福斯 (FLS) 2008 Q2 法說會逐字稿

Ladies and gentlemen, good morning. My name is Terry, and I will be your conference operator today. At this time, I would like to welcome everyone to the Flowserve Corporation Q2 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. Sir, you may begin.

Thank you operator. Hello, everyone and thank you for joining us. Welcome to Flowserve's second quarter 2008 investor conference call. Today's call is also being webcast with our earnings presentation on our website at Flowserve.com. Just click on investor relations tab to access the webcast and the accompanying presentation.

Before we get started with the presentation, I want to make one brief note. For those of you who have accessed today's call through our dial-in phone number and also wish to follow along with our earnings presentations slides on our website, please click on the "Click here to listen via phone" icon at the bottom of the Event Details page. I would also like to note that our web cast will be posted on our website for replay approximately two hours following the end of the call. The replay will stay on the site on-demand for the next few months.

Joining us today are Lou Kling, President and CEO of Flowserve; Senior Vice President, Chief Financial Officer in Latin America Operations, Mark Blinn; and Vice President and Chief Accounting Officer, Dick Guiltinan. Following our commentary, we will again the Q&A session.

Regarding any forward-looking statements, I will refer you to yesterday's earnings release and 10-K filing and today's earnings presentation slide deck for Flowserve's Safe Harbor on this topic. All this information can be found on Flowserve's website under the Investor Relations section. I also encourage you to read these statements very carefully with respect to our conference call this morning. The information in this conference call, including the initial statements by management, plus their answers and questions related in any way to projections or other forward-looking statements are subject to Flowserve's Safe Harbor.

Now I would like to turn it over to Lou to begin the formal presentation.

Thanks, Zac and good morning. It's a pleasure to welcome you to our 2008 second quarter conference call.

I'm pleased to report that the second quarter was another terrific quarter for Flowserve with continued strong execution and outstanding financial results. These results met or exceeded all our internal expectations, which is why we're now significantly raising our full-year earnings per share guidance to between $7.20 and $7.50 per share from our previously announced $5.90 to $6.20 per share. These record second quarter results show the continued strength in our end-markets, strong leverage in our income statement and most important successful execution of our key strategies, including significant organic growth, success in our after-market initiatives, additional process excellence improvements, further SG&A reduction and strong margin improvement. When looking at the full-year, these financial results, along with the continued penetration of our key end-markets further operational excellence improvements within our manufacturer facilities, continue margin enhancements, improved traction in our tax planning and increase confidence we have in our ability to continue to execute and grow in this environment caused us to raise our outlook again for 2008.

During the next few slides, I will cover some of the significant Company highlights for both this quarter and the first half of 2008, as well as the key performance metrics achieved during the quarter. Next, as I've done in the past couple of conference calls, I'll touch on a few of the key global project wins we've had over the past year or so. I'll highlight just a very few subset of these project wins, which should show more clearly how we're using our global footprint in executing and strategic global locations and key market segments to position the Company well for success over the long term. In the back half of the presentation, I'll review our primary end-markets, which are an area of significant focus for the Company. [This discussion should help provide you with a solid understanding of our external market outlook and also help you gain a stronger sense of our very attractive opportunities we see ahead.]

Slide three covers the primary highlights of the second quarter of 2008. We delivered record fully diluted quarterly earnings per share of $2.13, up nearly 92% over the same period last year. This significant increase in earnings was due to a number of factors, including increased consolidated operating margin of 440 basis points to 14.8%, over 24% increase in sales at 360 basis-point improvement in gross margin and a further reduction of 80 basis points in SG&A expense as a percentage of sales. We also delivered our sixth consecutive quarter of bookings in excess of $1 billion recording bookings of over $1.3 billion, up 24% over the previous year. This increase was driven primarily by continued sector strength with notable growth continually in the power and chemical markets. We continue to drive strong manufacturing throughput in the second quarter, delivering record second quarter sales of almost $1.2 billion, up over 24% over the previous year and recorded very strong gross margin performance, up 360 basis points to over 36%. This gross margin increase was primarily due to pricing, higher sales volumes positively impacting fixed cost absorption, continued strong execution on our operational excellence programs and the continued strength of the Company's end-user, after-market strategy, which drew high levels of after market sales. We also delivered well against our ongoing internal initiatives of reducing SG&A as a percentage of sales, lowering SG&A to 21.7% an additional reduction of 80 basis points versus the same quarter last year.

With respect to our end-markets, we continue to see broad strength during the second quarter based on continued global infrastructure investment. This infrastructure investment also yielded strong after-market growth when combined with the tremendous success of our end-user, after-market strategy, particular in our pump division.

