福斯 (FLS) 2009 Q1 法說會逐字稿

Good morning, I will be your conference operator today. At this time I would like to welcome everyone to the Flowserve first quarter 2009 earnings release 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 will now turn today's conference over to Mr. Paul Fehlman, Treasurer and Vice President of Investor Relations.

Thank you. Hello everyone and thank you for joining us. Welcome to Flowserve's first quarter 2009 earnings conference call. Today's call is being webcast with our earnings presentation via our website at Flowserve.com. Simply click on the Investor Relations tab to access the webcast and the accompanying presentation.

Before we get started with the presentation, I want to point out a couple of important items. Firstly, for those of you that have accessed today's call through our dial-in phone number and also wish to follow along with the earnings presentation slides, via 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 webcast will be posted on our website for replay approximately two hours following the end of this call. The replay will stay on the site for on demand review over the next few months.

Joining us today are Lew Kling, President and CEO of Flowserve; Mark Blinn, Senior Vice President, Chief Financial Officer and Latin American Operations, Tom Pajonas, the President of our Flow Control Division; and Dick Guiltinan, our Chief Accounting Officer. Following our commentary we will begin the Q&A session.

Regarding any forward-looking statements I will refer you to yesterday's earnings release and 10-Q filing and today's earnings presentation deck for the Flowserve Safe Harbor statement on this topic. All of this information can be found on Flowserve's website under the Investor Relations section. I encourage you to read these statements carefully with respect to our conference call this morning. The information in this conversation call, including all statements by management, plus their answers to 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 Lew to begin the formal presentation. Lew?

Thanks, Paul. And good morning. It is a pleasure to welcome you to our 2009 first quarter conference call. During the next few slides, I plan to discuss many of the Company highlights for the first quarter. As well as many of the primary performance metrics we've achieved during this period. I also plan to discuss what we're seeing in our major markets, oil, gas, power, water and chemical, and also spend some time not only on the current situation, but also on the long-term drivers of demand which we have discussed in detail during the 2008 year-end conference call that we still believe is still applicable today. We have also continued to evaluate our operating environment and continue to gather a wide array of both internal and external data to support our operating and investment decisions.

While it is fair to say that there continues to be uncertainty in the global marketplace, such as the broad-based hesitation we saw in the fourth quarter of last year, and into the first quarter this year, I can also say that we continue to see benefits and opportunities that companies like Flowserve that can differentiate themselves through superior product and service offerings, on time delivery, strong customer partnerships, and the latest differentiator, a solid balance sheet. We also remain cautiously optimistic, based on our relatively stronger pump bookings performance during the latter part of the first quarter, which has continued into the early part of the second quarter. As we announced last quarter, we have also begun to execute plans using our strong cash position to reduce or optimize certain nonstrategic manufacturing facilities as well as more aggressively driving further initiatives that will better support lowering our overall cost structure. While we see a projected 2009 realignment cost of up to $40 million during the year, we also believe we can achieve that amount in annual run-rate savings during the latter part of 2009, with full benefits expected in 2010.

Slide three provides an overview of the notable highlights achieved during the first quarter of 2009. When comparing this quarter with the first quarter of 2008, we find a very different environment. You will recall that commodity prices were booming in 2008, oil had reached $140 per barrel and the US dollar was considerably weaker. In fact the euro reached $1.57. In addition, early hints of recession were still being denied and sub prime was not even a household word.

With all of that change, I'm still pleased to report that the first quarter was another strong earnings quarter for Flowserve, with superior execution and excellent financial results. Culminating in many respects to another outstanding quarter of accomplishments by the Company. We posted record first quarter earnings per share of $1.64, which included $9.9 million, or $0.13 of realignment charges, as well as an additional $9.9 million in negative impact from foreign currency. Despite these head winds, our first quarter earnings per share was up nearly 8% over the previous year's first quarter results. These record earnings per share for the quarter demonstrate the continuing success of our operational excellence initiatives, strength of our backlog, and strong after-market platform and continued support from our customers. I'm also particularly proud to announce that before realignment charges of $9.9 million, we reached our 2010 operating margin goal of 15%, 21 months earlier than we targeted back in 2005.

This was achieved through our constant focus on cost and efficiency with significant improvements in both gross margin and SG&A expense. We should also note that we still have more work to do in these areas to continue to improve our operating platform. In other words, we're not done.

Due to our strong backlog, solid orders, and continually-improving operating platform, we are reaffirming our previously-stated 2009 earnings per share target range of $6.75 to $7.50 per share, which includes the full impact of up to $0.50 per share in realignment costs for the year, and the negative currency effects of the first quarter. Our bookings performance for the first quarter represented a decline of 32.3%, versus the prior year, or a 25.1% decline versus the prior year when we consider the 7.2% negative currency impact.

It should be noted that this comparison was against the highest bookings quarter in the history of Flowserve. $1.43 billion, which was approximately 31% over the first quarter of 2007, and also included a significant amount of business for thrusters. These specialty products are large underwater positioners that look like large satellite positioned electric outboard motors used on floating oil platforms or oil production ship to maintain their relative position with the sea bed. The thruster market, although a nice windfall last year, had remained dormant for almost 20 years and is not part of our long-term strategic growth portfolio of pumps, valves, and seals.

Therefore, if we normalize our bookings by removing the $74 million of thruster orders booked by the pump division in the first quarter of 2008, as well as the $1 million booked in the first quarter of 2009, and adjust the currency head winds on normalized pump, valve, and seal bookings, would have been down approximately 21% year-over-year but in line with 2007 quarterly levels.

