福斯 (FLS) 2009 Q3 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 third quarter 2009 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). I will now turn the call over to Mr. Paul Fehlman. Sir, you may begin your conference.

Thank you, operator. Hello, everyone and thank you for joining us. Welcome to Flowserve's third quarter 2009 earnings conference call. Today's call is being web cast with our earnings presentation via our website at Flowserve.com. Simply click on the Investor Relations tab to access the web cast and the accompanying presentation. Before we get started with the presentation, I would like to point out a few important items. Firstly, for those of you that have accessed today's call through our dial-in phone number and also wish to following along with the earnings presentation slides via our website, please click on the "click here to listen via phone" icon at the bottom of your 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 this call. The replay will stay on the site for on-demand review over the next few months.

Joining us today are Mark Blinn, President and Chief Executive Officer, along with Tom Ferguson, President of the Flowserve Pump Division, Tom Pajonas, President of the Flow Control Division, Andy Beall, President of Flow Solutions Division, along with Kyle Ahlfinger, VP and Chief Marketing Officer, Dean Freeman, VP Finance and Treasurer, and Dick Guiltinan, VP and 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 slide deck for Flowserve's 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 those statements carefully with respect to our conference call this morning. The information this this 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 to Flowserve's Safe Harbor.

Now, I would like to turn it over to Mark to begin the formal presentation. Mark?

Thank you, Paul. And good morning, everyone. Before I review the quarter, I will make a few comments on our markets, and our areas of focus. We have seen increasing signs of stabilization in our markets. Notably in China, India, Brazil and the Middle East. And we continue to believe that the long-term secular spend drivers in power, water, and oil and gas remain firmly in place. While our industry has continued to see pricing pressure and reduced volume, companies like Flowserve that have strong technical capabilities, good execution and strong balance sheets have been able to maintain sound performance and we believe have expanded market share. With these dynamics in place, we have remained focused on being disciplined in our market approach by leveraging our technical capabilities, maintaining price discipline, as we continue to see large project opportunities going forward. We have remained focused on execution. Throughout this year, we have carried a large backlog and we maintain an on time delivery above 90%. We have continued to drive efficiency in our operating platform, and focus on cost controls, and we have continued to invest in our business, in areas like our realignment initiatives, end user strategies, and strategic growth markets and products.

Looking at the third quarter, we are very pleased with our continued strong earnings. Third quarter EPS of $2.07, represented a 1.5% increase over prior year. Year to date earnings per share of $5.63 were basically flat to prior year, but up almost 7% when you exclude realignment charges. We have seen continued stable bookings. This was the fourth consecutive quarter of bookings of approximately $1 billion in what has been a challenging economic environment. Our book to bill ratio for the quarter was 0.93, resulting in a strong backlog of $2.66 billion. We have also seen steady after-market performance. Third quarter bookings were down 7.3%, or down 2.5% excluding currency, seeing the impact of reduced maintenance spend in refinery and chemical facilities, offset by the growth from traction in our end user initiatives. Year to date after-market bookings were up 1% on a constant currency basis despite the disruption we saw at the beginning of the year.

During the quarter, our margins remained strong. Third quarter operating margin was up 100 basis points year-over-year to 15.3%, and that included 110 basis points of realignment and discrete legal charges. Gross margin for the quarter was up 150 basis points, and this was driven by our supply chain and low cost source initiatives, the benefit of mix shift, the pricing environment that we saw late last year, and the benefits of realignment. Year to date, our operating margins grew 100 basis points to 14.8%, and this included realignment charges of 100 basis points, and we did this despite slightly lower sales. We maintained strong cash flows in the quarter, which allow us to continue to provide growth investments and shareholder returns. We funded $23 million of cap ex in the quarter, returned $27 million to the shareholders, and fully funded our US pension obligations with $58 million of cash.

If you look at 2009, we're very proud of what we accomplished. We have substantially completed our previously announced realignment program. And we now expect $60 million in annualized savings run rate, approximately $50 million of which will be structural. We have generated strong cash flows, to support capital expenditures, our pension funding, and return of shareholder capital. And Paul will talk about this a little more in detail later. We have also continued to invest in key growth areas, like our integrated solutions group, our Calder acquisition, we have opened up QRC's. These initiatives are designed to continually improve our operating platform and expand our global capabilities to take advantage of future market opportunities, which Kyle will review with you now. Kyle?

Thanks, Mark. Good morning. As Chief Marketing Officer for Flowserve, one of my primary responsibilities is to remain current on the global outlook for our key markets which include oil and gas, power, chemical and water. As a general statement, our key markets continue to feel effects from the impact of the global recession. However, as we have discussed in the past, the infrastructure markets have demonstrated resiliency, even in tough economic times. As shown on slide eight, the drivers of infrastructure investment, include items like demographics, independence, and economic growth, which are foundational in many of today's investments in the developing regions.

Moving to slide nine, you can see the booking split for the third quarter compared to the same period in 2008. Two important points are worth noting. One is the greater contribution of bookings from the power industry. The other is the improved percentage of bookings from after-market reaching 39% for the quarter. Slide ten takes a look at the power industry, as well as oil and gas. As can be seen by the graph on the left, our bookings in the power industry have grown for the first nine months each year from 2006 to 2009. The power industry continues to show strength on a global scale. Industry forecasts point to incremental capacity expansion globally in excess of 1,000 gigawatts over the next eight to ten years. Approximately 40% of this forecast and expansion is focused on renewables with wind and solar becoming important, as well as a larger contribution from nuclear power. Recently, India announced plans to add 470 gigawatts of nuclear power by 2050 and China announced plans to increase the total power contribution of nuclear from 4% to 8% by 2020. Also, the governments of Belgium and Germany announced plans to extend the operating life of their existing nuclear facilities which offers the potential for brownfield investments, as the existing plants prepare to run for a longer period.

Even with this increased interest in renewables, fossil fuels are still forecasted to be the largest source of power generation well into the next couple of decades. Long-term investments in coal-fired power generation are currently being challenged by unresolved legislation on carbon, cap and trade. This should drive more investments toward newer clean-coal technique, such as super critical and ultra super critical because of their reduced carbon footprint. Overall, power industry forecasts show that the need for electricity around the globe should continue to support investments in power generation, with developing markets such as China and India, leading the way. We believe Flowserve is well positioned in all forms of power generation, with established reputations in fossil fuel and nuclear, as well as a growing reputation in alternative renewable sources.