Slide four covers the key year-to-date highlights for 2008. The team delivered record earnings per share of $3.66 in the first half, up nearly 117% over the same period last year. This significant increase in earnings represents consistent strong execution against our commitment to create ongoing value for our shareholders. In the first quarter of this year, we achieved a consolidated operating margin of 11.9% and in the second quarter, we achieved an all-time record quarterly consolidated operating margin of 14.8%. This calculates to a first half consolidated operating margin of 13.5%, up 400 basis points versus the first half of 2007. We are extremely pleased with our consolidated operating margin trend and we remain fully committed to delivering 15% by 2010.

Bookings for the first half of the year are up over $2.7 billion, up almost 28% from the last -- last year's first half. And another first half record for the Company. We also delivered record sales of over $2.1 billion, up 24% from a year ago. And we saw significant gross margin expansion, up 280 basis points to 35.5% and SG&A reduction as a percent of sales of 130 basis points to 22.5%. We also continue to drive higher backlog while achieving strong sales to a record backlog of over $3 billion, up nearly 34% versus December 31, 2007. So as you can see, the first half was tremendous with Flowserve and the reason I feel confident in significantly raising our 2008 target earnings per share to between $7.20 and $7.50 per share.

Slide five outlines in detail many of the second quarter highlights I discussed on the previous slides. As I've noted earlier, the Company delivered tremendous leverage throughout the P&L during the quarter, delivering operating income and earnings per share growth more than three times the rate of sales growth.

Slide six shows our progression of bookings -- booking success since the start of 2004 and highlights a tremendous growth in bookings we've driven since the back half of 2005.

Slide seven highlights our sales since the beginning of 2004 and the average conversion cycle we've talked about many times between a booking and a sale, which is averaged about 12 months. I'd like to remind everyone that this is an average conversion cycle with valves and seals being shorter than 12 months and pumps on the average being longer. As I've noted in previous presentations, as projects continue to increase in size, complexity and scope and customers continue to order earlier to help ensure adequate capacity, the conversion cycle could extend another month or so.

Slide eight highlights an important element of our business model that we've talked about for some time, that being the strength of our global footprint and how we leverage it. This chart represents a small sampling of our large project wins from across the globe over the past year or so, and many of our key industries including oil and gas, power, chemical, water and general industries, specifically pulp and paper and mining. We've updated the chart with some recent wins that were not shown at our first quarter conference call. The strength of this snapshot is not just the fact that we're a leader on these projects around the globe, but also represents the continued after-market opportunities that projects like these represent for our future. Our continued investment in our global manufacturing and quick response in our footprints across our key manufacturing and infrastructure growth areas continues to be a significant competitive advantage for the Company and a significant benefit to our customers.

Slide nine begins our view of our core markets, oil and gas, power, chemical, water and general industries, supported by considerable independent market research conducted by a number of data sources highlighted on the following five market perspective slides. We have also added a new graph on each slide that shows a total combined available original equipment and after-market estimates for the past seven -- 11 years for pumps, valves and seals. The bottom of each bar represents mature markets, such as North America and Europe, while the top of each bar represents the developing markets including China, India, Africa, Middle East and Latin America. The two major points on all five charts are the increase in influence being felt by the developing market, but equally important is the continuing positive growth trends from the mature market.

In the oil and gas market, we continue to see robust business activity and planned markets on a global scale. Investments are being made in upstream, mid-stream and downstream projects and they are being made in multiple regions throughout the globe. Upstream investment focused on finding and producing more crude oil are being fueled by the projected growth of global consumption, as well as the projected depletion rates of existing fields. As we have discussed in the past, a majority of the new oil being developed is not of the conventional light crude variety. In the near term, it is more of what we call heavy oil, requiring more complex recovery methods. A significant amount of longer term oil will most likely be coming from deep water or subsea production fields. The challenges of extracting this oil continue to stretch applied technology, which is where we believe Flowserve is a leader. Our continued and collaboration with key customers has supported the development of products and services required by these more complex applications. The by product of these complex recovery systems is different varieties of crude oil, which require different methodologies to upgrade or refine the product for market. Most existing refineries were built to handle the conventional light crude which dominated the market until recently and without modification, these refineries will not be ready to process to variations found within heavy oil. Many existing refineries are in the process of upgrading their operations to allow the flexibility to handle the various types of crude oils arriving to their facilities. There are also several new refineries in both the planning and construction phase, which are requiring to meet projected demand growth particularly in the Middle East and Asia. The market is also seeing several of the heavy oil producers adding upgraders or small-scale refineries at or very near their oil fields. These upgraders allow the producer to develop an improved greater crude oil for delivery to the market. All these needs are driving continued investment in the downstream side of the market where we are a leading supplier for pumps, valves and seals, including those required for the new refining of upgrading the process which bodes well for our business going forward.

