福斯 (FLS) 2002 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Flowserve second quarter conference call. At this time, all participants are in a listen only mode. Following the formal presentation, instructions will be given for the question and answers session. If anyone needs assistance at any time during the conference, please press the * followed by the 0. As a reminder, this conference is being recorded, Tuesday, July 23rd, of 2002.

I would now like to turn the conference over to Mr. Michael Conley, Director of Investor Relations. Please go ahead, sir.

Thank you, and good morning to everyone. Welcome to the Flowserve second quarter conference call. I'm Mike Conley, Director of Investor Relations for Flowserve and I thank you for being with us today.

Before we get started this morning, I'd like to remind you that a replay of this call will be available today beginning around 1:00 o'clock, Eastern time through 10:00 p.m., Eastern time, on Thursday, the 25th. The access number is 800-405-2236 and outside the U.S. it's (303) 590-3000 and the pass code is 483790# for either number. You can also access a replay of this call through out website at www.flowserve.com and I'll repeat this information at the end of the call today.

Joining me are, this morning, Scott Greer, Chairman, President and CEO of Flowserve and Renee Hornbaker, Vice President and CFO. Scott will review our second quarter financials. Next, Renee will provide some additional details and then Scott will have some final comments and, of course, after that we'll move into the Q&A session.

Regarding forward-looking statements, I would refer you to last evening's news release for our remarks on that topic. The Safe Harbor statement in that release also applies to all statements made during this conference call. The information in this call, including answers to questions, related to projections or other forward-looking statements are subject to the previous Safe Harbor statement applicable as at the date of this call. And with that, I'll turn it over to Scott.

Thanks Mike, and good morning to everyone.

Last evening, we announced second quarter net income, excluding special items, of 46 cents per share in line with our previous guidance. As a reminder, these special items were associated directly with the acquisition of . While the results were not at the top of our range, they do show that we maintained our focus in an extremely difficult business environment. Further, despite challenging conditions, we improved our cash flow and we continued to deliver the company as we promised we'd do.

Renee will give you some more color on these a bit later, but it suffices to say these measures demonstrate that Flowserve is on the right track and our strategies are sound.

As you may recall when I visited with you during last quarter's conference call, my comments were in the context of what I called a difficult but improving business environment. While we do see improved "activity" in most of our end-user markets, yet this activity is not translating into bookings.

Actually, bookings in the chemical and industrial business declined in the quarter. In fact, the bookings -- the decline in bookings for comparable operations, excluding the -- the impact of was 9 percent. While, overall comparables was down 9 percent, chemical and industrial business, according to the Hydraulic Institute, has shown a 25 percent decline which is in line with our experience.

The second quarter was spared the full impact of this bookings decline due to the backlog going into the quarter. However, we do not have the luxury of a strong backlog in the chemical and industrial sectors going into the second half of the year. All signs are becoming more positive all the time. Chemical plant utilization is showing improvement. Pricing, for many chemicals, is showing strength and key large public chemical companies are posting improved results.

That said, it appears that little increase in spending, i.e. increased capital expenditures, will happen this year. But it does bode well for higher cap ex budgets for 2003.

With this as a backdrop, the near-term watchword is cautious. It is prudent to now assume the cautious near-term view and we will run our business accordingly. Notice that I said, near-term. Those words were carefully chosen because I continue to feel that Flowserve's long term outlook is extremely positive. But in the short-run, it is unclear as to what the magnitude of the orders in our quick turnaround business will be.

We had based our previous financial estimates and public statements on the assumption that our chemical and general industrial business would be basically flat or slightly down this year and we could live with that. But, what turns out to be happening, is the condition, instead, seems to be weaker, contrary to what we saw just three months ago.

Right now, I'd like to take a few minutes to give a brief overview of some of our key end-markets. Our petroleum related business had really been shouldering much of the load of late. On the upstream side, we're seeing a number of projects being funded with few delays. In North America we're seeing more project activity in Canada for pipelines and tar sand than in the United States. Much of the activity is for offshore production facilities in various parts of the world. In general, much of the upstream activity is focused in West Africa, Asia and the Middle East.

On the downstream side, we find the activity has been pretty much flat. I don't anticipate refineries will look to increase their capacity until chemicals -- the chemical industry requires more feedstuffs. De-sulfurization remains a bright spot on the downstream side. We are getting some bookings now, but it's looking like the anticipated implementation date for the new clean fuel standards are being pushed out a bit to 2005 and 2007 for gas and diesel, respectively.

Nonetheless, by our count, about a hundred US refineries are currently, or soon, to begin undergoing some type of de-sulfurization related activity. In sum, we're very upbeat about our petroleum related business.

As I said a moment ago, the chemical and general industrial sectors do not seem to be getting any better and there doesn't seem to be many signs of near term improvement. There's a bit of chemical activity in China but little in North America and Europe is fairly quiet. As I said earlier, we've seen slight improvement in capacity utilization and inventories, in general, are down. But this has yet to translate into any significant new bookings.

On the general industry side, pulp and paper remain weak. Steel is poor, although we are seeing some de-bottlenecking activities at some mini-mills and we're seeing little activity in mining. Parts and business in general is weak but project business is even weaker.

The outlook for new bookings in power, particularly combined-cycle, for the short-term is down. But, we've stated previously, our backlog in power entered the year in good shape. In addition, a large order was received in the second quarter for a nuclear project in Asia which is keeping the power backlog good.

Over the next year, we expect an increase in coal-fired power projects. Several are in the planning stages now and some could break this year. Coal-fired plats are roughly three times as expensive to build as combined-cycle, but the fuel is cheaper. For Flowserve, the dollars spent for our products on a coal-fired plant tends to be six times higher than combined-cycle. But it should be remembered that the bill cycle is two and a half years versus one year for combined-cycle. As I said, in the long-term, we are bullish on the power market and we don't foresee any sustained decline in power demand.

Desalination is a good segway to my discussion about the water markets, since they go hand in hand. Typically, a desal plant requires a power plant nearby to furnish power to run it. To give you a perspective of these projects, it is not unusual for a desal project to require 10 to 15 million dollars of pumps. Our desal business is good and growing, particularly in the Middle East.

We remain bullish on water. The level of worldwide activity we're chasing is strong including in the United States, Middle East and China. And there are some good opportunities in Mexico. Population shift, economic growth and infrastructure improvements will continue to drive this market.

And now, I'll make a few comments about our business segment results. The pump division reported second quarter 2002 operating income of 36.6 million. A 22 percent increase compared with 29.9 million before integration expense in last year's first quarter. Under the new FAS-141 and 142 accounting standards, the 2001 number would have been 33.1 million. Sales increased 18 percent to 282.4 million. Operating margin improved 50 basis points to 13 percent. These improved results were mainly driven by synergy savings from the acquisition.

Solid business activity in the petroleum and water markets help offset some of the continued weakness in the chemical and general business, particularly, in the industrial pumps and . The strength in petroleum and water projects was not enough, however, to offset all of the under-absorption in our chemical and industrial business in pumps, due to both the volume decline and the reduction in inventory.

In the Flow Solutions division, improvements in our seal business were offset by weakness in our service arena. Operating income was 18.1 million compared with 22 million in last year's second quarter. The 2001 number was 23 million using FAS-141 and 142 accounting rules. Sales were about flat at 55.4 million. Operating margins fell 240 basis points to 11.6.

While the seal business remains strong, bolstered by their fixed fee alliances, the service business weakened. Mainly, because, as we've said before, many customers bring business back in-house to avoid employee redundancies during periods of economic instability or uncertainty.

The integration of our valve business is right on target. We've announced and begun to close seven plants which are moving quickly to integrate themselves into existing facilities. The synergy savings range previously announced remains very doable.

One of the prime attractions of was its product mix which lessens the company's reliance on the chemical industry. Indeed, this product mix will help our valve business going forward in this environment. Our own valve division has been the most severely impacted by the chemical market slide. Excluding the impact of sales from our valve division were down 4 percent. The decline in sales, coupled with our decision to continue to reduce inventory, caused operating margins for comparable operations to decline 450 basis points from prior year. Most of the drop in earnings is directly correlated to the under-absorption in our manual valve plant.

The Flow Control division reported operating income excluding special items of 15.7 million in the second quarter of 2002 versus 9.2 million in last year's first quarter. Second quarter sales were 163.6 million versus 78.2 million last year. The results for 2002, including the acquisition of which was completed in May -- on May 2nd. Excluding operating income was 5.5 million on sales of 75.5 million.

Operating margins excluding special items was 9.6 percent in the second quarter. Excluding operating margin was 7.3 percent. This compares to 11.8 percent last year's quarter.

Now, I'll turn it over to Renee for a look at the numbers.

Thanks, Scott.

I'm going to focus, primarily, on the second quarter of 2002 results compared with results for the year ago period, before special items in both periods.

Special items recorded during the quarter all relate to the acquisition of . They include, 2.3 million of restructuring and integration expenses associated with the integration of and a negative purchase accounting adjustment of 2.6 million associated with the required write up of inventory. Either way, an additional 2.6 million will be recorded as a special item in Q3 as the acquired inventory closed through of sales.

Also, during Q2, we established a 10.8 million dollar restructuring reserve, mostly recorded in goodwill, with the balance, about 600,000 recorded in . The restructuring relates to the announced closures during the quarter of 6 US facilities in conjunction with the integration. We will record additional amounts for restructuring in Q3 and possibly Q4 as additional facilities are announced for closure.

As a reminder, our stated synergy savings target is in the range of 10 to 15 million dollars and that related costs will be about three times the projected savings.

Special items also include an extraordinary loss of 6.3 million dollars, net of tax, associated with debt refinancing for the acquisition. Special items in 2001 included 16.9 million of integration expenses associated with the integration, which was completed in the fourth quarter of 2001.

Incidentally, separate from the integration, we have subsequently made public our intention to exit our pump facility in Santa Fe, New Mexico. As we have told you previously, as we continue to reduce our manufacturing footprint, expenses associated with such non-acquisition related closures will be run through normal operations. The P&L effect of this closure could be as much as 1 million and is expected to be largely reflected in Q3 expenses.

Compared with the prior year results, the company has a benefit of 4.7 million dollars or about 7 cents per share related to the 2002 required implementation of FAS-141 and 142.

Q2 sales were 592.7 million compared with 464.6 million in last year's quarter. Included in the 2002 number are 88.1 million of sales from . Absent those sales, 2002 sales would have been 504.6 million, up 9 percent from last year. This sales increase is a reflection of the good backlog that we had going into the quarter.

Currency translation had virtually no impact on this quarter's sales as the strengthening of the Euro was offset by the devaluation of Latin American currencies during the quarter.

Original equipment or OE sales represented 57 percent of total sales during Q2 and 51 percent for comparable operations compared with 45 percent last year, Q2.

impacts us somewhat as a majority of their sales are through distribution and sales of complete units are reflected in OE. As we have said before, increases in OE sales and bookings can have an impact on our results due to the fact that OE sales generally have thinner margins than do after market sales.