Turning to oil and gas, we have seen a decline in bookings from the highs of 2008, with 2009 bookings being challenged by the recessionary concerns and the delay of some major capital projects in this industry. In the past month, energy agencies have increased forecasted demand for oil in 2009, up by approximately 1 million barrels per day compared with mid-year forecasts. This increase is driven predominantly by a greater-than-anticipated demand from the developing regions of the world. Carrying this increase into future periods should drive investments in expanding the supply of oil globally, which will involve recovery and processing of more complex oil including tar sands and deep water and other natural oils. And in the area of natural gas, industry forecasts and proposed project plans indicate continued investments in liquefied natural gas or LNG where our product investments have expanded our capabilities. We believe that Flowserve's long standing reputation in oil, our technological advances in handling complex oil and our product capabilities in both oil and natural gas position us well for current and future opportunities in this important market.

Slide 11 takes a look at our other key industries of chemical and water. Investments in the chemical marketplace are being forecasted in the developing regions with a focus on basic commodity and agriculture-related chemicals such as ethylene, ammonia and urea. In the mature markets, the chemical industry is still facing a tough market condition which may lead to more plant closures or shut-in as the available capacity exceeds the market demand. Opportunities still exist for brownfield and after-market investments as customers move to optimize continuing operations and companies from the developing regions buy unused assets. In the water industry, the market continues to prepare for a strong growth investment in desalination worldwide. A recent market research report shows the potential compounded annual investment growth of 7.3% over the next five years, in reverse osmosis applications. With the technology investments we have made, our established presence in these two industries, and our long-standing specialty products designed specifically for these industries, we believe that we are positioned for market share growth in both chemical and water.

As we monitor our key industries and prepare for their related business opportunities, it is important for us to remember that our customers buy equipment and service this for three types of projects. As seen on slide 12, one new project type is new capital purchases for greenfield operations. As discussed on previous occasions, we utilize our end user strategy, and our technical knowledge, to work to create long-term value for our customers with the aspiration of establishing Flowserve as a preferred choice for their flow management requirements. Another project type is capital purchases for the enhancement or upgrade of continuing operations referred to as brownfield projects. This is a key area of focus for our new integrated solutions group. By leveraging our application knowledge, we believe that we can partner with our customers to optimize the performance of continuing operations. The third type of project spend is after-market services to help ensure operational up time of existing facilities. Utilizing our large global footprint, of quick response centers and our diagnostic capabilities we believe we can help minimize unplanned downtime, there by driving toward lowest total cost of ownership for our customers.

Let's now take a look at our after-market business. On slide 13 you will see two graphics. The one on the left compares our after-market bookings for nine months year to date, from 2005 to 2009 in reported dollars. The graph on the right is the same information formatted in constant dollars, based on currency rates as of June 30, 2009. When comparing after-market bookings in '09 to '08, it is worth noting that these numbers were impacted by the drop in spending from the global financial crisis, which began late fourth quarter 2008, and carried into the first two months of 2009. As we look at our global markets, we continue to see after-market opportunities. We believe that continuing investments and expanding our QRC footprint is important in positioning Flowserve for current after-market opportunities, as well as increasing opportunities which should become available as the economy recovers. In closing, we continue to see strength in our position in our key industries around the globe, and we will continue to drive a customer-centric culture with the intent to gain market share growth in future periods.

Now, we would like to turn the presentation over to Tom Ferguson to review our pump business.

Thank you, Kyle. And good morning, everyone. The pump division continued on pace to have another record year in sales and operating income. Our focus on our end user customer, operational excellence, and our strategic growth initiatives continued to provide a platform to drive above market sales and income performance. We did see continued challenging market conditions that affected our year-over-year bookings. But our after-market grew in spite of overall refinery and chemical maintenance spending declines. By using our global opportunity management, and sales approval tools, we were able to continue to drive our pricing discipline to avoid taking projects that are not strategic, or that do not provide a reasonable return. Our balance score card approach allowed us to sustain customer satisfaction at record levels while delivering at over 93% on time to our customers requested date.

Bookings in quarter of $518 million were down $341 million, or 40%, versus 2008. And down 37%, on a constant currency basis. Year to date bookings of $1.7 billion were down $798 million, or 32%, and down 25%, on a constant currency basis. Sales in the quarter of $637 million were down $2 million, or virtually flat, versus 2008. And up 4.5% on a constant currency basis. Year to date sales of $1.9 billion were up $63 million, or 3%, and up 13% on a constant currency basis. Operating income in the quarter of $109 million was up $9 million, or 9%, and up 17% on a constant currency basis when adjusted for realignment. Year to date operating income of $326 million was up $44 million, or 16%, and up 34%, on a constant currency basis when adjusted for realignment. Operating margin, including realignment in Q3, increased 150 basis points to 17.1%, and increased year to date 180 basis points to 17.2%. Operating margin excluding realignment in Q3 increased 170 basis points to 17.3%, and increased year to date 250 basis points to 17.9%.

Bookings were primarily impacted by low OE volume caused by the weak oil and gas and chemical markets and our focus on maintaining pricing discipline. The after-market mix increased significantly versus a Q3 of 2008 to 46% of our total booking. While after market bookings were down 6% on a constant currency basis versus Q3 2008 this was primarily due to the lower volume of spare parts tied to new units, which we also considered to be after-market. Year to date after market bookings are only down 1% on a constant currency basis and when you consider the global market conditions earlier this year the lower maintenance spending and lower volume of parts tied to new projects, our core end user strategies have performed quite well. Our original equipment to after-market sales mix only shifted slightly with after-market growing to 38% of the total sales in the quarter, versus 36% in Q3 2008. After-market sales were up 10%, versus Q3 2008, on a constant currency basis. Year to date, after-market sales are up 6%, on a constant currency basis. Our improved on time delivery performance, shorter cycle times and growing technical services capability should provide a strong platform for future after-market growth.