In the area of natural gas, there continues to be an increased focus on utilizing this form of fuel for its cleaner environmental properties. Significant investments are being made in the upstream portion of this market to find and develop new fields worldwide. In fact, one of the largest gas finds is in the United States, right in our own backyard near our Irving, Texas headquarters with the developing of the Barnett Shale discovery. The newer gas fields are not adjacent to the ready customer market, investments in liquefied natural gas, or LNG, are forecasted to remain strong. As I have mentioned in prior calls, we are well positioned to win important project opportunities in this segment of the market such as our previously announced major win in Qatar. Oil and gas is a core market for Flowserve and we'll continue to invest to increase our market share in this very important industry.

Slide 10, in the power industry, investment continues and the forecasted growth well into the future. As I've mentioned in previous calls, industry analysts are forecasting a doubling of demand for electricity on a global scale over the next few decades. This growth in demand is directly coupled with the significant development of infrastructure occurring around the globe, particularly in the Middle East, China, India and South Africa. This demand requires the construction of new power plants ranging from hydroelectric to nuclear with the majority still being coal-fired plants. An interesting data point is the recent press coverage on the expansion of coal mining. In fact, closed coal mines are being reopened and reduced production mines are being expanded to meet the proposed increases in demand for coal. Therefore, the projected growth in the power industry is also having expansion effect on the mining industry as well. Coals prevalence in the power industry is driven mostly by its lower cost, lower plant construction cost and the speed of which a new plant can be brought on-line. This increase in coal-fired plants is also increased in the concerns about CO2 emissions. This, in turn, is driving activity levels in the development of carbon capture and storage methods, also known as carbon sequestration, where our pumps, valves and seals should play a major role. Many of these coal-fired plants are projected to use advance cycling techniques, which operate at higher temperatures and pressures with reduced emissions. These approaches are referred to as super critical and ultra super critical power plants. We have continued to invest in research and development for new products specifically suited for these applications. In addition, utility companies are making investments where practical in the refurbishment and upgrading of existing power plants to increase their efficiency and lower their emissions. Due to the need to control CO2 emissions, many of the utility companies are now looking at expanding their use of natural gas and nuclear material as alternate sources of fuel.

Nuclear is forecasted to experience a significant increase in investment worldwide as the cost for all fossil fuels remains high and with the pending government application of carbon credits, the operating costs for nuclear power plants could even become more attractive. Obviously a side benefit of nuclear power generation is that it produces zero carbon emissions, which is driving new power plant planning and licensing worldwide for more than 100 units to be built by the year 2020. As a leading producer and products and services to the power industry, the projected growth in this segment positions us well to grow our market share in that market.

In the chemical industry, there continues to be a focus on investment into lower cost regions of the world. This focus is drawing strong growth in new plant construction in both Asia and the Middle East. Several of the oil companies are also partnering with chemical companies to add petrochemical plants adjacent to refineries, such as those planned in Brazil, the Middle East and China. As an example, it was recently announced that the current ethylene shortage in China is driving investments in large-scale integrated projects combining a refinery and petrochemical facility on the same campus. Our investments in manufacturing, service and support capabilities in China have positioned us well for that growth opportunity. The chemical market is also seeing significant growth plans in India. Recently it was announced that India plans to increase its chemical output production 12% to 15% by 2012, which will require increased investments in new plant capacity. This market segment continues to see strong growth in coal gasification and liquification as the industry continues to look for alternatives to higher priced petroleum feedstock and Flowserve has several heritage brand specialty products designed especially for this critical application. The chemical industry has continued to show strong opportunities for growth in our product and services and our expansion investments in China, India and the Middle East has positioned us well to gain market share in this industry.

In the water market, the outlook remains positive due to the persistent need for fresh water worldwide. Forecasts continue to show sustaining growth in this industry with strong growth in the development areas of the global market. These are two critical factors in improving the availability of fresh water to the global population. The first is obviously finding or producing portable water. And the second is the ability to move large sums of water to areas which need the water, but do not have local access. This creates the requirement to have infrastructure, which is capable of moving large volumes of water over long distances. Our line of large water and Volute pumps used in water transport, flood control and irrigation applications supported by our Changsha Pump Company joint venture in China provide us with the opportunity to grow our share in the worldwide water market. As researchers and government look at how to answer the need for more portable water, there is a growing interest in desalination as a viable solution. Analysts projections continue to support the forecast that portable water produced by desalination should double by the year 2015.

