福斯 (FLS) 2010 Q1 法說會逐字稿

Welcome to Flowserve's quarter one earnings call. There will be a question and answer session at the end of today's presentation. (Operator Instructions) I would now like to turn today's call over to Paul Fehlman.

Thank you, Operator. Hello, everyone, and thank you for joining us. Welcome to Flowserve's first quarter 2010 earnings conference call. Today's call is being webcast with our earnings presentation via our website at www.flowserve.com. Simply click on the Investor Relations tab to access the webcast and the accompanying presentation.

Before we get started on the presentation, I want to point out a couple of important items. First, 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 an on demand review for the next few months.

Joining us today are Mark Blinn, President and CEO of Flowserve, Tom Ferguson, President of the Flow Solutions Group, and Tom Pajonas, President of the Flow Control Division, as well as Kyle Ahlfinger, Vice President and Chief Marketing Officer, Dean Freeman, Vice President Finance and Treasurer, and Dick Guiltinan, VP Finance and Chief Accounting Officer. Following our commentary, we will begin the Q&A session.

Regarding any forward-looking statements, I'll 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'd encourage you to read these statements carefully with respect to our conference call this morning. The information in this conference 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 Mark to begin the formal presentation. Mark?

Thank you, Paul. Good morning, everyone.

First, I will take a moment to review our first quarter results and highlight a few important trends. We had a solid quarter with earnings per share of $1.42 which included $0.32 of charges related to the Venezuelan currency devaluation, as well as other below the line items related to other currency valuations versus the dollar, and $0.01 of net realignment charges. Bookings for the quarter were $1.07 billion, representing an increase both year-over-year and sequentially, and this was our sixth consecutive quarter of bookings around $1 billion. Year-over-year operating margins were down slightly on an adjusted basis as the benefits of our realignment initiatives, supply chain management, operating efficiency and the steady aftermarket business have offset some of the headwinds from price and volume. And I'm especially proud of our operations management and the people in the field who continue to execute well while also substantially completing the integration of the Pump and Seal divisions to align our business for future growth.

Moving on to the current global economic environment, in general, economic indicators are showing some signs of improved market conditions. We saw continued signs of growth in emerging and developing markets, especially China, India, Brazil, the Middle East, and Russia. Also the stabilization of market commodities and the stabilization of the price of oil supported capital investment planning and the activation of large projects postponed from previous periods. And while GDP forecasts support improving market conditions we currently remain cautious in our assessment of the US and other mature markets. We are also keeping a close watch over currency volatility in Europe as weakness in the euro can negatively impact reported earnings, but from a business perspective can make our European operations more cost competitive over time.

When you look at our business, we believe that we are well positioned to take advantage of growth opportunities in the current market environment as the investments we have made provide a global platform for the business in emerging markets. Our capabilities in advanced technologies and applications expertise provide capabilities in the critical applications that our customers need. And our aftermarket service platform continues to expand to provide even more offerings to our customers. And we believe this will be further leveraged by the integration of our Pump and Seal businesses into the flow solutions group. As a result, we are reaffirming our EPS guidance for the full year 2010 of $6.35 to $7.15, including up to $0.26 per share in realignment charges and approximately $0.25 per share related to the Venezuelan currency devaluation.

Looking forward, we believe that our long-term success will come from effective execution of several key strategies. The first of these is disciplined profitable growth, which means that we will continue to invest to grow our business globally while ensuring that we meet our financial commitments, return value to our shareholders and maintain a sustainable business for the future.

The second is customer intimacy. You have heard us speak to the importance of our customers on many occasions. This key strategy reminds all of our associates around the world that we need to continue to understand our customers better, that we need to invest to provide the products and services which best fit our customers' requirements, and that we need to work to build a long-term relationship beneficial to both parties.

Next comes strategic localization, this is a modified way to look at our globalization strategy. Simply put, this articulates that we cannot become truly global overnight. Therefore, we must localize in a manner which is in alignment with where our customers are located and where our future growth opportunities are most likely to occur.

The last key strategy I wish to talk about today, is operational excellence. This should not be a surprise to anyone as Flowserve has been focused in this area for the past several years. We keep this as a key strategy to remind ourselves every day that we must remain vigilant in our pursuit of exceeding our customer's expectations and optimizing our cost structure on a global basis.

And finally, as we think about how we'll run the business for the long-term, we believe that by employing these strategies, as well as sound, consistent and appropriate business practices we will create value for our shareholders, our customers and our employees.

In closing, I want to state again how proud I am of what the Flowserve team accomplished in the first quarter. They once again proved that we have the right mix of experience, expertise and commitment to continue to deliver value to our customers. Witnessing how they have performed in some challenging times over the past several quarters, I'm excited about the potential for the future of this Company.

Now I'd like to turn it over to Kyle, to give us a review of our markets. Kyle?

Thanks, Mark, and good morning. I'd like to take a few moments to discuss perspectives relative to our key industries, geographies, and our aftermarket business.

