福斯 (FLS) 2007 Q3 法說會逐字稿

Good morning. My name is Kenya, and I will be your conference operator today. At this time I would like to welcome everyone to the Flowserve Q3 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer Session. (OPERATOR INSTRUCTIONS) Thank you. I would now like to turn the call over to Mr. Zac Nagle, Vice President of Investor Relations for Flowserve Corporation. Please go ahead, sir.

Thank you, operator. Hello, everyone, and thank you for joining us. Welcome to the Q3 2007 Flowserve Investor Conference Call. Today's call is being webcast with our Earnings Presentation via our website at wwwflowserve.com. Just click on the Investor Relations tab to access to webcast. Before we get started today, I want to make one it it technical note. For those of who you have accessed today's call through the dial-in phone number and also wish to follow along with the early presentation slides via our website, please click here to listen via icon at the bottom of the event details page. I'd also like to note that our webcast will be posted on our website for replay approximately two hours following the end of the call. The replay will remain on the site on demand for the next few months.

Joining us today are Lew Kling, President and CEO of Flowserve, Senior Vice President, Chief Financial Officer and Latin American operations, Mark Blinn, and chief accounting officer Dick Gildman. Following the commentary we'll begin the Q&A session. Regarding forward-looking statements I'll refer to you yesterday's Earnings Release and Earnings Presentation for Flowserve's Safe Harbor Statement on this topic. The Safe Harbor Statement is also outlined in our 10-Q filed yesterday and our 10-K filing.

All of this information can be found on Flowserve's website under the Investor Relations Section. I encourage to you read the statements carefully with respect to our Conference Call this morning.

The information in this Conference Call including initial statements on management ,plus their answer to questions related in any way to projections or other forward-looking statements are subject to Flowserve's Safe Harbor Statement. Now I would I would like to turn the formal presentation over to Lew.

Thanks, Zac, and good morning. On behalf of the entire Global Flowserve Team I am very proud to report Outstanding Third Quarter results for the the Company. In Q3 the team continued to execute well against our strategic priorities, made more progress towards achieving our 2007 commitments and continue to position the Company for future success.

I am going to start this morning by spending a few minutes outlining some of the significant company highlights in the quarter and year-to-date. Then I will spend a fair amount of time walking you through what we're seeing in our key markets and geographies highlighting the first three quarters of the year and what we expect going forward. And lastly, I will spend some time outlining some of the important investments we're making in the business to help drive success over the long-term.

Slide three provides some of the more notable highlights in the Third Quarter. I am pleased to report we continue to set a number of new records during the quarter. The first and probably the most important record was the Company's Third Quarter Earnings per share of $1.10 which represents 116% growth over the same quarter last year. This is more than five times the rate of sales growth demonstrating the tremendous leverage we're able to achieve throughout the P&L during the quarter. Additionally, it is important to note that the fully diluted earnings per share of $1.10 includes the unfavorable impact of a $0.14 per share charge in the quarter for discreet legal expenses which I will discuss more in detail later, and as also disclosed in our Q3 press release and our 10-Q.

Moving onto our bookings performance, the Third Quarter was another strong bookings quarter for Flowserve, up a very healthy 19% to a third quarter record $1.1 billion marking the third consecutive quarter of bookings exceeding the $1 billion level. Sales continue to be strong reaching a Third Quarter record $919 million, up 19% versus the third quarter of the prior year. The strong sales reflect both the solid conversion of our original equipment backlog as well as strong aftermarket sales resulting primarily from our successful end-user strategy.

An important point worth repeating from our Second Quarter Conference Call is that the strong aftermarket sales in Q3 includes just a nominal amount from the significant ramp-up of original equipment project wins which really started to accelerate in the Third Quarter of 2005. If you consider the average cycle time of these large project wins most have not yet completed the warranty phase and in some cases may not have even been scheduled for shipment by this time. As these projects progress through their completion and warranty periods, a significant amounted of potential aftermarket opportunities could become available and we have poised extremely well to capitalize on these aftermarket opportunities because it is our original equipment entrenched in these projects. We have also made significant progress on operating margins as we drive towards our goal of 200 to 300 basis points improvement in 2007.

In the Third Quarter we drove a 380 basis points improvement in operating margins to 11.8% the highest quarterly level in Flowserve history. Additionally I am please to do report we continue to make significant progress on delivering our full year target on SG&A reduction as a percent of sales. In the third quarter SG&A as a percent of sales was reduced 190 basis points to 22.9%. And this included the discreet legal charge I noted earlier.

The Company's record fully diluted third quarter earnings per share includes the unfavorable impact of a $0.14 per share charge to SG&A in the quarter and a $0.17 per share charge for 2007 year-to-date in discreet expenses for legal fees and accrued settlement costs related to the investigation into two decentralized foreign subsidiary involvement in the United Nations Oil for Food Program during 2001 and 2003. Subject to certain necessary approvals, the Company has made substantial progress in resolving this matter with the appropriate U.S. government authorities and currently does not expect further case resolution costs.

Turning to our end markets we continue to benefit from very favorable market additions in the Third Quarter. The significant need for global infrastructure build-out continues to drive investment broadly across our key markets, and I will speak to this in more detail in a few more slides. Lastly, we made solid progress on cash, generating over $100 million in operating cash flow during the quarter.