Slide 13 shows the market grouping referred to as general industries. This group contains industries such as mining and oil processing, district heating and cooling, agriculture, government, pulp and paper and food and beverage. None of these integral industries accounts for more than 5% of our total business and, in fact, the volume produced by many of these industries represents no more than 1% of our bookings. Also, within this part of the business are the orders that flow through general distribution which serves a broad array of customers which may include companies in the oil and gas, power, chemical or water markets as well as other general industry markets. General industries also contains the emerging biofuel market, which we are working to ensure that we will be a major provider of pumps, valves, seals and services to this industry.

In summary, the second quarter was another terrific quarter for Flowserve and I'm extremely proud of the Flowserve team around the globe for their outstanding performance. Once again, they not only met, but in many areas far surpassed our already high expectations with respect to the quality of their overall execution, which as I've noted many times before is probably the most important factor to our success as a company. We have continued to demonstrate our ability to deliver strong financial performance across the P&L in bookings, revenue, operating income and earnings per share and have also continued the strong momentum we had when we exited 2007, taking advantage of the outgoing strength of our key end-markets as well as our global footprint and driving strong bottom-line earnings through the operational excellence and leverage in our P&L.

With respect to our focus going forward, we will continue to strategically deploy assets and resources on a global scale to provide local support to our customers and we will continue to focus on our execution against a critical customer centric metrics of on-time delivery, performance and reliability. And lastly, we will continue to work to ensure that shareholder and Flowserve employee goals are tightly aligned by continuing to link Flowserve compensation plans to Flowserve Company performance.

Now at this time I would like to turn the presentation over to Mark to discuss the segment results and our financial performance in more detail. Mark.

Thank you, Lou. And good morning, everyone.

As Lou mentioned, we are very pleased with our second quarter results and more important, we're pleased with the progress towards our long-term objectives and we're confident we'll achieve them. During the second quarter, we saw continued strength in orders, highlighted by our strong after-market growth. As we continue to execute on our after-market strategies. In fact, if you look at our growth in the after-market business over the last year, you can see that we are quickly becoming a $2 billion after-market business, which is profitable, high margin, sustainable business. We also continue to see strong global sales growth. As we have discussed many times, over two-thirds of our revenues are international and two-thirds of our operations are international. We are truly a global company with a diversified operating and sales platform. Looking at gross margins, last year at this time we saw good improvement in gross margins despite mix shift to original equipment in the pump division, which showed that we were driving improvement through pricing, operational excellence and absorption. This year we've seen a slight shift to more after-market in the pump division and margins have expanded significantly, which demonstrate that independent of mix, we are continuously and systematically improving our margins in all three divisions. In fact, in the seal division this quarter, we saw a 10% shift to more original equipment and their margins expanded.

Looking at SG&A, we remain focus on driving SG&A as a percent of sales down to 20%. During the quarter, SG&A increased $41 million and once again half of that was selling related. We also invested in R&D. Also in this number we have included the Niigata SG&A, which was not consolidated last year and we saw a $14 million increase from currency. We did have some legal recoveries in our seal and valve division that were basically offset by Niigata integration expense in the pump division. Looking at the tax rate, we did have a $0.16 benefit from tax items, but more important is that we've seen our structural rate go down through planning. Going forward, we expect our structural rate to be at or below 29%. We also expect to see an additional benefit of 2% to 4% in the rate in 2008. The important point is that we will continue to invest in tax planning going forward to drive the rate down.

Turning to cash flow, oftentimes in the mid-year call, we talk about the fact that we use cash in the first half of the year and generate cash in the back half of the year. But when you look at the second quarter results, you can see we in a strong cash quarter when you consider we used $27 million to wind down factoring and $50 million to top up our US pension plans. Both things we discussed at the beginning of the year. Bottom line is that we've made tremendous progress towards our objectives and the second quarter results show that, but the real story is the 15,000 motivated Flowserve employees that are committed to meet and exceed these objectives.

Looking at our second quarter, we saw strong orders in top line growth, tremendous margin expansion and great earnings leverage as net earnings grew four times sales in the quarter and five times year-to-date.

Looking at bookings, bookings increased $257.3 million or 24.4% to $1.3106 billion. Sales increased $226.9 million or 24.4% to $1.1576 billion. Gross profit grew an incredible $115.6 million or to 38.2% to $418 million and gross margins expanded 360 base basis points to 36.1%. This has been driven by pricing, operational excellence and absorption. We also did see a 200 basis point shift to after-market in the pump division.

SG&A increased $41.4 million or 19.8% to $250.9 million and SG&A as a percent of sales decreased 80 basis points to 21.7%. Again, half of that was selling related, but we're also pleased to note that corporate expense, that segment as a percent of sales was at 3%, which is a target we committed a number of years ago. Operating income increased $74.7 million or 77.1% to $171.6 million and operating margin expanded 440 basis points to 14.8%. Net earnings increased $59.7 million or 94.5% to $122.9 million and earnings per share increased $1.02 or 92% to $2.13.