I should also remind everybody that the pump business is not a quarter over quarter business, especially in relation to bookings. The overall pipeline of opportunities remains at a good level, but just a couple of orders moving by one week at the end of the month can have a significant impact on quarterly results. For instance, this year, we did not have an $85 million IPIC pipeline job like we did at the end of Q3 2008. Our backlog remains over $2 billion. And as we work to reduce cycle times and remain focused on book to ship after market, this should allow us solid shipments well into 2010. Our emphasis on our end user customers, building new QRCs and driving end user growth initiatives, such as our new integrated solutions group provides us platform to help ensure long term growth regardless of short term market cycles. Our integrated solutions approach brings a new technology platform in play to leverage our extensive QRC and end user sales network. We see some major opportunities to improve books based on several large projects that appear to be moving to closure in Q4 or early 2010. While we can discuss the specifics of these opportunities, the Middle East, China, India, Latin America and Russia key areas of focus in the oil and gas and power markets. We are also pursuing several new desalination and water pump opportunities in Asia-Pacific and the Middle East. We opened a new QRC in South Korea in Q3 and continue to enhance the newly opened QRC's in Saudi Arabia, and Dubai and southeast Asia. Our supply chain team continued to focus its efforts on low cost sourcing, while improving the overall quality of our entire supply chain. Our continuous improvement efforts continue to generate solid benefits in cash, on time delivery and gross profit. We also continued to emphasize safety and total cost of quality while also developing our leadership team for the future. I remain confident about our future as we drive our growth initiative, utilize technology to provide new opportunities, in both original equipment and after-market, and maintain our emphasis on operational excellence. And now, over to Tom Pajonas of the valve division.

Good morning. One of the focus areas for the valve division over the last several years has been efficiency of our asset delivery model. So I would like to summarize the platform. Overall, the valve division has 53 manufacturing and service centers worldwide, including six joint ventures. 18 are in the Americas, 23 in Europe and Middle East and 12 in Asia-Pacific. Approximately 67% of the valve business is outside North America, producing products and solutions which include valves, automation, and after-market services.

Now, let's take a look at the markets, financials, and initiatives as shown on page 17. Bookings for Q3 decreased $34.5 million, or 9.4%, versus 2008. And 6.4% on a constant currency basis. These Q3 bookings have increased sequentially from Q2 by $59 million, or 21.6%, and from Q1 by $30 million, or 10%. And have produced a backlog of $506.2 million, at the end of Q3, up $23.3 million, from the end of 2008. Year to date bookings were $907.2 million, or down 23.6%, and down 17.8% on a constant currency basis. The overall market in chemical continues to be soft, with our distribution business channels cautious to restock, which is putting pressure on product lead times. This plays into our strength of being able to deliver against shorter lead times, as well as our on time delivery of 94% year to date. Chemicals used in agriculture and specialty chemical products continue to be a promising avenue for this industry. Along with renewed interest in China, for acidic acids, used in paints, adhesives and textiles and PVC's which are used in automobile components and computer housings. Power continues to forge ahead, especially in the nuclear segment in the US, China, Korea, Europe, as well as India. The valve division has established relationships with most of the major nuclear power plant suppliers. We have secured a more than $45 million nuclear order from Westinghouse in Q3, packaging several of our products together in a single offering.

In the oil and gas area, we are seeing good movements in the proposal activity for China, India, Brazil, north Africa, and the Middle East. As these customers are generally continuing with their long range capital spending plans. Middle East activity is driven by gas development, as well as greenfield and brownfield refinery expansion. Liquefied natural gas, LNG projects, are continuing to be proposed despite the current lower natural gas demands and the lower price per million BTU. Overall, we're continuing to see some projects being delayed, as customers and engineering procurement and construction EPC contractors review demand and additional savings opportunities. Overall, project end dates however have not changed correspondingly, which will require shorter lead times on our products.

Desalination opportunities continue to exist in the C-water, reverse osmosis area, especially since this process requires valves like ours that are designed to operate in the high pressure corrosive environment. Sales for Q3 decreased $71.7 million, from 2008, or 19.6%, and by 16.6% on a constant currency basis. Decreased sales in EMA, and North America, attributed to the chemical market, and also to the general industries, which are both served in large part through our distribution channel. Sales year to date were $893.2 million, or down 13.8% from 2008. And down 6.6% on a constant currency basis. Gross margin increased 190 basis points, to 38.2% in Q3, and increased 90 basis points on a year to date basis including realignment. This margin increase was attributable to material cost savings, favorable product mix, especially in the nuclear business, higher margin critical application valves and our low cost sourcing initiative, as well as our lean and value engineering programs. We have reduced SG&A, $13.9 million, and $27 million on an absolute basis, in comparison to prior Q3 and Q3 year to date respectively, as a result of our sound financial controls. SG&A on a percentage basis only increased 10 basis points, from prior Q3, and increased only 20 basis points in Q3 year to date, in spite of a revenue decline, which clearly demonstrates our ability to decrease costs in the business.

Operating margin including realignment in Q3 increased 160 basis points, to 18.4%, and increased Q3 year to date 40 basis points, to 16.6%. Operating margin, excluding realignment, in Q3, and Q3 year to date increased 180 basis points, and 130 basis points respectively versus the prior period. Strong gross margin performance from our operating platform coupled with focused SG&A control, consistent with our long-term strategic outlook, allowed a solid operating margin performance. The flow control organization will continue to focus on the global power market. In particular, the nuclear business continues to offer growth opportunities, and we are well positioned with our manufacturing, service, and long successful nuclear certification programs. The ability to package a broad array of products, services, and solutions, will continue to be an important aspect in the nuclear and oil and gas business. Investment in diagnostics will continue as we drive our asset management programs in the areas of overall plant life cycle initiatives. We plan to continue our global after-market service center deployment in addition to the Indonesian, Malaysian, Saudi, and United Arab Emirates centers that we have added this year.

And now, over to Andy Beall, the President of the Seal Division. Andy?

