福斯 (FLS) 2010 Q2 法說會逐字稿

Good morning my name is Michael and I will be your conference operator today. At this time I would like to welcome everyone to the Q2 2010 earnings conference call. (Operator instructions). I would now like to turn the conference over to Mr. Paul Fehlman. Sir, you may begin your conference.

Thank you, operator. Good morning and welcome to Flowserve's second quarter 2010 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. For those of you that are listening to today's call through our dial-in phone number and also wish to follow along with the earnings presentation slides via our web site please click on the click here to listen via phone icon at the bottom of the event details page. The web cast will be posted at www.flowserve.com for replay approximately two hours following the end of this call. The replay will stay on the site for an on-demand review over the next few months. Joining us today are Mark Blinn, President and CEO of Flowserve, Thomas Ferguson, President of the Flow Solutions Group and Tom Pajonas, President of the Flow Control Division, as well as Kyle Ahlfinger VP and Chief Marketing Officer, Dean Freeman, VP of Finance & Treasurer, and Dick Guiltinan, VP of 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 Web site under the Investor Relations section. I encourage you to read these statements carefully with respect to our conference call this morning. The information in this 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'd like to turn it over to Mark to begin the formal presentation. Mark.

Thank you, Paul. And Good morning everyone. First, I will take a moment to review our second quarter results and highlight a few important trends. We had another solid quarter with earnings per share of $1.62. This included the impact of $0.10 per share of net realignment charges and $0.19 of net after-tax currency effects below the operating lines. Bookings for the quarter were $1.13 billion. This represented an increase of both year-over-year and sequentially and it was our seventh consecutive quarter of bookings around $1 billion. Looking at our order book, two things I think are important to point out. First, our book to bill ratio for the quarter was 1.18 and 1.15 year-to-date as we saw some projects released into the market.

Second, our after-market bookings grew to around 40% of overall bookings during the second quarter to $449 million. That's up almost 10% versus last year, and about 13% sequentially, reflecting that our end-user focus and investment continues to create after-market growth opportunities. Looking at margins year-over-year, operating margins were stable despite lower revenues. The benefits of realignment, supply chain management, cost saving initiatives and the steady after-market business, have offset some of the margin head winds from price and volume. It is also important to point out that we've continued to position the Company to drive disciplined profitable growth.

In mid-July, we bought Italian valve manufacturer Valbart. This fills a product gap in our Flow Control division and provides good growth opportunities. We continue to reposition the business through our realignment program, our capital investment plans, and our strategic localization initiatives. And we also began to execute on our plans to position the industrial products division, to grow their top line and improve margins.

Now let's look at a few aspects related to our business outlook. Many of our markets are still feeling some of the effects from the recent financial crisis in economic recession. And during the last quarter, events around the world caused concern as to whether we might face another recession. For example, the news related to Greece and other European countries created concern over sovereign debt. The oil spill in the Gulf of Mexico caused concerns over the future of deep water drilling and production.

There was a level of uncertainty about China's ability to maintain its aggressive growth. Pending financial legislation placed uncertainty on the availability and cost of capital. And we also saw volatile fluctuations of currency exchange rates around the world. With all of this uncertainty, we believe that over the near term, our market opportunities will remain choppy. Meaning that some of the sectors in markets will present opportunities and some will remain challenged.

But over the long-term, many of our markets are positioned for growth, particularly in developing and emerging markets. As the needs created by their economic growth plans should support future capital investment in critical areas like oil, natural gas, power generation, and water. This is why our investments in these regions are a priority in positioning Flowserve to participate in this future growth.

These markets, however, remain subject to competitive pricing conditions as we continue to see pricing head winds. Our approach to this challenge is to maintain discipline in the business we pursue, focus on operational excellence, and constantly review our operations and processes to optimize our cost structures. This continuing management discipline contributed to our margin performance in the quarter.

The next graphic shows our seven key strategies for the next five-year period. You may recall that I briefly touched on four of these during the call last quarter. We've highlighted the first one labeled discipline profitable growth. As I mentioned, we believe that our served markets will continue to provide long-term growth opportunities, which will vary by industry and geography. An objective of this management team is to organically grow at a rate which exceeds the market growth rate and do it while delivering on our shareholder return commitments.

Our growth strategy is to focus on organic growth to maximize the value of our existing portfolio, and we will also pursue strategic acquisitions, where we can leverage the combined strength of the two companies to create incremental value. A great example of this strategy is our recent acquisition of Valbart. This acquisition fits our growth strategy well. It provides for a larger served market, leverages existing resources, pulls through organic sales and integrates technology into our portfolio, which strengthens our ability to serve our customers.

Now let me take a moment to cover one more of our key strategies, employee focus. The intent of this strategy is to attract and retain the highest caliber personnel in the industry. We want to create an environment which engages and develops each employee, and provides them with a rewarding career. As we have said on many occasions, our people are our greatest asset.

The reason I want to highlight this key strategy is to recognize that in order to achieve the other six strategies, we must have the right talent in our organization. During my recent travels, I had the privilege to meet and talk with many of our associates. I left these meetings excited about the outstanding personnel we have in our Company. Our management team is in place and we are focused on leading and developing this Company. I am confident that we have a strong organization ready to meet the challenges of growing this business globally.

All things considered, I'm pleased with our performance in this market. The organization has responded well to the challenges presented to them and we are focusing through this economic cycle to position the business for profitable growth. Now I'll turn it over to it Kyle Ahlfinger, to give us a review of our markets. Kyle?

Thanks Mark and good morning. I'm Kyle Ahlfinger, Flowserve's Chief Marketing Officer. For the next few minutes I'd like to provide an overview of the long-term outlook for our markets from both an industry and a geographical point of view. Looking at bookings year-to-date to from industry perspective, as we have noted in previous discussions, we have seen improvement in project activity in oil and gas. Bookings in this industry have improved measurably compared to the first half of 2009.

Industry forecasts for oil and gas reflect a positive outlook for capital spending, due to demand growth projections over the next decade. These growth projection have improved since early 2009. It is important to note the future demand growth is predominantly in the developing region. Mature markets are staying relatively stable or even dropping slightly, due to overall energy efficiency improvements and environmental protection planning. Long-term capital spending plans indicate increased spending for both international and national oil companies.