For the year the theme is consistent. Bookings grew $597.9 million or 27.9% approximately to $2.740 billion. Sales increased $416.8 million or 24% to $2.1509 billion. Gross profit increased $195.9 million or 34.5% to $763.8 million and gross margin expanded 280 basis points year-to-date to 35.5%. Turning to SG&A, SG&A for the year has increased $70.9 million or 17.2% to $484 million and SG&A as a percentage of sales has decreased 130 basis points at 22.5%. Last year we decreased SG&A as a percent of sales 280 basis points and so far this year we've increased it another 130 basis points. Operating income increased $126 million or 76.7% to 290.3 million and operating margins expanded 400 basis points for the year to 13.5%. Our second quarter and year-to-date operating margins show great progress towards our 15% commitment.

Turning to the pump division. The pump division had another strong quarter highlighted by continued strength in pricing, great execution under after-market strategies, benefits from operational excellence and the benefit from being a leading manufacturer of high-end specialty pumps. In the pump division, bookings increased $120.2 million during the quarter or 19.5% to $736.4 million. Sales increased $108 million or 20.6% to $633.2 million, gross profit increased $61.9 million or 43% to $206 million and gross margin expanded 510 basis points to 32.5%. This was driven by pricing, operational excellence, great after-market execution and we did see the impact of some specialty pumps and the good news is we have more in backlog. SG&A increased $23.8 million or 29.7% to $103.8 million and SG&A as a percent of sales increased 120 basis points to 16.4%. I do want to point out that again, half of this was selling related, but this amount also includes $7 million impact from the Niigata integration expense and also the inclusion of their SG&A in our consolidated P&L. Operating income increased $38.2 million or 58.6% to $103.4 million and operating margin expanded 390 basis points to 16.3%. That's impressive.

Looking at the year-to-date numbers, bookings increased $352.3 million or 27.6% to $1.6267 billion and as Lou mentioned in our press release, we do expect the second half bookings to be higher than the first half. Looking at sales, sales increased $250.5 million or 26.5% to $1.1943 billion, gross profit increased $119.5 million or 45.8% to $380.6 million and gross margin in the pump division expanded an impressive 420 basis points to 31.9%. SG&A increased $43.5 million or 27.7% to $204 million and SG&A as a percent of sales for the year has increased 20 basis points to 16.8%. Again, half of that is selling related and that also includes an $8 million impact year-to-date for Niigata, the integration and the inclusion. Operating income increased $74.8 million or 69.9% to $181.8 million and operating margins expanded 390 basis points for the year to 15.2%. The pump division has had strong operating income flow-through for the quarter and the year. If you look at our supplemental slide on the pump mix, you can see that we did see a 200 basis-point shift for after-market for the quarter of the year, but the real story is the strong growth in after-market bookings and sales. For the quarter, bookings grew 24% in after-market and for the year 21% and sales grew an impressive 29% in after-market for the quarter and 32% year-to-date.

Turning to the valve division, the Flow Control division, they had another impressive quarter. It was highlighted by strong order growth, reflective of the 12-month lag from pump orders. Also, they're seeing the benefits of pricing power, not only due to strength in the markets, but also because of their ability to deliver high-end, high quality products on time. As with the other divisions, we've seen excellent execution on operational excellence and for the valve division, Lean and CIP are really kicking in in 2008 and we've also seen strong execution on cost controls.

Looking at the results, bookings increased $114.7 million or 36.4% to $429.6 million. Sales increased $85 million or 29.8% to $370.2 million and gross profit increased $31.5 million or 31.1% to $132.9 million. Gross margin expanded 30 basis points in the quarter to 35.9%. You look at the gross margin for this division, this has been a two and a half year story where margins have continued to expand. They've executed on a number of initiatives to improve gross margin and there's more in the pipeline.

Looking at SG&A, SG&A increased $10.3 million or 16.8% to $71.7 million and SG&A as a percent of sales went down 210 basis points to 19.4%. Similar to the other divisions, half of the increase is related to selling, they're investing heavily in R&D and they did in the quarter receive a $2 million benefit from a legal resolution. Operating income for the valve division increased $21.7 million or 52.8% to $62.8 million and operating margin expanded an impressive 260 basis points to 17%.

Looking at the year, bookings have increased $195.5 million or 31.3% to $819.5 million, sales increased $116.8 million for the year or 21.1% to $670.5 million. Gross profit has increased $44.6 million or almost 23% to $239.1 million. And gross margin has expanded 60 basis points during the year to 35.7%. SG&A in the valve division increased $18.5 million or 15.4% to $138.5 million and SG&A as a percent of sales has decreased 100 basis points for the year to 20.7%. If you look at income from affiliates, I do want to highlight this for a moment, income from affiliates increased $2.3 million or 74% to $5.4 million. This really demonstrates the significance of these strategic joint venture relationships that we have around the world. They add value to our bottom line. Operating income increased $28.5 million or 36.8% to $106 million and operating margin for the year has expanded 180 basis points to 15.8%. The valve division has been focused on execution and cost control by continuing to invest in technology and their high-end product offering and their efforts are paying off.