Thanks, Tom. Flow solutions continued our focus to provide exemplary service to our end user customers and win participation in new global projects by supplying mechanical seals and sealing support systems to pump and compressor OEMs. This dual strategy continued to build our install base through new project orders followed by a high rate of capture of after-market business from end user customers who operate the sealed equipment over the product life cycle. Our business model is designed to serve the full range of product life cycle opportunities from new equipment design, startup, reliable operation, renewal and repair, and finally decommissioning of the asset, at the end of its useful life. The third quarter was a solid period for the division, with total bookings of $141.4 million, including bookings to the Flowserve pump division. Bookings during the quarter were above the first two quarters of the year, and down compared to last year, by 18.3%, or 14.8% on a constant currency basis. The year-over-year decline in bookings stabilized. In fact, the book to bill ratio in Q3 was greater than one. And the division added $9 million to our backlog in the quarter.

Year to date bookings were down compared to last year by 20.9%, or 15.3%, on a constant currency basis. Consistent with the first two quarters of 2009, project bookings saw a greater decline than the after-market business. Our after-market bookings were more stable and correlate directly to the ongoing operation of sealed rotating equipment. Our close association with customers through a global network of rotating equipment specialist sales engineers backed up by local quick response centers helped ensure that when a seal needed parts or repairs, we were there to assist our customer faster than the competition. The challenges associated with today's global economic market encouraged our customers to move forward with alliance agreements with Flowserve. Customer focus on their bottom line encouraged customers to choose Flowserve to provide outsourced management of their mechanical seal assets. In the quarter, we signed 20 new alliance agreements, which increased the total number of long-term after-market customers we serve. Our reputation for improving reliability, our demonstrated ability to reduce a customer's total costs, our trained team of rotating equipment specialists and our global network of QRC's made this possible.

In the quarter, we expanded our ability to deliver service to our customers by investing in new QRC's in China, Canada, and South Africa, and completed our gas compressor seal test facility in Brazil. These investments showed our commitment to seizing the strong opportunities available to us in these important growth markets. Through our rotating equipment specialist training program, we have an outstanding team of global specialists, even more prepared to deliver value to Flowserve customers. This is important in today's environment where our customers have fewer staff to maintain the rotating equipment and can rely on flow solutions for our knowledge and expertise. Shipments of $136.3 million in the quarter were slightly down compared to prior quarters of 2009, reflecting a lower available backlog at the beginning of Q3. The mix of business shifted from original equipment and projects to after-market. Our volume was heavily weighted towards the after-market, which enabled year to date gross margin to improve to 46.2%, and quarterly gross margin to increase even higher to 49.1%. We anticipated early this year that market conditions could leave us with excess capacity. And Flowserve announced a realignment program to size the business to meet this change in demand.

We're very pleased that our financial performance reflects these realignment efforts, which include cost controls, cost reductions delivered by our supply chain management team, and the use of our flexible standard manufacturing platform to load our most cost-effective operations first. The results showed a lower cost of sales and increased expense reduction in the quarter, driving improved gross and operating margins. The quarter's numbers show that we successfully aligned the organization to a $34.6 million lower sales volume versus Q3 of the prior year, while still delivering 21.3% operating margin. Q3 sales were down compared to last year by 20.2%, or 17.3% on a constant currency basis. While operating income was down 12.1%, or 3% on a constant currency basis, and excluding realignment charges. For the nine month period sales were down 14.3%, or 8% on a constant currency basis. And although operating income was down 20%, on a constant currency basis, and excluding realignment charges, operating income was flat. This speaks well to our business model, focused on the end user customer, and shows how our quick action to remove costs has protected overall profit margins.

In summary, year to date 2009 has been a year of lower project activity and tight cost controls by our customers while total demand has been lower, flow solutions was rewarded by its customers for having provided solid value in the after-market. And we responded appropriately by successfully resizing our operations for the lower total business volume. The net result was the delivery of a solid financial performance for the third quarter and the year to date period.

And now, over to Paul Fehlman to review the financials.

Thanks, Andy. And good morning, everyone. As Mark discussed, we are pleased with our results for the quarter ,which demonstrate the strength of our global platform and our backlog. The success of our after-market focus, and our continued execution of realignment efforts, all driving strong earnings and increased margins.

Turning briefly on slide 20 to our consolidated financial results, third quarter books of $975 million were down 29% reported and down 26.3% on a constant currency basis. Sales of $1.051 billion were down 8.9% reported, and down 4.8% on a constant currency basis. Gross margin reported was up 150 basis points to 36.6%, and that included 20 basis points of realignment expense. SG&A, as a percentage of sales, went up 50 basis points to 21.6% in the third quarter, including about 90 basis points of realignment expenses, and discrete legal expenses taken during the quarter to tentatively resolve remaining issues surrounding the shareholders suit. The result was that operating margins were up 100 basis points to 15.3%, on a reported basis, and adjustment for realignment expense, the operating margin grew 140 basis points to 15.7%. Our reported earnings were $2.07 per share, and adjusted to remove the effects of realignment expenses were $2.12 per share, which represented an $0.08 increase over the prior year. The year-over-year comparison includes a few discrete items that bear noting. Q3 of 2008 included $12.4 million in discrete tax benefits that did not recur in 2009. Additionally, other income and expense swung from a net expense of $8.7 million in Q3 of 2008, to a net gain of $7 million in Q3 2009, primarily due to a $16.2 million currency-related gain.

Looking at the year to date results, bookings of $2.946 billion were down 28.4% reported, and down 22% on a constant currency basis. Sales of $3.166 billion represented a 4.2% decrease reported, but an increase of 4.2% on a constant currency basis. Gross margin year to date improved 60 basis points to 36% and included 60 basis points of realignment expense impact. SG&A as a percentage of sales improved 40 basis points over the three quarters, and also included 40 basis points of realignment expense. The result is that year to date reported operating margins improved 100 basis points to 14.8%, and adjusted operating margins improved a significant 200 basis points to 15.8%. Year to date reported earnings were $5.63 per share. And adjusted earnings came in at $6.06 per share, representing a $0.38 increase over the prior year.