International oil companies are focusing a majority of their spending on upstream investments to increase their levels of future proven reserves. The majority of downstream and mid-stream spending is with national oil companies in the developing regions. Looking downstream, industry data shows leading refinery investment areas over the next five years to be the Middle East, China, Latin America and Southeast Asia. Moving to power generation, the long-term outlook for this industry has remained relatively unchanged from previous reviews. Variations over the timing of expansion projects and the type of fuel sources being considered. These modifications are being driven predominately by environmental programs in legislation.

Both the European Union and the United States are working on plans to reduce sulphur dioxide and nitrogen oxide within the next few years through the industrial emissions directive in Europe and the clean air transport rule in the US. The targeted reduction levels will require either existing plants to invest in mission control systems or plan for their replacement with new plants that use cleaner fuel sources. Some industry reports forecast the natural gas could provide a bridge between the desired objectives and greater utilisation of renewable energy. A recent event related to renewable energy was the announcement of the funding of $1.85 billion from the American recovery and reinvestment act for the advancement of solar power. Approximately $1.4 billion of this funding will support the construction of a large-scale concentrated solar power project in the western United States.

With the desire for cleaner electricity, planned investments are projected to increase in nuclear power globally. Recent reports were released concerning Vietnam's plan to expand their use of nuclear power with up to 14 new reactors by 2030. This capacity would be incremental to the already increased capacity planned in major regions such as China, India and the Middle East.

As we have discussed in the past, Flowserve has developed technology and flow solutions which are well suited for most forms of power generation. We believe that our product offerings, application solutions capabilities, and global after-market presence position us well for growth opportunities in this industry. And the chemical and water industry, market outlooks are consistent with what we reviewed last quarter. The developing regions, particularly China and the Middle East, are leading the way in new capital investments for chemical capacity expansion, particularly in petro chemicals.

Now let's take a look at a few geographical regions and their outlooks, focusing on the Middle East, China and Latin America. Projections for the Middle East support investments in oil, natural gas, power generation, chemical and water. One recent commentary stated the Middle East will become a major exporter of petro chemical products globally over the next decade. This is consistent with the strategy of the region to extend their market participation into the higher value products within the oil and chemical markets.

The Middle East has also projected to lead the global market in desalination investments over the next five years. They're overall economic growth and urbanization expansion will drive demand for potable water, and also increase demand for electricity. We believe that our investments in expanding our presence in the Middle East, along enhancements we have made to our portfolio of products and solutions will provide growth opportunities in energy, chemical and desalination investments planned in this important region.

Looking further east, China continues to experience GDP growth, which exceeds initial expectations. In the first half of 2010, their GDP grew 11.1% over the same period in 2009. This was strongly supported by a 13.2% increase in secondary industries, including mining, electricity, and other energy-related industries. Reviewing the forecasted capital investments over the next five years, China's projected to lead in power generation and petro chemical. China is also projected to be one of the larger investment regions for expansion and refining capacity. A recent report from China states that the forecasted power generating capacity is expected to reach 1,350 gigawatts by 2015 from an installed capacity of 960 gigawatts at the end of 2010. As China continues to grow its economy, we believe that our manufacturing presence, service network, and strategic joint ventures provide us with future growth opportunities.

Finally let's take a look at Latin America. This region is in a variety of development stages, depending upon the country. Our sales in this region have grown measurably when comparing the first half of 2010 to the same period in 2009. Our strategy is to continue to expand our presence in key market areas. This will allow us to pursue business growth opportunities, and to stay abreast of new business opportunities as countries develop their economies.

As we have discussed on previous occasions, we are in the process of expanding our manufacturing presence in Brazil, as well as our service capabilities in other key countries throughout the region. Let's now take a look at our after-market business. As Mark noted we experienced good sequential and period-to-period growth in our second quarter after-market bookings. After-market bookings for the first half of the year grew 8.1% compared to the same period in 2009, including a benefit from currency.

On the sales side, after-market continued to improve in percentage of total sales compared to the previous year. This contributed 38% of sales for the first half of 2010. As we look at after-market opportunities going forward, we believe our extensive global network of Quick Response Centers will continue to provide opportunities for market share growth, our integrative solutions group will also provide new growth opportunities through their ability to deliver operational improvements and optimize equipment performance.

In closing, we continue to see long-term growth opportunities in our served markets around the world. We are also confident in our capabilities to provide our customers with proven products, solutions, and services, to meet their needs and exceed their expectations. Now I would like to turn the discussion over to Tom Ferguson, President of our Flow Solutions Group. Tom?

Good morning. I'm Tom Ferguson, President of the Flow Solutions Group. Which encompasses the engineered and industrial products division. Generally I am pleased with the overall performance of the Flow Solutions Group. Our focus on end-user customers, operational excellence and strategic growth initiatives continued to provide a platform to drive bookings growth while generating solid sales and income performance.

By using our global opportunity management and sales information tools, we continue to drive our project performance discipline, but have also continued to see pricing pressure in most sectors. Our customer focused end-user strategy allowed to us sustain strong customer satisfaction survey metrics, and also helped us maintain 91% on-time delivery to customers requested date. For the Engineered Product Division or EPD, Q2 bookings growth of 7.2% was driven primarily by oil and gas project activity. In spite of mixed levels of project activity in our core markets, we had strong performance in refining, power, oil pipeline, and LNG projects.

We also are pleased with our after-market business, which strengthened in the face of relatively lo customer maintenance spending levels. Our end user focus in integrated solutions initiative offset the natural tendency of refineries to put pump repairs back into their own shops. Sales were down 9.6%, Sales were down 9.6%, primarily due to the lower backlog entering the year. Gross margin was up to 36.9%, due to favorable after market OE mix. Continued focus on operational excellence, and some realignment saving.

We are pleased with our operating income margin of 20.3%, driven by executing on our realignment actions and continued emphasis on SG&A controls. Moving to the industrial products division, let me say that I remain excited about the opportunity this new structure provides to us focus on these products and markets. For Q2, the industrial product division saw increased bookings of 6.1% versus Q2 2009, but is still slightly below prior-year for the first half. This was due to continued weakness in the chemical and water markets in North America and Europe, but bookings were bolstered by the robust oil and gas and power activity.