Q2 bookings increased 6 percent to 572.3 million due to the acquisition of . Absent the 79.1 million of bookings, Q2 bookings declined 9 percent compared with last year, while sequentially they were 4 percent higher than Q1 2002.

Q2 bookings also included the benefit of a 20 million dollar order for a nuclear power project. As with sales, currency translation had virtually no impact on Q2 bookings.

Regarding the OE, aftermarket split, OE bookings in Q2 represented 57 percent of total bookings. 51 percent for comparable operations compared with 50 percent last year reflecting the softness in related activity.

The Q2 declines in chemical and general industrial related bookings have a direct effect on our deliverable backlog for the next quarter.

Q2 gross profit was 182 million up 17 percent from last year, while gross margin declined 280 basis points to 30.7 percent. Gross profit was negatively impacted by the 2.6 million of purchased accounting adjustment from the required write up of inventory which runs through cost of sales. Excluding Q2's gross profit was 156.8 million, slightly above last year, while gross margin declined 240 basis points. Gross profit was also negatively impacted by the lower mix of short turnaround and business, including lower volumes of chemical and industrial process pumps, manual valves and service and repair related activities. In addition, gross profit was adversely affected by the under-absorption at several facilities that were working down inventories of finished goods.

SG&A in Q2 was 122 million dollars compared with 103.6 million last year. Excluding SG&A was about flat with last year. Q2 2002 SG&A includes about a 4 million dollar benefit from the effects of FAS-141 and 142. Q2 SG&A as a percentage of sales declined to 20.6 percent a drop of 170 basis points from last year.

Operating income excluding special items was 62.6 million dollars in Q2 compared with 52.1 million last year. The 2002 number includes 10.2 million of operating income excluding special items contributed by . Excluding and special items in both periods, operating income was about flat with last year.

Q2 operating margins, excluding special items, was 10.6 percent compared with 11.2 percent last year. Currency translation had an unfavorable impact of 5 percent on operating income in Q2.

Q2 net interest expense declined 24 percent to 23.9 million due to repayment of higher cost debt in Q4 2001, renegotiation of the company's debt facilities at lower rates and the decline in market interest rates. At the end of Q2, our outstanding debt balance was just under 1.3 billion with an effective average interest rate of about 6 and three-quarter percent. Although the effective rate at the close of the quarter was close -- during the quarter was closer to 8 percent.

Our debt structure consists of 328 million of Term A due in 2006, 700 million of Term C loan C, due in 2009, both at LIBOR plus 2.75 and approximately 250 of 12 and a quarter subordinated notes due in 2010. There is nothing currently drawn on the 300 million revolving credit facility. Incidentally, as most of you are probably aware, in May Moody's upgraded our credit by one notch across the board and we're very pleased by that.

As at the end of Q2, about 69 percent of our debt was floating, including the effect of 150 million dollars in interest rate swaps that we have in place. Our net debt to capital ratio was 61.1 percent at the end of Q2. Down from 71.3 percent at year-end and down from about 80 percent a year ago. Our leverage ratio of debt to EBITDA, including , declined to 3 and a half times compared with 3.7 times at year-end and 5.2 times about 2 years ago. So, as you can see, we are continuing to make good progress in our drive to deleverage the company as rapidly as possible.

Q2 average shares outstanding on a fully diluted basis were 52.6 million. The actual number of shares outstanding as at June 30, 2002 was 55.2 million.

Operating cash flow was 49.2 million dollars in the current quarter. This reflects an increase of 59.7 million dollars from the prior year. Additionally, it reflects a 67 percent improvement in operating cash flow from the first quarter of 2002. Operating cash flow after cap ex was up 69.9 million from Q2 2001. The cash flow reflects improved earnings, our focus on working capital utilization and the benefit of a tax refund.

Cash was 81 and a half million at the end of Q2 compared with 18.6 million at Q1 and 21 and a half million at year-end 2001. This is obviously higher than the normal balance and is due to higher quarter end receipts, including a 23 million dollar IRS refund at the close of the quarter and higher balances offshore.

The IRS refund is a result of recent tax law changes and relates to the five year carry back of net operating losses. We submitted an early filing and received an accelerated refund.

In Q2, receivables increased 122 million dollars from Q1. Mostly due to about 106 million of sales, but also due to higher sales from comparable operations and about 5 percent currency translation resulting from the strengthening of the Euro.

But, Q2 DSO, excluding , improved to 80 days from 88 days in Q1 and 88 days one year ago. We are continuing to drive this down. Focusing on collection, front-end and credit.

Q2 inventory turns on a basis were 3.2. About flat with Q1. Q2 inventories increased about 132 million due to 118 million of the inventories and 5 percent currency translation. Finished goods inventory declined by about 11 million, especially at the quick turnaround businesses due to the continued focus on inventory reduction. We expect inventory turns to improve during the balance of the year as we ship work in process inventories.

Consistent with our focus on cash, capital expenditures were 8.7 million in Q2 which compares with 18.9 million in last year's Q2. At this point, we now expect fully year 2002 cap ex, including to be closer to 40 million dollars than the 50 million dollars we had indicated earlier.

Depreciation and amortization was 16.7 million in this year's Q2, of which 14 and a half million was depreciation. This is down from 18.4 million in Q2 2001. 4.7 million of this is due to the implementation of FAS-141 and 142.

EBITDA, excluding special items, or adjusted EBITDA was 77.7 million in Q2 and includes 14.1 million of EBITDA contributed by . This compares with 70.8 million adjusted EBITDA in the second quarter of 2001. The decline in EBITDA from comparable operations reflects the unfavorable product and market mix and the under-absorption as a result of lower production volumes, especially due to inventory reduction.

In summary, while some or our markets are having an unfavorable impact on our margins, we, nonetheless, are continuing our focus on cash flow even at the expense of some current period earnings. While I'm not satisfied with, I am encouraged by, our progress.

Lastly, in today's environment, there are many accounting policies and practices that are bandied about in the press. Some of you may have some questions about where Flowserve stands on some of these issues. So, before turning it back over to Scott, I thought I'd make a few comments on a few of them.

Starting with revenue recognition. In any given accounting period, most of our revenues are recorded when they are realizable and earned. Generally, when the title and risk and rewards of ownership have passed to our customers. This is in accordance with the SEC's staff accounting bulletin SAB-101 issued in December of 1999. A small portion of our revenues, generally around 5 percent or so, is recorded in accordance with the AICPA's statement of position SOP-81-1 on contract accounting.

Contract accounting under SOP-81-1 is specifically excluded from the guidelines of SAB-101. It is relevant for binding contracts for the production of goods where specifications are provided by the customer. As you might imagine, this could apply to a significant amount of our revenue, except that we take a conservative approach and apply it to only larger and longer term contracts and to only those for which we receive progress billing. The revenue is recognized on a cost on cost basis. The most common method where the percentage of revenues for the total contract is recorded based on the ratio of the total costs incurred to the total cost -- expected cost for the contract. We review the costs on a quarterly basis and update our estimates for the percentage complete at least every quarter. The progress billings reduce our inventory balance.

Now, let's run down some expenses. Restructuring expense generally represents severance costs for Flowserve's associates directly related to facility closures or reductions in force, usually associated with an acquisition. In 1999, restructure being an exception. Such costs related to associates of an acquired business, however, are reflected in purchase accounting and generally recorded into goodwill, i.e., on the balance sheet.

Integration expenses represent other period costs associated with facility closures in connection with an acquisition. They include such other costs such as performance and retention bonuses, idle manufacturing costs, costs related to the integration team and asset impairment.

Now, pension expenses. For 2001, we had used an assumed long-term rate of return on pension investments of 9 and a half percent. This rate was in the range of that used by Fortune 500 companies and was the same rate as we had used for 2000, despite the reduction in returns in the market, as this rate is to represent a longer-term rate of return and not current performance. We are currently reviewing this rate for 2002 and will update you on any change. But any impact should be well within our guidance. By the way, each one half percent change in the rate represents about 1 million dollars in expense.

As indicated earlier in this quarter, we had an extraordinary item, net of tax, related to unamortized debt issuance costs and related fees associated with the early redemption of debt. This is in accordance with prevailing GAAP under FAS-4. Effective January 2003, under the new FAS-145, such costs prospectively and retroactively will be recorded in earnings before income taxes and included in the calculation of EPS before extraordinary items.

Now, regarding stock option accounting. For 2001, as reflected in Footnote 4 to our annual report, the value of options issued in 2001 was 2.9 million dollars or about 7 cents per share or about a 5 percent impact on EPS before special and extraordinary items.

Our current plans are to continue our current practice, which is permissible under FAS-123, and to continue to disclose the potential impact, of course, unless requirements change.

And now, I'll turn it back to Scott.

Thanks Renee. In closing, I want to emphasize our long-term outlook for Flowserve and our end market. While the chemical and industrial markets are currently weak, their outlook is positive. We are seeing increases in quote activities, chemical plant utilization is moving up. The major public companies are reporting improved results. Inventories are lower. Pricing in many chemicals is improving. Nevertheless, I would now question whether capital budgets will be increased mid-year. That said, we will continue to concentrate on what we can control. Cash flow and deleveraging will remain a key priority and we've made good strides already this year with cash flow from operations at 49.2 million in the second quarter and 78.7 million year to date.

The integration of is on plan. We've already announced seven plant closures. Our continuous improvement process is moving forward, helping us to permanently reduce our cost structure and reduce our footprint.

Our business model, already in place in our seal business, works and demonstrates that it can increase market share and profits in a very difficult environment. With our service reorganization, we should be able to do the same with other businesses. And even with the weakness in the quick ship business being down, Flowserve continues to get the project business which will give us a good backlog for 2003.

Given the worse than expected booking climate in the chemical and industrial area, we expect third quarter earnings to be in the range of 38 to 43 cents per shares with the full year at 170 t0 190 excluding any special items associated with the acquisition.

To put this in perspective, the bottom range remains higher than 2002, even with FAS-141 and 142 adjustments and the higher end is in line with previous guidance. Needless to say, if quick turnaround business in chemical and industrial markets improve only to somewhere within the lower levels of 2001, we would increase our full year projections accordingly.

With that, I'll turn it over to Mike.

OK. Thank you, Scott. Before we start Q&A, let me remind you that although business conditions are subject to change, in accordance with Flowserve's policy, the current earnings guidance is effective at the date given and will not be updated until the company publicly announces updated guidance.

And with that, I'd like to go to Q&A, Stephanie.

Thank you, Mr. Conley. Ladies and gentlemen, at this time, we will begin the question and answer session. If you have a question, please press the * followed by the 1 on your push button phone. If you would like to cancel your request for a question, please press the * followed by the 2. You will hear a three-tone prompt acknowledging your selection. Your questions will be polled in the order they are received and if you are using speaker equipment, please lift your handset before pressing the numbers.

The first question comes from Steve Volkman, please state your company name followed by your question.

Hi, it's Morgan Stanley, good morning.

Morning.

Morning Steve.