Turning now to page 21, primary working capital is up about $31 million from last year, at the same time. Primarily driven by an increase in whip inventory, creating a large cash opportunity for Q4, which has historically been our largest operating cash flow quarter. Page 22 outlines our cash flows. We were pleased with our $82 million of operating cash flow, which included a contribution of $58 million in US pension funding in the third quarter. Further, we were able to invest $23 million in cap ex to further strengthen our operating platform and also return $27 million to shareholders in dividends and share repurchases while driving an increase in our cash balance by $40 million. The themes of investing our strong cash flow into organic growth opportunities through cap ex, returning capital of shareholders, and strengthening our balance sheet have been a consistent focus of management.

Page 23 outlines the significant uses of our cash flows since the beginning of 2006. As you can see, we have invested well over a billion dollars of our cash flow over the past three and three quarters years into strengthening the operation, driving organic growth, returning capital to shareholders, and reducing off balance sheet leverage by topping up the US pension program and eliminating factoring and securitization. Further, by strengthening our balance sheet, we have positioned ourselves well to take advantage of opportunities as they arise. Slide 24 shows the results of our operating excellence, costs and realignment initiatives over the past five years. The results include the improved metrics around SG&A, and corporate expenses as a percentage of sales, higher operating margins, and higher RONA's. And finally to underscore the work that has been done, although we are very happy we have driven growth essentially a flat manufacturing footprint since 2005, that does not tell the whole story. Over that period of time we strategically shifted the footprint to more cost effective locations without sacrificing quality or customer satisfaction.

To sum up, while we have been steadily taking out costs and driving a more efficient operating platform, we have also been strategically investing in growth initiatives, pursuing geographic expansion in developing market, and after-market growth opportunities, while advancing our technological capabilities, all of which makes us very well positioned for the future. With that, I will turn it back over to Mark.

Thank you, Paul. As we have discussed, during the year, our industry has seen overall reduced business volumes, pressure on pricing, and to respond, we are driving market share growth initiatives, our end user strategies, continued operational excellence initiative, cost controls, and our realignment initiatives and because of our success in our realignment initiatives, we are expanding our efforts to include additional realignment investment of up to $45 million. We expect additional realignment charges of up to $30 million in 2009, and up to $15 million in 2010. And we project full-year run rate savings of over $50 million from these new initiatives, a majority of which will be structural in nature. Similar to our earlier initiatives, we will be moving manufacturing to low cost facilities, consolidating product lines that drive efficiency, and reducing head count. These realignment initiatives are also designed to create a more effective structure to drive our end user strategy and leverage the growing network of QRC's. Bottom line, is we expect annual run rate savings from all of our initiatives of approximately $110 million, with a majority of the benefits being structural.

Looking forward, Flowserve now expects 2009 full-year earnings per share in the updated target range of $7.20 to $7.50 per share. Looking at key areas of focus going forward, we are going to remain committed to our business management discipline, invest in our end user strategy, invest in geographic expansion, particularly in developing regions, focus on our talent pool, drive operational excellence, execute on a realignment initiatives, and maximize the potential of our balance sheet. We are confident that continuing our global growth strategies and focusing on operational excellence initiatives will allow us to take advantage of future market opportunities. And now, I will turn it back to Paul for Q&A.

Thanks, Mark. Operator, we are ready to open the call for Q&A now.

(Operator Instructions). We will pause for just a moment to compile the Q&A roster. Your first question comes from Mike Schneider with Robert W. Baird.

Good morning, gentlemen.

Hi, Mike. How are you doing?

Doing great. First, really appreciate the new format. I like the detail and the process. On the seals division, I'm wondering, just to get some insight into what is actual market share gains, as a result of the QRC strategy versus just same store sales growth, this may be too granular but if you look at the bookings in seals they were down 14.6% in constant currency. Are you able to, one, peel out the pumps division, and just give us a sense of what your external customer bookings look like? And then secondly, do you have a same store sales number if there is one to give us a sense of just how much is through penetration growth by you, versus same store sales declines?

Well, if you are referring to the after-market bookings, a lot of those are direct to the customer where you see, it is on the OE side, typically, that you will have inter-divisional sales. Beyond that, we do look obviously at QRC by QRC but as we talked about before we are not a retail business, a lot of these QRC's are put in to support customers and so looking at a same store sales, really wouldn't reflect a business. Overall, when you look at it, what we commented on was, and I think this is generally been across pumps and seals and to a certain degree valves, is that maintenance spend in refineries and chemical facilities in the United States and Europe has gone down, and we've gotten traction from our end user strategies, and that does include deployment of additional QRC's.

Okay. And then remind me of what after-market bookings then were in the seal division. If that generally would then exclude the Flowserve pumps division.

We don't -- we haven't broken down the divisions, that division specifically, but what we've talked about before, generally, Mike, is -- and I think Andy talked about it, roughly three quarters of our business is after-market, and we did see a swing, last year, with the project activity, but generally, the run rate is about three quarters of our business is after-market.

Okay. And then as you look at pricing, this is a recurring topic, in almost every industrial conference call right now, as you look at project pricing coming in, really I guess focused on valves and pumps, you can give us a sense of what magnitude of pricing declines, whether expressed in sales dollars, percentages, or in margins, you're seeing right now, and is it accelerating, or is the level of pressure at this point at least constant?

I mean I won't go into specific pricing and backlog, but generally we've seen pricing pressure during the course of the year. If you remember, we talked about it at the end of the year, and if you look at pricing, what happens is the first thing is when you have a precipitous drop in material costs, the market tends to respond. Now, I'm not suggesting it is 100% correlated. The fact is, other things come into play, eventually it is going to be what kind of excess manufacturing capacity is out there, and it tends to be a little sticky on the way down, and on the way up as well. And we certainly have seen pricing during the course of the year, in general, in our after-market business, pricing is stable. And so you find that to be a relatively stable pricing format. On the project side, it is really project by project. So that is kind of the environment that you have out there, is it is really project specific.

Do you view though the level of pricing pressure rising today? Or it is just a steady pressure that we've seen as you mentioned over the last several quarters?

It has been pretty steady over the last couple of quarters.

Final question, what should we read into the restructuring program being so significantly expanded? Is it a case now where because you've worked through some of these long lead time orders you've got the ability to address the footprint, and head count more aggressively, or is this a reflection of your view of what is coming in 2010?