For after-market, industrial primarily handles parts and does not handle repairs and services. Gross margins were down 280 basis points to 25%, due to the significantly lower sales. Realignment savings, CIP and supply chain efforts were not enough to offset the 17.8% sales decrease. SG&A was reduced by 12.9%, driven by cost containment and realignment efforts. Overall operating margin of 8% was down 380 basis points versus 2009. This was primarily due to the lower sales volume caused by the lower starting backlog at the beginning of the quarter as well as realignment charges taken during the quarter. 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, the Middle East and even in the USA. The power sector continues to spend as it has consistently throughout the past few quarters. We have been successful in booking several larger long lead after-market jobs that leverage our integrated solutions technical capability. We have also completed the integration of our Pump and Seal division customer facing organizations with minimal impact on our overall performance. We face challenging end markets in 2010, but Flowserve is well positioned to leverage discreet opportunities for growth in our core energy and infrastructure markets, and in both original equipment and after-market solutions.

While we have historically been strong in our engineered products and markets, the separation of engineered and industrial allows to us 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. We will use the same strategy we used when we first took over the pump division in 2003, and focus on significantly improving the operating platform, while focusing on fully integrating our supply chain efforts across our internal manufacturing sites, to provide more focus to low cost sourcing and platform optimization.

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 significant growth in margin improvement. I'm excited about the opportunities this new structure offers us in the Flow Solutions Group. And now over to Tom Pajonas to cover FCD.

Thanks, Tom and good morning, everyone. I'm Tom Pajonas, President of the Flow Control Division. In summary, I'm pleased to report another quarter of solid performance. Bookings in the quarter versus prior year increased across industries, including after market. Gross margins were up versus prior year as we continue to execute our core initiatives while maintaining an on time delivery of almost 93%. We continue to plan for the future as evidenced by our acquisition of Valbart which will enhance our valve product line offerings, predominantly in the oil and gas industry.

While we will discuss this acquisition in greater depth, this acquisition along with our capital expenditure plan, our new product developments, and our continuing drive to increase service capability worldwide, should produce additional leverage in our business. Now let's review the financials. Second quarter bookings increased $51 million, 18.6%, compared with the same period in 2009. Book to bill during this period was 1.21 versus .91.

The overall net increase in bookings was the result of strength in the oil and gas, chemical, power and general industries. This growth was largely driven by North America and the chemical industry in Asia, as distributors continue to restock to meet end user demand. Bookings for the first half of 2010 increased $67.9 million, and 11.8% compared with the same period in 2009. The increase in bookings is primary result of strength in the oil and gas industry in EMA in North America and increased bookings and power generation and general industries. Increased bookings were partially offset by decreases in the chemical industry, largely driven by EMA.

Distributors continue to restock during this period. Sales for the second quarter decreased $33.7 million, or 11.1% compared with the same period in 2009. Sales of original equipment decreased across all industries, primarily in EMA, and in the chemical industry in Asia-Pacific. Sales in EMA, Latin America and Asia-Pacific decreased approximately $26 million, $6 million and $5 million respectively. Sales for the first half decreased $74.8 million, 12.5% compared with the same period in 2009. Sales of original equipment decreased across all industries. Sales in EMA, Asia-Pacific, and North America decreased approximately $35 million, $18 million and $15 million respectively.

Backlog of a $574.7 million at the end of the second quarter increased $89.4 million, 18.4% compared with the end of 2009. Currency affects provided a decrease of approximately $28 million. A book to bill rate of 1.23 for the first six months drove a strong increase in backlog and forms a stronger base going forward. Gross margin performance increased 37.2% from 36% in the quarter, and year-to-date to 37.3% from 36.1% or an increase of 120 basis points for both periods. Operating margin increased 20 basis points to 15.7% from 15.5% in the quarter, and on the year-to-date basis, was the same as the prior period at 15.7%.

Despite the lower sales volume, we've been able to drive operating margin as we see the benefits of our cost containment, and realignment initiatives initiated last year, as well as changes in the mix. Despite the continuing overall market uncertainties, there are a number of encouraging things happening in the market over the short-term, that should lead to sustainable markets in the long-term. In the oil and gas market, LNG project activity remains strong globally for construction of liquefaction and regasification terminals. Overall, Australia, Europe, Asia and Africa are in various stages of LNG investment activity. In the refinery market, a number of large products are moving forward in the Middle East, with various EPC's receiving awards in the second quarter.

Our new Flowserve-Abahsain joint venture facility in Saudi is almost complete, with the opening scheduled for this summer, which is designed to take advantage of these regional investments. The shale gas drilling activity in the US and related construction of processing facilities, gathering systems and pipelines continued to drive our booking activity in the second quarter for plug valves, sold directly and through distributors. In addition, gas pipeline activity was strong in China for the quarter. Expiration and production proposal activity for new floating production storage offloading facilities remained robust in West Africa and Brazil.

In the power market, new nuclear construction continues to be active. In the U.S. alone, there are licensed applications for 22 reactors that have been submitted to the NRC. China has plans to increase nuclear generation from 9 gigawatts to 70 gigawatts by 2020, or almost 44 new reactors. India expects to build 20 more reactors over the next 15 years. The fossil market continues to be challenging in the US, due to uncertain governmental CO2 policies.

On the other hand, China and India will drive the majority of the coal-fired unit growth, based primarily on super critical boiler technology, requiring more sophisticated valve metallurgy. We continue to support all power majors with their standardization programs, with valve offerings that will allow us to reduce overall plant lead times. Life extension requests on nuclear units are increasing as our customers look to extend the original life by 20 years. In the US alone there are currently 20 submitted reactor applications for life extensions. These projects will require life extension analysis in new valve products.

Chemical, petrochemical development plants for the Middle East, particularly Saudi are gathering pace as we're starting to see feed-based inquiries coming out of the large EBC's. The chemical industry in the US continues to remain flat, with no major capital investment planned for 2010. Investments are, however, picking up pace in Asia, particularly for chlorine and PVC, production. Chemical remains an important investment focus in China, even though certain chemicals now appear to have over capacity. Brazil appears headed for future investments in the production of industrial chemicals in the next four years.

In the general industry's market, overall capital project activity has increased over last quarter in pulp and paper in Latin America, mining in South Africa and Australia, and district heating in Russia. And our after-market business, we continue to experience growth opportunities as we expand our service capabilities. Chemical MRO has increased over 2009, as distributors have begun to restock their shelves, due to end-user demand. The nuclear MRO activity continues to be stable as plant life extension and restarts are executed.