Turning to our year-to-date results, once again I am pleased to report it's been a terrific year thus far for Flowserve. Again, probably the most significant measure of our success is our ability to drive leverage throughout our entire P&L culminating in the fact we have increased earnings per share at a significantly faster rate than the growth rate of sales. To date we have delivered $2.79 in earnings per share, up 95% versus a year ago. And this includes the negative discreet legal charge of approximately $11 million or $0.17 per share for fees and accrual we made year-to-date related to the oil for food program previously discussed. And even with the charge included, our 95% increase in earnings per share compares very favorable to our already very strong sales growth of 22%.

Our year-to-date bookings were $3.2 billion, up 19%. These bookings through the Third Quarter were greater than our total sales for 2006 which was also a terrific year for Flowserve. This continues to show that the end markets for our products and services are strong and that we are focused and winning regularly in our chosen markets and geographies. Our year-to-date sales were $2.7 billion, up 22%. This strong sales growth demonstrates we are effectively converting bookings into sales within our factories while at the same time maintaining our commitments to our customers as measured through key metrics such as quality and on-time delivery.

Moving to operating margin, we have performed well against our 2007 operating margin expansion targets of between 200 and 300 basis points. Through the first three quarters of the year we have driven 220 basis points of operating margin improvement which already places us within our range. And we will continue to maintain this focus in Q4 and we are confident we'll achieve our 2007 target.

Mark will get into the division performance in much greater detail, but I would be remiss if I didn't highlight the strong and steadily improving performance of each of our divisions throughout the year as a key year-to-date highlight. Each division has consistently contributed operating margin dollars to the bottom line. In pumps and valves we've seen this through the form of increased bookings and margin expansion. In sales we've seen this in the form of focused investments enabling the team to grow bookings faster than industry growth rates and well above average industry operating margins.

I am extremely pleased by the things I am seeing in each of these businesses, and I am truly excited about the significant opportunities for continued improvement I see going forward. Lastly, we are formally reaffirming the annual 2007 sales and operating margin targets we set out to achieve at the beginning of the year. In fact, we are raising our 2007 sales target based on the terrific results by the team year-to-date. We now expect 2007 sales to come in between $3.6 and $3.7 billion, and we continue to expect 2007 operating margin improvement between 200 and 300 basis points.

Our overall performance in Q3 gives us continued confidence in the ability to successfully execute against our 2007 objectives and our ability to drive even stronger performance in the future.

Slide five outlines in detail many of the third quarter and year-to-date P&L highlights I outlined in our previous two pages. The slide layout is pretty straight forward so I won't go into every number but I do want to point out our performance in the Third Quarter and year-to-date has been very positive across the P&L from top to bottom with strong bookings, strong sales, significantly reduced SG&A as a percentage of sales, and year-to-date earnings per share almost doubled that of last year.

As we measure our own internal score card, we continue to be especially proud of our global team's ability to drive net income and earnings per share in a much faster pace than our increasing sales. This demonstrates the both our ongoing focus on this plan operational excellence and our SG&A cost reduction programs are delivering the results we need to drive success throughout the business.

As I outlined in the front section of the presentation, I am very proud to report our bookings continue to be very healthy, topping $1 billion mark for the third consecutive quarter in 2007 rising 19% versus a year ago. This was the ninth consecutive quarter of high double-digit bookings growth which translates to 169 million in actual dollar growth for the Company over the last year's Third Quarter.

Sales throughput continue to be significant in the third quarter, up 19% to $919 million as we converted existing backlog and focused on our strategy of capturing strong aftermarket sales and service business.

Slide eight highlights our bookings performance by industry for both the third quarter and year-to-date. We continue to experience strong year-to-date growth across all our focus industries. I would like to point out that in the Third Quarter our growth in New Orleans Gas Segment was essentially flat period to period. As I've mentioned, this is not a quarter-to-quarter business, so we focus more on the year-to-date results to ensure we're on track with our objectives. For the the first nine months of 2006 we grew our oil and gas business $394 million over the same period in 2005 and in 2007 we grew this business an additional $194 million for the same nine-month period. Our global sales teams are successfully winning key projects in this mix segment and the outlook going forward remains clearly positive.

New upstream oil and gas project announcements continue in the Middle East, Africa, Asia, and Latin America. On a downstream side industry forecasts show increasing investments in refining capacity, which Flowserve's product portfolios are well-positioned. Turning away from New Orleans gas another exciting aspect of our business strength is the growth rates in our other key business segments. Flowserve continues to increase business in mining held by the TKL and industrial acquisitions in Australia made by the pump and seal division. Our slurry field business for providing the mining industry with performance capabilities which we believe are unmatched in the market. In a developing market of biotechnologies, we are actively engaged with primary players in the leadership row for flow management solutions.

We have already begun to receive orders and a shipped product due to the investment in ethanol and other biofuel developments and are preparing new products to meet the needs of this future market. We are also benefiting from the growing infrastructure demand in the water industry. The growth of 33% year-to-date demonstrates the success our business is experienced in this segment. Forecasts for this market remain robust simply due to the increase in global demand for the supply of clean water.

In the chemical industry, our product portfolio has been well-positioned for many years. In fact, several of our heritage brands within the portfolio were originally designed to specifically serve the needs of this industry, and they continue to do so very effectively. Our 39% year-to-date growth in the chemical market has been achieved through successful project wins in all other sales regions. As to the power industry the market outlook remains strong. Some regions such as India and China will require significant additions in electricity over the next several years. Globally the demand for increased power should drive investment in new power generation as well as capacity expansion of the existing facilities.