It is primarily the former. I think you characterized it well. If you look back, going back to '05, we have been doing these activity, the sale of GSG, we took about $13 million plus in '06. It went down in '07 and '08, primarily because we were focused on on-time delivery. We have the bandwidth of our management and frankly at those periods of times you tend to go ahead and use sub optimal capacity. But when we get into this year, we saw the opportunity to drive some of the initiatives that we wanted to do. As Andy mentioned at the beginning. The year, some of the short cycle businesses we did take action to respond to the markets so I don't want to suggest it is all structural, but certainly a vast majority of this is structural and as you kind of go through the course of this year, one of the things we wanted to stay focused on is why we are realigning our business is we had a big backlog and we wanted to continue to sustain margins and deliver on time, because if you don't do that, that will impact margins more than anything. So we maintain focus on executing to the customer, and executing on these realignment initiatives, and we like the result.

So would shouldn't read a more negative view of 2010 into the restructuring announcement?

No, you shouldn't.

Okay. Thank you. Thank you again.

You're welcome.

Your next question comes from Kevin Maczka with BB&T Capital Markets.

Good morning.

Good morning, Kevin.

I guess just following on Mike's question on pricing, just one addition I would like to ask there, are you actually walking away from business now because of your price discipline? I found your comments on discipline interesting there.

Well, I mean if you look back over the couple of years, walking away, and I don't like to use that term, but we have been selective during the course of over the last couple of years and for multiple reasons. If you heard Tom, they go through a process where they look at global opportunities and you've got to match capacity to the opportunity, you've got to look at the strategic opportunity in terms of the customer base, and your ability to deliver after-market, and that's the type of discipline we're maintaining going forward. Understanding that this management team recognizes we want to focus on margins, and we also know from past history, for the folks who have been here a long time, is if you are not careful about how you load your plants you can get some unintended results. That is what is driving the discipline around this. So we have to continue to be selective. And sometimes that selection occurs at the customer, by virtue of one of our competitors, or by our choice.

Okay. And then Mark, your comments on the 90-plus percent on time delivery, and the pressure on lead times, can you give us some sense on how that compares to your major competitors, and can you quantify or even give any color at all on how much market share you think you're able to take because of your ability to do that?

Well, I think that's benefited us over the last couple of years and as we always have said, we've got some very good competitors on, and what we focus on -- we focus on what we can control, and we think that is a critical element, is delivering at those high levels. Because if you think about it, we're a portion of an overall project. But the fact is, the project doesn't operate without our equipment in it. So if we don't execute well, we can hold up a project. And customers and engineering contracting firms are well aware of that. So I think it is absolutely critical and at times like these, what you saw, and you see a little bit in terms of how our book to bill is rolling out, what you saw over the last couple of years is these very large complex projects got very tight in terms of the supply base. So they were extending lead times to make sure they could manage the project. And so that was really, correlated to the environment around the view of capacity out there that existed in 2007-2008. The fact on these projects is regardless of the environment you're in, is time is money. The longer the project takes to put in place, the more money it is going to cost. So they're going to bring in lead times. And Tom talked about that. Tom Pajonas in terms of the distributor, they are going to try to focus on just in time inventory and they're going to demand shorter lead times, and on the projects with the pump and seal business, what they're going to do is compress the lead times to reduce the cost. So what you see is what we talked about is if these projects get pushed out, we don't anticipate that they're going to push out the commission dates by much if any at all. And then your ability to execute is going to become critical.

Okay. Thank you.

You're welcome.

Your next question comes from Charlie Brady with BMO Capital Markets.

Good morning.

Hi, Charlie.

If you look at the pump division for a minute and we look at the after-market OE sales mix, sequentially, from Q2, you had a 200 basis points positive mix shift to after-market, and I guess I would like to drill down sort of the mix of business in terms of sales net in the quarter, because given the added 200 basis points mix shift, the operating margin, you know, didn't go up correspondingly. I'm wondering, was there something there in the gross margin or SG&A sequentially different from Q2 that you wouldn't have gotten I guess as much of a benefit from a mixed shift sequentially as I would have thought you would have gotten.

No, that is not the issue, is if you look historically, in terms of volumes, because at the end of the day, there is volume leverage in our business, is historically Q4 has been our largest volume quarter, followed by Q2, and then Q3, and Q1. So if you look sequentially at our revenue volumes, and in the pump business, you can see volumes were down. So the fact is, they were able to offset the impact of that volume with mix shift.

Okay. Right. Because did you pick it up year on year, so fair enough. Back to the seal question, on the after-market mix, I know historically it is 75% after-market, but it sounded like in the prepared comments that that mix had shifted meaningfully higher than the normalized 75%. Did I hear that correctly?

You have seen a shift -- what the comments were there with a shift over last year because of the reduced project activity, but -- so what you've seen -- we saw at one time last year, I think it was roughly 60/40 on the booking side, quickly followed by the sales. So 15, 15% is a significant shift.

Okay. And then if we look at the backlog number for the firm as a whole and specifically on pump division, how much of that backlog is out next four quarters or next 12 months?

Charlie, we usually have our disclosure at the end of the year when we talk about shippable backlog but one trend you saw last year, if you looked at prior years is I think our pump backlog expected shipments over the next year was roughly about 85%. And I think that imbedded a lot of the longer lead times that were being quoted. The fact is, is during the course of this year, lead times have been brought in. So all other things being equal, you should expect that to go up.

Thank you.

Your next question comes from Jamie Sullivan with RBC Capital Markets.

Hi, good morning, everyone.

Good morning, Jamie.

I saw the comments how you expect orders to be up in the fourth quarter, assuming decisions get made as you expect. I'm just wondering, is it across the board, or were you specifically talking about the pump division?

Well, I mean the discussion was across the board. But if you heard Tom's comments, he was talking about the opportunities that were out there. Andy talked about certainly the book to bill in the quarter. So I think all of that is really designed to tie together.

Okay. And the sequential improvement in valves and seals bookings, is that -- just wondering if you could add a little bit more about whether that is bouncing off the bottom? Is that taking advantage of prior OE orders, following the pumps? Just some color there.