Looking at the next slide at our seal division, they had a strong quarter highlighted by strong orders and top-line growth as their ability to deliver timely, quality service has increased demand for their seals. They've also been able to sustain very high margin growth and they have continued focus on standardizing their platform to deliver consistent worldwide service.

Looking at bookings, bookings in the seal division increased $31.1 million or 22.5% to $169.5 million. Sales increased $39.5 million or 29.4% to $174 million and gross profit increased $18.4 million or 30.1% to $79.6 million. Gross margin expanded 20 basis points to 45.7%. These are very high gross margins and as I mentioned earlier, they did see a 10% shift to more original equipment during the quarter. SG&A increased $6.9 million or 18.7% to $43.8 million and SG&A as a percent of sales decreased 230 basis points to 25.2%, similar to the other divisions, half of this is selling related. They did have a benefit from the resolution of a legal matter during the quarter of approximately $2 million. Operating income increased $11.6 million or 44.8% to $37.5 million and operating margin expanded 240 basis points in the quarter to 21.6%. If you look at the story for the year, it's consistent. Bookings for the year have increased $61.8 million or 22.2% to $340.8 million. Sales have increased $60.9 million or 23.1% to $324.6 million. Gross profit in the seal division has increased $27.2 million or 23% to $145.6 million and margins year over year have remained flat at a very high 44.9%. SG&A has increased $14.3 million or 20.1% to $85.4 million and SG&A as a percent of sales has decreased in the seal division for the year 70 basis points to 26.3%. Operating income in the seal division increased $12.9 million or 25.3% to $63.9 million and operating margins have expanded 40 basis points in the year to 19.7%. This is a seal team that is constantly differentiating itself from its competitors and the high margins reflect that.

Looking at working capital, we saw growth in working capital during the year which was expected. We also saw a significant benefit from continued advance payments from our customers which we not only view these as sources of cash, but as a strong vote of confidence from our customer base. Also, if you compare our working capital metrics to last year, they're consistent when you consider the sales and the backlog growth. Comparing our working capital to year-end balances, you can see that receivables increased $253 million since year end to $920 million. This is driven by $105 million of increased progress billings as we build projects to ship, also we had a $68 million impact from winding down our factory which we talked about at the beginning of the year and also we've seen increase in advanced sales. Inventory since year-end has increased $213 million to $893 million. This includes the impact of $172 million of work-in-process primarily in the pump division and also an increase of $50 million in finished goods, which are goods waiting to be shipped to our customers. You can also see that in advanced cash, advanced cash increased $96 million, again, a vote of confidence from our customers. We are very comfortable with our working capital position.

Turning to cash flow, as I mentioned earlier, we've often said that we use cash in the first half of the year and generate cash in the second half of the year. When you look at our operating cash flow year-to-date, you can see that we used $178 million. Now, if you compare that to our first quarter where we used $173 million, you can see that the second quarter was relatively flat. Now, if you consider that during the quarter we used $27 million to wind down our factoring and we also topped up our pension plan to the amount of $50 million, it was a strong cash flow quarter.

Looking at capital expenditures, year-to-date we spent $38 million. We do expect higher spend in the second half. Also, we've returned $58 million to our shareholders year-to-date in the form of dividends and share repurchase. If you look at our balance sheet, it's strong. We have a lot of flexibility to invest in high return capital expenditures, execute on our repurchase program, provide return to our shareholders through dividends, all the while maintaining flexibility for strategic acquisitions.

Now I'll turn to the full-year outlook. If you look at our gross margin initiatives and we often get asked about material price increase and we have been able to more than offset that through pricing, supply chain and low cost sourcing. Another thing that has been driving our gross margins is our end-user strategy that's been driving our after-market growth. If you look at our initiatives around SG&A, we are very pleased to see that we scaled corporate overhead to 300 basis points and we will continue to drive that down. Some of the incremental has been strong sales expense, but that's tied to bookings, which is good for our company.

Looking at our tax rate, we see a structural rate going forward of 29% or less and additional benefits in '08 of 2% to 4%. The result is that we raised our guidance to between $7.20 and $7.50 for the year.