Environmental concerns should also drive demand for our products and help provide cleaner power generation. For example, the first new U.S.- based Nuclear Power Plant License request in three decades was recently submitted to the Nuclear Regulatory Commission. Forecasts show that as many as 32 licenses could be submitted by 2009. Since Flowserve is a leading supplier of M stamp products required in nuclear power plants worldwide, the outlook for this market segment remains promising.

In summary, Flowserve's booking growth is showing strength across all our focus industries with the market outlook remaining positive for these industries, I am confident in our ability to meet our growth objectives. Turning to regional sales performance, all four regions of the globe contribute to our year-to-date growth of 22% over the first nine months of 2007. With our well-established presence in North America and Europe, combined with our investments in a developing markets, we are very pleased to see this balance growth across our sales.

As we discussed in the past, we continue to add capacity and capabilities in all regions to support our customers needs. We have added pump testing capacity in our facilities in Etten-Leur, Netherlands, Brunn, Austria, Vernon, California, and Dessio, Italy among others. We have also been adding more pump test capacity early next year in the Middle East through our Saudi Arabian joint venture. Additionally we have also added test capacity in our seal business in Kalamazoo, Michigan, Chandi, Singapore, and Tlaxcala, Mexico. We have also continued to increase our quick response center assets to provide local Customer Service and we have expanded our ability to deliver local training for our products around the globe. We are truly committed to the globalization strategy to become a local for our customers by placing the appropriate Customer Service assets in close proximity to their needs.

Before I hand things over to Mark to cover the financials, and segment performance in more detail, I want to take a moment to summarize a few points. First of all, I am extremely proud of the outstanding performance accomplished by this Flowserve team. They have continued to exceed our year-over-year growth commitments with record bookings, sales, and earnings which makes me very confident in this team's ability to continue performing well into the future. Our performance is also supported by good health of our key markets.

We have discussed earlier Flowserve is fortunate to be participating in industries and global markets which are forecasting strong fundamentals for the foreseeable future. We are also excited to see our investments in key developing markets generate strong growth for the Company. In China, for instance, we have seen significant growth in bookings fueled by our relationships with key customers, by our expanded local presence and for the future we continue to remain optimistic about the the health of our key industries. We are strengthening the business alliances we have and the many customers around the globe.

This positions as well to participate in their future projects and should allow to us continue to expand the historically high profitable aftermarket business which is a key part of our growth strategy and financial objectives. We will also continue to invest in our future growth from both an industry and global perspective as we work to develop new technologies for markets such as subsea, geothermal and biofuels, and we'll continue to invest in expanding capabilities of our current products through adding new advanced materials, diagnostics, and digital communications. Finally, we will continue to drive our outstanding financial results by directly and clearly linking employee compensation to our corporate performance objectives.

All of this ties directly with our company focus which has been and will continue to be generating long-term value for our customers, our employees, and our shareholders. Now I would like to turn the presentation over to Mark for more detailed view of our financial performance. Mark?

Thanks, Lew, and good morning, everyone. As Lew mentioned we are very pleased with our third quarter and year-to-date results. Prior to reviewing the financial information I want to put some of these numbers into context. First of all, we talked about after market. We've talked about our end-user strategies including alliance agreements, re-engineering and upgrade, QRCs, parts and service, technical services, and the seal success cycle.

It is important to keep in mind that the the growth in the aftermarket from one year to the next is compared to a very large base of install base over many years. That's why we are so pleased with the growth of our aftermarket year-over-year. It shows that our strategies are paying off and that we're taking share. You can also see the impact of aftermarket on our P&L as our success in pursuing these strategies gave us a 1% shift in aftermarket and a 2% shift in the pump division to aftermarket which gave us leverage in our P&L. I would also like to talk about currency. We did get a lift in bookings and revenue but we also see the impact increasing cost and sales in SG&A. Net, it provided a benefit to us during the quarter and the year.

With respect to SG&A we are getting leverage on our SG&A through fixed cost leverage and traction on our initiatives that we started in the first quarter. As you look at SG&A for the quarter and the year, about half of the increase was selling related expense. Year-to-date we have seen 6 million increase in R&D, about 2 million a quarter. Also, we are seeing the benefit of reduced corporate spend. I will point out that the legal expense Lew talked about is in the other segment and just to be balanced when you compare to the prior year we did have the $5.6 million stock modification in 2006.

Looking at operating income, we had very strong flow-through in the quarter led by our pump division. On the tax rate, our systemic tax rate has been steadily improving. We did have a number of discreet items going both ways which did provide us a small benefit in the quarter. With respect to working capital, as Lew mentioned, we saw a swing from $62 million use of cash to a $45 million source of cash during the quarter. We have seen growth in receivables, approximately a third of this growth has been in progress Billings, inventory has grown to support our project business primarily in the pump division with work- in process, but we've been able to offset a bit of this with advanced cash. Bottom line, it was a great quarter demonstrating the power of execution and operating leverage.

Turning to our financial results, bookings increased 169 million or 18.9% to 1,061,000,000. Sales increased 148.4 million or 19.3% to 919.2 million. Gross profit improved $63.8 million or 25.5% to 313.6 million and gross margin improved 170 basis points. This was driven by improved pricing, operational excellence, and we did see a benefit overall of a 1% shift to aftermarket. If you look at SG&A, SG&A increased 18.8 million or 9.8% to 210.1 million.

Again, half of this increase was selling year-over-year. You also see that SG&A we got leverage of 190 basis points to 22.9% as a percentage sales. Operating income increased 46.3 million or almost 75% to 108.2 million representing a 31% flow through on sales. Net income from continuing operations increased 34.6 million or 121.4% to 63.1 million and diluted EPS increased $0.59 or 115.7%, to $1.10, a very strong Third Quarter.

