share amount will be affected by increases in share count. Q1 sales were $447.1 million, up a bit from $444 million in last year's first quarter. This year's sales would have been better except for a 3% unfavorable currency translation, principally related to this reduction in the value of the Euro. Original equipment sales represented about 49% of sales during Q1, up about 1 percentage point from last year. Q1 bookings would have been about flat excluding the unfavorable currency translation of about 4%. Moreover, the encouraging news is that sequentially Q1 bookings increased about 5% from the fourth quarter of 2001. Most of this improvement came in petroleum and in field MRO. That said, I want to point out that MRO activity in most of our other businesses is still comparatively weak. Compared with Q1 2001, increases in bookings for petroleum about offset lower bookings for chemical and general industry. Q1 growth profit was $142.1 million, up about 3% from last year, while growth margin improved 80 basis points to 31.8%. While these improvements reflect slight increases in sales volume, they more so reflect the capture of IDP synergies and improved efficiency now that the integration activities are completed. These improvements were partly offset by underabsorption at a number of facilities that were working down some inventories of finished goods to improve working capital. SG&A in Q1 was $100.2 million, flat with last year. The decline in general administrative expense and a $4.7 million benefit from the benefits of FAZ 141 and 142 were offset by an increase in selling expense and some period costs associated with headcount reduction. Q1 SG&A as a percentage of sales was unchanged at 22%. Operating income increased 12% in Q1 to $41.9 million, compared with $37.5 million last year before integration expenses. Margin improved 100 basis points to 9.4%. FAZ 141 and 142 provided a benefit of $4.7 million, which was partly offset by unfavorable currency translation of about 7%. Q1 net interest expense declined 31% to $21.8 million due to lower interest rates and the lower debt balance. At the end of Q1 our outstanding debt balance was about $1 billion, down $37.6 million from yearend with an average interest rate of 7.5%. As a result of our recent financing activities to fund the IFC acquisition, Flowserve's outstanding debt at the time we plan to complete the acquisition in early May will be about $1.3 billion. We were successful in refinancing our term B notes due in 2008 at a spread of 350 basis points over LIBOR, with term C notes due in 2009 at an initial spread of 300 basis points over LIBOR. We are extremely pleased by the confidence shown by Flowserve's lender in loaning us more money at a lower rate to help us fund our growth. This refinancing is expected to result in a pretax extraordinary charge of around $11 million in Q2 for the early extinguishment of that debt. About 70% of our post-acquisition debt will be floating, including the effects of various interest rate [swaps] we have in place. Of our $300 million revolving credit facility, utilization at end of Q1 was $42 million in borrowings and about $30 million reserve for letter os credit. Our net debt-to-capital ratio was 70% at the end of Q1, down from 71% at yearend. The leverage ratio declined to 3.6 times compared with 3.7 times at yearend. Q1 average shares outstanding on a fully diluted basis were 25.8 million, reflecting a full quarter's worth of the higher share count from the equity offering in November. Average shares outstanding in Q4 of 2001 were 39.3 million. The actual number of shares outstanding as of March 31, 2002 was 45.2 million. As a result of our April equity issuance of 8 million shares, the actual number of shares outstanding at the closing of the IFC acquisition will be about 53.6 million, with the possibility of adding 1.2 million more if the [green shoe] option is exercised.