So, I think, obviously, what we're seeing in the market today sounds to me, or at least suggests to me, that there's more going on than just whether your quick turnaround business might be a little weaker or not. I'm wondering, Scott, several companies that I've been listening to this quarter have been talking about taking some steps to, sort of, have the CEO certify the results and have you thought about that kind of things, or where would you come --

No. We haven't. What we're seeing is, in fact, when we look at the end of our first quarter, the chemical and industrial business, which is our most profitable business, actually showed an up tick in the last month of the quarter and was on projection to be somewhat in that slack to slightly down from the prior year.

What has happened subsequently, is it has softened. Now, if we look internally at our own projections and what -- and the plans that the business units have in place for the full year, they actually would still leave it to somewhere within our prior guidance. But what we feel that is prudent, with it being that soft, and I would question whether even if things are turning around in that segment, will they really increase the spending, that's really why we've decided to take a much more conservative approach.

We're ready to certify the past ones and the future ones. That really has nothing to do with it. We just think it is better to signal earlier that it's softer and if -- if we're wrong, we're more than happy to beat the numbers and move it back up.

OK, that makes sense. But, I was actually asking it slightly differently. What I mean, is that some CEOs are, sort of, stepping up and, sort of, taking official responsibility for the numbers, in a sense, kind of guaranteeing what's been reported is real. And, you know, obviously, you'd need to go through whatever internal issues you'd need to go through to get there, but for you to stand up and, kind of, come out officially and say, I'm certifying the results that we've already showed, you guys --

Yeah.

-- that seems to be something people are looking for.

Yeah, we are certifying that. Absolutely. I'd certify the results for you. You mean, the past results, I can't --

Exactly.

-- I'm kind of forbidden to guarantee you future results.

Thank you for that.

No, but the past results -- and I think one of the ways that I would look -- for any investor to look at it, we've been -- we see the cash flow is showing it, we're really pretty comfortable with what, you know, we're going to certify. So I guess my ass is in the sling when I'm certifying something in the past. No, we feel very comfortable with that.

I think the market would like to see your ass in the sling a little bit. How about --

Well, are you sure?

What about -- is there any chance that any of you that are in that room right now may not be at the company in the next few months?

There is no -- no chance of that. Everyone will be here. No-one is planning to depart, nor am I making any major management changes anywhere in the foreseeable future.

OK. That's helpful. Renee, can I just drill down a little bit on the cash flow. Where do we expect year end debt levels to be?

Well, year end debt levels, what we had indicated earlier is that we would expect about a 170 million dollars in debt -- in cash flow from operations after cap ex to be available for debt reduction. Through the first couple of months -- first couple of quarters of the year we're about -- not quite half way there and so we would expect debt, you know, to come down about another 80 million. Plus, we'll be -- some of those cash flows that are tied up in cash at the end of the quarter will also be used to reduce debt. So we should probably be down 100 million or so from where we are today.

OK. Great. Thank you that does it for me. Thanks.

Thank you, Steve.

operator. Thank you. The next question comes from Michael Schneider. Please state your company name followed by your question.

Robert W. Baird. Maybe you could give us a sense, just first looking through the quarter? You mentioned that you saw some up tick in the general industrial and the chemical business in March, Scott, but, did it precipitously fall off as you went through the quarter? Because you were on the road in April for the road show, you discussed in May, it just seems to me something happened late in the quarter that came as a surprise.

Yeah, normally, when you look at how our quarter bookings are, usually they are stronger at the end of the quarter than the beginning of the quarter. The salesmen are trying to make sure they book things as they originally projected it. So what we saw is it was getting back in line from a more normal down market at the very end of the first quarter. What we saw is a continued decline and actually not foreseen by our salespeople. They actually thought, talking to the customer, that they were going to bring in some more quick turnaround. And remember, that is a major part of every quarter. It's not just in our backlog and it didn't come through.

Then checking with what all of our competitors are saying, it seems to be the same type of sluggishness there. So what we're looking at going forward, well, you know, we were able to handle in Q2, our concern if it continues at this lower rate into Q3 and on, is really why we're taking a more conservative outlook.

Again, what I do want to stress, you know, if we're being overly conservative, you know, we'll move the guidance back up.

Mike, all of our internal forecasts were for sales to be up in June and they just weren't and they just weren't and they just didn't materialize --

Bookings you mean?

Bookings, I'm sorry, bookings, just didn't materialize as we expected them to do.

OK and then I guess what's most curious to me is the disconnect. We have seen improvements in the utilization rates at chemical plants. We have seen better earnings, obviously, out of the chemical companies, yet you don't see it in the daily activity and these plants are running at higher utilization rates, by definition the work should be higher?

Right we --

disconnect?

What I think it is is that part of your quick turnaround is -- you've got to think of two kinds of projects. There are the big major projects where you're doing a major installation or a major upgrade. There are small projects which are almost similar to where they're going to work on a particular loop. Where they're going to do some upgrades during the maintenance, and I think it's that part which they continue to look at very cautiously.

And while there -- while all the signs are absolutely positive and those are the metrics that we'd look at, that improved utilization is the best indicated that you're going to see better spending in chemical. What I think they're doing is saying, well, we've set out capital budgets back at the end of 2001 and I don't think -- I'm assuming they're just not letting them spend at a higher rate commensurate with the improved activity. So I think there is -- you know, when we look at -- when we go out with out -- to our salespeople, they are all telling us they are seeing increased activity from where they had seen it before in chemical and in industrial where they're talking about some of these smaller, quick turnaround type projects.

What they're not seeing is them actually committing to them so that they'll end up in a sale this year. We may actually see commitments coming in the fourth quarter so that they can put something, you know, in a booking, but they don't want it to hit their capital expenditure budget. But the activity we're seeing more of it, but it, frankly, not seeing it turn into bookings. Particularly in June. That's what really causes us some concern.

OK and Renee, two specific questions. The Santa Fe facility is a million dollars in projected costs, that is included in the third quarter guidance?

Yes it is.

OK. And then secondly, the covenants, the stock seems to tell us that you guys, you're going to break the covenant. Did you discuss what the two tightest covenants are at this point and where you stand, given the new guidance level?

The covenants -- the two types -- there's -- the most important target for us is our leverage ratio. That's the one that's always the most -- that is the tightest on purpose and we have -- we have a comfortable margin at these levels of guidance, there is no concern that we have, at all, in terms of continuing to meet our covenants.

OK. And the EBITDA ratio isn't in jeopardy either?

That is correct, it is not.

Not even close, Mike, not even close.

And the fixed charge ratio?

Wide margin of error.

OK, thank you.

Even at these lower levels.

And also remember, Mike, part of what we're doing in the earnings is we still are going to drive that inventory. We're not letting them build. We could've, actually, been at the top end of the range this quarter if we'd have let the chemical plants build in anticipation of better business. We're not doing that so we-re -- we're getting hit but under-absorption across our businesses. Both in our valve and our pump business in particular because we're going to continue to guide down inventory, because we are -- we're going to be paying down debt. We want to delever, which makes the covenants, extreme covenants. Very clear covenants.

And, in fact, by the way, where our current leverage ratio stands, at the end of the quarter, under our revolving credit facility, we -- and Term A, we have the ability to bring that rate down another 25 basis points based on the fact that our rate is now at 3 and a half.

OK.

Thank you, sir. The next question comes from Scott Gramm. Please state your company name followed by your question.

Bear Stearns, good morning.

Good morning, Scott.

Hi, Scott.

Hi guys. I've got several questions. The reduced guidance, it seems as if, to me, that you took essentially what was a fairly disappointing June and have extrapolated this forward; is that fair?

That's pretty --

Sales wise?

-- much fair. What we're saying is that the -- that level and we cannot see from any competitors customers saying they're going to bump it up. We think -- we have extrapolated and just said, you know, that part of the business, we're going to continue to drive down inventory and there's going to be under-absorption. While we will make the necessary cuts, they always lag. So that's really exactly what we're doing.

OK.

The overall business, Scott, I think it's very important to say that on the project business, project bookings still are good, in fact, project sales as a percent of sales this quarter were very high because we still are -- we still have a backlog and we're still adding to it. So, yeah.

OK.

.

The -- at the same time, you know, I'll add here, that it looks like the -- this business, this quick turn, high margin business, frankly is a lot larger than what I thought it was or perhaps it's much more seasonal than I thought it was and to that end, if we're talking about a reduction in guidance, single -- mid-point to mid-point from where we were to where we are, we're looking at approximately 25 million dollars of operating income reduction? If it's 20, kill me, but you know, roughly in that area which, at a high margin, if that's a high margin business for you, is suggestive of a 100 million dollar top line short fall in the second half of the year which does not seem to be plausible given the sales results that you guys poured out in this quarter? So, I'm hoping, Renee, you can connect some of the dots here for me.

Shall we both try? Let me quickly and then Renee can give you real specifics. When you look -- and you've got to go by bookings, Scott, is what you're looking at. The bookings remain relatively good, although they were slightly down. But what is billable in 2002, because remember, for example, we talked about the big nuclear project that's in Q2, that's 20 million dollars, I'm just going to give you an example. That probably won't start shipping until, I think, the first quarter of 2003. So there's a big portion of that quick turn that will come -- will show up on a booking in -- in one month or one quarter and may go off the next quarter.

So that 100 million of bookable business decline in revenue is not -- not overly conservative. It's conservative. We're taking a conservative approach. Renee can maybe give you some better --

Yeah, what it does is it has a compounding impact. Because, not only, do you lose the benefit of the revenues, but as you are also reducing inventory, we have lower production volumes. Part of that production volumes is due to lower sales, part of it is because we're shipping out of inventory rather than building it and that just has a double hit on our expense and the fact that we anticipate the under-absorption at those facilities to be -- continue to be significant in Q3 and Q4 and that, combined with the sales change, we just felt that it was prudent -- I'm sorry, the bookings decline, we just felt that it was prudent to be conservative in how we looked at the rest of the year and to manage our business accordingly.

Scott, that's a real important point on the under-absorption. Remember the plants we're talking about tend to have the ones that have the big incremental margins on the upside and the downside. Bigger fixed portion. You can think of that as chemical pumps and vales. We'll concentrate on those two. We could certainly stick with our former guidance if we were willing to build some of the standard product and build it into inventory through the year. But we're -- we are -- and in fact this quarter, when it was getting soft, I was asked by both of those plants, well, you know, it's got to be turning around, can we build, and we won't let them do it? We won't let them do it. So, you really look at that. So the 25 million you're talking about is not out of whack.

OK, well, let me --

On the positive side, Scott, remember, if we're wrong and we're being overly conservative, you know, we can move the numbers back up?

Well then, my thinking of a 100 million in sales and 20, 25 million operating income is pretty close to the target then, suggesting that second quarter sales trends --

No, no, no.

A little lower sales. Because you're getting -- you've got to remember you've got to double up.

About 50 million.

OK, OK, fair enough.

Lower sales and absorption accordingly.

Understood. So it's a lot -- actually a lot less on the top line shortfall.

Right.

