福斯 (FLS) 2010 Q3 法說會逐字稿

Welcome to Flowserve's Q3 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. Good morning, and welcome to Flowserve's third quarter 2010 earnings conference call. Today's call is being webcast with our earnings presentation via our website at flowserve.com. Simply click on the Investor Relations tab to access the webcast and the accompanying presentation. 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 website, please click on the "Click Here to Listen Via Phone" icon at the bottom of the event details page. The webcast will be posted at flowserve.com for replay approximately two hours following the end of this call. The replay will stay on the site for on-demand review over the next few months.

Joining us today are Mark Blinn, President and 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, VP and Chief Marketing Officer, Dean Freeman, VP 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 filings in today's earnings presentation slide deck for Flowserve's Safe Harbor Statement on this topic. All of this information can be found on Flowserve's website under the Investor Relations section. I encourage you to read 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.

Thanks, Paul, and good morning, everyone. Before starting with the third quarter results, I should say that we are especially proud of our employees and operating platform which have enabled us to maintain strong operating margins during the downturn in the business cycle. We were also pleased with the stability of our third quarter bookings, marking the eighth consecutive quarter with bookings around $1 billion. As well as the continued growth of our aftermarket business, which was up 5% year-over-year in the quarter. During the quarter, we saw a number of things that impacted both revenues and margins.

As expected, business activity in certain regions slowed for summer vacations and fewer projects shipped. We also had some planned shipments push into the fourth quarter due to customer project schedule and test certification delays on these large orders. And finally, as we work to improve the industrial products business, we have some reduction delays and took some actions with short-term costs to drive long-term benefits.

When you look at margins, our margins were also impacted, as we had earlier fleshed through favorable pricing and backlog from project business booked in the 2007, 2008 period. Consequently, we saw in the third quarter results the impact of the more recent pricing headwinds that we've been calling out for some time. But, we were able to offset much of the more recent challenging pricing and fixed cost absorption impact as we continue to gain traction in our realignment program and our cost control initiatives.

As we look at our markets, over last year, we have not only talked about the competitive price environment, but also the general market uncertainty. We still believe that our longer cycle business, like our large projects activity and EPD, will remain choppy into 2011. But, we now see more evidence that our short cycle OEM and aftermarket businesses appear to have started recovering, especially in developing markets with slower growth in mature markets. Our increased aftermarket, as well as our FCD and IPD bookings, support this analysis. That's not to say that there are not good, large project opportunities to be captured. Rather, it's highlighting that capacity is continuing to chase these projects in the near term. We see opportunities in the Middle East, in Brazil, as the country develops its oil and gas capabilities and in China, as they continue to develop the country's infrastructure.

As we have said before, we plan to maintain discipline when it comes to pursuing orders. As you look back over the last year, we successfully integrated our pump and seal businesses to improve efficiency and face to the customer. That done, we are now focused on the efforts to improve IPD. The cost profile, the product offerings, its supply chain and the manufacturing footprint, all to capture growth and produce higher margins from its increased bookings.

We also pursued strategic localization by investing in emerging market growth through adding local employees, increasing our manufacturing footprint and our QRCs, plus strengthening our strategic local partnerships. Our continued objective is to be a strong local player in important markets like Brazil, Saudi Arabia, China, India and Russia, all of which increasingly require local content. We have expanded our product offering in the Company by acquiring Valbart, which allows us to expand our valve technology into more highly engineered critical equipment for the oil and gas industry. And, this addition also increase our portfolio solutions for our customers to help pull through other valve products.

We've been doing all this while remaining very disciplined in our cost control initiatives, as shown by the year-over-year reduction in SG&A of $64 million year to date. Through these initiatives, plus our realignment work, we have positioned the Company to operate more efficiently in the current markets and to be able to quickly capture profitable growth as the cycle turns up. Another way to look at our business is to look at the following four areas. Aftermarket, long cycle engineered project, flow control valve business, and industrial product division, the last two of which are primarily short cycle OEM businesses. Our aftermarket business has grown and has shown resilient margins and has produced steady earnings performance through the cycle. Our long cycle engineered project business continued to expand its global capabilities in emerging markets and leveraged operational realignment efforts while dealing with the pricing pressures.