First let's look at slide number seven, which shows a comparison of our 2010 versus ' 09 first quarter bookings splits by our key industries. As can be seen by the bar graph, we experienced overall bookings growth period to period driven predominately by an increase in our oil and gas business. As Mark noted, this growth was supported by increased activity in the oil industry including re-engagement relating to major projects which were postponed in previous periods.

Looking forward, the planned investments in the oil industry vary by different regions. The international oil companies are forecasting a majority of their capital spending on exploration and production. Whereas planned projects announced by the national oil companies include production, transportation and refining. The current level of the price of oil and its relative stability appear to be supporting these investments as well as a revived interest in tougher applications such as oil sands.

In natural gas, forecast to spend in the area of liquefied natural gas, or LNG, continues to show favorability as third-party project databases detail planned additions which will almost double capacity by 2015 from the base of 2009.

In the power generation market, industry forecasts show that fossil fuel will continue to play an important role in investments proposed through 2015. Over this period, projections indicate potential additions in excess of 700 gigawatts of generating capacity utilizing fossil fuel designs. It is worth noting that nuclear power continues to gain interest around the globe as a long-term viable source of electricity, which is cleaner for the environment, and cost effective to operate once the facilities are up and running. In recent months, China and India both have announced intentions to increase their utilization of nuclear power.

The chemical industry is starting to show some signs of stabilization in the mature markets. This is promising in that optimism in this industry is typically an indicator of improving economic conditions in general. It should be pointed out that investment in bulk chemical production remains challenged in the mature markets. The majority of investments for bulk chemical capacity are currently projected in the developing regions of the world. Roughly 90% of the proposed capacity additions, which exceeds 200 million metric tons over the next five years, are forecasted for the developing areas with China and the Middle East leading the way.

In the area of water, a review of industry forecast for desalination projects between now and 2015 show a potential capacity addition of approximately 10.5 million cubic meters per day. This equates to roughly a 20% increase over the current capacity. Almost 90% of these proposed capacity additions are comprised of plant designs which produce 50,000 cubic meters per day or greater. This size facility focuses on efficient flow management, including energy recovery, as a means to measurably reduce operating costs. Flowserve's expanded capabilities fit well relative to the needs of this growing industry application.

Turning to slide eight we get a look at our sales by our primary geographical region. In the first quarter of 2010, our sales were influenced by increased shipments to the Middle East and Latin America. This growth in shipments was offset by declines in much of the mature markets. These shipment declines are indicative of the economic conditions in 2009 which drove a reduction in bookings in these markets.

As we look forward the mature markets are showing economic indications of a level of stabilization with signs of moderate recovery in selected areas. GDP forecasts show overall favorability in the second half of 2010 and moving into the next couple of years. This is in line with, and supported by, recent news concerning improving levels of consumer confidence.

One of the areas of potential growth in the mature regions is in aftermarket. We believe that as customers begin to utilize existing capacity and optimize continuing operations, there will be opportunities to leverage our network of quick response centers and the capabilities of our newly established integrated solutions group. Another area of opportunity is in the new construction and project planning occurring in the developing regions within our core industries. As denoted in previous comments, the third-party project databases, and industry intelligence we utilize, indicate that these regions will account for the majority of investments in refining, petrochemical, power generation and desalination between now and 2015. The leading locations include the Middle East, China, India and Brazil which aligns with where we have expanded our presence and the investments we have planned in the near term such as our manufacturing expansion in Brazil.

Moving to slide nine, let's take a look at our aftermarket business. From 2006 through 2009 we have grown our aftermarket bookings at an average of 7% compounded annually and our sales at a rate of 10%. Comparing the first quarter of 2010 to the same period in 2009 our bookings grew 6.4% including a benefit from currency. The first quarter continued to see some challenges in aftermarket particularly in mature markets. Some of our customers purchased required parts, but performed maintenance work with their own personnel as a way to control costs and utilize existing resources. As we look forward we believe that in the mature markets, growth opportunities for aftermarket spend will be influenced by our customer's view of the state of global economies and their respective business objectives. We believe that in the developing regions our expanded service infrastructure is well positioned to grow market share and to support the pursuit of key strategic projects.

Lastly, we believe that our aftermarket approach provides a strategic advantage and is a key component of our long-term business plans. Therefore, we will continue to analyze our global service network capabilities and invest in expansion which align with our customers and provide a platform for future growth.

Now I would like to turn the conversation over to Tom Ferguson for a review of the Flow Solutions Group. Tom?

Good morning. I'm Tom Ferguson, President of the newly formed Flow Solutions Group, which encompasses the engineered and industry product divisions.

Let me start by saying we are pleased with the engineered product division's performance for the quarter. Our focus on our end-user customers, operational excellence and our strategic growth initiatives continue to provide a platform to drive bookings growth while generating solid sales and income performance.

Q1 bookings growth of 23% was driven primarily by oil and gas and power project activity. While it is too early to call a trend, we did see a marked increase in the number of original equipment project releases in the quarter. As end-user confidence has improved in the broader economy, commodity prices have stabilized and engineering construction companies began ramping up to meet committed startup schedules.