Understood. The other question is in, you know, very -- I think equally important is, you know, for some time companies that sell into the industrial chemical and markets, including yourselves, of course, but for some time there was a little bit of an out performance, so it seemed, where you guys were concerned in these end markets versus what these guys were spending and I think a lot of companies were, in fact, suggesting that things were a lot worse and showing that in the top line and in the margins. Now, here we are in, essentially, this month of June where there's been renewed weakness in this business, I'm wondering, is it, you know, why do you think now, I mean, this has not been something that has been dogging you for some time to this magnitude at least, why do you think in the month of June, suddenly, things, kind of went awry? Is there something systemic? Is it a market share issue, in your opinion? Maybe put some --

It's almost the opposite.

-- reason why suddenly now?

When we were outperforming, what you were hearing from our competitors, we did say, at the time, we think it could possibly be that we were regaining market share or taking market share. And, in fact, one part of our business continues to show that. If you look at our seal business, it continues to out perform significantly all the other seal businesses in the chemical business. That's a pure market share.

What I think what we are seeing in the other parts of our business, we've taken back market share, we've increased them, I don't think we're going to increase it at a fast enough rate to offset where all of our competitors are seeing the business. And I think that's really the phenomenon.

I think if I can just add to that too, in terms of why June? If I had to speculate on that, some of it can be related to the fact that some of these parts and services and even some of the products go through maintenance expense for our customers and you can imagine why in June, they might be wanting to reduce their maintenance expenses.

Right. But then why would we extrapolate that into the second half of the year, Renee?

Being cautious because we don't -- we don't know. A lot of these are sold through distribution. the distributor's inventories are low as well. But, we're being cautious.

Scott, we could easily stay where we're at. In fact, as I mentioned, I think when -- on the first call from Steve Volkman, is that if I look at it internally, we have -- the businesses all have plans in place to be able to make up that gap. And it would be much easier for us just to stick with where they're working to. But what we're very concerned by when I look at it in June, and I look at my own capital expenditure. We've been able to maintain cap ex down. In fact, significantly below our plan and even though it's below plan, we won't let the divisions start cranking it up to reach plan.

I'm wondering if they may not be a similar event that's taking place on that incremental amount of business that we're talking about at the end users. You know, and again, I guess that's why, kind of at the end of my comments, where I said, if we're wrong we'll put guidance back up. But, we're just -- you know, I've heard too many of our competitors and when our people attend, for example, the Hydraulics Institute for Pumps or the Valve Manufacturers Association, when they keep saying how bad it is, I don't think we're going to be able to buck that trend for that last 6 months and that's why we said, well, we're going to bring it down.

That's fair. Just the last question on the covenants --

And I want to tell you, it's very painful to ever bring things down.

Well, you can imagine the pain that's being felt on the other side of the goal for a lot of people that are on it. The last question I have, Renee, could you talk about the single point numbers on the covenant ratios? It's often difficult to extrapolate directly from published financials what, sort of, the number that you use, you know. This number versus that number, where you're at right now versus where the ratio is specifically. Could you give us a little bit more color on that?

Scott, I'm pretty sure I know right off the top of my head, give me a minute and I'll get back to you. If we could move on and I'll get right back to you while we --

We'll make sure we mention --

I just don't -- I just don't want to give you a wrong number.

That's fine. All right, thank you.

Thank you. And the next question comes from Donna Ceceda. Please state your company name followed by your question.

Good after -- good morning.

Good morning.

No, almost good afternoon. I'm from Merrill Lynch. Can we pursue a little bit more something that Renee just said to Scott about a lot of the products that caused the shortfall at the end of the second quarter going through distribution? I know a lot of the chemical services sells kind of go through that market?

Right.

I guess, the chemical service must as well, roughly, end user versus distribution in those areas? What kind of a split are we talking about?

Off the top of my head, what we would look at and we'll calculate this, the majority of pumps would be directed to the end user and the manual valves would be through the distribution, so I would say let's say probably 60:40 direct end user.

OK.

Am I I'm just asking Renee OK.

And that's ex we're just talking about?

Right, we're just talking about -- oh if you added 's part chemical most of that would probably on the same ratio would probably go maybe a little higher ratio would go to distributors, a little less direct and some of it would go to actually competitors too. Because they do a lot of actuations.

Right.

That's another area that we get a feel for and it's spurred in my memory too. The other thing that made us a little nervous about the outlook is through on our business which is the actuation business, they do business with all of our competitors. And what they're seeing from the competitors reflects exactly what we were seeing in June, that it looks soft in that general area and that is really also what reinforced our decision to say, look, we've got to be conservative here. I don't think it's going to bounce back quickly.

OK. Have you had for the customers that are going through the distributors, have you had -- you or your sales guys, I should say, had an opportunity to go back and talk to both the distributors and the end users to get a sense for both the sell through as well as the inventories in both of those levels?

Absolutely. Before we accepted that it was going to go down -- our projection going down, we did. The distributors and the end user customers, because we still have -- even though we go through distribution, Donna, and everyone who's listening, it still tends to be a pull through. So our sales people are actually not calling them distributors, they're calling them the end user to make sure that they're pulling through that distributor on the manual valves.

And we find it very consistent. You know there are some stirring that things are looking better. We have one of the largest US chemical companies, actually there is a small project that looks like it'll break that we're working with, but overall it -- it's consistent, both with our end user and with our distributor that, well, things are soft.

Have you had any returns from the distributors on the valves?

No, they're pretty much already -- as the chemical business softened -- you know, actually it's been softening for the last couple of years, inventory's been coming down, so it's really not an issue.

Right, and, you know, we were thinking that earlier this year that because inventories were so sharply down right at the end of 01 --

Right.

-- they were doing a little bit of building, is it your sense that -- I guess my concern was that they were actually -- their inventories had gotten to the point where they were actually trying to give stuff back to you.

No, we're not to that point. And, you know, I should also point out that pricing even in that segment is fine. It's not even a pricing issue. It really is -- it's low volume really coupled with the fact that we are hell bent on not building inventory in those parts of the business.

And, again, I think that's really the critical part to kind of follow back with where Scott was trying to connect the dots, it's really that coupled with the fact that we just see it -- it's softer than we expected. We could live with kind of flatish chemical business and keep the plants moving. But we can't with it this much lower, so.

Is it too early to ask about early July?

Yeah, it is. Because if it's looking too good, you guys are going to move it up and so, no, it's still very early.

No, the reason I ask is that what I've seen in some companies, not necessarily but some of the other companies that I follow, is that some of the stuff that would have typically been shipped on the last couple of weeks in the quarter, very short lead cycle go out very fast, but very profitable. Sort of the hockey stick that usually shows up at the end of the quarter wasn't there. That maybe it's evening itself out a little bit more third month versus, you know, going into the first month.

Well in that parts of our business, the hockey stick was certainly not there. Although it tends -- that is not much a hockey stick as engineered or project business which, you know, they can fool around with during the quarter and then they've got to get it out the door.

Right.

But it was more -- what we do see sometimes is the hockey stick on the short turnaround business and it may hit the quarter it was taken or it may hit the subsequent quarter. We didn't see that the end of this quarter and there is -- the end result, too, is when we look into third quarter, we're going in with a much lower backlog in those areas of the business. I mean, it's particularly, Donna, you've followed us long enough to know that we're really talking . You know, the line. It would be in tough shape right now.

If I can just get back to Scott Gramm on his question on the leverage ratios. The maximum leverage ratio amount is 4.0 times for each quarter the remaining quarters of the year and it was in Q2 as well. And as I stated before we were at 3 and a half times. So we had a comfortable margin for error and as we look out with our guidance, we are still well within that comfort zone.

And by the way, the EBITDA is based and the covenant calculations, they are all based on pro forma EBITDA including . So they were all established based on including 's EBITDA for historical quarters.

In terms of our interest coverage ratio, it is a minimum of 2 times in Q2 and we were about 3.6 times in Q2, so very comfortable margin there and it steps up to 2 and a quarter times for Q3 and Q4, but again, we have a comfortable margin for error in those numbers.

Our fixed charge ratio, the minimum is 1.1 times. We were about 1.75 times for Q2, so again, a comfortable margin for error and the minimum stays at 1.1 times during the balance of the quarter -- balance of the year. So there is -- there is no issue that we can anticipate at this time related to covenant. We have a comfortable margin for error.

Renee, while you're reading off numbers, how big was that tax refund?

The tax refund was 23 million dollars and it's largely a factor if you look at the integration. We spent a lot of costs associated with the integration, most of those costs were in the US and so for US tax purposes, we had some net operating losses and with the tax law change, we were able to carry that back to historical periods and even though the tax return wasn't due until September 15th, we filed it in June and were able to get the refund back before the end of June.

OK. I don't know. I've got a little writer's cramp from all those numbers you were reading off. Just a suggestion, maybe you want to put those in the press release.

The press release is so long now, but I understand.

The covenant numbers, yeah, we never even thought of it.

No, not the covenant numbers, but there was a lot of other information that Renee was giving during the course of her presentation that might be just as easy to have the numbers in front of us instead of going through them on the conference call.

But most of them, I think, are in there, but if not, we'll take a look at that for the future, Donna.

OK. Could we talk about this change in segment accounting that you mentioned in the press release? I guess, you're going to extract the seals from what's currently Flow Solutions and make that --

Right, now, with the significance of our valve business, it seemed to make sense to realign valve service with our valve business and pump service with our pump business and our customers were giving some of that feedback and that's the model, actually that our seal business follows.

It includes, not only, new units for seals, but also it's service business and it seems to be a pretty good model. So that's what we're planning to do effective July 1st, we reorganized our business that way and as a result will be including service in -- part of it will go to pumps and part of it will go to valves and seals will pretty much stand out there on its own. And we are in the process of working through all of those numbers and what the impact will be and we'll provide that just as soon as we can.

OK. Any possibility of even some rough orders of magnitude here as we're setting up the models for the remainder of the year on a segment basis?

No, we really don't want to go there. Right now, we don't have --

We don't want to mislead you on the conference call.

We want to make sure that we have the allocations between those two businesses pretty close before we disclose the numbers.

OK.

We'll make sure that all of you have information for your models, if we have to put out another release or something.

Or an .

That probably answers this question then, any chance we'll see that then before the third quarter?

We will try. I don't want to commit. We will try to do it in connection with the 10-Q. But we have a lot of purchase accounting issues to work through, so I don't want to commit to that and it could be a couple of weeks after perhaps.

OK. Thanks a lot.

Thanks Donna.

Thank you. The next question comes from Michael Boran. Please state your company name followed by your question.

Yeah, Orix Capital Markets. Renee, I had two questions and they both relate to EBITDA. The first was, you referenced 3 and a half times net leverage number, pro forma for EBITDA and I was curious what the -- just the portion was over the last 12 months?

I don't have that right here today. But most of it is in our prospectus that we filed in connection with our shares offering. So it's all in there historically.

OK. And then on the EPS guidance of a dollar 70 to a dollar 90, if that were to be converted to an EBITDA number, what would that range work out to be?

Well, we've given you the depreciation and amortization. I think you can kind of back into it.

I could, I didn't know if you wanted to give me any help with it.