It is also important to understand that although the first quarter bookings were affected by some uncertainty in our markets, our bidding opportunities have remained very active, our pipeline of large project opportunities is still good, and our after-market bookings remain stable with upside potential. And although we experienced some delays in the customer order placement process that began during the fourth quarter, and continued into the first quarter, we still have not seen significant level of cancellations in our backlog. And as I stated earlier, we remain cautiously optimistic based on our relatively stronger pump bookings performance during the latter part of the first quarter, which has continued into the early part of the second quarter.

It it is also significant to note that our book to bill ratio with the end of the first quarter was still approximately 1, despite tough market conditions. This means we're able to achieve our record first quarter earnings per share, while only slightly eating into our strong backlog.

As you can see in the chart, sales were up 3.2% over last year, to $1.02 billion, the highest first quarter sales in the history of the Company, despite a 10.1% currency head wind, demonstrating the resilience of our backlog, and our strong after-market performance. As I described earlier, excluding the $9.9 million of realignment charges taken into the first quarter, we did reach our 2010 goal of achieving 15% operating margin well in advance of our stated target date, as operating margins improved 330 basis points to 15.3%. Including the $9.9 million of realignment charges, operating margin increased 240 basis points to 14.4%. Gross margins were up 110 basis points to 35.9%, including 60 basis points of realignment charges. We continue to drive SG&A efficiency, lowering SG&A an additional 140 basis points achieving a level of 22% of sales, including 30 basis points of realignment charges.

As you can see in slide four, in the first quarter of 2009, there was a significant shift in our bookings away from general industries and thrusters. Although power and chemical became a large percentage of our bookings, they were lower than 2008 on a relative dollar basis, reflecting the general business uncertainty and resulting industry hesitation which we saw in the first quarter that continued -- that we saw in the fourth quarter and continued into the first quarter. Most strikingly, the lower graph shows the significant reduction in original commitment bookings due to the uncertainty in the market while the after-market business remained relatively stable.

Slide five breaks down our sales for the first quarter by region and by mix. As you can see, there were minor shifts in sales away from Latin America and North America towards Europe, Middle East, Africa, as well as the Asia Pacific region. The original equipment and after-market sales mix remain relatively stable with a slight shift towards the more original equipment as we continue to ship our backlog of strong project bookings from earlier periods.

Slide six covers the key financial metrics in the traditional P&L format for the first quarter. I've hit most of these key highlights already but I do want to point out the effect of foreign currency on the results. As you can see in constant dollars, our booking, sales, and operating income were significantly stronger than the as-reported numbers.

Slide seven, which I'm sure is familiar to most of you, demonstrates the quarterly progression of bookings growth over the past five years, as I mentioned earlier, our bidding opportunities have remained very active. Our pipeline of large project opportunities is good and our after-market bookings remain stable with upside potential, as many of our project shipments over the last few years start exiting their warranty period. Again, as we normalize bookings to currency head winds and exclude the thruster bookings in the first quarter the prior year, we're down only 21% versus the first quarter of 2008. And I would also like to emphasize again that we have not seen a significant level of cancellations in our backlog and we believe that we have negotiated terms and conditions in our contracts and collected advance cash to protect us from any significant negative impact if cancellations were to occur.

Slide eight shows the quarterly progression of our strong sales growth over the past five years. During this time, we have grown almost exclusively on an organic basis which demonstrates how well positioned the Company's services are for the markets we serve as well as our internal investments in capital and R&D have been able to support growth in our business. And where we have made acquisitions such as the remaining 50% of Niigata Worthington, we have been very pleased with the results. As a reminder, the as-reported sales in the first quarter of 2009 shows a 3% improvement over the first quarter of 2008, but would have been up approximately 13% in constant dollar terms without the 10% currency head wind.

Now, let's take a look at what drives investment in long-term infrastructure opportunities. Slide 10 is one I've shown in previous presentations. This illustrates the multiple drivers which influence global spending on infrastructure-related projects such as those in oil and gas, power, chemical, and water industries. As we have discussed in the past, the key take-away from this slide is that several of these drivers influence spending, even in uncertain economic times such as the environment we find ourselves in now. Investments have added dimension and are no longer just driven by large independent US or European companies trying to create shareholder value and internal rates of return. They may be driven by unique drivers affecting that particular country.

For example, the growth in global population, along with the advancing urbanization is challenging the world's ability to provide potable water to all parts of the globe, leading to an increased need to invest in technology such as desalinization solutions. Another continues investments for energy independence by investing in capabilities of alternative energy sources which in turn reduces the overall need for hydrocarbon-based energy. The third example is the growing need to refurbish, upgrade, optimize, or make more efficient the infrastructure in place today.

These changes are likely to be driven by economics or the growing call for greater regulation to achieve continually increasing environmental, health and safety standards. Much of this energy infrastructure was put into place many years ago when crude was cheaper, nearer the surface and lighter, and power plants didn't have the stringent carbon requirements complex recovery or regulatory issues they have today. This is requiring significant investment to keep these facilities viable in today's increasingly regulated and complex environment. An interesting aspect influenced infrastructure spend which written out of the current economic uncertainty is the advent of stimulus programs being instituted by many governments around the world. Many of these programs were started to accelerate activities in the area of road work, bridge refurbishment, general construction and basic services which are designed to create jobs.

These investments have a compounding effect on their local economies, which promote investments in our core industries, because of the increase in demand for their end products such as electricity, asphalt, chemical by-products and many others. By creating new employment opportunities, these investments also help improve consumer confidence, leading to improved spending behaviors, which should drive increased demand for our customers, products, and services.

Slide 11 looks at the oil industry market. The latest March 2009 forecast relative to global demand for oil have been adjusted downward from those issued at the beginning of this year. The outlook now shows an overall decline in demand in 2009 compared to 2008, with the return to positive demand growth in 2010. This return to positive growth next year is important, since oil production investments are not made on the spot price of oil, but rather on the projected price when the project is completed. Usually three to five years out.