We had strong performance in oil and gas, power and LNG projects. We were also pleased with our aftermarket business which was relatively stable in the face of low customer maintenance spending levels, particularly in North America. Our end user focus and integrated solutions initiatives offset the natural tendency of refineries to pull back repairs into their own shops. Customers in the refining sector are still deferring maintenance while those in the chemical sector have finally started spending. The power sector has been spending pretty consistently throughout the past few quarters. By using our global opportunity management and sales information tools, we continue to drive our project performance discipline. Our customer focused end user strategy allowed us to sustain strong customer satisfaction survey metrics and helped us maintain 92% on-time delivery to customers requested date.

Sales were down slightly due to lower backlog entering the year. Gross margin was also down slightly due to the market pricing impact as we have discussed over the past year. This impact was mostly offset by realignment savings, continuous improvement and supply chain savings. We are pleased with our operating income margin of 19.2% driven by executing on our realignment actions and emphasis on SG&A controls. It should be noted that these results were delivered while absorbing the impact of integrating our Pump and Seal divisions.

We remain cautiously optimistic about the opportunities we see in oil and gas in the Middle East, Russia, Latin America, and Asia. We are also seeing increasing opportunities in the power and desalination markets in Asia, Middle East, and even in the USA. We face challenging end markets in 2010, but Flowserve is well positioned to leverage discrete opportunities for growth in our core energy and infrastructure markets and also in original equipment and aftermarket solutions.

Moving on to the industrial product division, let me say how excited I am about the opportunity to focus on these products and markets that this structure now provides us. I will cover the new divisional structure and its rationale in the next couple of slides.

For Q1 the industrial product division saw reduced bookings of almost 10% versus Q1 2009. This was due to continued weakness in the chemical and water markets in North America and Europe. Bookings were bolstered by the robust oil and gas and power activity. For aftermarket, industrial primarily handles parts and does not handle the repairs and services. While gross margin improved 50 basis points, due to realignment savings, CIP and supply chain efforts, this was not enough to offset the 8.5% sales decrease. SG&A was reduced by 5% driven by cost containment efforts. Overall operating margin of 10.7% is lower than we believe we can generate as we now focus on the key success factors for the industrial business.

Let me provide a little more color of what each division consists of, who it competes with and what its key focus areas are.

The engineered product division, or EPD, is made up primarily of our engineered, highly customized, designed to specification pumps and seals. The majority of our service, repair and solutions businesses are included in this division. The major competitors are Sulzer, Ebara, Clyde, John Crane Seals and EagleBurgmann Seals. The division primarily focuses on the oil and gas, power generation and desalination markets, but does provide products and services to all Flowserve core markets. The keys to success are a broad range of high performance customizable products, a strong end user solutions and service focus, robust global project management capabilities, and world class engineering and technical resources as well as high energy testing facilities. The majority of our QRC's are managed within this division but leveraged across the entire group.

The industrial product division, or IPD, consists of pre-engineered pumps or those that tend to be configured to order rather than fully engineered to order. The focus will be on fully integrated supply chain, operational efficiency, product line innovation and development, and platform optimization. This division primarily serves the chemical, water and general industrial markets, but also has significant offerings for the oil and gas and power sectors. While we have historically been strong in our engineered products and markets, this separation allows us to focus more on the key success factors for our industrial products and markets. While we cover our end-user customers with a fully integrated sales and distribution organization, we have dedicated a project pursuit team to the industrial division to ensure focus on these products.

Fully integrating our supply chain efforts across our internal manufacturing sites to provide more focus to low cost sourcing and platform optimization is another area of opportunity provided by this structure. To put this all in perspective, the focus on the industrial key success factors that this new structure provides us should allow us to generate 200 basis points to 300 basis points of operating margin improvement by 2015 as is shown on the graph. I'm excited about the opportunities this new structure offers us in the Flow Solutions Group.

And now, over to Tom Pajonas.

Thanks, Tom. Good morning everyone. My name is Tom Pajonas, President of the Flow Control Division.

I'm pleased to report another quarter of solid performance concerning bookings, gross margin and operating margin that signify the health of the business. Before I turn my attention to a discussion on the market dynamics and our keys to growth, I would like to spend a few minutes on the core financials.

Bookings in Q1 2010, were $319 million versus the prior year of $303 million or a 5.3% increase, primarily due to the strength of oil and gas and power markets. Sales were down 13.8% versus prior year. This was largely due to a decrease in prior year orders while being partially offset by growth in our aftermarket business. Gross margin increased 130 basis points due to favorable product mix, realignment savings and material savings in spite of lower volumes and pricing headwinds. SG&A expenses were approximately $5 million lower than prior year due to realignment efforts and overall cost control. Operating income of $40 million in Q1 resulted in a 15.7% operating margin.