We just don't -- as we go, we'll see if we can calculate it, but I don't think --

OK. Well, that would be appreciated, thanks.

Thank you. The next question comes from Keith Hughes, please state your company name followed by your question.

It's Keith Hughes from Robinson Humphrey. Renee, given the -- obviously we've got an inventory focus here in the third quarter, you had talked about 70 million coming out of your work in capital in 02, is that number going to go up or are you still sticking with that number as the goal?

Well, we're still sticking with it because, remember, it's even harder when you've got some softness out there.

OK. So the -- before 70 million, it seemed like it was primarily going to come out of accounts receivable, is that mix, at least, going to change or?

Oh, it's both. Accounts receivable and inventory.

But we said it would be biased to accounts receivable and you'll notice we did improve our DSO this quarter. The receivables went up because the sales were up. But I think we'll continue to get a good portion from receivables and inventory, we should get some also this year. We're bringing down finished goods inventory when the work in progress ships, that'll help as well.

Receivables are always the quickest and a big chunk, usually, of inventory are when the big projects ship at the end -- later in the year. So that's why it still will remain biased to the receivable side.

OK. And just quickly, the 3.5 leverage multiple you discussed, is that trailing 12 months pro forma EBITDA?

That's correct. That's trailing 12 months.

Thank you.

Thank you. Our next question comes from Catherine Muldoon. Please state your company name followed by your question.

Hi, Sait Asset Management. I'm just wondering if part of the problem you're seeing in the chemical industry is partly because they're running flat and have no time for maintenance or is it strictly cap ex related?

No, they're not running flat. Their utilization has moved up. Mind you, it was back in the -- for the US plants I think it was in the low 70s and was -- we're seeing some statistics now that say it's in the 80s. So there may be parts of a plant that are running, but that would also lead one to believe that there are still parts of the plant for certain types of bulk chemicals which they may even have down or running short cycles. So it's -- they're not -- I think it's still a matter of postponing the costs where they can.

You know, mind you, we still have to sell them our old business to them. No matter how tough things are they can't -- you know, they'll still have to make some replacements.

OK. Thanks.

operator. Thank you. The next question comes from Carl Merganthaler. Please state your company name followed by your question.

Hi, it's Carl Merganthaler, Bank of America Securities.

Hi Carl.

A couple of questions. I know the realignment was brought up a minute ago, but part of the shortfall on the quarter and for the guidance seems to be from the Flow Solutions division so, I mean, is there something else going on here? Did management change at the middle level? Is there, you know, some full blown reorganization happening here? Was there a problem in the second quarter?

No, it wasn't a problem. Part of what -- and we've been concentrating mostly on the chemical and the industrial part of the business, actually service has been affected. It certainly was affected in where in power plants that are already built. Not new projects. On the upgrades, we're seeing very little being spent on the upgrades, the big service projects and so it has been hurt by a lower level of sales and the absorption. So it really is very much market related.

Now we can -- if our chemical and industrial business would've been just where we had thought it was going to be, mind you, it was no great shakes at the beginning of the year, it could've more than covered any of the weakness in that -- in the service arena, which that probably is shorter term. But we're still going to be cautious there as well.

But you're making the argument that the shortfall is entirely market related and under-absorption of lower volumes, there are no integration or internal issues which are going on right now?

No internal issues or integration, no. It really -- it's really clearly -- their business is down, in fact, it's in every part of their segment. Whether you look at the business was down in their pump repair business, it was down in their valve distribution, valve service and their on-line and hot tapping. Now the only part that has shown any kind of improvement right now is the on-line leak sealing. But they were -- it was pretty much down across the board and they really can't adjust their overheads quick enough for that -- that lower outlook.

Actually, when they went into the quarter, they thought it was rebounding. Their forecasts were much better on the sales side and it was just slower than need be. So, we -- we really haven't been giving that a fair part of the problem, but again, if chemical is just reacting like it should, that -- the weakness in service wouldn't have caused it to do anything.

And just on some of the accounting issues that Renee went through and I do appreciate that, but you -- I think you said you'd debt pay down of about 100 million from where we are today?

Right.

And now that assumes, I guess, about a 150 million in operating cash flow less about the 40 in cap ex, are there any other assumptions which go into that?

Yes, working cap -- continued working capital .

Okay, well, you do have an under-funded pension plan and in your MD&A from last year you talked about the company expects to fund contributions to the plan from operating cash flow, so how much operating cash flow to you expect to have to go into the pension plan this year, in that assuming the assumptions have to change, how much operating cash flow is going to have to go into the pension plan next year?

There are no required contributions for 2002. For 2003 we're anticipating contributions in the range of about 15 million dollars or so for 2003.

And that assumes that the rate of return assumption stays the same?

That assumes that the rate of return assumptions stay -- the rate of return assumptions I'm not going -- would not change materially.

OK.

They may come down some, but, you know, we look over the long-term. If you look at the historical long-term rates of returns in the stocks and bond market and you look at the mix of our portfolio within the calculations, it would not seem to warrant a huge reduction in that amount. There may be some adjustment that we may make and when we did our internal analysis for 2002 we included some conservatism in our numbers and so we would not anticipate it have any significant impact on 2002 results.

She hasn't even calculated any change in the assumptions .

But you don't expect the pension plan to be a significant cash drain in 02 or in 03?

In 03 it will be 15 million dollars. We don't anticipate any significant -- anything really in the US plans for 2002.

Now, I guess the stock's performance today, at least, will make expensing stock options less dilutive on the P&L; isn't that right? All of your options are now not in the money.

volatility adds to the expense so that is not necessarily a correct assumption.

Because of the black .

Because of the black calculations. So --

OK. Thank you very much.

Thank you. The next questions comes from Chuck Peterson. Please state your company name followed by your question.

Lehman Brothers. Good afternoon. I had a couple of questions. First one, could you refresh my memory as to what you had said earlier about depreciation and amortization for the year?

Depreciation and amortization for the year should be in the range of 75 million dollars.

So if I take that and I assume a tax rate of about 36 percent, which I believe is consistent with your prior guidance, and interest expenses just a touch over 100 million, I get to an EBITDA number, call it 315 to 330, does that sound reasonable?

That -- that's probably in the ballpark.

OK. Great. And in terms of, you gave some cash flow numbers for the second half of the year, just wanted to make sure I translated those properly to a net debt basis. It looks like you guys would be just a touch over 1.1 billion at the end of the year based on what you were saying before?

Hm-hmm.

Does that sound right? OK. Terrific. And you gave -- just jumping to the covenants you gave earlier, it looks like pro forma LTM EBITDA was probably about 365 million through June?

Unfortunately, I don't have the specific amount associated with that right here, but I think that's about right.

OK. And you wouldn't by chance have a revenue number pro forma for the acquisition as well, would you, for the 12 months?

For the 12 months, revenues were in the range of 500 to 515 million depending on which 12 months you use. But those were the ranges we'd given for revenues before.

OK. And last question, do you have available for the year ago quarter, pro forma revenues and EBITDA to help us, kind of, calculate the terms for working capital during the quarter?

Do we have it? Yes. Do I have it right at this minute? No.

Could I get it off line, do you think, if I gave you a call?

I don't see any reason why not. Most of it should be included in, you know, embedded in the prospectus, so we should be able to get to it.

OK. OK. Terrific. That's all I have, thank you.

Thank you.

Thank you. The next question comes from Gary Rothman. Please state your company name followed by your question.

Hi, it's Gerry Brodman from Credit Suisse First Boston, good afternoon.

Hi Gerry.

Good afternoon, hi Gerry.

Question, let me see, where do I want to start? On the cash flow, make sure I get my understanding on this. We're shooting for 170 million in debt repayment for the year?

That's correct.

And we're now down to 100?

No, no, no, no, no. We've already reduced our debt this year.

OK, so what's the new target?

To tell you the truth, it was down in the first quarter by 35 million dollars and it was down another 20 million or so in the second quarter and -- and we're still sticking with 170 million reduction.

OK, so we are still shooting to 170?

Absolutely.

Yes.

That has not changed.

Is that 23 in the original estimate, or is that from the tax or is that afterwards?

23 was included in our original estimate.

OK, OK. On the under-absorption issue, make sure I get this right. I got pump and these are kind of ball parkish on the pro forma -- pump is up year over year 18 percent in revenue with Solutions down about a percent, Flow Control down about 3 percent -- are we seeing under-absorption in the pump business as well?

Yeah, 'cause of the part of their business, yes.

The products for the chemical and general industrial businesses are produced in different plants than products for power or water or petroleum. So while some plants --

So it's a plant by plant basis?

-- may be up, the chemical and general industrial are down.

So how many plants are exposed on the pump side to a chemical --

Well, two major plants, one in the United States and one in Europe and then there is one that does Ag chemicals, a smaller one in the United States. But it's the two big ones. It's actually the big one in the United States that really has the big swing.

OK. All right. Then, in the release this morning, and again I know enough to be dangerous here, on the F EX exposure, top line no impact, 5 percent on the operating income --

Right.

-- 12 percent on earnings?

Right, negative.

Right. Can you walk me through how that all works and I've got Latin America at 9 percent of sales in 01 and what currency the exposure here is --

In South America --

-- and try to frame this up?

-- our exposures are to the Mexican Peso which devalued during the quarter, to the Argentine currencies, the Venezuelan currencies and the Brazilian currencies. All of which are down from where they were a year ago. And if you look at the impact on the earnings, the reason why it may be somewhat counter-intuitive, is that the Latin American currencies were down pretty much the entire quarter, while the Euro only strengthened really to any significant degree in the last month of the quarter. So as you're translating your sales month by month, there is an impact at different -- depending on the timing of when those currencies move. So it can have a more significant impact if it's for the full quarter versus just one month of the quarter.

Sure, but now as you frame this to find out the exposure to Flowserve, it's really the first question is, how much revenue is in the country that's being analyzed and then how much expense is there as well, so whether -- are you repatriating revenue or just net earnings? Could you comment on the balance in these countries, are your expenses relative to your revenue? Were you repatriating the top line here or are you repatriating the profits from?

We're not repatriating. This is just a translation.

A translation. There's -- this is not a foreign exchange --

Well, repatriation for financial statement purposes?

No.

No.

No, no, no, no.

OK. So explain this.

Well, when you consolidate your P&L you have to translate into your functional currency which is dollars in our case.

Right.

Now, if we have cash in these countries, that's a whole different treasury issue and a lot of those we don't have -- we did not have big cash exposure and that -- that would be the amounts that you would call repatriation. For example, Renee talked about we had cash balances -- or high Euro cash balances at year end.

That's correct.

That's right. But don't the earnings get brought back to US dollars?

On paper they do --

Right.

-- actually those funds don't move because you'll trigger all sorts of withholding taxes if you actually move funds back and forth between all these countries.

OK, so bad choice of words, when we repatriate the earnings for financial statement purposes?

The word repatriation means we're actually sending the cash back here.

Right. OK. So bad choice of words. So when we translate those earnings back --

Right.