If you look at our year-to-date, you can see that this is reflective of strong trends for the year. Bookings year-to-date have increased 520.5 million or 19.4% to 3.2 billion. Sales have increased $475.8 million or almost 22% to 2,653,000,000. In gross profit has increased 161.1 million or 22.4% to 881 million. In gross margin year-to-date has improved 10 basis points. Keep in mind, this includes a 200 basis points shift to original equipment across the Company and a 300 basis points segment shift in the pump business. If you look at each one of the segments year-to-date Pump Margins improved 40 basis points, Valve Margins improved 50 basis points, and C O Margins improved 40 basis points. We've had across the board gross margin improvement in all of our businesses. SG&A year-to-date up 68.1 million, again approximately half of that is selling related expense to 623.3 million, and SG&A as a percent of sales has improved 200 basis points year-to-date to 23.5%. That is within the range that we talked about at the beginning of the year.

Operating income increased 96.2 million or 54.5% to 272.6 million representing an operating margin increase of 220 basis points, and net income from continuing operations increased 79.2 million, almost 100% over the prior year. In earnings per share an increase of $1.36 year-to-date to $2.79.

Turning to our pump division, they had an excellent quarter highlighted with great execution on the aftermarket strategies. They continue to have a very strong presence in the project business and did see a benefit from execution on their end-user strategies. They're focused on executing on the backlog and controlling costs, and you see the benefit in the leverage that they got.

Bookings for the third quarter increased 73.9 million or 14.2% to 594.9 million. Sales increased 95 million or almost 24% to 496 million. Gross profit improved a tremendous $39.4 million or 36.3% to 147.9 million, and gross margin improved 280 basis points during the quarter to 29.8%. This reflects the impact of improved pricing, absorption, operational excellence, and it does have the impact of a 200 basis points shift to aftermarket. SG&A for the quarter in the pump division increased $10.8 million or 15.6% to $80.1 million, again this division along with the others about half was selling related.

In SG&A as a percent of sales improved 120 basis points to 16.1%. The impact of this was that Operating Income increased 29.2 million or 73.6% to 68.9 million. It is important to point out that this operating income leverage is three times sales which demonstrates what this business can do in this type of environment.

Year-to-date figures, bookings have increased very strong 323.1 million or almost 21% to 1,869,000,000. Sales have increased 324 million or 29% to 1,440,000,000, and gross profit has improved 91-point -- 96.1 million or almost 31% to 408.9 million, and gross margin over the year has improved 40 basis points to 28.4%. Again, this is driven by pricing, operational excellence, with somewhat of an offset of a 300 basis points shift year-to-date to original equipment. Looking at SG&A, SG&A did increase 36.5 million or 18.2% to 237.1 million, but SG&A has a percent of sales improved 150 basis points to 16.5%. The net impact of the gross margin improvement in the SG&A was operating income increasing 61.7 million or 54% versus the prior year to 175.9 million, and operating margins improved very strong 200 basis points, tremendous leverage for our pump business.

Looking at the next slide around the mix in bookings and sales, you can see that bookings in original equipment and aftermarket remained very strong during the quarter and of year-to-date with a year-to-date mix of 64% original equipment and 36% aftermarket. I do want to call your attention to the sales mix for the Third Quarter. We saw a tremendous growth in aftermarket of 30% versus the prior year, and as we've been talking about this, this is really on the heels of our aftermarket strategies we're getting good execution on these strategies and good execution on our aftermarket backlog. Looking at the year-to-date sales mix you can see that project business has grown 38%, project sales have grown 38%, but also the aftermarket sales grew 19% during the year. Keep in mind when I talked about the aftermarket base this is multiple times of the market growth in aftermarket.

Looking at our Flow Serve Control Division our Valve Division, they also had an excellent quarter highlighted by consistently improving margins in very strong order growth. This is a broad-based increase in bookings and sales. They've maintained a strong focus on pricing, product management, low cost sourcing, capacity optimization, and expense control. And the important thing to note is this efforts are ongoing. Bookings during the quarter increased $59.7 million or almost 23% to 324 million.

Sales during the quarter increased 37.1 million or 14.4% to 295 million, and gross profit increased $12.9 million or 14.6% to over $100 million. Gross margin during the quarter improved 10 basis points to 34.3%. Excuse me. SG&A increased $7.1 million or 13% to $61.9 million, and operating income improved $6.4 million or 18% to $41.1 million representing a 40 basis points improvement. If you look at their margins, they've steadily improved over the last two years. Good consistent performance.

Looking at the year-to-date figures, bookings increased $142.2 million or 17.6% to 948 million. Sales increased over $120 million or 16.6% to $848.7 million. Gross profit for the year has increased $45.7 million or 18.3% to 295.6 million representing a 50 basis points gross margin improvement over the prior year.

SG&A increased $17.9 million or 11% to $181.9 million, and they also achieved 110 basis points leverage on SG&A, so they've been driving margins and very focused on expense control. The result, operating income increased $29 million or 32.4% to $118.6 million and operating margin has improved a tremendous 170 basis points to 14% during the year. A great quarter and a great year for the valve group.

Turning to the Flowserve Solutions division our Sale Division, they also had an excellent quarter highlighted by industry-leading margins in tremendous order growth. Last time we discussed operating margins. They have consistently held their margins around 20%. This time they were actually above that mark, but this does not mean that they have stopped investing in selling resources, systems, and QRCs which is demonstrated by their very strong booking growth during the quarter of 27%. This growth has a good mix of original equipment and aftermarket as they continue to drive their aftermarket strategies and increase their install base.