I mean, Jamie, what we don't want to do is call trough, call peak, or anything like that, because again, that would suggest that we are a quarter to quarter business, which we're not. I think if you looked at the sequential order, and Tom mentioned this, is Q3 bookings had that westinghouse order, so the fact is, is while last year, we got a benefit from the thruster orders, and the pipeline order, and we're doing that in comparison to be fair this year we got to talk about the Westinghouse order. But I think the important thing to look at in that Westinghouse order is that it is reflective of opportunities to come in the power industry, as they go through this nuclear renaissance that is out there.

Okay. Then on the I guess overall -- the follow-up on the price issue, if you look at the pressure you're seeing there, offset by some of the bookings mix, whether it is after-market, incremental restructuring, just with the backlog you have, what is the most dominating force, or can we assume that margins can be maintained with everything that is going on?

Well, we won't comment specifically on margins, but as I mentioned, that is an area of focus, because we think that is an efficiency metric that is important to the business. So we do orient our decisions around that. As we talked about before, the head winds you face in businesses is going to be price and volume, and there are things we do to offset that and I think we've been pretty consistent in saying just on a general basis, we have the opportunity around supply chain and our operational excellence initiatives to improve our platform. We see these realignment initiatives, some of the stuff has been pent up in terms of being backlog of decisions we've made for quite a period of time. We just didn't have the bandwidth to do it quite frankly. So now we get a chance to really start to position this business long term and make some structural benefits. I think the important message, Jamie, is we will certainly respond to markets quarter over quarter and one year to the next but a lot of what we're doing is trying to position this business long term, to where we can drive real good earnings leverage because we fundamentally believe that the underpinning in terms of the secular drivers and water, power and oil and gas are there. So you -- we are in a cyclical industry. We will certainly say that. And we will respond but a lot of what we're driving to is really long term earnings leverage around taking care of our customer and optimizing the use of our balance sheet.

Thanks. If I could just sneak one quick one in, on free cash flow expectations for the fourth quarter --

Well, I can only point to the past and say that historically the fourth quarter has been a large cash flow. When you look at the third quarter compared to the prior year. We built a lot of whip and we still have a backlog that we need to shipment up and we also put $58 million in our pension plan. And I think another key theme that we want to make sure we drive home is when we look at -- we look at pension plan as debt and so we were able to top that up, and that is important. That is important not only to the strength of our balance sheet, but to our employees.

Thanks very much.

You're welcome.

Your next question comes from Hamzah Mazari with Credit Suisse.

Thank you. Good morning.

Good morning.

Just touching on bookings again, some of your competitors had bookings improve sequentially at Q3, and I'm just wondering what your degree of confidence is, in Q4 bookings being up sequentially, and is that all really timing related, due to projects being pushed out, due to re-evaluation of customer budget assumptions? Is that fair? What is your degree of confidence there?

Well, I mean I'm not going to go beyond what we certainly said in our press release, and it was around -- assuming the timing in these projects, we feel that bookings can be up so if I didn't believe it could be the case, we wouldn't have said it.

Okay. That's fair enough. And then on your free cash, obviously Q4 is a big quarter for you guys, and can you talk a little bit about what your uses of free cash are going to be, hypothetically, you generate a little over 300 million of free cash, you already have a ton of cash on your balance sheet, what are your uses of cash over the next couple of months?

Well --

Or longer term.

Yes, sure. What we do typically in the cadence is we talk about the cash plans at the beginning of the year. And so -- but -- look what we've done this year. We used our cash, for capital expenditures, a lot of them for new growth opportunities, and we have returned capital to shareholders and repurchased dividends and we saw, $82 million of the pension plan, as we did our plan this year, we saw that the pension had been marked down, and the mark's effective January 1. So we saw the opportunity and the need to go ahead and fund that up. So I think that has been consistent with our cash. And keep in mind also at the beginning of the year, cash was king for many businesses and we certainly recognized that. So what we will do is we will stay the course, we think these are good levers, we don't want to be mutually exclusive at this point in time, and then at the year-end call we will have our cash flow plan a little more specifically.

And on realignment, the savings that you are getting from realignment, are they going to be spread out evenly through 2010 and going forward? What is the ramp-up of your realignment savings look like? Year to date, you have 17 million. Is that right?

Yes, we've got year to date, 17 million, including 10 in the quarter. We expect approximately 30 this year from our initial realignment effort. And 60 run rate on that. So we expect a lot of that 60 to kick in during the course of next year. As far as the additional, oar the expanded realignment initiatives, we don't see a lot of those really coming in until the latter half of next year.

Okay. Thank you very much. Appreciate it.

Your next question comes from Scott Graham with Ladenburg Thalman.

Scott? I think we lost him.

Scott, your line is open.

I'm here. You can hear me?

Yes, we can hear you now.

Okay. Great. Hi, guys. I've got several questions. Two of them are in the pumps area with the bookings, and I'm just -- I know that these things are lumpy, and I know that you're being price disciplined and I know projects get pushed back but obviously and I guess this is mostly a question for you, Tom, an OEM of minus 60 is a big number, and I'm just wondering if you can give us some more color on that and it why that should improve going forward.

I think a couple of things. And you alluded to it. We're not a quarter over quarter business and we didn't have an IPIC size order in this third quarter. But you know, we are maintaining our discipline. And being selective. But we see opportunities that have continued to push out, starting to firm up. And so I think the positive news for us is we're very strong in the Middle East and Brazil and Russia, places like that. And that's where we see the highest level of activity, especially on the oil and gas side. So I think we have tried to do our best job as possible, in being selective, but making sure that we're taking the business that we need to, for both strategic reasons, as well as to continue to grow that after-market generating base out there. So that has been our focus, and as Mark alluded to, some of these project schedules are not just firming up, but the due dates and the commissioning dates are hanging out there and the lead times or the available lead time is getting shorter. So we just feel that things are going to start to close, and consequently, that's why we maintained our selectivity.

So the minus 60, if you had to bucket this, Tom, comparison, pushout, discipline, just general market, what would you say would be kind of the rank order there?