Due to new construction costs and the overall project lead times, many customers are looking at life extensions as a way to satisfy their energy needs. MRO steam system activity in Germany and the US is active with distributors and end users needing to replenish inventories. Russian distributors are increasing their pace of building inventories to support local demands as the credit situation continues to turn more positive. In spite of some uncertainty in the market, we continue to stay focused on our localization efforts as customers in the Middle East push for local manufacturing and service capability. This parallels our efforts to provide technical proposal support to our customers at their facilities.

As I look to our future growth, we place a focus on diagnostics, remote monitoring and overall actuation development, which also drives our research and technology. As I mentioned earlier, we're very excited about our new Valbart acquisition in the trunnion ball space, which allows us to make a more complete offering to our oil and gas customers. Namely, with trunnions, control valves and gate globe and check valves. This also leverages our existing route to market capabilities across essentially the same customer base. This acquisition will primarily focus on a large portion of the $3 billion worldwide trunnion market, and will concentrate predominantly on oil and gas production and gas transmission applications. This will enhance our coverage in the upstream and mid-stream oil and gas market.

Other appropriate applications in the power and chemical markets will also be pursued over time. The Valbart business is headquartered in Mezzago Italy and will become our lead center for trunnions worldwide. Other locations include a 67% owned joint venture in China, and another location in Houston, Texas. Based on a year ending May 31st , 2010, Valbarts unaudited results include revenues of approximately $104 million, with $22 million of operating income. The existing Valbart management team has been in place since 2003. And will continue to manage the Company as lead center.

We are excited by the sales synergy's that exist as Flowserve begins to leverage our sales force and technical service network with this new product line. Our experience with Valbart goes back to 2009, when we established a joint venture to develop a new turning control technology. We believe that this history, the stable management team, sales leverage opportunities, and the detailed integration plan will lead to the success and growth in the market. Overall, we will continue to assess acquisitions and the best deployment of capital as we look for the best ways to grow our business. And now I'd like to turn it over to Dick Guiltinan

Thank you, Tom. Good morning. I'm Dick Guiltinan, Chief Accounting Officer. I'd first like to recap a few financial highlights that were mentioned previously. We are pleased with an EPS of $1.62 per share, considering the charges for realignment and foreign currency. Bookings for the quarter around $1.1 billion included a very large order of over $80 million, (inaudible) the negative currency effect of $12 million. Bookings grew at 9.5% over the second quarter of 2009. On a sequential basis, bookings grew 6%, reflecting that large order and significant currently head winds.

The solid bookings number for the first half leaves with us a backlog of $2.5 billion, going into the second half of the year, an increase of 5.5% compared to December 31 of 2009. Our margins for the quarter, both gross and operating, have remained at solid levels, even with the sales decline of 12% for the quarter. In previous quarterly calls, we have discussed uneven order flow, reduced backlog at the beginning of the year and pricing head winds has sales challenges. But we also discussed our continuing efforts to properly scale the business, reduce costs, and drive operational excellence. Margins for the quarter indicate our supply chain, low-cost sourcing, realignment and other cost controls are realizing benefits. SG&A expense reduction remains a key focus area.

Turning to the year-to-date results, the themes remain consistent for the second quarter, increased bookings and solid margins. Realignment and currency are highlighted in several bullet points, so let me focus on those areas later. My colleagues earlier presentations covered key operational results for the quarter. So I'll discuss the financial ones. You'll note the large increases in the other expense net line, where the effects of currency volatility in our transactions are reported.

The recent move-in of the Euro' s exchange rate has several effects on our financial statements. The effect on translating our balance sheet flows through equity, the effect on translating our income statement is embedded in the line items. And most noticeably the effects of transactions of gains and loss which are reflected in other expense. I would like to discuss that transaction piece. We believe it's prudent to hedge the cash flows of certain large products from the time of booking until we receive payment. A typical example would be an order from the Middle East in US dollars, which is placed on a plant in Europe.

We attempt to protect the local currency cash margin as the order moves into backlog, then into sales, and finally to cash. Throughout the process, we are marking the forward contract to market, as the exchange rates fluctuate. The underlying exposure and backlog does not have an offsetting effect until revenue is recognized later in the transaction flow. As we recognize revenue, we will see some margin effect as US dollar revenue and local currency costs flow through, ultimately at collection our protected cash flow is realized. During the second quarter, the mark to market loss on cash flow hedges was $16 million. For the first half of 2010, the mark was a loss of $26 million.

As you know, we were also impacted by the devaluation of the Venezuelan Bolivar. Our most recent forms 10-K and 10-Q and have detailed descriptions of the Venezuelan currently effects. We recorded a net charge of $8.6 million about $0.15 per share year to date in the other expense line. It is better than our initial guidance of $0.25 per share, because we were able to repatriate some cash at the Venezuelan essential items rate for selected obligations. This reduce the effect of the devaluation by $3.8 million. Our tax rate for the quarter was 26.8%, This is a little better than our estimated structural rate of about 28%. The tax rate for the quarter reflects the impact of foreign operations, planning initiatives, and discreet items such as FIN 48 reserves, which can be episodic.

A couple of quick comments about realignment. We are substantially complete with the previously announced realignment programs. Expected program charges are about $88 million, we have spent about $76 million of that at the end of the second quarter. We now estimate that realignment related cost savings will be about $92 million for the full year. Our best estimate of the run rate savings when all actions are complete, is still $110 million, but this includes some additional expected savings, offset by currency related reductions.

Let me make a few comments about cash flow. Our second quarter was strong, about $96 million in operating cash flow. This offset about two thirds of our cash use in the first quarter. Operating cash flow fort he first half reflects payments of our broad-based annual incentive bonus, working capital requirements and some reductions in our advanced cash. Our CapEx for the first half was $25 million, with some larger projects slated for the second half. For the year, we expect to spend between $100 million and $115 million. That's down slightly from our earlier views, reflecting currency effects, and reconsideration of a few projects.

We've continued to return cash to shareholders through $16 million in dividends, and $11 million in share repurchases during the quarter. We closed the quarter with $500 million cash on hand, and as Tom Pajonas noted, we invested about $200 million of that balance on the Valbart acquisition in mid-July. I haven't covered every line in these pages. The earlier discussions addressed most of the key points.