In Q1 receivables declined by about $20 million from Q4 2001, or about 3 days from last year's Q1. However, 2002's 88 days were up from 76 days at the end of 2001, reflecting the seasonal impact of higher sales in Q4 2001. As you know, the fourth quarter is typically our largerst shipping quarter. Our goal for [DSL] remains at 60 days by the end of 2006. Despite the reduction of the bridge inventories, overall inventory turns on a [_____] basis were 3.2 times, slightly down from yearend, also in part reflecting the seasonal impact of higher sales in Q4. Total sales increased slightly during the quarter. Total inventories increased slightly during the quarter as a result of growing working process [in support of an] increased backlog that was up about 3% from the yearend. We expect inventory turns to improve during the remainder of 2002 as our continuous improvement process which focuses on supply chain management, scrap rework, and cycle time reductions begins to take hold. Our goal for inventories is to be a source of cash and to improve inventory turns to 7 times by 2006. Our 2002 goal continues to be to pull $70 million out of working capital. Capital expenditures were $6.1 million in Q1, which compares with $3.5 million in last year's Q1. We anticipate full-year 2002 cap ex including IFC will be $50 million and less. Depreciation and amortization was $13 million in this year's Q1, of which 11.6 million was depreciation. This is down from $18.1 million in Q1 2001, $4.7 million of which was due to implementation of FAZ 141 and 142. First quarter 2002 EBITDA was $54.4 million, about flat for the year-ago period excluding unfavorable currency translation. EBITDA was $56.5 million in the first quarter 2001 excluding integration expenses. First quarter 2002 results reflect changes in business mix related to softer conditions in chemical and general industrial sectors. Traditionally, as Scott said, these sectors produced many of our best profit margins. First quarter 2002 also benefited from the synergies from the acquisition of IDP. And now I will turn it back to Scott.

Thanks Renee. Before I hand it back to Mike for Q&A, I want to close by making a few comments about our pending acquisition of the [_____] flow controls division, which we are extremely excited about. As you know, we recently completed a secondary equity offering of $8 million shares at $31.50 per share. Net proceeds from the offering were $241 million. As Renee said, these proceeds, combined with about $300 million in bank debt, will be used to finance the $535 million purchase price for IFC. At the same time, we raise new bank debts and refinance the existing bank debts at lower rates. The acquisition of IFC will be transforming Flowserve's valve business into the second largest valve producer in the world. We will become an industry leader from being a simple midge player. Now we are paying 6.1 times EBITDA before synergies for IFC; including synergies, the multiple drops to 5.5. It is a complementary acquisition which will broaden our product line, thus helping us to have new markets and new applications. The acquisition should be neutral and slightly accretive in 2002 even without synergies. So if captured, the expected synergies should add a nice kicker to our operating results in the future. Our financing package is designed to result in an improved debt to EBITDA ratio excluding one-time charges for integration expense. It [should] not increase our leverage. We expect to receive our anti-trust [cleared] any time now, and complete the acquisition effectively May 1 and to immediately begin the integration. So as you can see, we've got our hands full lately, and will continue to have them full; we are having a great time doing it. Now I'll provide some earning guidance for the second quarter and full year 2002. We expect to report second quarter 2002 earnings per share in the range of $0.46 - $0.50 share. Keep in mind this excludes any impact from the IFC integration expense and purchase accounting inventory adjustment due to that acquisition. This compares with $0.35 before integration expense and $0.44 including the effects of FAZ 142 in the second quarter of 2001. We continue to expect full-year 2002 earnings per share to be in the range of $1.90-$2.37. We assume that the pending acquisition of ISP will be neutral to slightly accretive this year. With that, I will turn it over to Mike and if you have any questions we'd be more than happy to answer.

Thank you Scott and Renee, I appreciate your comments this morning. Before we start Q&A, let me remind you that all those business conditions are subject to change. In accordance with Flowserve's policies, the current earnings guidance is effective at the day given and will not be updated until the company publicly announces updated guidance. With that we go to Q&A. [_____].

Thank you sir. Ladies and gentlemen, at this time we will begin the question and answer session. If you have a question please press * followed by the 1 on your pushbutton phone. If you would like to decline from the polling process, please press * followed by the 2. You will hear three tone prompt acknowledging your selection. Your questions will be [taken] in the order they are received. If you are using speaker equipment you won't need to lift the handset before pressing the numbers. Please limit yourself to one question and one follow-up question at this time. One moment please for our first question. Our first question comes from Michael Schneider. Please state your company name followed by your question.