As I mentioned, bookings increased during the Third Quarter $33.8 million or 27% to 159.4 million. Sales increased 17.8 million or 14.5% to $140.7 million. Gross profit increased 8.7 million or 15.6% to $64.5 million representing a 40 basis increase in gross margin to 45.8%. SG&A increased 4.1 million or 13% to 35.9 million. The result is that operating income improved $4.8 million over the prior year or almost 19% to $30.4 million representing an 80 basis points improvement in operating margin. Very strong margin improvement, but we're really excited about their very strong order growth during the quarter and for the year.

Looking at their year-to-date figures, bookings have increased 62.2 million or 16.5% to 438 million. Sales have increased 38.3 million or 10.5% to 404.4 million. Gross profit has improved 18.8 million or 11.5% to 182.9 million, and gross profit margin has improved 40 basis points to 45.2%. They continue to drive gross margin improvement. SG&A increased $13.7 million or 14.7% to $107 million. That does represent a decrement leverage on sales of 100 basis points, but this reflects their investment in selling organization systems and QRCs where they've been able to drive good, strong gross margins and operating margins.

Operating income increased $5.1 million or 6.7% to $81.4 million. Solid operating margins for the quarter and for the year of 20%.

Looking at year- to- year SG&A comparisons, our report card on leverage on SG&A you can see that we're getting strong leverage in selling and marketing expenses. We continue to invest but we're getting leverage on those resources. Global finance professional fees during the quarter we got 70 basis points of leverage and salaries and fringe which is head count we got 70 basis points of leverage. The net effect of all this was that SG&A as a percent of sales improved year-over-year 190 basis points. If you look at the year-to-date comparisons, the story is the same and the result is a 200 basis point improvement year-over-year.

Turning to primary working capital, as Lew discussed earlier and I discussed we generated over 100 million of cash flow during the quarter while funding growth. Receivables increased approximately $150 million, and as I mentioned earlier, a third of these were progress Billings as we build the project orders for delivery. Inventory increased almost $189 million, primarily driven by work in progress in the pump decision. In advanced cash increased $129 as year end as we're able to drive up-front payment to offset working capital needs.

You look at your year-to-date cash flows. The Company has used cash primarily in three ways, to fund growth in the form of working capital. As we talked about, our working capital has gone up, but we've been able to fund that with our cash flow generation and balance sheet. We've also funded our business for the future as Lew talked about. We've added capacity in India, China, the Middle East, test capabilities, ERP systems, QRCs and service centers. We've upgraded machinery and high volume facilities to reduce labor costs, and finally, we returned $62 million to the shareholders. We think this is a very balanced, deliberate use of our cash flow.

Turning to the 2007 Outlook on slide 21, we are within our target ranges for the year. We talked about these before, and we've reaffirmed our guidance on this call. Looking forward, we had a great quarter, and we've had a great year-to-date. As we look forward, we see continued strength in our focused end markets and regions as tremendous global infrastructure needs are driving large investments. Bottomline is infrastructure supply cannot meet demand and they're not going to solve this over the next few years. We've made significant progress towards achieving our 2007 targets that we we set at the beginning of the year, and we're confident in our ability to drive consolidated operating margin to say 15% in 2010. We've made strong progress on operating cash flow delivering 170 million during the Third Quarter, and we'll maintain a clear focus on delivering cash and maintaining financial flexibility going forward.

We delivered strong operating performance in each division year-to-date and see significant opportunities for further improvement in the future. We still have work to do. Raising our 2007 targets to between 3.6 and 3.7 billion of sales based on solid year-to-date results and positive outlook for the Fourth Quarter. We're reaffirming our 200 to 300 basis points improvement between SG&A as a percent of sales in gross margin.

Execution remains our biggest key to success. We've said that when you look at our business and our financial statements it is not a quarter-to-quarter business in terms of trends. But when it comes to execution this is an hourly business. We remain focused. I'll turn you over to questions now.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Mike Sneider with Robert W. Baird & Co.

Congratulations.

Thanks, Mike.

First I guess the aftermarket surge this quarter was impressive, and maybe you can walk us through, Lew, you made it clear that the aftermarket orders are not a function of the newly installed base but this is the legacy install base that you're leveraging, so you must be gaining share and success in the aftermarket strategy, but it's a little unclear how you could have such a surge in one quarter when you look at the orders, they've been bouncing around anywhere from 8% to 27% year-to-date what goes on in one specific quarter like this that would drive that type of performance and maybe should we or should we not expect this type of growth despite what goes on in a project business in the coming quarters

Mike, I think you've made a point for us in your question around this is not a quarter-to- quarter business, and so that's why we focus on yearly trends you know, relative to bookings and sales. But we'll talk a little bit of the Third Quarter. You're right that primarily in our pump projects a lot of those have not come online. But what we're capturing with this growth is not only our legacy install base as you talked about but also our competitors install base and also where the alliance arrangements are taking opportunities to provide services in parts and repair to our customers where they may have been servicing it themselves.

So, those are some of the drivers that you see if you talk about it, you know look at the strategies that we've kind of laid out, those offer the good opportunity for presentation -- penetration in those markets. Excuse me. Now, if you look at specifically in the Third Quarter, you know again it's not a quarter to quarter business. Some of the things that we saw was we had a good aftermarket backlog coming into the Third Quarter, and we executed very well on that.