This softening of demand in 2009 has been driven by a true decline in mature market demand where transportation has significantly been reduced and aggressive distributor destocking programs has also helped to reduce demand. This decline in the mature markets has been partially offset by continuing growth of demand in developing markets around the globe, particularly in the regions such as the Middle East, China, India and Brazil, which remain committed to building out their infrastructure. In addition, there continues to be investments made in after-market activities with the focus on operational optimization of existing facilities, particularly in downstream refining operations.

Our investments in establishing expanding global manufacturing assets, expanding our global network of quick response centers, establishing strategic joint ventures to strengthen our emerging market access, and enhancing our relationships with key regional customers, have all served to provide a position of strength in pursuing the growth opportunities in these developing regions. In addition, our continuing investments in expanding and advancing the portfolio of Flowserve, products for the oil industry, such as those required for complex recovery applications, and to meet the needs of advanced refining processes, have also provided the opportunity to expand our market share in this critical industry.

Slide 12 gives us an overview of the natural gas market. The latest March 2009 forecast relative to demand shows continued growth over the next couple of years. One of the key drivers in this growth demand is the projected expansion of the gas-fired power generation with a forecasted compound annual growth rate of 4%, over the 2008 to 2013 time period. One of the major factors supporting this growth is the lower operational cost of natural gas, where prices have dropped more than 30% since January. This drop in natural gas prices has been predominantly driven by significant increases in global inventories, causing supply to exceed demand. This industry continues to also see investment plans for the expansion of liquefied natural gas, or LNG, since net producing countries and net user countries are more than 1500 miles apart.

We also believe we have a leading market position in cryogenic product offerings for the LNG market. That is, products capable of withstanding temperatures exceeding 273 degrees centigrade below zero. This positions us well to pursue these projects to support the global expansion of LNG operations currently under way or planned for the future.

As we have discussed on previous calls, we also see future market opportunities in the use of natural gas as a transportation fuel source via compressed natural gas, or CNG, which is one of the factors in our decision to develop our joint venture with Linde in Austria to design, manufacture and support CNG refueling stations in the European Union. This joint venture, Flowserve compressed system GMBH, launched in 2008 is, already delivering products to serve this alternative fuel market opportunity. The combination of Linde's compression technology with Flowserve's flow management and manufacturing capabilities positions us to pursue the CNG refueling market opportunities worldwide as well as future opportunities in biomass and hydrogen alternative fuel solutions.

Slide 13 takes a look at the power industry. The forecasted consumption for electricity continues to show significant incremental demand growth over the next five years with China leading the way with greater than 30% projected incremental demand increase. Much of this demand growth will be met through the addition of power generation capacity over the next five years, with the primary fuel source coming from fossil fuels, both coal and natural gas, which fits well with our portfolio of product capabilities for the power industry. Project activity in the area of nuclear power generation continues to ramp up in many parts of the global market.

We are seeing new orders and new project planning occurring in many regions of the world with China having the most aggressive growth plans followed closely by India. Due to the time frame to design, license, and build these nuclear power reactors, it will be approximately five years before this source of electricity begins to help meet today's growing global demand. But environmental and energy security requirements continue to drive robust investments for nuclear power generation worldwide. In addition, environmental concerns continue to provide the support for investments in energy alternatives such as solar, wind, and geothermal, to name a few. Wind is forecasted to be the predominant source for supplying alternate energy with solar gaining promise in regions where the intensity and availability of sunlight offer a sustainable energy source.

Our long-standing experience and credentials in the power industry positions us well for growth opportunities in both traditional and alternative power generation markets. I would like to share one example of how we are expanding our presence in the alternative energy market, specifically solar power.

Slide 14 gives an overview of the solar power industry with specifics on one critical application. Global solar investments have been projected to exceed $40 billion over the next 15 years. The most active regions of the world today include countries such as Spain, the United States, Mexico, Australia, and South America. New entrants considering investments to alternative energy source include countries like Morocco, Algeria and Israel. Even the European Union has announced plans to analyze the potential of solar power with a possible long-term investment of as much as 400 billion euros to meet future energy needs for the region.

One particular application where Flowserve fills a critical and difficult technology need is in molten salt heat transfer. This application uses the sun's energy to heat salt solutions to a molten state, which efficiently holds on to the heat, allowing it to be transferred to the steam generation unit for the making of electricity. This molten salt is highly corrosive and abrasive, requiring Flow management products capable of withstanding this environment over an acceptable performance time frame. Our market leadership position in surface hardening technology and long-standing expertise in these harsh flow control environments positions us well for growth opportunities projected in this segment of the alternative power solutions. I would also like to point out that our potential business opportunity in this solar power application stretches well beyond the corrosive and abrasive components. It also includes the pumps, valves, and seals utilized in the steam management and the power generating portions of the power plant.

Slide 15 shows the continuing challenges within the global chemical industry. The current economic conditions around the world are hindering consumer spending, which has significantly reduced the need for majority of end products produced by the chemical industry. As we have all read in the global press this drop in market demand has led to a number of plant closure, layoffs and overall financial weaknesses at many of the major chemical companies around the world. On the lower left side of the chart, there is a sampling of current news showing the challenges being faced by individual chemical companies, as well as the industry itself. But there is a positive longer term outlook to this story to consider.

First, the global GDP and world trade forecast show a moderate rebound to growth in 2010 with GDP growing 1.1%, and world trade growing 1.7% as stated in the March 2009 report from the economist intelligent unit. Second, as reflected in the current news shown at the lower right of the chart, investments are continuing in developing regions of the globe, supported by positive forecasts of demand growth in countries like China, India, and Brazil. As well as infrastructure buildout in areas such as the Middle East in preparation to meet future indigenous demand.