Good morning. Robert W. Baird & Company. Wondering if you could address the inventory situation for a moment. I am trying to reconcile two statements: one, Renee you mentioned that inventory's up sequentially because of the bills and working process, yet you state that margins suffered from declines in finished goods. Obviously in the fourth quarter, your seasonally strongest period, I would have expected inventories to come down sequentially, yet we've seen three sequential quarters of increases in inventory without acquisition. I'm trying to wrap this all up and understand why inventory is indeed isn't heading down.

Let me try to break it down for you a little bit, because there are differences depending on product area. The businesses that typically had bill-to-board inventory were the [_____] in the businesses acted by the chemical and general industrial market. Those are ones where we have more [_____] products where we can [_____] finished goods [_____]. We did that last year for the integration of IDP as well as for systems conversion in one of our valve businesses. As a result of that, inventories of finished goods at yearend was up because [_____] down after economic conditions in the second half of the year. They have [_____] those down even though business conditions haven't improved. Conversely, on the engineered pump side the bookings level and the backlog have been building, and those are the ones that have the biggest proportion of working profit. So we have got just inventory building and working progress related primarily to the engineered pump business. That should work down as we ship it during the course of the year, but it is a typical phenomenon that we do have; some build in working process because of the significant outflow at yearend just as we build working process during the year in support of the increased backlog. That said, we are focusing on ways to continue to reduce the working process on that and we think we will make some good progress, but some of it is going to come maybe later in the year as the real benefits of our continuous improvement process start to kick in. Scott, you want to add anything to that?

The way to look at it, both our valves and our seals divisions did decrease their inventories in accordance with our plans to get inventories out; actually, the net corporate increase was in pumps and that was due to several large projects that are in process that [_____] engineered, some of them actually were expected to be shipped in the first quarter and some of them in the [_____]. So the good news is that we have a very clear handle in parts of the businesses that are already starting to get [attraction].

And can you quantify this bridge inventory amount, what you believe existed, let's say, even at the end of the third quarter or fourth quarter, where we are now and how much is left?

This is a stab at it: it's probably in the area of $10 million or $15 million and I would say we're probably a third of the way to reducing that.

And the rest of our projected inventory decline for this year will come out of better processes so we get a better turn. Also, Mike - a big one I want to make sure we tie to that is: I mentioned that inventory came down in valves, for example; that's a part of the business that's had a quick turnaround business, so it would double the impact [_____] we [saw] the inventory down, we held [_____] prior to bringing [those rates], that of course through absorption. One of the reasons why margins were much weaker in [FCG] than normal.

Okay. The final subpart of my one question, I promise...

This is the third subpart ..

The inventories at the two facilities you had some disruptions at towards the end of last year, could you describe if you've worked off or do you need to work off that part of it?

No. There's still a lot there. We've worked out the majority of the bubbles of project business we talked about, you know pretty much the zero margin stuff that you had to get through the process, but as you can well imagine they still have more raw material with semifinished components than they should have. But as far as the problems that were causing [sales decrease] last year, they are pretty much out the door.

Okay, thank you.

Our next question comes from Scott Graham. Please state your company name followed by your question.

Bear Stearns. Good morning. Hi guys, I have got one question with five subparts, each of which has two subparts. Really just two questions: the SG&A number was a little higher than I thought, and the flow control margin was a little lower than I thought. Could we connect the dots there? Is the SG&A increase 100% of sales basis largely attributable to flow control and if so could you maybe quantify that headcount reduction number?

I wouldn't say it was attributable to flow control, it was pretty much actually, [with some] headcount reductions in the first quarter. So while proportionately it might have impacted flow control most significantly, [_____] from additional headcount our seals business. So virtually every business was impacted, I wouldn't say it was just flow control though it proportionately could be because it's a smaller percentage and it affected it more.

So flow control was really hurt much more by the mix issue?