Here are my take aways from the quarter. Our good book to bill ratio leaves with us a strong backlog. While we continue to see pricing challenges, our gross margin improvement reflected the benefits of a favorable mix, and realignment, low-cost sourcing, and other cost control initiatives. We continue to drive for operational excellence, and maintain discipline and pricing in CapEx, and in evaluating future uses of cash. Our realignment was effective and help create a strong operating platform for the future.

And finally, the Valbart acquisition was an important step in filling a strategic need as a platform for growth. In summary, we had a very solid quarter in a challenging environment. We are well positioned for the second half of the year. Moving ahead to guidance for the full-year, we have a couple of things to consider. First, as we've talked about many times, about 70% of our business is international. This means revenue, operations, people, Quick Response Centers, all around 70% international.

To reiterate, the mark to market on FX contracts flows quarterly below the other line in other income and expense. With the strengthening of the dollar in the first half of the year, we recognized about $0.35 below the line from FX exposure, not including the $0.15 effect of the Venezuelan devaluation. There is also an above the line effect as foreign P&L's get translated into US dollars. We estimate this effect was about $0.12 negative to our earnings outlook in the first half of the year. So all things considered, our earnings estimate took a negative hit of about $0.47 per share in the first half of the year, simply based on the movement of the dollar.

As we think about the second half of the year, we are now using a rate of around $1.25 to the Euro, we believe this will create an additional negative effect to earnings, when compared to the $1.43 rate we used for our original full year guidance. On a more positive note, we are reducing the expected full-year negative effect to earnings from the devaluation in Venezuela from $0.25 per share to the already recognized $0.15 per share we have taken in the first half of the year.

Despite the FX burden, we are reaffirming our guidance range for the full year, at between $6.35 and $7.15 per share. This includes the $0.26 per share in realignment charges we have been citing all year and the new $0.15 per share charge from the Venezuelan devaluation. The $0.80 range for the full year is appropriate given the potential for continued volatility and currency markets, as well as our continued cautious outlook for the recovering global economy. Let me now hand it back to Paul Fehlman.

Michael, we're ready to open things up for Q&A.

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

Hey, thanks. Good morning. I want to comment on the guidance and the $0.47. Just to make sure I understand it. Year-to-date first half, there's been a $0.47 head wind to earnings, correct?

Hi, Charlie. It's Dick Guiltinan. That's correct.

In the guidance, the original guidance, when you were using a 1.43 Euro, I guess I'm -- is $0.47 relative to where your guidance used to be?

Right. Let me start -- when we did the guidance we used at 1.43, at that point we would have translated the above the line effects at that rate. As we've gone through the first half, obviously we've averaged it down to about 1.33 for the first six months. And in addition to that, we actually closed June at about 1.22. So there's clearly been a degradation of just the translation effect. In addition to that, below the line, with that level of currency degradation, obviously our mark to market hedge was a lot larger than we would have anticipated with the flat currency.

I guess what I'm trying to get at is the original GAAP guidance with the Venezuelan currency and the realignment cost, had you been using the exchange rate, the 1.25 exchange rate when you first made that guidance, would your overall guidance had been then $0.47 less?

Yes, If we could have seen the impact of the currency, the 1.33 average that Dick talked about and the market 1.22. Remember those marks come on one day a quarter. So the below the line depends on where the currency is on one day of the quarter. Had we known that, certainly that would have impacted our guidance negatively at the beginning ofthe year.

What I'm trying to get to then is, all things being equal, the guidance has gone up fairly meaningfully, relative to when you first originally put guidance out?

Well, interpret how you want. The fact is we've been able to overcome the impact of this currency and maintain our guidance.

Okay. Let me switch gears now. The after-market bookings 40%, after market in the quarter. It sound as though there's still good momentum in the after-market bookings. If we look to the second half, do you think we'll get a similar type of mix?

Well, Charlie, we don't want to comment on mix going forward. I think what we were predicting in the after market, as Tom commented, in the face of our mature markets, spend being pulled down we were able to grow the business. The after-market business and that's on the heels of a lot of strategic initiatives these two folks have. Keep in mind as you walk forward, last year when we talked about bookings in the first half of the year and even in the third quarter, we talked about the challenge around these projects getting let loose.

Right. Intuitively what that would say is, that's going to put pressure on your OE mix component of your overall revenue going forward in future periods. Well, as commented now and we reference one in this period, we've started to see some of those projects come loose. So if all of the things being equal, that would tell you that the mix should shift towards more OE. Having said that, our intent is to continue to grow the after market as much as possible. If we maintain the mix, it's because we're growing our after market business.

One more and I'll hop in queue. That 70% of your business that is international. Can you -- how much of that would you consider developing markets?

You know, that's a good question. I wonder if we can reference that on the slide. Because we don't break out the Middle East. But clearly if you look at the sales outlook on Slide 8, I think it is, you can see Asia-Pacific and Latin America. And Middle East and Africa actually. I'm sorry. We did change that. It's right there. It's Middle East and Africa, Asia Pac and Latin America, those are all emerging or what we call kind of emerged regions.

Okay. Thanks.

You're welcome.

Your next question comes from the line of Scott Graham.

Hey, good morning. I have three questions for you all. Could you talk a little bit about the bookings as the quarter progressed. Was this just more of a continuation from what we saw in the first quarter with these releases? Or was there maybe a strengthening? Just directionally how did you feel as the quarter progressed?

I think there's an overall phenomenon that's in our industry, you tend to see most of your bookings in the last month, because people push hard and there's the aspect of that. I think overall what we saw in the bookings and the book to bill and the sequential growth were certainly encouraging. Keeping in mind in the second quarter we had the large project that came in as well. And you know that tipped it up quite a bit.

But for the most part, I think our general overall comments around the market is there's still some choppiness out there. And, you know, it was just five weeks ago, six weeks ago that the market was very concerned about Europe, China, there was volatile fluctuations in currency, there was a lot of uncertainty. And that will manifest itself in bookings over short-term, especially even on some of the short cycle things, people will stop and hold.

Very good. On the larger bookings, even more specifically this quarter that you were able to finally book. Was this a situation that, maybe I shouldn't have said finally. Is this a situation that was in the hopper for a while and you were finally able to write that ticket. And then are there similar -- I'm not talking sizes, but larger, you don't have to quantify, but larger types of bookings that you are hopeful to be released in the second half?