We have been adding some as we talked about on the call some capacity in some of our Service Centers, and our Parts Machine Centers, which enables us to get us more flow through on this aftermarket. Now we won't call the trends going forward. The best things to look at are bookings trends over sustained period of time, but the point is that we have seen very strong project growth in this business, and we do see the opportunity coming up as they come online, but also we've been driving aftermarket independent of that project growth.

And with aftermarket orders and pump up 19% year-to-date, why should not we expect that growth to continue given that those are generally service type agreements and as you mentioned alliance agreements? It just seems some people are modeling that number actually comes down now from here, but can you walk us through again how this revenue flows out say over a six to twelve-month period based on these alliances?

Well, alliances is one component of it. That's an aspect where we go in and establish a long-term relationship. A lot of our businesses around providing technical services, standard parts, standard service, repair work, but as the point I was trying to make in the beginning of my comments, Mike, is that if you look at aftermarket growth, you've got a year-over-year -- let me give you an example, in project work when I compare OE growth, it's last year's projects bid in one versus this year's projects bid in one. When you look at aftermarket, I am comparing to multiple years of install base in terms of the growth. The aftermarket just doesn't grow that fast. typically in the midsingle-digits. It may fluctuate over time, but as we talked about, it's a great annuity stream for our business.

If you look at what been able to accomplish, we've been able to align our capacity in terms of machining capabilities and QRCs, and that's what's driven our growth. So, what I always say is to keep an eye on long-term trends in terms of our bookings, and we will be focused on continuing to take market share. I mean that's part of what's happening here. It is not that the market is growing that fast, it is that we're succeeding on our strategies and taking share. So, I won't make a call of how this is going to shift in the future because things can change from the quarter-to-quarter, but I think I can overlay it by saying we're going to continue to pursue profitable projects, and we're going to continue to drive this aftermarket opportunity, and we also think that the project wins that we've seen over the last couple of years we're going to really start coming on line for us, and we're going to align our capital in the form of our QRCs, our people, and our organization to capture that.

Your next question comes from Mark Grzymski with RBC Capital Market.

Good morning, guys. It is Mark and congratulations. Great quarter.

Thank you.

Thank you, Mark.

If we could just stay on the pump division, Mark, if I am looking at it right here, I would assume also that between the price increases that you're getting which are more than offsetting the cost increases that you're facing, and the fact that you're staying away from a lower margin business,you know, that's part of the reason why it seems that the margins are so much higher, and I would just assume that those are going to be more sustainable than the shift in mix?

Well, you know, I mean, that is an important factor. Pricing flows through very efficiently through your P&L, and you're right. I mean, we've had discussions during the first two quarters when we've talked about mix shift in the other direction, and yet we've been able to sustain that or offset some of that shift, and you're right, it is because of pricing also keep in mind in our pump business they get tremendous operating leverage. So, it's going to be operating leverage and then some of the initiatives that we have around driving operational excellence, and then on the cost control line, so I have tried to always say this. Take shift away, and all of our businesses are improving in the gross margin line and the operating margin line. What shift does is create quarter to quarter activities which you see here.

That's why when I kind of order the impacts on gross margin, it has been pricing and operational excellence and absorption, and we do have an impact of shift. You can see that as you're driving the other initiatives a slight shift to more aftermarket you generate tremendous leverage in your P&L. But we look at this in a sense kind of long-term. The other thing is just segment shift. When you look at our consolidated gross margins, as I mentioned in each one of our divisions, one they had 40 basis point improvement in gross margin for the year in the pump, 50 in valve, and 40 in the seal division, and when you look at our reported, it is only 10% improvement. Well, that's segment shift. You peel behind that our businesses are improving right to your point.

Okay. Okay. Great. Thanks. Just a follow-up before I jump back into the queue. I see you're adding capacity. You went in detail there, Lew. Two parts to the question. First, are there any constraints your end and then secondly, are you faced with any supply constraints out there in the market?

Well, when you look at capacity, we're always going to look at capacity because in a market like this it keeps going up. Capacity is going to be an issue going forward. If we keep growing at these rates, and that's why we are adding facilities. As you know, we added facilities, three facilities in China. We added a couple of facilities in India and we've been adding onto the existing facilities in some cases adding brick and mortar and other cases adding machining capability and test capability. So, we're constantly looking at capacity.

We've gotten to a point now where we actually can build pumps in different locations. We can move a pump that would normally be in a European location, and we can build it in a U.S. location. So. we're looking at that constantly. Besides the footprints we're looking at our capacity.

We're also creating strategic alliances with suppliers. That's to make sure we do get the equipment that we need when we need it, especially in the the the area of motors. Motors has always been a product that is in short supply, and of course every pump that we build and our competitors build needs a motor to drive it, so we have started buying those motors a little bit early. When we go ahead and we get the order within five days because most of these orders only have five days on the order coming in from the motor supplier, so we order it within those five days to make sure we cover things. We're constantly looking at it, and capacity is always going to be something we look at.

But no constraints on the supply side as of right now for you guys?

I think you can never say there is no constraints. We go out there. There are constraints because there is a lot of business out there. But we're able to work around them. Our strategic sourcing operation is buying as a company no longer a 60 individual factories, so the constraints out there we're overtaking and making sure we do that.