Mix, and the volume. Largely] a result of getting rid of that inventory.

Okay.

More of it is in our manual valve business, that is the one that's volume-sensitive. And remember, when we get the inventory down we can start running that plant up. It's [upwards] of $0.60 on the dollar profit.

You've talked about goals, which is great for inventory and AR reduction, but you've talked about better blocking and tackling in some inventory of bubble and bridge reduction. Maybe we can get more down to [_____] if at all possible? To what extent is 6 Sigma going to help this, lean manufacturing going to help this, versus other?

The underpinning... the 6 Sigma and our [_____] management system - make sure we get [_____]- are going to be a big part of driving this year after year. The initial part of this year it's still going to be the brute force method, we have blackbelts working on these processes and we have had some plants that [_____] seal divisions. Their reduction really is a result of their adopting lean practices, lean enterprise. There's a part of this where it's already being seen by the process improvement. The other part is pretty rough-and-tumble, we even have people assigned from Dallas working with those plants to make sure we get some of the [_____] through quickly at the same time we're using blackbelts. So it's a combination, but the blackbelts is what's going to continue through our goals year after year. And in the second half a lot of reduction should come from process improvement.

Would it be fair to say that you have line of sight on the 70 at this point?

Yes. We know where it is...

Scott, the Flowserve management system that we employ would start with goals at the top level drive all the way down through the organization, so each location has their goals and their projects that they're working on in connection with the inventory reduction targets they have. So everybody is aligned all the way down through the organization, so they know in effect what [we're] doing and we have a pretty good idea where the opportunities are. One of the things Scott didn't mention is our supply chain management. That is one that we hope will be a significant driver this year of the improvement, in working with our suppliers to time the delivery of the components that we need during the period we need them and managing that whole process, etc. That's one that can be more easily done on the front end and that's going to be a significant driver, particularly the working process improvement this year.

_____]: Okay. Could you just also repeat the D&A and cap ex numbers for the quarter, Renee? And then I'll get off.

Cap ex was $6.1 million and D&A was $13 million.

Okay, thank you very much.

Thank you, Scott.

Our next question comes from [Jerry] Brockman. Please state your company name followed by your question.

Credit Suisse First Boston. Good morning, guys.

Good morning, [Jerry].

Question: have you had any progress on integration plan for the [IfC] division?

A lot of progress.

Anything you're willing to share?

No, not any more than I've been sharing for the last two and a half weeks, I [saw] every investor in America. We'd say $10-15 million is what our commitment in synergy savings are planned, more internally. They're studying detail work now and within the next month they'll have names, dates, everything. Some of what we can't do, some of the detail work; we actually own it.

The other question I have is on revenue: is there any way to try to assess what kind of revenue we're seeing this quarter that may be spillover from the quarter before?

I don't think there's much of that. The quarter before had that terrible short-term business, so that was probably negative turnaround in the first part of this quarter, improved a little bit at the end of January that helped it, but the quick ship hasn't been particularly good. So it's almost like a negative spillover. I guess that answers your question.

Do you provide capacity utilization by division [for/through] your facilities at all?

I guess I want to circle around it...

I will characterize it as this: we are more than able to close four [IFC] plants and handle any kind of boom that the world has ever known in all of our enduser markets.

Okay, great. Thanks a lot, guys.

Thanks.

Thank you.

Our next question comes from Steve [_____]. Please state your company name followed by your question. STEVE [_____]: [Body] Brown Asset Management. I noticed that goodwill was up about $20 million from yearend. Is that due to an acquisition made during the quarter or was that an upward revision of prior acquisitions?

It's actually due to FAZ-141, where we had to reclassify certain intangibles and as a result got reclassified to goodwill. So if you look at it, the $20 million increase in goodwill is pretty much offset by a reduction in the intangibles and that's what it's related to - it's a reclassification. STEVE [_____]: Thank you.

Our next question comes from Chuck Peterson. Please state your company name followed by your question.