I don't want to comment on large projects going forward. I mean we always work on them. But they're very competitively bid, Scott. I want to make sure that's clear. You know in our opportunity management, we'll see these projects well in advance and they come out when they do.

So it wasn't a matter of we were struggling to get this one through the hopper or anything like that. We did see some projects like the Luke oil one we referred to I believe on our first quarter call, that was something that we were trying to pull in and it had gotten deferred. We're starting to see some of these projects get released as we commented. But it's very competitive. And just over the near term with what I talked about, the world was a different place six weeks ago. It's still kind of choppy over the near term.

Is that larger booking of this quarter one that was kind of a -- you were waiting on or was that something that kind of all new in the quarter? Just trying to gauge --

No. That was pretty much ordinary course of business.

Right. Right. I had a feeling. Then two other questions. The pricing. I know the environment -- does the pricing environment feel a little heavier 2Q versus Q1, in the sales number that is, because the bookings in the first quarter, second quarter of last year, were kind of hard to tell from an outsider what the pricing looked like. Did the sales roll out a little with a little bit more pricing pressure in Q2 than Q1?

That's been a general trend we've been calling for a while. As we've seen the backlog roll off, some of the higher price backlog, even going back to 2008, has been rolling out. And as Tom commented, we still saw some of the good pricing in Q2, but that's been rolling off. The margin head winds on us going forward that we've been calling out around pricing.

Sure. Last one is this. Middle East and Africa sales look like in the second quarter they were down about 20% plus. And I'm wondering on that if -- is that a situation where it's more OE business in that market and that's why maybe that decline was a little heavier than some of the other regions?

Scott, this is Dick Guiltinan. I think if you're looking year-over-year around Middle East and Africa, there were several large orders in 2009, destined into Africa that didn't recur. It's not part of an overall trend.

Okay. Very good. Thanks a lot.

Your next question comes from the line of Mike Hellerin.

Just back on the clarifying a couple of FX comments on the guidance side. To be clear, the $0.47 does not include the Venezuela, so it's just the incremental $0.35 from the currency hedges. And then the translation impact?

Yes. That's correct, Mike.

Okay. On a go-forward basis, I know you commented that you're still expecting some currently related head winds in the back half of the year. Anyway you can quantify that?

I wouldn't want to talk about forward currency effects. But I think there are a couple of things we can think about. If you consider that we started the year at 1.43, we closed June at 1.22. If you look at the average for the first half of about 1.33, that gave us that above the line impact on operating income of about $0.12. If the rate stayed constant, down at the 1.25 for the balance of the year, I'd expect that $0.12 to be somewhat higher.

Okay. And then maybe thinking about the second half guidance a little bit differently, if you take out the currency head winds or you exclude those, did you guys operationally increase your guidance for the back half of the year, relative to your previous expectations?

You know what, I don't want to say anything other than what we said about our guidance. I mean clearly my point was earlier was we've maintained our guidance and clearly we've seen some head winds relative to our original guidance around currency that we didn't anticipate. So all other things being equal. Having said that, just want to be clear on this. While the dollar has strengthened against the Euro it has weakened against some other currencies so you have to think about the entire basket. But all in all , we've certainly seen a head wind.

And it's things we've been talking about in our comments is, anticipated benefits around the realignment, great execution on the supply chain side, good execution within the factories. I mean anything that isn't delivered on-time costs you more. And we've been focused on cost controls as you can kind of see in our corporate line. That's one area where we've been very focused on our costs as well. So I think that will paint the picture for you. But I don't want to get any but I don't want to give any proforma

Fair enough. Switching gears to the pricing side. I know you've commented on some pricing pressure that continues to the organization. Could you maybe break that up a little bit and maybe talk about the end markets or division where you're seeing the most pressure.

No. We really -- Mike, we don't go too much into pricing, other than telling you there's head winds. Those are things we keep to our selves in these discussions. But clearly one thing -- the general theme we can comment on, most of the pricing activity is on the OE side. After market remains relatively stable.

I'm assuming then the EPD versus IPD, not willing to comment on the pricing differences in those two divisions?

No. No. Don't break them out certainly by those at all. I think the commentary Tom made is IPD has some parts, less service. And the EPD has a lot of the highly engineered equipment and also has the big portion of the after-market and as he mentioned last time, that's where vast majority of the seal assets went into.

Thanks to the time.

Thank you.

Your next question comes from the line of Hamzah Mazari.

Just a couple of questions. First one, you know your bookings were way up. Sales were slightly off. SG&A came down and margins were very strong. Could you maybe comment on the operating leverage within your business model. You know some of the work that you're doing there, the work that's been done, and how that holds up or improves as we look to next year given where your bookings are tracking and what that implies for a stronger top line.

The point around that is our realignment has been focused primarily on structural changes in our business. There's been some that have been volume related. So the point to that is, we're designing these initiatives. By the way, when we talk about realignment, I just don't want that to be around cost cutting. When we realign, we have invested also quite a bit in some other regions around the world. That's all part of our general realignment concept. We just want you to understand the money that we're spending on taking specific capacity out of resources out.

On the flip side we're spending money elsewhere to drive strategic localization and market opportunities. But the point is we're designing this around, even our cost initiatives, around these being structural. When you look at SG&A, the S component will vary with the sales component around commissions and everything will vary with sales. But a lot of the G&A side, we're designing to try to make that as much structural as possible, to get that operating leverage. I'd say the same thing in our cost of sales line. Some of that will, of course, vary with sales.

As you can imagine, as we refine our processes, move capacity strategically or product opportunities, the goal there is around creating centers of excellence that drive very high margin business. So I think the general theme that we want to leave with you is what we're doing with this business, starting from the realignment initiatives, the cost controls, integrating the two divisions, breaking them out so you can have the separate focus is around creating structural improvement in our overall platform. And the goal is in our tent, we mentioned, we want to grow this business both organically and inorganically if appropriate. The idea is we want create a scalable platform and be able to leverage it to get that operating leverage.

Makes sense. And then second question. On cash deployment. Are there any other deals out there that are like Valbart, that fit your book of business. And then just confirming does that have to be in Q3. Is the priority still reinvestment in the business and accretive acquisitions like the one you just did, versus going out and doing buy backs or increasing dividends, et cetera.