Now, let's spend a few minutes talking about the current market dynamics. The majority of our incremental growth in original equipment orders is coming from emerging economies investing in nuclear power generation and oil and gas exploration and production projects. In the area of our customer's MRO business, which as you know is maintenance, repair and operations, we have begun to see an uptick in demand, as distributors have started to reverse their previous destocking efforts. End users have started to release funds to catch up on maintenance activity that was previously deferred.

In the oil and gas market the stronger activity is coming from North Africa, Middle East and Asia Pacific. Specifically, proposal activity will remain strong in the first quarter for refinery expansion projects in Saudi Arabia and Columbia, as well as large gas processing facilities in the Middle East. Liquefied Natural Gas projects have been awarded to several EPCs in Australia and Papua, New Guinea. The shale gas plays in the US, like the Barnett Shale in Texas, are driving new domestic exploration and production development and midstream projects. This has resulted in distributed orders for pipeline and gas valves. Our control valve MRO business was strong in the quarter as a result of our new QRC network in the Middle East and existing QRC network in the US.

In the power market, the major growth areas were nuclear power plant projects and steam system MRO activity. The global nuclear power industry remains active, especially in China, where we received an order in excess of $15 million from the State Nuclear Power Engineering Company. Most of the current activity in coal powered generation is primarily located in China and India. US and European coal projects appear to be at a standstill pending legislation concerning carbon dioxide emissions. On the other hand, the recent increase in natural gas reserves and production has spurred renewed interest in combined-cycle natural gas plants which have decreased emissions, shorter overall build times, and lower initial capital costs.

Chemical capital activity continues to be focused in emerging markets while chemical MRO activity is US and European based. We have seen an improvement against last year's MRO business in the US. We attribute this to a combination of end users now carrying out maintenance work that has been previously postponed and our distributors restocking in order to meet the potential upswing in demand. Overall, capital projects in the chemical industry remain scarce and those that are approved are proceeding slowly.

In general industry markets which include mining, district heating and fine chemical operations, we are seeing increased activity in Russia for many of the industries we serve. Project activity in mining and pulp and paper, has seen positive signs in rebuilding in Australia, South Africa, Korea and Russia.

Now that we've discussed our market dynamics, let's talk about our key initiatives to growth. Increased localization of our manufacturing service base is one of the most important drivers especially in the emerging economies. These local resources include quick response centers, local manufacturing, local supply and engineering resources as well as technical service capability. Not only do these resources position us to capture a large share of the MRO market, they also have a strong influence on the awarding of large capital projects. End users have expressed preference for suppliers who are able to demonstrate commitments to local economic development.

Our joint ventures are also another key enabler to expanding our local presence. As an example, we have strengthened our nuclear presence in China by finalizing a joint venture agreement with the CNNC and SUFA. This JV will build valves for the Chinese nuclear power market. Our strategy of building capabilities in high growth regions will continue to form the basis of our customer-centric model. Other critical keys to growth include offering a broad portfolio of products that make it easier for customers to source a large portion of their needs from a single partner they can trust. In addition, we offer up front technical services to assist the EPCs during their detailed engineering phase and strong project management process throughout the projects.

Lastly, we have also accelerated our growth in adjacent markets. These adjacent markets include desalination, underground gas storage, defense products, nuclear waste remediation valves and nuclear balance of plant valves. Our strong industrial presence in the nuclear industry allows us to pull through products from our other units

And now, over to Dick Guiltinan.

Thanks, Tom. Good morning. I think you can sense from my colleagues' presentations that we were pleased with our financial performance for the quarter. Let me cover a few key consolidated highlights.

Earnings per share was $1.42 including charges of $0.16 for the Venezuela currency devaluation and realignment. The strengthening of the US dollar also caused other currency losses primarily from hedging activities of about $0.16 a share. I will discuss both in more detail later.

Bookings for the quarter were just above $1 billion. Bookings increased about 11% over 2009, up 5.6% on a constant currency basis. On a sequential quarter basis, bookings grew 14.1%. The stronger bookings quarter helped to increase backlog to $2.4 billion.

Sales for the quarter were $959 million, down 6.4% over 2009, or 11% on a constant currency basis. Our aftermarket sales were stable compared to the prior year. The decline in original equipment reflects the timing of last year's large project shipments and the lower backlog at the beginning of this year. The relative stability of the aftermarket shows the resilience of that part of our business during a challenging economic environment.

Gross margin increased 40 basis points to 36.3% including realignment charges. If you adjust for realignment charges, our gross margin was flat year-over-year despite the pricing headwinds we have previously discussed and the effect of reduced absorption from lower volumes. We believe our efforts to scale and optimize the business through realignment, our CIP, low-cost sourcing and supply chain programs, and our focus on other cost reductions have helped to reduce some of the impact of these challenges.