Lehman Brothers. Good morning.

Good morning, Chuck.

Two questions. First: I think I missed what you said about the credit facility earlier. Mind repeating that, Renee?

What portion? Let's see: we refinanced our term B facility at about a 50-basis-point improvement over what we had reduced from LIBOR plus 350 down to LIBOR plus 300. In addition, we are also in the process of completing the final allocation on that whole facility. The term C facility, which will determine the exact amount of time of closing, also was at that same rate. We increased the term A by almost $100 million. All that will be more or less effective at the time of acquisition. Effective interest rate 7.5%. There's a one-time hit related to the early extinguishment of debt, it's a non-cash charge related to the financing fees associated with that term B facility that got extinguished with this new term C facility...

Okay...

as an extraordinary charge, at least according to current accounting literature.

And has the new covenant package been finalized at this point?

Yes, it has.

Could you share the details of that?

We will file it when the financing is completed.

Okay. One another question related to the margin impacts of running down your inventory levels, could you quantify that at this point - either dollar or basis points on margins related to running down the inventories?

Probably a 1% impact on the margins. In other words, gross profit margin was impacted by about 100 basis points as a result of running down the inventory and the excess absorption.

For the total company?

For the total company.

And what do you expect for the rest of the year in terms of overhead absorption impact?

If we had $10-15 of bridge inventory - and we're maybe a third to half the way through that - we could expect another percent or so over the next couple of quarters.

Okay, terrific. That's all I have, thank you.

It isn't what happens with the rest of the volume, the volume of the business increases in some of those markets would certainly offset that impact, so it's a little hard to forecast it right now.

Okay, thank you.

Thank you.

Our next question comes from Donna Takeda. Please state your company name followed by your question.

Merrill Lynch. Hi, everybody.

Morning, Donna.

Following up on the change in the classification on the goodwill regarding 141 and 142, Renee: beyond that reclassification, do you - and I know you've been busy - any expectation of any writedowns of any of the goodwill?

We have done our own internal calculations on that and don't believe that any writedowns are warranted. Our auditors are in the process of reviewing that in detail, although they've given it a cursory look-see at this point. We don't think that there will be any adjustment.

And - sorry about this, but a multipart question on your backlog: it looks like most of the backlog got built on the pump business, would that be fair?

Yes.

Yes.

Scott, in your comments you mentioned that some of your customers were pulling back from the service in-house. Was this any of the stuff that was on contract or is this just some anecdotal evidence?

It's the [normal] course of business you expect to see a on quarter-to-quarter basis.

This wasn't in any of the service contracts?

No, none of fixed-fees. In fact, we continue...we're with the strongest in fixed fees in seals, and maybe even added some during the quarter, so that should help us going forward. We've got some plants at low utilization that brought [_____].

Was there any currency impact on the backlog?

There would've been a currency translation impact probably in the same range as sales and bookings, probably in that 3-4% range.

So backlog on a constant currency basis would've looked a little higher.

That's correct.

Yes.

On to the other question: Renee, I think you said that your average rate, going forward, on the debt was going to be 7.5%?

That's on all debt, yes.

Correct me if my memory isn't right, but I thought that was going to be 8%.

We were successful in reducing that term B and the whole new term C by 50 basis points, so we just improved the rates, we were fortunate that we had a good equity offering and...

the [guys] loved the deal...

we took advantage of the market and were able to [_____] down for a change.

Great, thanks a lot.

Thank you.

Our next question comes from Keith Hughes. Please state your company name followed by your question.

Sun Trust Robinson Humphrey. My question is for Renee: We've had two nice quarters of decline at accounts receivable. Are the working capital gains as you head towards your $70 million target...are we going to be switching towards inventory, is that where most of the gains are to come?

I think this year the easier gains are still out of the receivables, that's the one where it's easier to do brute force on the back-end. I would say we will definitely get improvements in inventory, but proportionately my guess is more of it's going to be coming out of receivables and inventories at this point...

early in the year...