By far, projects pushing out. And I won't go into much more detail than that. But mostly what we saw was projects pushing into Q4, and probably early 2010. But formal approval for a lot of these projects has now been made by a lot of the Boards of our customers. So we see that as a positive.

Got it. On the after-market side, we saw a good sales number in after-market, or organically, but then we saw a tampering of the bookings in after-market. Is that now -- should we now assume that the sales will allow growth that we saw in this quarter, does that now temper for the next couple of quarters? I know that this is short cycle, and I'm hoping that means easier to read, but what are you seeing out there on the after-market side on a delivery schedule standpoint?

Well, we're seeing -- it is mostly -- there's two things going on. One, our customers have not been spending on their maintenance budgets, which means they're running into the issue of stuff breaking, and having to be fixed on emergencies, which drives our cycle times, which means we have to match up our cycle times to take advantage of those emergencies. And we're doing that. And that's our quick response centers, and our ability to deploy our engineers quickly, and globally, but get them into the local market where they need to be. Secondly, Mark talked about the programs. And Q3 is always a difficult quarter, because you've got power plants running all out for the summer months so they're not providing maintenance, and you've got refineries who have had their maintenance budgets squeezed and now it is coming up to the end of the year, and I think it is a positive that we're seeing refineries having some budgets available at the end of the year, and then finally, what really went down in Q3, was the parts tied to the new projects, because we -- since we didn't have a lot of project, large project bookings earlier in the year, we're not seeing that type of start-up spares coming into play. But, we are continuing to ship out our backlog, and as that happens in the next couple of quarters, we should start seeing some of those project spares again. So I would say it is a pretty stable market. And we feel well positioned to take advantage of it.

Fair enough. Okay. Mark, this one for you. The QRC footprint I think is obviously an excellent opportunity for you, particularly with expanding out. Andy alluded to the addition of three QRC's. Is this maybe marking the beginning of really a doubling down and I don't mean that literally, but a significant increase in investments and focus on building out the QRC base further? Is this the beginning of that?

Well, I wouldn't say it is the beginning because it is ongoing bought but if is a priority for us. We've talked about this before. If you look at our QRC network and our after-market delivery capability in the Gulf Coast region, it is terrific. And we would like to see those capabilities worldwide. So opportunity is the right way to look at it. And that is why we like our balance sheet, because we can deploy these. But Mike's earlier comment, it is not a matter of like putting a retail store up. It really has to be linked to projects and to the customers. So we will put the bricks and mortar but we also have to have the surface engineers, the field engineers that are capable out there to really make sure they deliver. But there is absolutely an area of focus, along with our focus on the developing region, both in terms of delivering on the project side, and the after-market.

Okay. I didn't remember three being added in one quarter, although that's possible, that just wasn't talked about, so 2010, with all of the cash on the balance sheet, with the lack of debt, it could be a pretty big year for QRC's, would you agree?

Yes, that's fair.

Very good. Thanks.

Your next question comes from William Bremer with Maxim Group.

Good morning, gentlemen.

Hi, Bill.

Good morning, Bill.

Most of my questions have been answered already. Going back to the next realignment initiative, okay, $0.40, hitting in the fourth quarter, up to 15 in 2010. How do you see that playing out? Higher weighting in the first half?

Well, I mean yes, because we're starting those initiatives, and we do anticipate that most of that expense will hit in the first half. But, like we did this year, the one thing is we're going to make sure we take care of our customer and that we execute those very, very methodically because we do not want to let performance in any way shift.

Okay. That's all I have.

Thanks.

(Operator Instructions). Your next question comes from Jeff beach with Stifel Nicolaus & Company.

Couple of questions. This quarter, we've seen quite a divergence in bookings between valves and seals, versus the pumps. Has there been in the past a -- let's say several quarter period in which there has been a significant divergence? I think they all serve similar end mark markets.

Yes, there has. I mean any time a large project comes through, it will create a divergence. So yes, I mean I don't know specifically, but I can -- what Tom talked about is we had the 8 a million dollars pipeline order in the third quarter last year, and almost 100 million, less than $100 million of thrusters in the first quarter. Without looking at the comparison to the other division, I bet you there was certainly a difference at that time.

I was talking more of kind of a trailing say three quarter time frame.

I may not understand your question.

I guess look at bookings over a several quarter period, and has there been a divergence in the bookings over time?

Yes, I mean I think if you're -- the concept of on short cycle is our seal is our shorter cycle business so they will tend to see the impact of the markets first, valves next and then the pump business. Pump business tends to be a longer cycle business. Does that answer your question?

Yes, it sure does. Second, can you give us an idea of what percentage, or give us an idea how much your cap ex is going into the QRC expansion?

I mean I don't have that number right now, but it is -- QRC can cost anywhere from a half a million dollars to slightly less, and to multimillion dollar facility like we have in the Middle East. So again, I want to kind of get away from this retail concept that -- because there are going to be fairly event-driven, but we have a QRC that we opened up in the Middle East which is very strategic for us that was many millions of dollars.

All right. And last, as this recession still unfolds here, the best input you can get from your managers out in the field, are the customers continuing -- are they outsourcing faster more, accelerating that trend or slowing it down to keep their own employees busy?

I think there is a combination of forces in effect, short term and long term. They talked about the maintenance budget. So the first thing they will do is look for ways to curb costs. That will deferring maintenance spend and letting go some of those people. And that means an outsourcing opportunity. I think long term the drivers you have is frankly there are maintenance shop, the people there have been there a long time and they're starting to retire and they're looking for ways to outsource that. So I think what you see is the opportunity to outsource more. Not only because of their cost structure, but reliability. We had some additional alliance agreements in our flow solutions division this time, and I think that is more indicative of traction around our strategy, in terms of being an alliance partner.

Thank you.

You're welcome.

There are no further questions at this time.

Okay. Thank you, Operator. I would like to remind everybody that this web cast will be available on our web site for replay in approximately two hours. And thanks, everyone, for joining us.

I do want to add one thing. From me and from everybody in the room is a thanks to Lou Cling, I know he is listening, very intently and he has been a good leader to all of us. Thanks, Lou..

Thanks, Lou.

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