Operating margin was 14.8%. When adjusted for the realignment charges in both 2010 and 2009, our operating margin was down about 40 basis points over Q1 of last year reflecting the lower leverage of SG&A on reduced sales. We saw reductions in SG&A during the quarter consistent with our realignment activities. But as you may remember, our initial realignment efforts were more heavily weighted toward cost of sales. The subsequent realignment activities should have a bit more impact on SG&A items, so we should start seeing additional benefits on SG&A as we go forward. In addition, other cost reduction initiatives are continuing in our segments and at the corporate office as well.

Included in Other Expense Net are the negative impacts of currency. The impact of the devaluation of the Venezuelan bolivar of $8.9 million was not as bad as we initially expected. We did recognize a currency loss of $12.4 million from the devaluation. However, we also recognized partially offsetting gains of about $3.5 million on payments that qualified as essential items. These payments received a preferential exchange rate not included in our earlier announced loss estimate. This loss flowed through to the bottom line as there was no tax benefit associated with this loss. We continued to assess the impact of the devaluation on our Venezuelan operations which comprised approximately 1% of our consolidated sales and total assets.

In addition we incurred other currency charges, primarily mark-to-market adjustments on our cash flow hedges reflecting the strengthening of the US dollar during the quarter.

The tax rate of 28.4% for this quarter includes the effect of the non-deducibility of the Venezuelan exchange loss offset by the resolution of tax matters in certain jurisdictions. As a note, the impact of the new healthcare legislation change to tax the federal subsidy on retiree health care plans, did not have a significant impact on our tax rate.

Slide 22 is an overview of our realignment activities. The initial realignment work is substantially complete. The subsequent realignment projects are well underway with the integration of the former Pump and Seal divisions essentially finished, and some other cost reduction initiatives also done. As you may recall in early 2009 we began efforts to realign selected parts of the business, to reduce costs and to better optimize assets.

As we gained momentum in the realignment initiatives, additional opportunities became apparent across the operations resulting in the expanded effort. Through the end of Q1 2010 we have spent approximately $68 million on realignment. During the past quarter, we have incurred a net realignment charge of $500,000 and we have about $4.5 million of related structural initiatives in progress. We also have about $15 million of other realignment initiatives under consideration. Many of these pending new initiatives should be structural cost reductions as well. We expect to realize 2010 savings of about $95 million. The annual run rate for these realignment savings should approximate $110 million.

Let me turn to cash flow on slide 23. Typically our first quarter requires a significant use of cash reflecting seasonal increases in working capital and payments under our broad based, global employee incentive plans. The $15 million of capital expenditure for Q1 2010 reflects a normal phasing of our full year CapEx, and also our focus on funding the announced realignment programs including the FSG integration in the first quarter. We are continuing to invest in strategic projects, like adding resources in emerging markets such as quick response centers. We also increased our return of cash to shareholders through aggregate dividends and share repurchases totaling $27 million in the first quarter compared to $21 million last year.

With all that said, we closed the quarter with cash of $468 million, resulting in a net debt of roughly $70 million at the end of the quarter. The strength of our balance sheet provides a strong platform to continue our investment programs, to fund realignment initiatives and to provide flexibility to support strategic investments.

Let me now turn it over to Paul Fehlman for questions and answers.

Thanks, Dick. Operator, please open the call for Q&A. Thank you, Operator.

(Operator Instructions) And your first question comes from Jamie Sullivan.

Hi, good morning, everyone.

Good morning, Jamie.

Quick question on the realignment charges. You mentioned that the $15 million is under consideration. You have $20 million in the guided. Just wondering how that might play out throughout the year. The $15 million would be in the back half. And then would, would that $15 million under consideration be additive to the $110 million in savings that you are projecting so far?

These are programs and the accounting in terms of how these things roll out depend on whether they are related to facilities and people in terms of when you take the charge. We could -- yes, we should see some additional benefit from these and you will see them probably during the course of this year, is what I would estimate at this point. We are still working through them. Part of it, as Tom talked about, is driving some of his initiatives in IPD.

Okay, great. And then, one follow-up on IPD, how much of that business is aftermarket? You mentioned it was largely parts versus services in some of the other segments.

Yes, Jamie, we have kept our aftermarket at a corporate level, a company level, really. Because we leverage aftermarket across all of our facilities and divisions. But I will tell you, a bulk of the aftermarket does come out of the engineered group, EPD.

Okay, maybe I can just squeeze one more in, just in terms of pricing, you know you had some mention of it in the release. I'm just curious, if we think about three or six months ago directionally, is the pricing pressure relieving a little bit?

You know, we talked about this. It has been steady pricing pressure. And we haven't, at this point, called that that pressure's off. And as you think about pricing, think about in terms of cycle times of manufacturer product. So, what we saw last year when we started to see the price impact was in some of our shorter cycle product offerings. It hit more immediate, but things that were in backlog reflected the price from 2008. So, the effect of price takes time to, in a sense, work over our P&L basically related to the cycle times of the products that we're manufacturing. But, it is still a very competitive market.

Okay, thanks a lot.

Sure.

Your next question comes from Charlie Brady.

Hey thanks, and good morning, guys.

Morning Charlie.