Slide 16 looks at the dynamics impacting the future of the water industry. As populations grow and urbanization advances in many regions of the globe, the world faces an increasing number of people living in areas experiencing major shortages relative to supply of potable water. As we have discussed many times before, we are a leading supplier of the lute pumps designed specifically for managing the movement of large volumes of water from the source to where it is needed.

Another critical area where we have strengthened our market position is in desalination. Desalination market has experienced strong growth, even in the tougher economic times with projections of doubling the capacity around the globe by 2016 supported by planned capital investment which has been estimated at approximately $64 billion by independent industry analysts. This investment translates to approximately 37 million cubic meters per day of capacity, either currently under construction or in the planning phases, with a majority of these plant projects using reverse osmosis membrane technology for desalination. One of the driving factors behind the increase in planned use of reverse osmosis membrane technology is that it has become a viable broad-based commercial process through the advancements made in energy recovery devices which significantly reduce the operational cost to produce potable water.

Slide 17 provides an overview of our April 21, 2009, acquisition of Calder AG, a leading supplier of critical proprietary energy recovery technology used in the reverse osmosis desalination process. We are very excited about the potential of this acquisition as it brings together the longstanding leadership position of both Flowserve and Calder to create the uniquely powerful integrated system solution which will reduce the operational cost of global desalinization for our customers. We believe by linking the product technologies of Flowserve pumps with Calder's energy recovery methods and utilizing Flowserve's global footprint and distribution system, we are well-positioned to serve most of the outstanding opportunities in this high growth desalinization market around the globe.

Slide 18 gives an overview of what we feel differentiates us from our competitors. As noted in the past, there are two key areas which anchor our differentiation. The first is our customer-centric culture. Not only do we focus on the buying decision, drivers of ontime delivery, product quality, reliability and local service, we also focus on our end user strategy which includes being very close to our customers. The second anchor is our strong balance sheet. We integrate the strength of these two anchors through three areas. One is our end user strategy which helps to ensure that our products, solutions, and services are aligned with our customers' requirements today and in the future. The other two are globalization and technology leadership. Our customers take a great deal of comfort in the fact that we strive to be local to their operations and that we continually challenge the envelope of applied technology to help ensure that we provide optimized solutions for their needs today and in the future.

Slide 19 shows our compound average annual growth rate for after-market business for the past 10 years. As you can see, we performed at an impressive 21.2% over this period. Our after-market is always driven by the desire that fuel remains readily available to heat homes and automobiles, lights turn on when it gets dark, and water flows when the faucet is turned on. The important point to note is that in tougher economic times, when capital for original equipment orders softens, the spend on after-market still continues and may even offer growth opportunities as facility operators look to outsource fixed costs and increase operating efficiency. We believe that with our expanded global network of quick response centers, our outstanding engineering capabilities to assist customers with optimizing their operations, and our persistent focus on becoming the Company of choice for after-market services, we are very well-positioned to grow market share around the globe, an important after-market component of our business. I want to thank you for your time and attention this morning. And I will now turn the discussion over to Mark Blinn for a more comprehensive look at our first quarter financials. Mark?

Thank you, Lou. And good morning, everyone. Before I review our full financials, I want to briefly review some results for the quarter which highlight our bookings and after market, our strong operating platform, and our strong balance sheet. First, with respect to bookings, bookings were slightly less than 1 billion for the quarter at 968 million, down 32% year-over-year, but down 21% if you adjust for currency in the thruster orders. We did maintain a good book to bill ratio of 0.95, resulting in a strong backlog of 2.67 billion. We also saw continued performance in after-market. With increases in Asia Pacific, Latin America, and the power sector. Offsetting our exposure in the chemical markets in North American oil and gas. In the after-market, during the quarter, we saw the impact from uncertainty in the market. And fewer commissioning spares. But we did see bookings begin to strengthen in March.

A great indicator of our strong operating platform is our operating margin, which expanded 240 basis points to 14.4%, or 330 basis points to 15.3% if you exclude realignment. This was driven by strong gross margin improvement of 110 basis points, including 60 basis points of realignment. And also despite a 200 basis point shift mix to original equipment. We also saw continued SG&A reduction as a percent of sales, down 140 basis points, including 30 basis points of realignment. And we saw an improvement in corporate expense year-over-year of 50 basis points to 2.3% of sales.

Looking at our balance sheet, the first quarter is historically a net cash flow use, usually our largest, yet we finished the quarter with over $200 million in cash.

The next slide looks further at our strong operating platform and the trends over the last four years, you can see sales were up 60% over the last four-plus years, backlog, up over 260%, growth in gross margin, and great overhead efficiency in SG&A and corporate expense. Meanwhile if you look at our manufacturing footprint, it is down slightly. Now, I want to point out, this is not the same capacity we had four years ago. We have taken out less efficient capacity, and added capacity in growth regions, like China, the Middle East, and India.

Now turning to the results for the quarter on slide 24, as Lew indicated, we delivered strong operating margins driven by tremendous operating leverage. Also, as illustrated by the far right column, we face strong currency head winds resulting from the strengthening dollar. Bookings were 968 million down 461 million over the prior year. This was driven by a decline in project orders and the impact of foreign currency as well as the thrusters. Sales were up 31.4 million, to 1.25 billion and gross profit improved $22 million to $368 million, with gross margin improving 110 basis points to 35.9%. This was driven by operational excellence, pricing, and volume leverage. And it does, as I mentioned, include the impact of 60 basis points of realignment and 200 basis points of mix shift.

SG&A declined year-over-year by $7.2 million, to $225 million and SG&A as a percent of sales improved 140 basis points to 22%, including 30 basis points of realignment. Reported operating income increased $27.8 million to $147 million, and operating margin improved strong 240 basis points to 14.4%, or 330 basis points to 15.3%, excluding realignment.