Yeah, we've been always careful not to prioritize one over the other. The priority is to get a cash on cash return in term of rate of returns and typically we target in excess of 15%. That's the way we look at all of our opportunity, be it realignment, capital investment, cost savings or an acquisition. Don't comment specifically on M&A opportunities out there, other than to say and now we've indicated it. We've been considering things. And we're very careful about how we do it.

So we evaluate all of those options, including how we return value back to the shareholders over a period of time. Because even a buy back has an internal rate of return to a share holder. So that's the discipline we're going to use. And I think the point is, cash on cash, we certainly take a long-term view of the returns on that and those investments. And that's how we'll distribute our capital. And we don't want to tilt or absolute prioritize one versus the other. We evaluate all those opportunities.

Thanks. Last question. How should we think about share gains you expect with the QRC network beared out and the Flow Solutions Group? You know just trying to understand, are we in the very early stages of, that where share gains could materialize as that ramps up? How should investors think about that?

This is Tom Ferguson. I think the way I like to look at it is, we have been building out QRC's and we've been doing that for several years now, on both the -- for both Pump and Seal QRC's. I call it planting flags in a lot of countries. In many ways that's to ensure we get the after-market stream off of the installed base we've been putting out there on project activity for the last several years. And ensure that we defend it from the very beginning.

As far as share gain, the other benefit of a QRC in an area, it keeps the business from going to third-party repair shops from the very beginning. Customers are still mixed in terms of what they keep inside to repair themselves and what they send out. So as these continue to be put in developing areas I think we'll defend our own after-market and it gives us the opportunity through the integrated solutions activities to take some share. But I don't want to put a forecast on that to say how much that's going to be. It's just -- it will continue to increase.

Here's one point I would make, this is Tom Pajonas, that Thomas Ferguson and I talked about. The QRC are becoming more important in the new equipment end of the business. As many of these countries around the world look for localization of the products. So the QRCs are becoming more important in that aspect.

That's very helpful. I appreciate it. Thank you.

Thanks, Hamzah.

Your next question comes from the line of Kevin Maczka.

Good morning.

Good morning, Kevin.

I guess I have two questions. The first is on IPD. Last quarter you had a nice slide, kind of outlining your expectations for a couple hundred basis points of margin improvement there. And, of course, we're not seeing that in the first half because of the competitive pricing pressures and other reasons. But I'm just wondering, should we expect that to kind of continue to get worse in some sense, before it gets better, because some of your initiatives there are not immediate things? Or do you think we can kind of stabilize here before ultimately going higher?

I'll let Tom comment. I think more important is what he's going to do. We certainly don't want to start guiding margin trends here over the next couple of quarters. I think what you heard from him is we're focused on this, we certainly have some work to do. And get this, and I have the utmost confidence he'll get it done but it's probably more important to hear, as he commented, specifically what the opportunities are over the medium and long term.

Yes. I think that we also -- I noted in my discussion that we made some management changes in the quarter, or at the end of the quarter. Because we need to accelerate the impact of the realignment efforts. While we've made good progress, we've still got work to do. So we're going to accelerate that. And the second thing that I also talked about in the first quarter, we're teeing up some pretty significant growth initiatives. Those are will take some time to gestate and get underway.

We've got some product development efforts that are critical. But you know we're stabilizing and definitely have a lot more focus on it. So as Mark alluded to, I don't want to predict we're going to get worse before we get better. I think we're likely to be tracking the rest of the year. And continuing to drive on those growth initiatives as much as we can while getting the realignment behind us.

Okay. And my other question is on the after market. Just to kind of revisit that. Nice growth in the quarter. There is a comment in here on one of the slides about still seeing stagnant maintenance spending. Of course, it sounds like you've seen some new projects led, so there's been a trigger point that's allowed that to happen. Have you seen any trigger point that has indicated that stagnant maintenance spending may improve?

Oh, yeah. This is Thomas Ferguson again. I think the one positive sign that's occurred, just somewhat recently, is the refinery crack spreads that started to get better. And that's usually a good sign for the refinery maintenance spending. So that's good news. The other -- kind of first bright spot we've seen in a while.

The power electric utility maintenance spend has been fairly stable over the years. The one positive there is in the US or actually around the world with the really hot summer, that tends to be good for maintenance activity as well. So a couple of positive signs that we've seen just in just recently.

Okay. Thank you.

Thanks.

Your next question comes from the line of Jamie Sullivan.

Hi, good morning.

Good morning, Jamie.

Question on Valbart. Are you expecting that to be a accretive or dilutive this year? I know you mentioned that will be accretive next year. Just wondering what your expectations are for 2010?

Yeah, Jamie, this is Tom Pajonas. For the remainder of the year, we expect it to be slightly dilutive. As we indicated, accretive the following year.

Okay.

You can imagine, Jamie, we're still doing the accounting work around that. So we'll give some more clarity later.

Okay. Thanks. And then on realignment and some of the numbers there, you mentioned $92 million this year and $110 million from the whole program. Does that suggest $18 million incremental next year that we should think about? Or am I missing something?

No. that full prime rate savings and most of our activity will be completed by the end of the year. So we would expect to see about 110 as the run rate savings for 2011.

Okay. Great. And then with the discussion around some of the maintenance holding off, but increasing after market, just wondering if you could talk about whether the increases in after market there are some recovery in the market and spend loosening, or whether you think that's share gain?

This is Thomas Ferguson. I believe it's share gain and because we are getting traction with the integrated solutions approach and especially with Pump and Seals coming together and the end-user focus. So I'd say in the first quarter, we were integrating our customer facing organizations, especially on the end-user side between pumps and seals. And second quarter we were pretty much finished with that and started to see traction. So I think we picked up the pace and would believe we took some share.

And Jimmy, keep in mind when you look at share gain, that's share gain also from customers and local machine shops as well. So they're certainly in the mix.

Sure. Okay. Thanks a lot.

Your next question comes from the line of William Bremer.

Good morning, gentlemen.

Good morning.

A number of my questions have been answered. For example, QRC's, what's the total amount worldwide at this time? I have seen referenced 150 that are servicing the after market. But what's the total number?

Total number is just under 160. I want to say 158. But we are in the process of driving through new ones and looking at the networks. So I think just under 160 is a good number.

Okay. And then, Tom, you mention that the mining and pulp and paper are starting to improve. Can you give us an idea of geographically where you're seeing that improvement?