I was just wondering, with respect to slide 15 on the industrial products division, and the, sort of, goals for operating margin. Could you expand on that and what that would be for the EPD division and maybe even flow control?

I think the -- and I will let Tom talk to this -- I mean, the discussion around IPD was related specifically to that division. As you -- as Tom talked about, some of the benefit of really breaking this out is, is focus. Focus -- and also as you look at that division, now it can start engaging in global processes and really start leveraging some global capabilities, and what Tom has done is put a plan in place to drive that margin improvement in that division. Now, that is not to say we will continue to focus that on our other divisions as well. But this is something specifically we wanted to call out, because the bottom line is we've got -- we know we've got work to do on this division.

Tom, do you have anything you want to add?

Yes, I think on the engineered product division, the -- we are pretty comfortable with the margins we are at. We are driving for growth. And we will continue to expand globally and look to grow our products and markets. Versus IPD, which clearly has lower margins and as Mark just said, you know, we think we can improve those fairly quickly by focusing more on platform optimization and continuing to drive operational excellence, and integrating the supply chain across the division. So, different opportunities between the two divisions.

And how much of -- between EPD and IPD, how much of the business goes through distribution?

The IPD division has a higher content of distribution. So, if you think about it holistically, the engineered division is, is much more -- is going to be much more customer-centric and oriented around the engineering contracting firms. IPD has that content as well, but that's going to be the more highly distributed product. If you look at the product characteristics that Tom talked about, those lend themselves to distribution.

Would it be similar to a makeup that flow control has?

It will be trending that way, but it is not quite to the same level in terms of distribution.

Okay. One more and I'll hop back in the queue. Can you give us the breakdown of backlog by EPD and IPD and flow control?

Yes, Charlie, we -- unless -- is it in our disclosure? Do you have it? Okay. Let us look at that up for you Charlie and we will get that to you in just a minute. It's in our Q.

Thanks. If it's in the Q, I will get it myself. Don't worry guys.

Okay. All right. We're done. And if not, we'll do it at follow-up.

Your next question comes from Hamzah Mazari.

Hello, this is actually Chris Parkins on behalf of Hamzah. Good morning.

Good morning, Chris.

Given the fact that your backlog went off, your bookings numbers were solid, and visibility is improving, could you add a little more color on your potential uses for cash and capital allocation on going forward?

Well, we talked about our use of cash on the year-end call. And really, what we wanted to do, and the important message was keep our -- keep ourselves a number of options in terms of how we deploy cash. If you looked at our capital expenditures, we are targeting $110 million to $125 million of cash this year; a lot of it in terms of -- in the expansion in new revenue opportunities.

We also have a systematic way of returning cash to the shareholder in the form of dividends, which we increased in the first quarter, and share repurchases. And then, you know, we considered -- we also continue to look at inorganic opportunities there as well.

So, pretty much what we have talked about on the year-end call. We are still moving forward with that very disciplined use of cash.

Thank you. Just a quick follow-up. If you look at your, basically -- your portfolio right now in energy -- your engineered versus industrial as well as commodity, it looks about two-thirds engineered. Do you expect that profile to maintain constant going forward and how should we begin to think about that?

Let me see if I understand your question. Can you say that question again?

Real quick, it says, basically, if you look at your current portfolio, it looks like it is about two-thirds engineered, do you expect that percentage to remain constant going forward, or -- ?

Oh, I see your question. Well, we actually want to grow both of them. And what you -- if you look at our business over the last ten years, we have probably gone from about a third engineered to two-thirds engineered. But, keep in mind on things around mix, engineered versus industrial, we don't ever intentionally want to limit any of those. We want to grow all of those at the same time. So, we are going to continue to focus on the engineered and, as Tom talked about, growing that business.

But also, if you think about the opportunities in the balance of a plant to package some of these products and capabilities. We definitely want to grow these industrial products as well because they're critical. You just don't want to show up on the engineered side.

Perfect. Thank you very much.

You're welcome.

Your next question comes from Scott Graham.

Hi, good morning.

Good morning, Scott.

On the aftermarket, I saw that we had, with currency, some growth there. However, without currency kind of flattish. And I'm wondering, we had a pretty good fourth quarter -- bookings-wise I'm talking, by the way -- we had a pretty good fourth quarter of bookings, and that followed, you know, kind of flattish numbers as well. Is there something that happened in the fourth quarter? Or was there something that happened in the first quarter? This is a fairly stable business. You had a fairly easy comparison from the year ago period in aftermarket. So, I'm just wondering why maybe that number wasn't a little bit better on the bookings?

This is Tom Ferguson. I think that the key issue is we were -- we did have our entire customer facing organization between -- within the Flow Solutions Group, merging together and being integrated between the Pump and Seal divisions coming together. So, there was some disruption, probably not huge, but a little bit of that. And then in general, we have, in the core refining market, a lot of the repairs are -- when refinery margins are squeezed those repairs tend to stay inside the gates of the refinery. So while we still get parts business, we don't get the full value of the solution offering. And that was just something we saw in the first quarter versus the fourth quarter last year where some of the customers had money to spend.