Looking at other income and expense, over the last year, this has been are primarily driven by the changes in foreign currency. Last year, we saw a substantially weaker dollar. And during the quarter in 2008, we had $16.5 million of income in this line. This year, with the stronger dollar, we had $9.3 million of expense. The year-over-year change is $26 million in this line. When you add that to the $24 million negative currency impact in operating income, we had a $50 million year-over-year impact from currency. And yet, we delivered stronger earnings of $4.2 million, to $92.3 million. Reported earnings per share were $1.64, $0.12 over last year. And if you exclude the impact of realignment, they were $0.25 over last year. A significant year-over-year improvement with tremendous operating leverage.

Looking at the pump division, the pump division saw strong margin improvement during the quarter. Bookings were 550 million, down 340 million versus prior year, driven by foreign currency and a decline in project orders. Primarily in the oil and gas and general industries. Sales increased $38.5 million, to almost $600 million, and gross profit improved a strong $24.1 million, to almost $199 million. Gross margin improved 200 basis points to 33.1%, and this does include 45 basis points of realignment. SG&A decreased slightly to $95.7 million, and SG&A as a percent of sales improved 120 basis points in the pump division, to 16%, including 10 basis points of realignment impact. Reported operating income was up $25.1 million, to $103.6 million, and operating margin improved 330 basis points to 17.3%. And if you exclude the impact of realignment, operating margins improved 380 basis points year-over-year. The pump division delivered outstanding margins, while continuing to invest in strategic growth opportunities.

Looking at the supplemental slide that we have on slide 26, which breaks out projects and after-market in the pump business, you can see the impact of the drop of projects and the impact of currency. The result was we saw a 14% bookings shift to more after-market. We did see a decline in after-market orders in the pump business, but if you consider the impact of commissioning spares, and the impact of currency, our after-market was stable. Which we are very pleased with considering the market uncertainty in the beginning of the year.

The flow control division saw continued operational improvement and benefits from cost controls. Books were 303 million, down 87 million versus the prior year, driven primarily by foreign currency and weakness in the chemical and general industries. Sales were down slightly to 297.2 million, yet gross profit increased $1 million to $107.2 million, and gross margin improved 70 basis points to 36.1%, with a slight impact from realignment. SG&A year-over-year decreased $4.5 million to $62.4 million, and SG&A as a percent of sales improved 130 basis points to 21%. Including a 10 basis points impact from realignment. Reported operating income improved $4.5 million, to $47.6 million and margins improved 160 basis points to 16%. If you exclude the impact of the realignment, their margins improved 180 basis points.

The valve division has delivered consistent operational improvement for the last four years. The seal division sustained their high margin results while executing on many of their realignment initiatives. Bookings were 133 million, down 38 million, versus the prior year, driven by a drop in project orders and the impact of foreign currency. I will note that their after-market orders were up year-over-year, by 6%. Sales were down 6.9 million, to 143.7 million, and gross profit was down $3.7 million, to $62.3 million, but this does include $3.1 million of realignment. And SG&A was up $2.1 million, to $43 million, also including $2.7 million of realignment. If you look at the reported operating income, it was impacted by the realignment charges, down $6.2 million, to $20.7 million, but if you adjust the realignment, their operating income was just down $400,000, and their operating margin improved 50 basis points to 18.4%. As you can see, the seal division responded very quickly with realignment initiatives while maintaining a stable after-market business.

On the next two slides, starting on slide 29, I'm just going to spend a moment to detail our actual and forecast realignment costs. Looking at the bottom right corner, you can see that during the first quarter, we saw $9.9 million of costs, you can see how it is broken out by division, and by P&L line item. For the full year on the next slide, you can see that we currently have detailed plans, which result in $36.5 million of realignment charges. We do anticipate an additional $4 million in the seal division, bringing us up to the $40 million that we talked about earlier.

As I mentioned on the last call, our realignment efforts have been ongoing for a number of years and we accelerated many of them into 2009. Also, we expect to start seeing the benefits from this realignment in the back half of 2009, and more important, we expect to see the full benefits of over $40 million in 2010.

Looking briefly at primary working capital on slide 31, you can see that working capital has remained stable. And we finished the quarter with a strong cash advance balance of $408 million to secure our backlog. Looking at first quarter cash flows, as I mentioned the first quarter has historically been our largest use of cash, and cash flow from operations was a use of $180 million, consistent with last year, and capital expenditures, we spent $44 million, which included investments in growth initiatives. Geographic expansion in the Middle East. Growth in markets. Like nuclear and after-market. We also spent $21 million in dividends and share repurchases. The result is that we finished the quarter with a very strong balance sheet, with over $500 million of cash and committed debt capacity.

Looking at our full-year cash projections, we still estimate that capital expenditures will be around $100 million, we did pay a dividend of $0.27 a share in April, we have 128 million remaining under our share repurchase program, we do anticipate 55 million to $75 million of pension contributions, we already made a $25 million contribution in April, we will spend money on our realignment costs, and we will also use our balance sheet for strategic acquisition opportunities like the Calder acquisition we completed April 21.

Looking forward, as Lew mentioned, we are reaffirming our full-year EPS target range of $6.75 to $7.50 a share, including approximately $0.50 a share of realignment costs. We are very pleased with our after-market business and feel we are very well positioned looking forward. We have a solid backlog. And we're also investing in growth initiatives. Our integrated services group which will drive incremental after-market opportunities, our Calder acquisition, which will make us a preeminent player in desalination. Also geographic investments in Brazil, the Middle East, in QRC's, which will give us critical geographic presence near key customers. We have a great balance sheet which gives us flexibility. And we're continuing to work on our operating platform through realignment costs and SG&A reductions.