-- it's really the relationship of revenue relative to expenses? I mean, do we have any imbalance out there in one country relative to another?

Well, this is the way to look at it Gerry. You take every -- on the P&L you take all your line item expenses and you translate it at what the current rate is. What Renee was saying, if one of them is down the full quarter, every month, you're going to see that we'll have a lower dollar profitability.

And if the other ones only drop the last month, it can only get one third of the drop to go --

Right, right. No, I understand that.

It also has to do with the mix of the business in those countries. And last year in that quarter versus this year, the profitability of one versus the other which can be a timing issue depending on whether there was a higher OE content in one quarter versus the other.

Overall, Gerry, I would say that if the Euro's going to remain strong or strengthen, that should be a net plus for Flowserve

We would, yeah, over the last -- if it continues at it's current rate.

Overall, our European businesses are very profitable.

That was my next question. I mean, going forward, here everyone else I've talked to says this is going to be a positive.

Yes, because going forward, Europe is much bigger for us than Latin America would be.

We could say that the same

.

OK. And then one last question, just to confirm the cap ex guidance for 02 was 40 million dollars?

Around 40 million dollars.

OK, and then any comment on an 03 guidance at this point in time. That's on an 03 .

No, no. You know, we should be back on track, but we're gonna -- we'll wait. I want to be conservative here. Because if things turn around and I have to move the numbers up for 02, I'll move them up for 03 more.

OK. What about integration with the on time delivery, any -- I mean, can you comment on how that's trending over time?

Certainly improving. We've got our on time delivery -- just as a company. I mean, that's one of the drives throughout the company. Not just because of integration, we don't have the issue that we talked about last year on some of the big engineered plants, that's pretty much all by them. Now, it's just improving the robustness of our processes to get stuff out on time. We have certain parts of our business who are now getting into the 90 percent which we've never seen in our business. And that's more of a continuous improvement side. As far as integration on the valve side, that is -- you know, there's some lessons learned from the pump ones and we don't have any big engineered facilities being consolidated. so we think that's still on track and we're watching it very closely. Lessons learned.

Have you guys thought about publishing any on time numbers?

We'll think about it.

You know, I think one of the reasons why we would be a little uncomfortable about that is that we take a conservative view on our on time numbers in terms of the way we measure it.

Right.

We measure it to the customers request date. Even if that date is an unreasonable date and they may ask for date X and we tell them, we're going to ship it -- you know, we can't do it until day Y and they still give us the order and still have the original date. So, we take a conservative view and measure it to their request date because we want to continue to improve our cycle times.

Some of our competition, however, could use that information against us if we take a conservative view, so I'd be --

There's the point.

-- uncomfortable in doing that. Even though, we know that the entire industry is -- is weak and could improvement and we're, at this point, not much better or worse than any of our competition.

Right, now I understand.

Maybe once a year we might do it, but unfortunately, .

Yeah, I'm just trying to grasp at, you know, some sort of indication as to how the integration is progressing and I respect your concerns as well.

Do you really want us to talk about the valve side -- you know, the valve integration?

Well, we've still got out there and just, you know, looking at your continuous improvement as a team.

That's OK. But I want to make sure that we don't get in any misunderstandings. As far as that's all integrated. That's done.

Right, absolutely.

All there's is just going forward where they're going to continue.

Right.

Let us kick it around.

Yeah.

Maybe not giving any numbers but be able to -- we could publish trends by division maybe.

Right and if you get the same definition, you can hide it from competitors some way, it might be helpful just to show some of the benefit you're getting on the inside from your management's efforts.

We'll take a look and see if that's doable.

Well, that's good for me, thanks guys.

Thanks, Gerry.

operator. Thank you. The next questions comes from Tom Clander. Please state your company name followed by your question.

Credit Suisse. Just a couple of quick numbers. Cash restructuring costs, you had looked at 30 to 45 million I think original estimate, where's that shaking our for the year now and how much did you spend in the quarter?

We've recorded 2.6 million of restructuring and integration expense, roughly about half of that would've gone out or so in the quarter. Most of it is yet to come because of -- remember we've recorded 10.6 million in restructuring expense and most of that related to when the plants actually close which will be over the course of the next 9 to 18 months. So what we have said, essentially, is that will be neutral to cash flow for the year. That's the cash outflows associated with the integration and restructuring will be about equal to the cash inflows of the operating cash flows from that business so it would not have an impact on our goal of 170 million dollars in debt reduction this year.

OK. EBITDA, I mean, assuming, I think when you bought it you were running 87 -- 83, 87 million of EBITDA and eight months of that gets you close to 60 million of EBITDA; is that business trending down year over year also? Because otherwise you're kind of short 20 million I think?

What?

We're not following your logic there? Short?

The EBITDA contribution of , I think, when you bought that was sort of in the high 80s kind of range and I thought total restructuring costs associated with were in the 30 to 45 million range?

Yeah.

OK and you're going to own for eight months --

I understand your --

-- out of the year, so that gets you to 60 million or 58 million of EBITDA contribution. So it should be added to cash flow even after your cash costs.

When you said short, that's when we were -- yeah. You .

I'm

No, I'm missing 20 million, OK. There should be an additional, at least, 20 million of cash coming out of this year after all your restructuring costs?

Right. Although keep in mind, some of that goes for interest, the increase in interest associated with that too. But yeah, could it be a positive contributor; it could?

OK. But that sort of number, 35 to 40 million of cash restructuring costs, I guess spread over two years is still a reasonable number?

It is.

Right. For what we've announced so far.

Right.

The interest expense, someone brought up a number and I think you said it was OK, it was north of 100 million, that seems a little high, seems like more mid-90s is -- what's a good number for this year?

I think a number of about 90 or so is -- is OK.

OK. And then as far as taxes, these restructuring charges and all, they're fully deductible for tax purposes?

They are deductible for the most part when they are paid out, so there could be a timing difference. For example, if we accrue a restructuring charge for 2000 -- in 2002 and we don't pay it out until January 2003, it would not necessarily be deductible in 2002.

OK. So it follows the realization, I guess? And back to this EPS to EBITDA calculation, the 52.6 was the average shares, was that the number you were using? Or were you using, I think you mentioned a higher number. Actual shares as at the end of Q2.

We're using fully diluted shares and the fully diluted shares for Q2 were 52.6 million and that's -- it will go up from that. It'll go up to 55.6 for Q3 and Q4. Depending on, again, the dilution effect included in the totally diluted computation.

OK. So for your full year guidance, when I translate to the EBITDA I should be using the 55.6?

Right.

OK and then that kind of gets you down 3.15 or 3.30 of EBITDA eventually.

Just to clarify in the interest expense, while we had originally said that our guidance for the year for Flowserve would be about 100 million in interest expenses or so, we had the financing associated with the acquisition adding to it. We have lower rates, so when and everything is all totaled, it will be in the range of 90 to 100 million, probably.

OK. OK, great. That's it. Thank you.

Thank you, Tom.

Thank you. The next question comes from Levaughn Veaugh-Reading. Please state your company name followed by your question.

Yes, Levaughn Bernard with Hockey Capital. Couple of questions. Scott, you actually said something I found a little disturbing, which was that your sales force is obviously still guiding you guys to flat, slightly down numbers, I guess, as it relates to some of your business, but you're taking a more conservative approach. Is there something that needs to be done as it relates to the sales force --

Could you repeat the question again?

Well, earlier in the conversation, you were talking about how your sales force really is still feeling not so bad about the business, yet you guys are saying, well, we don't necessarily believe what we're getting from the sales force and we want to take a more conservative approach. Is there something that needs to be done to give or get a better understanding of how the business is actually progressing vis-à-vis the sales force?

Well, the sales force on the quick turn around, they know they're working on some but they can't -- you can't say when the customer will actually place the order. You know, if we were talking with the sales force and talking about project business, that's a whole different thing. That will book, they know it's going to book, at least within a six month window when it actually books. But the other part why -- we -- they had thought that it was going to return to a more normal level even in June and it didn't do it and that's really what we're seeing. In particular, what my competitors are saying the same thing, we think it's wise to be conservative. And don't forget, it's quite natural -- normally sales forces tend to be a little bit more optimistic. Well, I hope I'm wrong.

I wonder -- you know, I think we've had this conversation in the past, obviously, you guys had already planned to reduce your inventories and what we're getting right now is this issue of under-absorption you say?

Right.

One of the things that I kind have never really understood is, people seem to keep trying to keep their capacity at a level to expect some kind of a bounce, and yet what we seem to be getting across the board over an extended period of time is flat to no bounce. And again, I guess, I'm questioning why not right size the organization or is there something that can be done to put the organization on a position to deal with more of a flat to maybe down environment as opposed to expecting at some point we're going to get a bounce?

You naturally do that and, in fact, in those plants certainly have put their work force either on a short work week or you've had lay offs. Likewise, you've cut some of your overhead. Remember there's -- the portion that hits you is fixed. So, it is -- and you can only shake it -- there is always the light effect. I mean, you can bring it down and you bring down your break even point, but it always lags where the sales are. So, we're not keeping capacity the same and waiting for the bounce. And the actions but those are always lively.

The other thing is that one of the facilities that is reducing inventory and experiencing some it's under-absorption is one where we will be moving additional product into it associated with the integration and so we don't want to take any permanent reductions at that facility that would impact the success of the integration because very shortly as we start to move product into that facility, some of that will turn around.

And we have to anticipate, before we even move product in, there's a lot of work that needs to be done at the facility in preparing to take on that additional product. So even if we don't move the product in until January 2003, for example, there would still be the need to have some of that cost continuing this year.

Got you. Renee, I guess, maybe I'll follow up with you off-line because I didn't quite follow some of the logic in terms of the foreign currency issues and how that translates into some of the numbers that were spoken about a little earlier.

Sure.

Also, I guess, finally, in terms of this chemical business and the portion of it, is there something wrong with the way you guys are defining it? Meaning, to me, if I'm a chemical company, I have a plant and there's a certain amount of maintenance that simply has to be done, I haven't seen people taking plants off line or slowing down production, so I'm still at a little bit of a loss to understand how you guys are seeing a fall off in that business? Obviously, you talked about some of the upgrades that come with routine maintenance, but to me, that's an upgrade and not routine maintenance so, are you --

Mind you, we haven't said that sale have stopped. I mean, there are -- we still have sales in the business. But, you know, when they can -- on the upside when they can convert at 50 percent profit, it works on the downside as well. So what you're seeing is utilization, while it has improved from where it was just three months ago, from the low 70s to 80s it's still down, in certain parts of the plant they are running it and they're doing maintenance and the maintenance is probably going back to a more normal level.

In other parts of the plant, depending on what chemical it may be, we are seeing those that are actually temporarily mothballed. So there are parts of it that are mothballed and that will reduce the . But it's really a combination of both. It's not -- I mean, we're still shipping, we're still doing basic fundamental maintenance is all we're squeaking out in that part of the business. And what we'd normally would have is -- and I don't want to call them projects because they're not exactly. But they're upgrade, preventive type maintenance as opposed to failure type maintenance. These are the things that you're seeing postponed and that's the delta that's impacted here.