Tom, with the refining margins a little bit better in the last two months, are you seeing a little bit of a change there? Or is it still kind of steady with what you are saying?

I think we are seeing a whole lot of things stabilize and especially in North America and Europe the -- if you would look at towards the end of the quarter, we did see that stabilization. But at the same time, we were finishing up all of our customer facing integration meetings in February and March. So, kind of a dual dynamic between market stabilization and also our organization getting fully focused on back, and back in the field.

That's fine. I have two other questions.

First, the pressure that we have been seeing recently on the euro, can you maybe talk a little bit about how that plays out for you guys on whether it is operating income line or whether it is the other line? Is there anything that you guys are looking at that might be some type of earnings hit? Is there -- I know that the decline in the euro certainly has a modest impact on earnings. But can you talk about how that looks at today's euro rate?

And then the second question is, I see you bought some shares this quarter. What is the remaining on the current authorization? If you would?

Okay, let me take the first one and I will let Dean take the second one.

Here is kind of a way currency flows through our P&L. As you know, what we do is we hedge cash flows. So, often times, for example a Middle East contract will be denominated in dollars, but we may manufacture that in Europe. And so what we'll do is we'll, in that instance, we will convert that dollar contract back to euros to keep our revenues and costs matched. The way it flows through our P&L is first, it will come through the other income expense line on the mark of the hedge which we mark quarter to quarter. Typically the -- much of that offset, or much of the asset that it is hedging is sitting in backlog, which does not come through the P&L in the same period.

The second thing that is impacted by currency is when we recognize the revenues, then we start marking the revenues through our P&L often times and other income expense, and then ultimately we collect the cash flow. And so what you can see is the immediate impact of the euro, and you saw the negative impact in this quarter, is going to be the other income expense line.

The last thing, if you think about our business, is we don't hedge our P&L. We hedge cash flows, but we don't hedge in our P&L. And what I mean by this is, as the dollar strengthens and you translate our foreign revenues all the way through the P&L to -- back to dollars, it will create an earnings headwind on you. It impacts your earnings. So, as the dollar weakens, along with many multi-nationals, they get a benefit from it, and as the dollar strengthens, it creates a negative impact to their earnings.

I think the one difference we have is, we were thinking about it from some other multi-nationals, is our hedges. They sit above the line because we are hedging those cash flows and they are not deemed, for accounting purposes, effective hedges for purposes of taking them below the line. So we have to take that mark through.

So that's kind of a long tutorial. But the bottom line is, as -- and we watch it carefully as I mentioned -- as the dollar strengthens that does impact our earnings short-term, and you can see on the translation. Now, the important thing to consider long-term for our business is it makes our European facilities -- and we have quite a few of them, that are very strategic to us -- much more competitive in the global arena. So, long-term it really benefits us in terms of making those facilities more competitive.

Dean, do you want to talk quickly about the share repurchase program?

Sure. We brought in [112,105,000] shares in the first quarter. To date we have spent $218 million against the approved program. It puts us about $82 million remaining on the program. And obviously, as we move forward, we will continue to consider our capital deployment strategies, the use of our cash moving forward and any subsequent share repurchase program.

Thanks a lot.

Thanks Scott.

(Operator Instructions) Your next question comes from Jeff Beach.

Yes, good morning and good quarter.

Thank you.

I have a couple of questions about your new corporate structure. First question is, is this structure unique in the industry? Or do some of your other competitors use this structure as well to approach the market?

And second, when you are changing here, there has got to be some changes in the sales organization, or the key person on some of the accounts changing it. And I'm just like you to walk through that and how you try to minimize disruption as you may change the salesforce to approach your clients?

I think, in general, I'd say it's not necessarily a unique structure. There was one of our competitors, I think, that broke out their engineered and industrial division as well.

Now, I do think we have many distinct elements about our business, which is probably the subject of a longer conversation. But -- so, I think the way we thought about this, to your point, was around the customer. How can we take care of the customer better? How can we serve the customer better? And then also one of the benefits is around focus. As Tom talked about, the breakout of the industrial Pump division really helps us focus on global processes which is what that division and what those products need. I think in terms of the process, Tom talked about it, but -- Tom?

Yes, I think for the customer facing, or sales and distribution and service organizations, we had gone through integrating the end-user side of pumps and seals in North America several years ago. So we took the learnings from that and made sure that, as we now did it on a global basis, we put specialists in place to ensure that the front line sales people had support. So, if they came from seals, they had resources they could go to for pump expertise and vice versa. So that was one of the changes we made based on our learnings from North America.

Secondly, we have a strong customer service order acquisition support group that stayed intact. That stayed in place. Even though we were integrating -- the end-user salesforce is where a lot of the impact was -- but the reality is that we still have probably 50% or 60% of the customers are still covered with both a Pump and Seal sales engineer at the end-user level; based on their choice; based on the customer having that preference. And, so the ones that are now covered, they still have the same relationships because, in almost every case, we either took the pump person that was calling on that refinery or chemical plant, or we took the seal person. So the relationship stayed intact, it was just putting the backend support behind them.