Early in year, that is true...

Are you just cutting days with your customers, or how are we accomplishing that?

It's in a variety of ways, but some of the ways are, for example, by just making sure that when we ship the product the customers get everything else they're expecting in order to [_____], because if they don't get the drawings or the documentation the way they want it what happens is the clock sort of starts ticking on their [terms] once they receive once they receive everything that they're expecting. So some of it's by making sure they're getting everything that they need in order to pay us on a timely basis, and some of it by collecting some past dues, things that we're focused on and are making significant progress in that area. So it is a combination of factors...focused...

I understand that. Just one quick followup in terms of the acquisition: are you still not planning to do any type of safety inventory [build] as we do with IDP with a new deal?

It would be very minimum, we [got] lessons learned...first of all we don't end up building the wrong stuff so all I have to do is work [_____]. So I think there'd be less of it. With lessons learned, we have a much better way of planning the handoff between plants, so I don't think that should be an issue.

Okay, thank you.

You're welcome.

Our next question comes from Karl Mergenthaler. Please state your company name followed by your question.

Bank of America. Good morning, how're you doing?

Good morning, Karl.

A quick question on the chemical [_____] market, which has been an issue for a while. If memory serves me right, back in the fall when you laid out guidance I think you were expecting the chemical [_____] market to be down 5%, can you confirm that, and where you are with respect to that for the rest of 2002? And then I have a follow-up question.

Karl, we're assuming in our guidance flat to down 5%, somewhere in that range, and we haven't changed that. We've seen all the research houses and tracked capacity utilization. We've seen some that show there has been some slight uptick recently in capacity utilization - nothing to write home about, but certainly better from where it was. If that were to continue, we'd have a fair wind at our back, but right now we're still there, it's pretty soft.

Also, when you talk about capacity utilization are you primarily talking about in the US? And how does capacity utilization compare, US versus internationally as far as your customers go?

Our big installed bases in the US followed by Europe, that's what we're talking about: the US is the one that is down the most, and why we focus on that is because capacity utilization as it improves has a direct link with [MRO] spending; the utilization in North America has been down 70%, which is kind of a record low, and as that creeps up you're going to start to see steady [MRO] business which cuts across the company. The current Flowserve...prior to the completion of the acquisition our valve business is very dependent, almost 50% of its business is dependent on chemicals. It really is down, but on the same token it converts really nicely into gross margin as that volume improves. Capacity utilization in the US followed by Europe starts improving...that's what we're most focused on. If you looked at places like the Middle East and Asia, capacity utilization is not the issue, in fact we're even seeing there's still some project business taking place in those parts of the world.

Okay, but just so I'm clear: anything from flat to down 5% should represent upside to where the numbers are now for 2002?

Just make it for a much easier year for us...

Okay, great. Thanks a lot.

We'd be delighted if that happens.

Our next question is a followup from Michael Schneider. Please go ahead with your question.

KARL C. MERGENTHALER]: Michael Schneider again?

We've cycled through everybody...

Maybe you can discuss bookings in April: we're several weeks in now and I'm wondering what you've seen -by segment or GI roughly - if you can tell us what the most recent changes have been?

It's so early it becomes anecdotal when we start about early in the quarter, but it's hanging in there; there are some places where it's encouraging, some places where they're not. It's the general industry trends - I talked earlier that petroleum looks good for us; it looks like there'll be a little bit of some refinery spending projects in part of the bookings; we have the daily [MRO] input in chemicals that's ticking up a little bit but still not at the level we saw in the first half of 2001.

Maybe you could comment: it appears to me this time around as we come out of this recession that the pump business seems to be leading you out of it.