Looking forward, well, there's a lot to look forward to. We do expect ongoing global infrastructure investments in our core markets to present significant opportunities in 2008 and beyond. We'll maintain focus on our capacity in globalizing our assets and also automating our capacity to drive incremental throughput. We'll maintain focus on our strong after-market strategy. I think we've seen the benefits of that focus. We'll be focused on cost containment, gross margin improvement and tax planning strategies to deliver strong operating profit in earnings per share. All the way we'll maintain financial flexibility through focus on delivering strong cash flow. As I mentioned, we do expect our structural tax rate going forward to be 29% or less. As we mentioned before, execution remains the biggest key to our success. Also, I do want to mention that we are coming out of this quarter as a management team more confident than ever that we will deliver on our 15% operating margins.

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

Thanks, Mark. Operator, I think we're ready to take questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Amit Daryanani with RBC Capital.

Good morning, guys. Just a quick --

Amit, did we lose you?

We'll move to the next question. Your next question comes from Charlie Brady with BMO Capital Markets.

Thanks, good morning, guys.

Good morning, Charlie.

Just a quick clarification on the tax rate. Just so I understand, I'm clear, structural rate of 29, but then a reported rate 200 to 400 basis points below that?

That's right, Charlie. Let me make sure I'm really clear on this. What we talked about around FIN 48, there's the aspect of the structural rate and then there can be fluctuations around that for a resolution of certain matters, but also from certain tax planning items. So what we're saying is we see our structural rate going forward to be 29% or below. We do see additional benefits of 2% to 4% through the back half of the years and those could be resolution of tax matters and/or the benefit of tax planning initiatives, but you're right, 29% or below is our structural rate, an additional 200 to 400 basis points in '08.

Okay, thanks for that clarification. As we look at the bookings, particularly on the pump business as we have that 200 basis-point shift and in Q1 we had another 100 basis-point shift, are you seeing a shift towards the after market business happening sooner than you might have envisioned or given the fact that for Q3, for instance, we're going against a 42%, after-market mix. Do you -- do you expect it to swing back more toward more OE in the back half of '08?

I don't want to call mix going forward because if I would have done it last year, I would have been wrong and that's primarily driven by our tremendous success in executing on our after-market strategies, but, Charlie, you can't ignore that the mix in orders over the last year has really been more biased towards original equipment. What we've seen is just tremendous success on our after-market strategies and the other thing I'll always remind you is we are not a quarter-to-quarter business. You can't call a trend from either one. But if you look at our full-year trend, I think that's indicative of where we're going, strong after-market growth, but we've seen project work and you've seen the bias to more equipment. So I would say that's a leading indicator of what you should see in shift going forward but we just don't want to call it because we're really lightning it up on the after-market strategy.

One more question and I'll get back in the queue. In terms of the bookings mix by end-market, it looks as though this half of the year, the oil and gas business has been trending down as part of the overall mix and you've been picking up on the chemical and power gen, so your mix of the business is a bit more balanced out. Is that what you expect going forward? I mean I would assume that that's more of a positive in that you're seeing a pick up from some other markets that have been maybe not as great a contributor in the past?

Well, I certainly don't want to any way infer that we're calling the oil and gas markets to be going down because that's not the case. They've remained strong, but what you've seen and we've often talked about our process is selective and we've certainly been very selective and I think it's reflected in our margins and our after-market growth. But yes, we have seen growth in the other sectors, chemical and power, but oil and gas remains very, very strong and very, very profitable for us. So I think what you should see going forward is that we will continue to drive selectivity through our processes and we will continue to see opportunities take advantage of after-market and we're going to capitalize on the chemical and power markets, but it is balanced, it is balanced for a number of reasons, that's the way the markets are, but also it's balanced around selectivity.

Thanks very much, great quarter, guys.

Thank you.

Thank you.

Your next question comes from the line of Amit Daryanani.

Hi, good morning, guys.

Good morning.

Hopefully the line works this time. Great quarter, by the way. Just a couple of quick questions. On the pump segment, the bookings, looked like it slowed down a bit at 7.5% growth this quarter. Just talk about what drove that ,and I know, Lou, you mentioned that we should see the back-half bookings being stronger than the back-half of '07. Are you talking dollar amounts or are we talking the growth rates?

We're talking dollar amounts. And, look, that's the way we run our business is we look at the dollar amounts of the orders because from quarter-to-quarter you're looking at different compares.

The other thing we'll remind you is you may have seen the organic rates in the 7% range for the second quarter, but look at the organic growth rates for the year. And again, we're not a quarter-to-quarter business. Orders can move from one quarter to the other. That's why we found it was important to talk about the back-half of the year because we have a very good visibility into our markets, we go through a detailed process and we wanted to make sure that we understood that our markets are good and we're executing well into them.