So, all the customers I have talked to, minimal disruption in general and they are all looking forward to seeing a better response and a broader set of solutions being offered to them.

Thank you.

(Operator Instructions) Your next question comes from Karen Finerman.

Hello?

Hi Karen.

Hi Karen.

Hi guys. How are you?

Fine.

Anything on the acquisition front?

We don't comment specifically on acquisitions. But as we talked about on our year-end call, Karen, that is one of the components of our cash deployment strategy.

But are you -- obviously I know you wouldn't comment on specific ones, but are there -- are you finding things to look at? When you think about acquisitions, what is the kind of size that would be something that would be interesting to you?

Well, what we are finding is the market for acquisition especially for strategics, and even to a certain degree, financials, is coming back around. So what you are seeing over the last couple of years is -- couple of years ago there was a lot of competition from the financial sponsors. Last year there was a lot of disruption and concern over financing. Now it seems to be stabilizing. So, we have regularly looked at opportunities out there. But it seems that the market in general is much more prone to opportunities.

In terms of size, we think -- really the way we look at it, we have a lot of flexibility in terms of our capital structure. We first focus on the strategic value, and I think, in one of my comments we talked about disciplined profitable growth. And then we think about fit to existing capabilities, how we would leverage it across our platform, the leadership we have in place and the like, and then we think about how we are going to finance it with our capital structure. We do have a lot of flexibility, but what I'll tell you is we are going to stay disciplined on this.

Your next question is a follow-up question from Scott Graham.

You guys didn't think you'd get off that easy, did you?

No we didn't, Scott.

This is actually a really easy question. On the savings chart, page 22, 2010 estimated savings -- I got that obviously. Could you -- I know that you start to get some savings from your restructuring in ' 09 and I think you will have carry forward into 2011. So of the Q1 2010, could you tell us the 2009 piece versus the 2011 piece?

I don't think -- we actually kind of look at it all together, Scott. Because in some areas they are not all that discrete. I actually don't have that information in terms of the breakout. It is really -- it is one program that we have kind of done over a period of time. So, the best data we have right now is $110 million run rate off of all this. We will update that though, if that changes.

You know the other thing, Scott, I think you can look at -- just from a historical perspective, we had some disclosures last year with the initial program and the expanded program that you can could probably go through and see how those generally break out. But I think it is important to note that these things are really blended together. So, the $110 million is really off the whole continuum of these efforts, which is a continuous improvement process.

Very good. Thanks.

Your next question is a follow-up question from Charlie Brady.

Charlie?

Yes, sorry. On the Venezuelan charge, you had $0.16 this quarter, you are still expecting that $0.25. So, is that other $0.09 going to hit Q2? Or is there any way we can have a sense of when that is going to come back?

It is Dick Guiltinan. At the moment, we're watching it very carefully. The immediate effect of the devaluation is already in the first quarter. What's not clear yet are the indirect effects, what happens to the economy and then indirectly what happens to the carrying value of our assets, or ability to remit payments or dividends. So, that is still playing through. We are going to watch that quarter to quarter. I can't really update that today.

It sounds as though your initial estimate of $0.25 in Q1 is turning out to be -- if nothing changes from now, it is less than what you thought.

Yes, I think what I said earlier is, the initial estimate of -- or the loss on the devaluation was $12.4. We then applied for central items rate on certain payments and when we got those, that's a preferential rate, so we had a gain of about $3.5 that offset our initial estimate.

But the -- as you saw in our guidance, we still have an estimate of approximately around $0.25 for the reasons that Dick talked about there, and we will update you and if in fact, we don't see that is a good estimate anymore, then we will update accordingly.

Okay. And on the realignment, the remaining, I guess, $0.25 there, is -- have you guys disclosed out how that might fall in the next three quarters?

No, we haven't. Those are things that are still under consideration and as I've mentioned earlier in my comments, Charlie, how they impact quarters is as much determined by how we implement the plans as they are by the accounting forum and the actions you take. Typically structural type actions will -- the expense will occur over periods. Historically companies would take the charge all in once in one period. Now it is much more regimented in terms of how you accrue the expense as you saw last year.

I think the important thing is we need to be very project oriented and thoughtful about how we do this. So at this point we do have the additional amount certainly under consideration and as we get finality around that, we will provide information like we do in our Q around the estimated cost benefit and the periods where we expect it to occur.

That incremental 15 is beyond the $0.26 in total realignment you have already called out, correct?

No, we talked about 20 for this year and as Dick talked about, we had a net expense in Q1 of less than $1 million. We've got additional $4.5 million really that is carry over to my point about how you account for things in prior periods and the additional 15 takes you to the 20. Those are things that are under consideration.

Okay. Got you. Thanks for clearing that up.

There are no further questions. And this concludes today's Flowserve's quarter one earnings conference call. You may now disconnect.