The bottom line is that management is confident that we have a strong market position, a strong operating platform, and a strong balance sheet, which makes us well positioned to deal in the current environment, and more importantly, to take advantage of future opportunities. And with that, that concludes my comments and I will turn it over to Q&A to Paul.

Operator, if you would please open it up for Q&A.

(Operator Instructions) Your first question comes from the line of Charlie Brady of BMO Capital Markets.

Thanks. Good morning, guys. And congratulations on a pretty strong quarter and hitting that 15% margin bogey much earlier than you thought. I just had a question, Mark, can you give us a little more detail, with regards to gross profit improvement, gross margin improvement, kind of break down, how much of that is coming from the higher volume, versus pricing, and CIP initiatives? And then specifically, to pumps, the impact on the specialty pump shipments in the quarter, and is that something that those type of pump products are going to be shipped throughout the remaining of 2009, or is that -- was that a one-off type of event?

Let me start with the latter one. No, those are not one-off. If you recall, we have been talking about specialty pump equipment over the last couple of years, and if you, with respect to Lew's comments around complex recovery and complex processes, these specialty pumps and specialty equipment are becoming more prevalent. To around refineries and some of the caustic opportunities, cryogenic, all the things we have been talking about, for example the Calder technology that we have is around a complex process. As to your question around gross margin, a significant contributor is still operational excellence in this business. We have seen a benefit from pricing and volume leverage in our business. But we have seen a significant contribution from operational excellence. So we still sit -- have a lot of opportunity in terms of our gross margin, because we're still levering the initiatives that we have on the operational excellence side.

Thanks. I will get back in queue.

Thanks.

Your next question comes from the line of Scott Graham of Ladenburg.

Good morning.

Good morning, Scott.

Just really one question and one follow-up. The bookings number in the pumps business was, obviously, a number that we were somewhat disappointed in, and if you could kind of maybe get us a little bit behind -- I know the thrusters bookings on the OEM side, I suspect, had an impact on that, minus 50, but what does that minus 50 look like on the OEM side, ex that, and what would you say that the pickup in March makes that number look like now?

Well, yes, I don't want to give any detail beyond what we provided bus if you look at year-over-year, a couple of things, one, we had obviously a very difficult compare. You had thruster orders that were in last year. But as we look at the bookings in terms of the view, you got to remember, I mean these bookings, adjusted for currency, were at levels we saw in 2007, when the market was still growing quite a bit. And so, as you look behind that, a lot of this was in project, projects as Lew talked about that we saw delays in. But also what you saw in the first quarter, and we talked about this briefly in the last call, is a tremendous amount of uncertainty in January and February. I mean even think about it all personally. During January and February, personally, you just -- you didn't know what the future was going to be, and that created a lot of uncertainty, and our comment around March, and particularly in the aftermarket was we saw the activity come back on line and normalize as a lot of the uncertainty in the global markets passed. I know there is still some going forward but if you recall in January and February, there was no visibility into the future in the global financial markets.

Right. I guess my point, Mark, was, when you look at the pump's number, of minus 50, I was just actually kind of hoping for a little bit more, maybe numerical clarity on what that number feels like today?

Well, I mean the only thing I can do is bring you down to the first quarter, and give you the additional information around what we saw beginning in March. And the other thing to talk about, is when you looked at the after-market orders, you did see a decline in commissioning spares, which attached to projects, but with that aside and the currency, after-market was very stable. And I also want to point out, after market was also impacted by the uncertainty in the first two months of the quarter as well. But beyond that, the thruster orders, the fact that you look at our book to bill, you look at some of the drivers that Lew has talked about out there, you look at how we're positioned in the marketplace, in terms of our global presence, and our value-add, and I think that is where you can draw your conclusions on what the bookings opportunities will be.

Okay. The next question surrounds the cost opportunity here, now, obviously, you guys are really -- it looks like you're in terrific execution mode on this realignment, but let's say for example, that the bookings are, maybe closer to reality, where they are now, or what may be weaker than what you would expect maybe is the best way to put it. Let's say along the lines of minus 20, as opposed to something better than that. What's the trigger for the next round of cost cutting at the Company to adjust the structure? Particularly for 2010? I don't think there is as much of a concern for '09. But for 2010, what is the next trigger here that you would think, Mark, would -- that we should be looking for? Is it a bookings number? Is it something other than that?

We're following bookings. We're following what the market does but I can assure you that all three divisions do have detailed plans with particular points, based on metrics, where they can start creating what we would call the next round of changes. So therefore, we do have detailed plans in place, and we will trigger those if need be.

All right. Very good. Thanks a lot.

Your next question comes from the line of Kevin Maczka of BB&T Capital Markets.

Gentlemen, good morning.

Good morning, Kevin.

I guess I will ask my question around the after-market. You saw the deceleration, flattish after-market revenues, and pump after-market revenues declining, so I guess my question is, how much of that business is replacement demand from customers? Customers just saying, hey, I've got a worn-out part, I need you to replace it, versus I want to outsource my entire maintenance function, or something along those lines, that maybe might not be as sensitive to the slowdown that is going on right now?

Well, the after-market has a number of components to it. It does have replacement parts. It has service. It has spares. But also as you talked about, it has the outsourcing, really the reliability contract and the efficiency contract that they put on us, which has been an increasing amount of our business.

So again, what you saw in the first quarter, around the after-market, and you look year-over-year, it is still a very, very stable business, but people were just holding off on all purchase decisions. Even around -- and they even deferred some of their maintenance activities, they can't defer them forever, but they certainly deferred them just trying to get an outlook on the environment.