Yeah. if you look at the pulp and paper, largely it's in Latin America, Brazil, and again that's probably one of the more cyclical industries. But that looks like it's beginning to awaken. And then the mining industry is a little bit more dispersed. You have Africa, you have Australia. You have Latin America on the mining side. And you've probably seen some recent announcements from some of the EPC's on some big awards on the mining business also in their second quarter results.

Okay. Great. And the last topic I want to approach is nuclear. I mean, we're seeing a tremendous ramp, not just in China, but Vietnam as you mentioned, a lot of different areas, even Russia, for example. Can you give us an idea this life extensions of what this -- give us a little more color there. What are some of the things that they are replacing in that and what is the time table of a project like that?

Yeah, if you look at the life extension, generally the units are out there for 40 years in the original application for the permits. A life extension is generally a 20-year extension of the existing reactor. They vary depending on the condition of the base reactor, but they tend to be long lead projects. You can almost call them mini new equipment project orders. They're not classified as an after market.

The first thing that they do is an overall assessment on the plant. And they'll do a number of engineering studies, much like feed work on oil and gas work. And then based on those studies, they will then successively put out the bids for various pieces of equipment and then let the overall order. You're talking several months if not a couple years for some of those big life extensions.

And what aspect of this does Flowserve handle?

We would handle obviously anything related to the products that we have, which is the pumps, obviously seals, the valve components in that. And we will do a lot of analysis work on those components as well as supply new pieces of equipment.

Our equipment is the steam cycle process. And some of the things around it.

But Flowserve is involved in terms of the original analysis of a reactor?

Not in the what's called the hot core of the reactor. But our components are used in various processes. So certainly we have to be part of that overall engineering analysis work.

Can you give me a ballpark? I know that nuclear reactors are quite extensive in terms of size. What type of project in terms of revenue would one of these projects represent?

Typically at a nuclear power plant, and this is very typical because they're all different type of applications. You could have somewhere around for pumps, valves and seals, you know $60 to $80 million US and then don't forget you have the overall reactor life over the next 40 years. And again just as an overall wrap, that could be two times the original equipment over the next 40 years.

Thank you so much, Tom. I appreciate it.

Your next question comes from line of Paul Mamola.

Hi, Good morning, everyone.

Good morning.

If I could take you back to IPD. Obviously a year-over-year de-leverage makes sense. But it looks like the same sort of revenue sequentially. So I was curious, what's impacting or can give us a general sense of what's impacting margin there?

Are you looking at the adjusted? Where they took realignment charges in the second quarter.

Okay. So adjusted is 10.9, versus -- all right 11.3. That makes sense. All right. Okay. The other thing is in the Q, there was a tax note that there's $9.5 million to $25 million that could come back in terms of settled tax items. Any sense of where that falls and is any of that incorporated in the guidance this year?

Well, when we think about our tax rate for the guidance, we normally start off of a -- kind of a view of the structural rate of about 28%, recognizing the extent of our foreign operations and we look at what the possibility for resolution of audits, expiring statute of limitations, and we normally try to think about how that might flow through the full year rate. The tricky part about that is when and how much is obviously dependent on the resolution of the matter at the time. And I think that's probably all I want to say about the rate right now.

Yeah. Generally high level because often times people try to look at these things as one off. When we have a higher source of foreign revenues in income, that will drive our tax rate down. That's linked directly to our operations. And then also we get benefits from benefits from planning activities as well. You used to be able to in years past move that into your tax rate. Now the requirements are they're fairly lumpy as we talked about.

Then the third aspect, as Dick talked about, there's things that we resolve that are probably more discreet. So, you know, that's why when we look at our structural rate, we talked about at the beginning of the year, it has come down, mainly because we're seeing the benefits of some planning and also we're getting benefits from more foreign source income.

Okay. That's helpful. And then I know you mentioned you're not trying to provide mix guidance. But can you remind us where -- in this last cycle, where after-market sales peaked as a total percentage and do you think there's upside here in the near term where you are at 38%?

Well, you know I think I look at those years and years ago and I think after-market got as high as 47% or 48%. But I just caution you to -- that's probably eight years ago. The Company is different. It's certainly different from then so that would be difficult. We want them both to grow.

Okay. Thanks for your time.

Your next question comes from the line of Wendy Caplan.

Hi, good morning. Dick, you talked about $100 million to $115 million in CapEx this year. Can you split that up for us in terms of the kind of capital project, brick and mortar equipment, some sense of that, please.

Hi, Wendy, it's Dean. We've Historically not called out the break-up of our capital expenditures. But you know I would say broadly as we think about it, we continue to invest in our after-market business, our geographic footprint, significant investment in continuing to grow our business in Brazil, Latin America specifically as we've called out before. We continue to work on our IT platform and optimization and last but not least, as we've talked about the realignment efforts have generated need for capital as well. That's how I think about it in terms of the spend here to fore and second half of the year.

Okay. And one other cash flow question, if I might. Working capital was about, if my calculations are right, about $0.29 per sales dollar in the quarter. Is there something inherent about Flowserve that characteristically that makes this the right number or do we think that it can go down from here? And what are the sort of trigger points that we're focused on?

Wendy, I can't do that $0.29 calculation. But I can tell you directionally, we do want to improve on our working capital. You've heard us from time to time, we do tend to burden it sometimes, particularly around motors, to make sure that they're available when we want to deliver the pump, because it's late. To avoid it being late. But we do have room to improve our working capital. And I want to certainly, come right out and say. We definitely have room for improvement.

Is there a magic number?

You know we were looking at primary working capital as a percent of overall revenue. And it's trailing revenue. So what happens is when you have a declining sales environment and things start to ramp back up, it will look like a burden. But generally, you know, we'd like to get this thing to 20% to 21% on an average run rate as primary working capital.

And again to go to my original question, so there's no kind of something inherent about Flowserve that makes that impossible?

No. No. And keep m mind, that also keeps -- that's the advance cash as well, the 20% to 21%. There's not anything inherently.

Okay. Thank you very much.

You're welcome.

Once again if you'd like to ask a question, simply press star followed by the number one on your telephone keypad. And there are no further questions in queue. I would like to turn the conference back to Paul Fehlman.

Thank you, Michael. I'd like to remind everyone that this web cast will be available on our Web site for replay in approximately two hours and thanks for joining us on the call today.

Thank you, ladies and gentlemen, for participating in the Q2 2010 earnings conference call. You may now disconnect.