Mark, you know, the constraints are really industry wide, and that's why you're seeing longer lead times on these large projects. So, remember, we're a small percent of an overall project, so if we are impacted, seeing any constraints, the overall project will as well, and that's why often the GCs are pushing these things out to longer lead times, but to lose point, I mean, we remain very focused on mortals and castings, and some of what we talked about on earlier calls is we used to order motors for just in time delivery, but some of our suppliers were constrained, and having difficulty with on-time delivery which impacted our delivery at the pump. So, what we've done is use our balance sheet and moved those purchases up earlier. Something we need to stay very focused on, but it is really propagating through the entire industry, so it really leads to longer lead times.

Okay. Great. But nothing internally specific? Okay. Thanks, guys.

Your next question is from the line of Scott Graham with Bear Stearns.

Good morning. Very nice quarter you've got gentlemen.

Thank you, Scott.

Hey, I wanted to just ask a couple of short questions. Most of them have been answered in fact. The tax rate is, you know, like trying to hit a moving target, and I am no Peyton Manning, so I am hoping that you can give us maybe a little bit of guidance around where you think the tax rate is going forward?

I am trying to think of a clever response to that Peyton Manning, and I am just not coming up with anything right now, Scott. Let me just tell you, when you remember our discussions at the beginning of the year around FIN 48, and it would create volatility in tax rates, and that's kind of in a sense what you're seeing with our company and I am sure other multinationals is how you accrue for things. You can't accrue 50%. It is either all or nothing, and it does create volatility in the the tax rate.

But here is the way we tried to comment on how you think about it is our systemic rate has been improving. Last call we talked about 35% for the back half of the year. For next year we've talked about a range of 30 to 35%. There will be fluctuations. As you see it in this quarter our systemic rate was slightly below 35%. We had a number of discreet items. There was a net benefit to those. One related to a Tax Law change in Germany. Those things are going to happen. When they do you have to impact your subsequent quarter when those occur. So but looking out long-term our tax planning strategies, our global footprint are yielding a benefit, so long-term systemic, when we talked about this a year-and-a-half ago, 30 to 35 for next year we're going to continue to drive improvement in our rate.

Okay. The other question really related to the pump's margin which is obviously the hot topic given the importance of it in the quarter. Now, we've talked obviously about the shift in mix pricing. Could you give us maybe a rank order of -- I mean, after the shift in mix which I think you're indicating is the biggest driver. How would you rank order the other factor, the pricing versus productivity versus operating leverages? Is there a way to do that?

I mean, in the aggregate, now, i mean it really will depend on whether I am talking about original equipment and aftermarket because aftermarket pricing usually holds fairly stable. You can see some increases, project work are going to be on a case- by -case basis, may have a different amount of SG&A allocated to it, but I mean, I wouldn't say that aftermarket was the biggest component. It was certainly a contributing factor. But what we see is going to be the pricing, the operating leverage, and the operational excellent in sourcing initiatives that drive it, and the reason I point that out is that again if you look at year-to-date we've seen a roughly about a 300 basis points shift in the pump business to more original equipment and yet they've been able it improve margins. And so you know a lot of that is being driven. If you look at prior quarters, I use the rule of thumb that about 30 basis points of shift to original equipment, I am sorry, 100 basis points is about a 30 basis point margin. You can see that we've been able to offset most of that impact through pricing, so I would say pricing and operational excellence and leverage are the leaders. The other thing that we talked about if you're talking about operating margin, Scott, is while I get a head wind so to speak for more original equipment in the gross margin line, I in a sense get a tail wind on the SG&A line because projects tend to have lower marginal SG&A burden. I think from the operating margin standpoint the mix shift doesn't completely balance out, but it has some neutralizing impact. Bottom line, pricing, absorption, fixed cost leverage, cost controls are what with driving these margin.

Thanks.

Your next question comes from the line of Jim Foung with Gabelli and Company.

Hi, guys. Great quarter here.

Thanks, Jim.

I guess just a couple questions in terms of your SG&A as a percent of sales. Are there any more benefits you can get in terms of improving the ratio from the absence of the professional and legal fees from the past or are you paying much kind of guiding to your professional level to where you are?

Now, you know, I mean, I think we've talked about audit fees, what, a year-and-a-half ago, that they will be decreasing over a period of time, and we certainly seen an improvement this year. We've been spending money at the financial edit professional fees tax planning. We certainly talked about the legal costs, so you know, we think there is certainly still opportunity.

Do you have a target in terms of what you think the SG&A position of sales can be? Do you have an operating margin target of 15% over as your long-term goals, is that also includes lowering the SG&A component or is it really going to come from the gross margin expansion?

We would expect that the primary driver of that is going to be continued reduction of SG&A as a percent of sales, not to say that we are you know going to continue to drive gross margins, but we talked about a target of 20% or below SG&A as a percent of sales, and that's one of the biggest drivers to us achieving our goal in 2010.

So if you get better than expected gross margin expansion, that could present topside in terms of your operating profit margin of 15%, then?

Well, sure. If we get better than expected improvement on SG&A as a percent of sales or better than expected gross margin improvement, then it certainly presents topside.

Great. Great. Ok,thanks a lot, guys.

You're welcome,Thanks, Jim.

You have a follow-up question from Mike Sneider with Robert W. Baird.

Hi, good morning, guys, and the valve division, haven't focused much on it, but you talked about the influx in aftermarket in pumps but you've also certainly talked on how the valve division lags pumps installations or orders by about six to nine months.