Got you. Thank you.

Thank you. The next question comes from Charles Brady. Please state your company name followed by your question.

Credit Suisse First Boston. Hi Scott. Hi Renee.

Hi, Charlie.

I just want to jump back to your end marked discussion on petroleum and specifically on the de-sulfurization, you had mentioned that you started seeing a push out in some of the EPA dates to 05, 06, I wonder if you could just elaborate a little bit on that? I'd not -- not heard a whole lot about those dates being pushed out.

Well, that's what we're getting with the and I really hate to try to interpret the law, but the latest I'm hearing is that -- I think -- I guess they get a grace period within there is my understanding, so it may push when they finally pop the switch on some of these new projects. I mean, effectively a law goes in when it's said, but I guess they get all sorts of potential outs and they can also postpone it for a while and even take the fines. There's a fining issue there. So, what we're saying is that some of them are probably going to do that, just from a timing issue.

Others -- you know, there's others that actually have been -- and this is the way to look at it; there have been emissions requirements in these refineries before and if they failed to meet them they get fined. What we're seeing is some of the refineries that have moved quicker, where we already have sulfurization in our backlog, those had probably -- were not really meeting most of the requirements that were already imposed and to beat doubling up on the fines, they are moving quicker.

The others that have already -- that are closer to the objective, they seem to be . But we're booking it and the s, if you look at the s they're in the process now of really bidding and booking on de-sulfurization. It just hasn't hit us quite yet.

OK. Well that was my question, is that the s were saying they'd seen a pick up in business and I just wanted to sort of try and put the two pieces together with what you were saying .

We have not lost any, Charlie, all we're saying is that, you know, the time, it's just on a longer -- a longer lead time than we'd necessarily like. But, no, it's still there. Petroleum -- thank God for petroleum.

OK. Great, thanks very much.

Thank you. The next question comes from Marcy Amos. Please state your company name followed by your question.

Hi, it's Marcy Amos with Bank One. Actually, I was phoning to note as well, that on a recent conference call, they were talking about how strong the bookings were in the clean fuel side of their business, so hopefully that will translate into some backlog for you.

As well, one of your competitors was talking about the valve service business outlook for the second half of the year being much improved over the first and I was wondering if you were seeing that as well, and then the other issue I was wondering about was, it seems like there have been some changes in competition this year, either with some of your competitors acquiring other companies or with a certain large competitor having taken their eye off the focus of operations and that perhaps now they are focusing much more closely on those. And I was wondering if you'd seen a big change in the competitive environment from that?

No, we've really not seen any impact of the -- of the problems of our biggest valve competitor, for example. I mean, that part of the business seems to -- seems OK.

And they -- and particularly in the part of the business that we're talking about, don't even compete. They're not heavily involved in the chemical side of the business.

There are -- you're going to see -- from a valve service side of the business, third quarter, normally we'd expect to be a little bit better because that's a lot of times when you see the turn around and they may have been talking about that. Whether it would be better than third quarter of last year remains to be seen. We're going to be conservative thinking about -- other than the areas of business that we've said are pretty good, we'll take a pretty cautious outlook there.

But, you know, we're hoping we're wrong.

You're not really seeing then, a lot of pricing competition, like someone trying to buy back some lost market share or some --

No. You know what, it's really surprising that we've look at this every different way. There are some projects that can get awfully pricey and from time to time we don't go after a specific project if it is. Remember, on the project side too, where you're going to make your best buck is if you get yourself .

So that, from time to time, there may be a project that the pricing looks pretty bad, but if you look at -- let's talk about the valve business, for example, as I said, so much of theirs goes to distribution and if we really look at our margins, or what you call standard margins that reflect pricing, that's been just fine. It's really just been a -- it's a volume issue.

And it's -- in our case, remember it's been exacerbated a little bit but the fact that we're reducing inventory on top of that.

OK. Thank you.

Thank you. The next question comes from Eric Sell. Please state your company name followed by your question.

Cabot Capital. Sorry if I missed this, I haven't been able to but what are you estimating the interest expense will be for the full year?

We said in the range of, you know, 90 to 100 million dollars in that range.

OK. And then in the following year, what do you estimate what it will be?

We haven't given any guidance about 2003 at all. But I would -- you know, suffice it to say, should be lower, because we plan on 170 million dollars in debt reduction for the full year, excluding the -- of course, the borrowings that we made for .

OK. And then I thought I heard you say earlier on the call that 70 million would be coming out of working capital over 02; is that correct?

That is correct. That's including -- we've -- 70 million is included in that 170 million dollars.

OK, so 100 is sort of sustainable? All right, thank you very much.

And that -- by the way, that's 170 -- 100 million after -- after cap ex.

Right. Correct, thank you.

Thank you.

Thank you. The next question comes from Sean Daly. Please state your company name followed by your question.

Hi, Sean Daly from Daly Holdings.

Hi, Sean.

I understand your, you know, wanting to put a conservative spin on things, or not spin, spin's a poor choice of words, but you know the stock has traded as low as 11 and a half dollars during this conference call and if you take even the low part of your guidance, a buck 70, we're talking about a seven times multiple --

Pretty cheap isn't it?

Well, I hope it's really cheap. What do you think investors are misunderstanding this morning?

I have no idea. You explain to me that investors have been thinking?

OK.

I mean, not just today. But, frankly when you look at that multiple, I mean, if that's the case, that's just crazy.

So, if it's crazy, can we -- I know you've got covenants to be concerned about, but what about equity repurchase by the company and --

At the current time, we're not allowed to.

OK. And what about senior management?

What about senior management? I mean, am I go out and buy some? I may.

OK.

But right now, I've been in a conference call for 2 hours.

OK. Because -- and do you think you could --

I got to -- but mind you, remember, I've got over 800,000 shares already. I've got a lot of skin in the game. It is enough to make my wife cry, but I say, it's coming back.

And then, in the question a few questions ago about 03 guidance, maybe some sort of, you know, down at this depressed level, it might help people if you gave some 03 guidance.

Well, we'll consider it. But what we question if we look at even the guidance we're talking about. We're talking -- I mean, here -- if you look at where Flowserve's -- where we're talking about 2002, up substantially still from last year, even at the low end of our range, where I don't think most of our competitors are down from the prior year, so we're still saying up. We've got strong cash flow and we're getting beaten up. I don't know whatever number we throw out for 2003 if the investors seem to care. I don't know.

I think there's probably some disappointment that you did the equity offering in April and then you're coming back, you know, three months later with lower guidance. But I'm hoping this is a ridiculous multiple. Thank you.

Great.

Thank you. The next question is a follow-up from Steve Volkman, please go ahead, sir.

Hi, just to actually pursue that one step further, I think there's been some discussion out in the press, I've seen it about some of management, I don't think it's been you, Scott, but some other management folks have been, at least it appears to be, have been selling some stock and I know it's always hard to actually get the real take home from whether these are options or stock or whatever, but it might make sense, especially at this price, for you to perhaps have some guidelines as to what senior management should have in terms of skin in the game as well?

OK. In fact, we were planning in our next annual report to actually show that our required holdings -- in fact, if people do not have their required holdings, we -- we reduce the amount of stock options they have going forward. In the case of -- I'm four times my salary and in the case of other executives are two times. All of them except those that are very new to the company, now actually pretty much meet that. There were only three executives that have to file, I guess you'd classify as insiders. All of them had -- actually all were due to purchases of houses that they had approached the board well before to get permission to do and they all remained within compliance.

I think it's important also to remember that I have, by far, the most shares and have not sold. But I do know -- I have been aware that there have been some. We have an additional one other manager who is preparing for retirement over the next couple of years, that we're going to want him to start moving his around. So, I think that is understandable.

Also, remember, we are awfully tough on the bonuses that we give here and so I can understand those executives that did request being able to sell for the real estate purchase, we thought it was appropriate.

Fair enough. Couple of other quick follow-ups here. Any chance that there's any kind of asbestos thing brewing that we haven't really heard about yet?

No. There is no asbestos thing brewing. There's no asbestos liability that came with it at all with . The amount that we've had in the past has been insured, are still insured in force. Also, the small amount where we've ever had exposure is really defensible. I think we've only gone to trial one time and most of them have all been resolved. So, asbestos is really not a big issue with us. It is a big issue when we buy a company and we will actually pass on some that have it. Because we're really knock on wood, we're in pretty good shape.

And Renee, my final follow-up, your comments about restructuring costs for acquired companies and purchase accounting adjustments and so forth, I'm assuming that if perhaps you don't use all the money, some of that could potentially flow back into earnings; has that happened at all in the last, you know, 12, 18 months?

No, no. In fact, most -- for example, take a look at this restructuring that we've posted to date it goes to goodwill and to the -- most of any restructuring expense, if any, that were to be brought back, would be an adjustment of goodwill and would not flow through the P&L. So there has been nothing brought back to the P&L associated with any acquisition.

OK. That's helpful. Thanks.

Yeah, I think the good part of what you look at -- if you look at our performance this year, I think it's, you know, in pumping particularly, it is demonstrating that the synergies that we talked about are real. The anchor on it has just been one part of the business. Again, if that strengthens up, everything is pretty much back to the way it was.

Thank you. The next question is a follow-up from Scott Gramm. Please go ahead, sir.

Hi, Scott, last time on the conference call, you were bold enough to say that the backlog that you had in the power business was suggestive of pretty healthy, perhaps even up, sales for the next couple of years; can you still say that?

Power is still OK. What happened, because we got a huge chemical booking this quarter. So that'll keep us --

Power.

Power. Did I say -- oh God, I've got chemicals on the brain. We got no huge chemical booking. We had a large nuclear power booking, so it'll keep our power going through this year and we think while the rate is much lower of any kind of bills you're going to see in the combined cycle, we do know of, and I think the s are currently fighting for it, some big coal plants. When those do break, and we know of some of them, I think we've got the lead position on, those are worth six -- every coal plant is worth six combined cycle plants for our products. So that's why. No, I have -- I have no change of outlook in power. No change in outlook in our petroleum business. No change in the water business and chemical, if we talk about 2003, I think it'll be back to a more normal rate, it's just in 2002 it's the only thing we've changed are chemical and industrial.

I would agree.

To add to what Scott said in the power, there is demand for offshore power projects and particularly any time you put in a desalination plant you typically have a power plant that goes in in connection with that. So, power, there's still opportunities offshore and we have a good business offshore in power.

Two other questions and unfortunately, they do get harder from here. I agree with the previous questioner that said that a lack of 2003 guidance has caused this stock to fall, even during the conference call which is, you know, a complete disconnect from what is going on with the stock today. I suspect that people even hearing something north of 2 dollars a share of guidance for 2003 would be comforted. Are you prepared to say something like that?

Absolutely, Scott. I mean, frankly, our former guidance, we had for 2002 was in that and we're just saying we're back -- we were backing off because of chemical. We do believe chemical is going to be back in a more sustainable level in 2003 plus a full year of . We're going to be well north of 2 dollars a share.