That is traditionally the case. As pump business improves in its bookings, valves can lag maybe three to two quarters, somewhere around this - so it could be three months, six months, around there. Particularly in the project business, they're further advanced. The other thing, Mike, is Flowserves's pump business today has a better offering in a lot of enduser markets than it used to and it is benefiting much more from upstream petroleum, where our [_____]valve business doesn't have as much. We'll have more when you combine with [IFC] so it'll benefit earlier. Our seal business has been doing just fine.

And that's where I'm somewhat perplexed: I understand the valve business lags the pump business, but it would seem to me you begin your increased capacity utilization as economic activity picks up, so your seal business should benefit first and your service benefit should benefit first.

On the [MRO] side, yes...

and that's precisely what's not happening this time around...

Seals actually had demonstrated that...

MRO business and seals have picked up...

but not on the valves side or...

No, not yet...the overall booking number you're looking at, that pumps looks like it's pulling us out, that's because it has stronger upstream project business.

And final question: Renee, could you give us what your implicit revenue assumption is for the earnings guidance you gave for second quarter?

I don't think it's much different from what's already out there, it would be pretty similar to what we had out there, what everybody built their numbers on before; we don't see any real change at this point...

but presumably sequentially up?

Yes, definitely sequentially up - even excluding [IFC] plants, yes.

And does your guidance assume further inventory workoff, particularly in the valve division?

Yes.

Yes, sir.

Okay, thank you.

Thank you.

Our next question is a followup from Scott Graham. Please go ahead with your question.

One good set of questions deserves another, likely we're in adjacent offices or something. The power business: the comment you made earlier was not surprising relative to 2002 in that you believe your sales will be up this year because of the visibility on your backlog, but that same comment you rolled into a 2003, perhaps even 2004 situation, which is very pleasing, but I'd like to hear a little more as to how you get there.

Part of it is the [_____] chip and booking. For 2002, on some of the combined cycle type plants, by the time I'd [seen] our backlogs they'd already those projects going forward. So that covers us for 2002 into some 2003. We also have major [_____] projects that we'll probably start shipping in 2003 at the earliest. So all of that keeps our business looking pretty good. We also think that the current slowdown in new projects being announced for the [gas-fired] plants is going to be of somewhat of a temporary nature in that it is not so much reflective of [_____]overbuilt for the projected electricity demands. So we would say that we would expect in 2003 to even start building some of those gas-powered ones at little better rates. So we have the benefit of the backlog and we have this big [_____] project as well.

Okay.

The other thing is with all the new power that has come on-stream, we get the benefit of the aftermarket from that as well, so that is also a factor - that after a project is up and running we get aftermarket parts and services resulting from that. So it's not all new project business, although that would be the lion's share of it.

The other question related the services business: this is a business that's been bouncing around, +2 to -2 on the revenues side. This is a business that we were all pretty optimistic about. Certainly the economic situation has your customers pulling in the reins on a lot of things, in-sourcing rather than outsourcing what they had outsourced and what have you to your point. When do you see the services play if you will, Scott, at Flowserve?

We're hoping that as we get through the year, later in the year we'll start seeing it recovering better to levels before. It did hurt on some of that quick turnaround business. It also had a phenomenon where a lot of big turnaround - by turnaround I mean planned shutdowns, where a lot of repairs done where we normally are a beneficiary because all that can't be done in-house. We know that in some process businesses they have postponed them simply because they want to see how the year progresses, so you get into kind of a double-whammy there, you follow me?

Yes...

So I would see, as the economy turns around and there's more confidence some of these turnarounds - which we are aware of and know that have been postponed - should come forward and ought to help our service business.

You still detect, however, that the long-term will be some measure of outsourcing, perhaps even migrating to a paid-by-the-gallon approach?

I think that's very possible. The best indicator we have is our seal business, which as the furthest advance of that continues to reap the benefits of the endusers. The interesting thing about seals, off all things, is it's most difficult for them to postpone on repair because of environmental considerations. So it's one of the best ones to follow. But we continue to make progress on our fixed-fee alliances and I think that would bode well for the next logical step [_____] be further on the service side of the business. It's a [big relief] for [_____]. Thus far our service business people probably the best in the industry right at the plant level, so they're kind of a spearhead for us.