So what you saw during -- one thing we did see an impact on as I mentioned earlier was the commissioning spares and what those are, are basically when you start up a facility, you have spares there, because there are anticipated breakages on certain pieces of equipment, as you start up a system, and you have the spares there. Those obviously, those orders attach to new projects, but we still see strength around service. These things have to stay in a state of repair. People still need replacement parts. And also, what we've seen is an increasing desire to really in a sense outsource for lack of a better term, the service work to us. And this will be in the form of reducing fixed costs, if they have their own maintenance capabilities and really looking to Flowserve to make sure they maintain the efficiency of the process, and the state of repair.

And I would add to that, Kevin, that over the last several years, we've seen more and more of our clients taking the position of outsourcing more of their work as their resources retire and so on and so forth. So that trend is continuing, and is somewhat escalated based on the current situation out there in the overall market. And the other thing I would add is we also see a lot of emphasis now on increased efficiency requirements in the refinery, the power business, and that also tends to drive a lot of the after-market work in our business.

Okay. And then as a follow-up to that, you had a couple of big announcements lately about new QRC's opening in the Middle East. I'm just wondering if you can quantify at all your expectations, maybe not this year, but longer term, or in any way that you can, in terms of how that rollout will continue to progress?

Well, we're not going into forward numbers, I was over there to open up the one in Dhahran and the one in Dubai. These are large QRC's, pretty much almost full factories, with learning centers, and test equipment, and especially in the Saudi unit. That is because our customers there need this equipment. They need the QRC nearby. In fact, at the presentation ceremony, when we opened up the one in Saudi Arabia, we had probably 70 customers there, and on the dais besides our partner were two higher-ranking partners of Aramco who made speeches also on public TV, CNBC, and every other channel that is in the Middle East, so very, very well-received. And the one in Dubai I think had 70 customers. So it is going to actually promote an awful lot of usage of Flowserve product in the region going forward.

Okay. Gentlemen, thank you.

Your next question comes from the line of Hamzah Mazari of Credit Suisse.

Thank you. Just a question surrounding the cost side as well. Could you give us a little more color on how to think about your cost structure going forward, in terms of fixed versus variable, and going forward, as well, how much low-hanging fruit do have on the cost side remaining? How should we be thinking about that?

A couple of things. In the SG&A line, just keep in mind, generally, about half of that cost is selling-related, which is variable in a sense with our top line. In terms of the opportunity, we still have plenty of opportunity. We talked about the metric of driving SG&A to 20% as a percent of sales. We still have some work to do there, on the corporate side, as well. So there is still an opportunity to leverage that. Some of what you see in the realignment is aimed at that. In terms of accelerating some of the initiatives that we had before to drive that level of fixed cost leverage. So we still have plenty of opportunity.

As I mentioned on the gross margin line, we have opportunity around some operational excellence initiatives as well. So really, we're far along in a lot of these processes but there is still as Lew mentioned a lot of work to do to drive costs out of this business.

I mean I would also add to that, Mark, that we've been working on six sigma for the last several years, and we will continue to work on that aspect, but there is also areas that are now newer areas that are looking at producing additional gross margin opportunities like lean mean manufacturing, value engineering. We continue to drive our low cost sourcing models, both across all three divisions, so we have not exhausted as Mark has indicated our opportunities in the business, and we will continue to drive those accordingly.

Thank you. Just one follow-up. Could you talk a little bit about the resiliency of your backlogs? How much of your exposure is late cycle to projects, if they're already near completion where your product is 3, 4% of the cost of the total project, so your cancellation rate remains pretty low, relative to maybe some of your competitors?

I think your question answered the question. It is right on. I mean a couple of things, when you look at our backlog, first, we are a later cycle. There is a tremendous amount of work that has been done on a project by the time they put orders on Flowserve. The other thing to keep in mind is the advanced cash balance that we have. It was $408 million at the end of the quarter. And also the terms and conditions that we have in our contracts. So we are very confident in the strength of our backlog. And as you look again, as I mentioned earlier, you look at the book to bill, we delivered tremendous earnings with a 0.95 book to bill, which means we didn't erode a lot of our backlog this quarter.

All right. Very good. Thanks.

Your next question comes from the line of Jamie Sullivan of RBC Capital Markets.

This is (inaudible) here filling in for Jamie today. Got one quick question for you. During your last call, you mentioned some of your costs of realignment, were you trying to do them sooner rather than later and in the first quarter, I think you only went through about a quarter of your intended amount for the year. Could you give us some kind of update on the timing of what is left to do, what will happen next quarter and what will happen in the back half of the year?

Yes, we plan to probably have most of it done by the end of the second quarter, because we really, by the -- getting near the end of the year, we want to have our run rate of savings up to where we want to be, and obviously get full impact in 2010. So we are accelerating to get it done by the first half.

Great. And just to follow-up, does that include that little list that you mentioned beyond the 36.5 on that slide?

That was the 4 million in seals, yes, that's included.

Great. Thanks so much.

Your next question comes from the line of John Moore of Robert W. Baird.

Good morning, guys.

Good morning.

First question, within projects, I know the multipliers have been rising for about the past two to three years or so. Are your quoted multipliers now declining? And if not, at what point would you expect that to start happening?

Well, a couple of things. I mean these are and always have been competitive bids. And what you saw, let's talk generally about pricing, is you certainly saw an increase in the pricing environment last year, a lot of that was driven by materials and input costs as well. And we did see, accordingly, multipliers raised. A lot of that was because of our operational excellence initiatives as well. So certainly as you can imagine in this environment, you see pressure on pricing but we've also been able to turn to our suppliers and drive pricing to sustain very good multipliers in our business. So we're not suggesting that the multipliers are going to completely evaporate, because we're able to drive a lot of benefit through our cost structure as well.