Should we interpret that, the strong growth called 16 to 18% in order bookings and valves is now at that inflection point or indeed there is something else occuring in that inflection point is yet to come? Well, I mean, I think part of what you're seeing is that lag effect in terms of sales increase, but I don't want to say that that's all that because you know, one of the biggest drivers in our valve business is around on-time delivery which saves substantially improved. I mean they're executing very, very well on their strategies, and that's driving the growth as well. So, you know, when we look at this, we're very excited about their growth because it is broad-based, and they're making very strong penetration into the oil and gas industry. Traditionally, our valve business is we're heavily concentrated in the chemical industry, so it is broad-based improvement. It is some of the lag effect you're seeing of the project work, but it is also driven by the initiatives they have in place.

Ok, and then back on pumps, in the Q you mentioned that there were several orders, I think that the oil and gas based that were pushed from 3Q into 4Q. Can you just give us some color on was it intentional or was it driven by the customer and then I just have a follow-up on that as well.

Yes. What we're seeing out there to the extent orders get pushed as the customer isn't ready for it at that point in time which will often happens. As we talked about earlier, we're a small percent of an overall project just because we deliver on time doesn't mean that the its site is ready for it, and so sometimes that will delay it. As we talked before before, last year, sometimes some of our shipments were lagged because we don't get it done on time. But for the most part what we're seeing right now is that some of our large projects we're ready to deliver them, and they aren't ready to be received.

Okay. And then does that imply, well, first of all could you give us some order magnitude as on were these orders meaningful and I presume they were in you called them out in the Q, and I guess that implies as well in Q4 we should probably expect a next reversion back to what we saw in the first half because projects shipments will be implicitly stronger with that, I guess pushout in aftermarket by definition we'll be diluted back down in the next?

Well, yes, I mean I don't like the term diluted because I think our project business is a profitable business. I will just -- you know, without pointing to where we think this mix shift will go in the fourth quarter, I will just point this in data. If you look at our bookings, it has been roughly 63% original equipment during this year. If you look historically, a lot of project business goes out in the fourth quarter, but also if you looked at the fourth quarter, historically the Company has gotten tremendous leverage off for that I would say that if to the extent some of these projects were not requested during the Third Quarter, our intent would be to deliver them during the Fourth Quarter.

Okay. And then, Lew, just one more strategic question. Share repurchases now I presume you're complete but the share repurchased program are close. What are your thoughts now because Q4 presumably has a huge in-flux of cash coming as you complete the year end shipments. What's the magnitude you would be willing to do? What's your appetite for doing so, et cetera?

We did complete the first share repurchase, so that is completed. It is share repurchase again as just one of the options as we mentioned many times going forward along with dividends, acquisitions and other things, so right now we have not made a decision on which way we want to go and what's best for the shareholders, is we'll continue looking at that.

You know Mike, as I went through the cash flows, you can see that you know, during the year we've taken a very balanced deliberate approach to our cash by- with capital expenditures funding working capital and returning to the shareholder. When we did that, really through an eye of what we thought was the best for the shareholder. And as you pointed out and we talked about in the beginning we do generate a lot of our cash in the back half of the year and primarily in the fourth quarter, so we don't think that now is the time that we need articulate a decision, but it is things -- those are things we're thinking about as a management team.

Great. Thank you.

Again, if you would like to ask question, press star then the number 1 on your telephone keypad. Your next question comes from the line of Rob Lietzow with Lakeway capital.

Hey, guys, congratulations. A lot of hard work starting to pay off now.

Thanks, Rob.

I guess the question, and I missed a little bit of the Q&A session. I don't know if you guys talked at all about the kind of the '08 view in terms of margin expansion, you know, next year, beyond what you're doing this year?

Yes. You can say the margin expansion opportunity in our OE business.

Just in general. Your operating margins are going up a few hundred basis points this year, and it's pretty clear that you don't think that's the end of the game based on your commentary. But you didn't really layout any definition of that.

No, we didn't. We didn't guide towards any original equipment margin expansion towards next year. What we have said about our original equipment business --

No, no, no, not original equipment, just overall, you're operating margin.

Okay. We have not given any guidance on operating margin for next year.

Okay. When do you plan to do that?

If we do it, we'll do it sometime after this call. We'll discuss that later.

Okay. I think it is pretty obvious that the margins for the Company, you know, you finally kind of cracked the code here. We've been waiting for quite a while to see it really show up in this quarter obviously was outstanding. But It seems as though this is just the beginning of what's going to continue to go on for the next probably couple years at least.

Well, what we have talked about, Rob, is where we intend ongoing, and we intend to going to 15% in 2010, and I would agree with you this year and including this quarter we've shown progress towards that ultimate goal.

Yes. No, it is been really strong. Now, the other thing is you've been pulling backlog into sales pretty much kind of one to one. Is that something we're going to continue to see? I think you said 12 to 13 months, but you've been saying that for awhile, and it's been kind of pulling one to one.

Well, I mean, I think what we talked about is we're kind of in a steady cycle. You saw early in two years ago a spike in our bookings growth, and then the sales started to catch up to last year, but in the industry not much has changed. We are seeing and we have seen longer lead times, and you know, I know about the one to one, but I am just telling you what you we're seeing in the industry are longer lead times, some of what you saw in the Third Quarter, for example, was very strong growth in the aftermarket business. That does have shorter lead times, so again not a quarter to quarter business. We're just calling what we see generally in the sales conversion cycle, and as we talked about earlier because of the supply base and everything, there is still fairly extended at the customers request.

There are no further questions at this time, Mr. Nagel. Do you have any closing remarks?

Yes. I would like to thank everyone for joining us on the call today and also let you know we're going to be a number of conferences in November. We got three conferences and then we've got one conference in December, and we look forward to seeing you there. Thanks.

This concludes today's conference call. You may now disconnect.