Okay, thanks.

Thank you.

Ladies and gentlemen, if there are any additional questions please press * followed by the 1 at this time. As a reminder, if you are using speaker equipment you will need to lift the handset before pressing the numbers. One moment please, for our next question. Our next question comes from Michael Cook. Please state your company name followed by your question.

Cook-[Mayer]-Taylor. Can you give me a bit of characterization on your views about non-US activity - what you're seeing, opportunities, strengths, weaknesses that may be somewhat different than what we're seeing domestically?

If we look over last year, while the US chemical business was soft, it was a little better in the first half of the year. The European side was okay, wasn't bad. As everything softened, we probably saw an equally dramatic weakness in chemical spending in Europe. So that's what's very similar. And remember, Europe is important to us because there'd be an installed base there as well so we have more of the [MRO] business. As far as new projects, the chemical industry's been quite active in the Middle East with some ethylene plants, we've seen some of those projects. There are some chemical plants in China. So in the Asia part of the business you're going to see more on new construction, less on MRO because the installed base is much smaller - the major installed base would be in Japan and that would not be a factor for us.

Okay.

If you look from a petroleum standpoint, the quickest we saw in spending upstream was spending on some of the Latin American [state oil] companies - state or some private. In 2001 we saw a lot of spending in Venezuela and Argentina, and now we're seeing much more by the big majors on projects; a lot of them are being put in place in Africa. Also a lot of secondary oil recovery spending in the Middle East area - Saudi Arabia and all the Middle East countries. We continue to see good LNG project business. We had good projects in 2001 with liquefied natural gas, we continue to see them this year.

Right...

General industrial, where it's a broad range of enduser markets - what you could think of is steel industry, food processing, pulp and paper, mining...what we classify as general industry - that has, as you might well imagine, is directly linked to [_____] and that business has been down and we would expect it to see it not turn out until the economy's turning around. I would like to point out, too, that our general industrial business has very similar products to our chemicals - maybe different alloys - so it also has the good incremental gross margin benefits to it - not quite as high as chemical, but just about. So that could be a good upside.

Thank you very much.

Once again, ladies and gentlemen, if you have an audio question please press * followed by the 1 at this time. If you are using speaker equipment, you will need to lift the handset before pressing the numbers.

There are no questions. In some ways it's anticlimactic since because of the [roster] we wanted to make sure we gave everyone an indication, so I feel like I've released this quarter twice and we've given you guidance on the second quarter and you'd like to have the results a little early. We are extremely confident about this enterprise, we see that Flowserve has the potential like we've said; we've seen in our pump business. I want to remind everyone that our first quarter release said things [_____] integration expense; we were talking about 2001, there are no integration expenses in 2001 so I think it demonstrated that we are realizing the benefits in our pump division, doing that in a very difficult time when our chemical and industrial parts of the pump business has been down. So as that improves, we think it will demonstrate over and over again what a propelling transaction IDP was. We see the [IFC] transaction for our valve business. Every bit is exciting, with the same type of upside potential. We talked about our committing to $10-15 million in synergies, of course you can well imagine our internal plans are higher so we hope to even be able to beat that, but right now that's what we're looking for. With that, I will turn it over to Mike.

Before we wrap it up, I want to remind you one more time of the access numbers for the replay: it's 800-405-2236 and outside the US, 303-590-3000; the pass codes are 464400# after either number. You'll also be able to access the replay of our call on our website, at www.flowserve.com. On behalf of Scott and Renee I thank you for being with us today. We look forward to visiting with you again on our second quarter call; that'll be in July so until then, so long!

Thank you, sir. Ladies and gentlemen, this concludes the Flowserve first quarter conference call. We thank you for participating, you may now disconnect.