All right. If I look at overall bookings numbers on a sequential basis in Q2, it dropped 8% sequentially. It seems a little severe, especially since last year the drop was about 4%. Can you talk about why the sequential drop there?

Again, they're still at very high levels and they did drop last year and there is some -- you can see if you look over the last couple of years, seasonality as to how orders occur. Last year is a good example, and it's the way people set their budgets and so on and so forth. But again, if we start looking at sequential from one quarter to another and try to call that a trend, I think we're going to be missing a lot of the message that Lou talked about in his comments and it could be very simple that one was pulled up -- came up into the first quarter that we thought would be in the second or slipped out of the second quarter into the third. So I would just caution you not to look too hard at necessarily the sequential bookings unless they're sustained over a period of time.

Fair enough. And finally, my final question would really be if I look at incremental margins this quarter at around 33%, the first-half has been about 30%, can you remind us how we should think about the long term increment markets? I know you talked about 25% historically but it seems like we should have a step up over here, should we 30% a longer sustainable rate?

Well, you know, I mean the incremental margins are going to be driven by compares and so, you know, there's a couple of things to consider. Look at the SG&A initiatives that we put in place really in the first quarter of last year. Look also at some compliance costs we added last year during the course of last year. That impacts incremental margins. I think the way you ought to look at it going forward is really around what our commitment is and that is that we want to drive this to 15% consolidated margins. The incremental margins can fluctuate from one quarter to another. They've been very, very strong. As you're seen we've been able to grow operating earnings at three times the rate of sales, which really does drive through that. But at the end of the day that is a metric we use for efficiency, but it's not necessarily the way we're driving our business. We're going to invest, we're going to create a sustainable business. But I think if you look over the horizon, you see we still have a number of initiatives that can drive incremental margin flow through.

Thanks a lot, guys.

The next question comes from the line of Scott Graham with Laden Thalmann.

Hey, good morning, guys.

Good morning, Scott.

I think you guys are going to have a good problem to have. It looks to me like the pace of cash flow is going to support a near zero net debt a little out from -- a little bit more than a year from that. What's the plan there, Lou? What are you thinking in terms of capital employment.

Well, we're not going to broadcast exactly what we're going to do, but as we've discussed many times, right now we're not paying off debt. We're looking at other things like acquisitions and ways to return money back to the shareholders. We're in the middle of a buy back program and we increased our dividend last quarter by about 66%. So I don't think you'll see us go to a net debt of zero. We'll probably continue to be where we are, maybe a little bit above.

Yes. Scott, the cadence we usually use is when we go through our cash planning is we talk about at the beginning of the year and we talked about the uses of our cash and if you'll remember still in the back half we've got some significant capital expenditures that are coming on and those -- you ought to view those as not only automating capacity, but those are new market opportunities and so we will be deploying cash to new market opportunities and that's in Brazil and Russia and other areas of the world, continued investment in China and India. So you can look at that as an acquisition or a capital expenditure. It's a buy versus build decision. As Lou mentioned, we also have plenty of capacity under our share repurchase program and we want to keep flexibility around some strategic acquisitions. So we don't intend to let the cash sit idle, but we also don't see any benefit at paying down our debt at this point. It's termed out, it's very low-cost debt and we're happy with it.

Okay.

One of the things we continue to do as we've mentioned is increase our number of QRCs around the world and that's basically following our customers. Where our customers need us, that's where we're going to be.

Okay. If I just might follow up on that, if, in fact, you guys are contemplating additional acquisitions, I guess my question would be where do you see holes in the portfolio? Is it an end-market like desal or is it a region, is it a product line that you might want to get more involved in? Any color on that would be helpful.

We're constantly looking at all of those things. As an example, the product line, we've mentioned this before, in our valve line, we don't have a safety valve. I'd like to have it, but I don't need it because I have relationships with people that do, do have that. But it's a possibility that if we had a chance to get it, we would.

We're also looking at areas as an example we created a QRC in the Czech Republic, so there we're looking at a place we wanted to be in. We're building a QRC, we decided to build versus buy in Vietnam because there was obviously nothing to get. So it's a combination of all of it, really.

It's a great example that Lou highlighted, Scott. If you think about our acquisition in Tulsa of basically sealing systems, which are auxiliary systems, it may have seemed like a small acquisition at the time, but we put a substantial amount of capital there and we're leveraging that platform worldwide. So holes is a tough word to use in terms of our overall portfolio, but I would think of it in terms of opportunity, and it can come in the form of capital or acquisitions as well, but we'll see them as they come along. The important message, I think, is that we're not in any defensive position where we have to make an acquisition.

Understood. Thank you.

You're welcome.

Okay. We have reached the allotted time for today's call. Do you have any closing remarks?

I would like to thank everyone for joining and we look forward to speaking with you soon. Thanks.

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