Now, just be careful. The other thing I would just submit here is that why I think the stock is also weak is that really if you recall back a year ago, it's pretty much been a carbon copy that you guys were comfortable with things through the end of May and then issues came up in the operations in June last year and this year externally, this year, which are unexpectedly forcing you guys to take guidance down. It may only be for conservative purposes, I understand that, but I think it would be helpful if, you know, and I -- I know we walked through the single point, 20, 25 million dollar operating income delta, but, you know, rather than saying that we still think that's conservative, if, instead, you can turn around and maybe support the bottom with some kind words. I think -- because it's -- it's a little troubling Scott, that these things are happening so late in the game and kind of seemingly catching you guys by surprise.

Bottom of the -- what rates are you giving me for 2002?

Pardon?

You mean the bottom of the current range we're giving you for 2002, is that what you're talking about?

What I'm saying is that while I think we went through, particularly my question of a 20 to 25 million dollar operating income delta from previous guidance, and then you turned around and say that you hoped that this is conservative, I suspect and submit that the weakness in the stock today in the conference call is, in fact, due to how late in the quarter you guys seem to become aware of some of these issues and maybe just giving us some helpful hints in terms of what you guys are going to be doing in the future to kind of sniff these things out earlier would be helpful, or is this just going to be way it's going to be? I told you it was a tough question.

I'm not sure. I mean, on the quick turnaround, we have a sense -- you have a sense where the business is going and you -- but you can't -- you know, you can't be sure. It's got to book in that same quarter. What I do want to make sure that everyone understands, internally, the numbers that our people are going to are still higher, including the income numbers. What we're saying is that at its current soft rate, we are wanting to be very conservative on it. I mean, we could -- as I say, if we wanted to increase a little inventory, we could stay with our last projections. The last guidance. I mean, we really could. What we've done is actually taken a hard line on the inventory. We're just not going to build it. Because eventually, it just makes it tougher. But if we wanted to run inventory, I'd have left my guidance where it was.

Scott, I really wanted -- the heart of the question is more along the lines of, I understand the difficulties of managing that business and certainly rolling up financial results in such a large organization with so many facilities is certainly time consuming and often problematic, but what I'm saying to you is that I suspect that a good part of the weakness today is how you guys, for the second quarter in five, have been kind of hit unexpectedly by a late quarter issue and getting some type of encouragement that such visibility on your operating results which maybe could have been extrapolated after three weeks after June 1st rather than six or seven weeks --

Well, now we would have had --

-- would be helpful.

We normally would've been -- you know visibility probably within May, we were starting to get a little concerned that it was -- this could turn around. that would have required that we put out some interim press report and do the very thing that we're doing. And we thought at the time, is that wise? Let's see where June is.

And the outlook for June was still for improvement at that time. A lot of this business, it is quick turnaround which means it can book in one month, some of it booked and shipped in one month. Some of it booked and shipped in the next two or three months. And so is the fact that it didn't materialize in June as we had anticipated and we get regular visibility. We get weekly reports on status and we do our analysis on our orders and our projections weekly in connection with that. And it's just a question of, as we looked at it during the course of June, the end of June didn't materialize like we had expected it to. Like the sales people had indicated it would and, as a result, we took -- you know -- we have lower backlog going into Q3.

Really, Scott, what part of it is that actually at the end of Q1, the very last month of Q1, it actually was increasing.

Right, right. And I understand why would have concluded what you concluded. I guess the final question in this series would be then, it's they your policy that one we hit July 1st, you know it's a quiet period and you don't -- even if you're going to lower guidance you just wait until --

That is our -- absolutely what we figure. What good is it if we'd have said in July it's going to look worse for the year. I don't know that it would have improved anything.

Right. So it's not -- it would not have been your policy to July 1st say, you know what, June stunk and we have to lower guidance --

No.

-- we'll just wait until we report earnings, that's your policy.

That's right.

Understood. That's fair, thanks.

OK.

Thank you. The next question is a follow-up from Chuck Peterson. Please go ahead, sir.

Good afternoon. Sorry to prolong this agony here, but I'll make this quick. What was the absorption impact on a dollar basis of running down your inventories during the second quarter and what do you expect for the year?

I'm sorry the dollar impact of running down the inventories on what?

On cost of good sold? Have you been able to quantify that at all?

Yeah, it was probably in the range of -- you know, it's exacerbated by the volume declines as well. But it was probably in the range of about 6 million dollars or so.

6 million dollars in the quarter. And would you expect to see a similar -- what would you expect over the balance of the year?

We would expect that it would, you know, we're currently anticipating that it could be in the same range.

On a quarterly basis?

Mm-hmm.

OK. Certainly. Thank you.

Thank you.

Thank you. The next question is a follow-up from Michael Schneider. Please go ahead.

It might be helpful to spend a minute just giving us some more detail on the orders by market to get people comfortable that it is, indeed, concentrated in chemical and general industrial. Scott, you mentioned at the outset that you've seen orders reflective of what you've seen out of the industry sources, but maybe Renee, you have orders by market if that's possible?

We have some -- not exact numbers by market. Not all of our businesses run their business by market at this point. But as -- you know, we get some feel for it and I would say that our orders by market, it depends by business segment, but I will tell you that petroleum overall were up. That --

It must be up strong double digits; right?

They -- again, aggregate they should be high single, low doubles. Power was on balance about flat and chemical was down in about the range that Scott had indicated that's consistent with Hydraulic Institute data of about 25 percent. Water -- water was up very strong. And general industry was -- was also down.

OK. And then in terms of the free cash flow, it's important to me that you have maintained 170 million in free cash flow estimate for the year and it looks like you've done about 60 million year to date; is that right?

That's correct.

And, but it's somewhat contradictory --

Actually more than -- well. Yeah, the -- more or less. I mean, our number 170 million was after cap ex, so on a year to year comparison, but that's -- OK.

But year to date I've got you at 63 million in free cash flow after cap ex, you maintain your number of 170 million, Scott you've made some what of an inconsistent statement there when saying that it's tough to run down the working capital levels in a weaker market, and clearly that's what you're intimating here, that things will be weaker in the second half. How do you reconcile those two statements?

We're talking about -- talk to -- yeah, it is tough to run it down in those parts of the business where they have negative sales growth. Because it just -- you compound your -- you compound your growth margin issues.

So how do you maintain the 170 million free cash flow estimate though, which implies 70 million --

Mike, we've shown it. I mean, we took it -- this quarter -- in fact, we wouldn't have -- actually if we were willing to -- willing to sacrifice the inventory, we'd keep up -- we could've kept our guidance where it was. I mean, if you just take the 6 million that Renee was talking about that -- that variances, that's -- that's only picking that up from like four major facilities.

All right. But then again, you sacrificed free cash flow for the quarter if you maintain the guidance and presumably sacrifice --

Free cash flow, you don't include the cash flow derived from the working capital reduction.

No, I do. I guess, what I'm asking is, it is important to me and I want -- and I think what the stock is disconnecting today during the call is that it seems to imply -- or people believe you won't hit the free cash flow estimates for the second half and I guess I just want to hear that even with the lower guidance, you're still calling --

No, we haven't changed the -- we haven't changed the cash flow at all.

And when Scott says it's difficult to reduce inventory, it's difficult and it's but we're taking the lump for it on the P&L for doing it.

Right.

So our intention is still to continue to take the hit on the under-absorption and continue to reduce inventories where we can. So the 170, you know, mind you, the 170 million of guidance we're giving you is below our internal goals. So we have higher goals in than the 170 million dollars. So, we are continuing to drive for the 170 million dollars that we've indicated.

The EPS guidance we gave you is lower than our internal goals. But we're just -- we think it's better to let you know beforehand that we think softness there, but we'd rather start moving it up. Although with the way the stock's reacting, I don't know.

OK. That's all, thanks.

Thank you. The next question is a follow-up from Eric Sell. Please go ahead.

Hi, just to sort of reiterate a question that was just asked a couple of hours ago, the end markets that represent your businesses, whether it be through your sales or backlog, you can look at it either way, in relation to, you know, break it down each business end markets, but if you could give some general sense as to, for instance, how much power represents of your backlog and your revenues and, you know, petroleum, water, chemical et cetera? Maybe just a sense of or, you know, any of these segments greater than 30 or 40 percent or any of those end markets rather?

No, no. Our end user markets is we take it on a, let's say a 2001 basis. Our largest market would be the petroleum based which is about, if I remember correctly, about 26 percent of revenue.

Of pro forma revenue.

Pro forma. Chemical would be about 23 percent --

Five.

25 percent. General industry about 23 percent. Mind you, general industry's a mix, you know, it's comprised of many different industries. Power is about nine --

Nineteen.

19 percent.

And water is about 7.

OK. And then one other question. You said that fixed charge covenant was 1.1 times the minimum and you were at 1.2 or 1.7?

I said we were at 1. -- actually rounded at 1.8.

1.8. Wow, OK. Can't read my own writing. OK. Thank you very much.

Thank you.

Thank you. The next question comes Mark Dischoff. Please state your company name followed by your question?

Bill Bost & Company. I just want to run through this cash flow for a second. If you have a dollar 70 for the year, I don't know what your average shares would be, let's call it 53 or something. That would be like 90 million dollars, maybe more if you have a higher share count, so let's call it 90 million. EBITDA is 75 and your working capital improvements is 70 and you have the tax refund is 23, is that part of the working capital improvement, or is that in addition?

A part of it would be embedded -- you know, it would've been included in -- a part of it would've been included in our estimates.

Part of it's already included in the working capital benefit?

Yeah.

All right, so if you take that out.

How much of it?

I said, it's included in the 170 million. Whether you include it in the operations or the cash flow for working capital.

Well, that's what I'm trying to do is the math. I mean, is it included in the working capital part? Because if you add it in, in addition, and you take out 40 million in cap ex, you come out with something close to 220 in free cash flow for the year, unless it's double counting because you've already got it somehow in the working capital. But I don't know it would be working capital.

We -- the 220 and then there -- did you count in the cash outflows for the integration?

No. How much is that?

About 20 million or so.

Okay. So now we're at 200 million. So I'm just wondering if I'm missing something, or why people would be questioning, you know, getting just to 170 for free cash for the year.

hornbaker; I don't know what you're missing.

So there's nothing else that's missing there?

No.

OK. Thanks very much.

Thank you. And that was your final question. Please continue with any further comments.

OK. OK, well that concludes today's conference call. We appreciate you joining us today. Remember, a replay of this call will be available today beginning at 1:00 p.m. Eastern time through about 10:00 p.m. Eastern time on Thursday the 25th. The access number is 800-405-2236 and outside the US it's (303) 590-3000 and the pass code in either case is 483790#. You can also access the call -- a replay of this call at our website Flowserve.com. If you have any additional questions, my phone number is (972) 443-6557. Again, on behalf of Scott and Renee and myself, thank you for being with us today and we'll look forward to visiting with you in October in our third quarter conference call. Thank you very much.

Thank you, sir. Ladies and gentlemen, this concludes the Flowserve second quarter conference call. We thank you for your participation. You may now disconnect.