Okay. All right. And then just one follow-up here. I guess with the pump orders down, 25%, this quarter, I'm just trying to figure out how we should think about that in terms of organic revenue growth? Does that translate into organic revenue growth being down 20 to 25% in the back half of this year in pumps?

Well, again, don't call a year by the quarter. First and foremost. And we don't give revenue guidance going forward. We have stuck to our earnings guidance, as we talked about earlier. I think moreover, look at the book to bill. We didn't erode a lot of our backlog. Look at what we have been able to deliver on our backlog when we generated through revenue in terms of earnings. And also, I think we need to take into consideration what happens to the market. One of the reasons we especially don't want to consider the first quarter in isolation is a lot of the uncertainty that existed in January and February. So I think as usual, as we talked about, you need to look at this business over a period of a couple of quarters, a lot of it depends on what happens in the markets, which are certainly out of our control, what is within our control is how we execute in those markets, our ability to take market share, and get closer to the customer. Which we've had a lot of success.

Okay. That's helpful, guys, thank you.

Thank you.

Your next question comes from the line of Cary Kelly of Ironworks Capital. Cary Kelly, your line is now open. (Operator Instructions) Your next question comes from the line of William Bremer of Maxim Group.

Good morning, gentlemen. Nice quarter.

Thank you.

Thanks.

Can you touch a little bit on possibly the timing of the SG&A toward the 20% figure?

As soon as possible. ASAP. I think that is the answer to the question. No, let me comment a little more generally. We have been working on that quite a bit over the last couple of years. But one thing to keep in mind is -- and we talked about this historically, that number certainly could have been lower if we would have decided not to invest in QRC's, not to invest in some of our after-market initiatives, so I think the point is, is we're going to balance growth opportunities, which will impact SG&A to a certain degree, against driving costs out of the business as well. And we've invested and brought a lot of capabilities into this business that we don't want to let go of, because the markets are going to be there for us going forward. So I would say we are driving in this environment, it has given the opportunity for us to accelerate some of the initiatives, but we're committed to getting it down to 20% or below.

Okay. Great. Also, maybe touch upon the pricing in the environment right now, in terms of contracts having to be rebid in this environment? Can you give aus little more color on that?

Well, I mean there are a -- a lot of our business goes through the distributors, and the distributor pricing is overall tough. If we take a look at the metal prices, most of the metal prices have also come down from their 2008 levels, so there is continued price pressure overall from our clients. Now, with that said, I would also indicate that our clients in this day and age are still looking for ontime delivery, which is one of the basic tenants that we have as a business and our ontime delivery is up significantly and probably one of the best in the industry, so that continues to be an important driver. Our positioning relative to the after-market, as more of these companies switch to looking at their operational costs, they also are looking at that component now, so while we're seeing price pressure, we also see other drivers coming in to the equation as they evaluate these proposals. And we are very positioned -- we're positioned very well considering those other drivers.

And this is Mark, a lot of that is consistent with what we see in pumps and seals, although there is less content that goes through distributors in those businesses. And around price, as we talked about, when price was going up, I mean they still are willing to pay a fair price, but they want an engineered product that works and can be supported. And so we're still seeing the value from our ability to deliver that, even though as I commented earlier, in this environment, you certainly see a pressure on pricing, as much because the cost of the inputs have gone down, as anything else.

And finally, maybe a little color on the acquisition of Calder. That market is extremely robust. A lot of strong multiples in that market. And can you give us the opportunity of how quickly you believe you can ramp that business up?

Well, Calder was, is a smaller business, in Europe, and we feel, through our distribution, because remember, we have hundreds and hundreds of sales people, I think they had about one, we feel we can probably ramp it up pretty quickly. They had a tremendous technology, and when you add that to our flow control ability and our distribution ability, one plus one should equal somewhere north of five. I mean it should work out very well.

Let me add a little bit to that, Bill. We've got a history of taking technology and complex applications like this and levering them on our platform. And one thing to understand about this business and this technology is it is basically one of the primary drivers that has made wide use commercial application of de-sal, basically viable, as it has reduced the cost of the whole process. So that's why we're very excited about this, because as Lew mentioned, they definitely have a platform that we can leverage, it is right in our sweet spot in terms of complexity, it is right in our sweet spot in terms of after-market opportunity.

Can you give us a sense of how many potential projects are in queue there?

Did you say projects? Well it is really -- this is a core process around any of the desalination processes worldwide, so it really attaches to the opportunity around global de-sal projects.

Okay, gentlemen, thank you all. I will hop back in queue.

Your next question comes from the line of Cary Kelly of Ironworks Capital.

Hi, can you hear me this time?

Yes.

Yes we can.

Sorry about that before. Are you seeing a pickup in rebuilding then from customers trying to capture some of that lower commodity cost. I have been hearing that a lot in the oil and gas area.

No. It is less so on the rebidding out of backlog and the term we'll use as rebidding, as we talked a lot before, a lot of these projects are fairly far along when we put orders on us and what you do see are customers now realizing that the labor costs and material costs have gone down are basically going back and rebudgeting and sometimes rebidding on the general contracting firms. We see from time to time things rebid out of a backlog, but that hasn't been a significant amount.

Okay. And the margins that are in the backlog, are you expecting them to be similar to what you experienced here in Q1?

Well, again, I don't want to give margin guidance, revenue guidance. What we have out there is EPS guidance. But, keep in mind, what we're focusing on -- we do focus on our multipliers and on our margins, we still have room on our operational excellence side, which gives us the ability to respond to the pricing environment that is out there. So we're focused on driving margins, not only through operational excellence, but also in fixed cost controls.

Okay. Great. Thank you.

There are no further questions at this time. Gentlemen, are there any closing remarks?

No, but I would like to thank everyone for joining us on the call today, and we hope to see you at one of our many investment events this year. Thank you very much.

Thank you very much.

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