While the flow control valve business participates in some large valve projects and has grown its nuclear business, it is geared more toward the short cycle and has grown its margins this year, increased its bookings and has meaningfully added to its product portfolio through the acquisition of Valbart. IPD is a work in progress in the near term, as we made recent changes at short-term cost to improve its long-term outlook, which is already supported by its increased quarterly bookings. I am confident IPD will capitalize on its growth prospects through a committed team of employees that is driving towards an operating margin objective.

Reflecting on my travels over the past year, in meetings with customers, operations teams, management and shareholders, I am proud of the way the Flowserve team has performed in this market, met the customers needs and returned value to the shareholders. As we look over the next three to five years, we believe that our markets will grow. Global energy infrastructure markets will respond to the needs for power. Chemical markets will rise with emerging market GDP and the needs of their growing consumer segments, and access to clean water will become one of the most critical problems in the world. We have created a balance sheet to support our growth initiatives through organic and inorganic means, while helping to offer strength and stability through the down cycle.

Through the efforts of the employees at Flowserve, we have positioned the business appropriately for recovery in the longer-term project business that we believe will remain choppy into 2011 but has a great opportunities beyond. And, we have continued to grow our presence in emerging markets in the aftermarket regions. Overall, what gives us confidence in our platform is that we have the resources to successfully implement IPD improvement initiatives, we have growing backlog, and despite all the challenges I called out earlier, we posted adjusted operating margins of over 14% in the quarter. Bottom line, our third quarter results are additional evidence that we are effectively dealing with the short-term realities of this environment while continuing to position our Company for long-term growth. I'll now turn it over to the management team to go into more depth on our markets, our operations and our financial results. Kyle?

Thanks, Mark, and good morning, everyone. First, let's take a look at our year-to-date business across key industries and geographies. Looking at our 2010 year-to-date bookings, compared to 2009, we continue to experience overall growth. While the drivers of bookings growth may vary by each of our businesses, the Company's total bookings growth has benefited from an increase in oil and gas, along with improving conditions in the global chemical industry. This growth was also supported by improvements in several components contained within general industries, including improvement in orders coming through our distributors.

Moving to the next slide, we have provided a view into the forecasted capacity additions around the world in four key industry areas: oil refining, power generation, bulk chemical and desalination. This chart reflects the capacity which may come online from 2011 to 2015 from projects which are classified as either in the construction or the planning phase. We utilized a number of sources to prepare this overview, which are denoted at the bottom of the slide. The first point to note is the importance of China and the Middle East, relative to the forecasted capacity expansion. More than one-third of the potential investment in power and chemical is related to China, while the Middle East leads the way in oil refining expansion and accounts for almost half of the projected expansion in desalination.

Looking at the forecast for oil refining, the graphic shows that there are projects being considered in all of the geographical regions. Approximately one-third of the forecasted production volume is based on expansion of existing refineries. This is the predominant component of the projected investment in the mature regions. In the power industry, the forecasted capacity expansions cover all forms of power generation, including renewable. At least two-thirds of these projected investments will continue to use fossil fuel, with the majority using coal and natural gas. China and India remained the largest participants in forecasted capacity expansion from 2011 to 2015 year. In China's recently released twelfth five-year plan, the government announced plans to add 390 gigawatts of capacity over this timeframe. This represents more than one-third of the forecasted expansion.

The graph for the chemical energy is focused on projects related to a specific selection of bulk chemicals as denoted on the slide. From this mix of products, urea, ammonia and ethylene account for almost two-thirds of the projected capacity. From a geographical perspective, China, Middle East and India account for approximately two-thirds of the forecasted investments. This aligns with our previously announced strategies to become significant players in this market area. The last graph on the right shows the data related to the desalination market. These forecast numbers cover multiple methodologies, with reverse osmosis accounting for approximately three-quarters of the proposed capacity additions.

As for geographical influence, the Middle East and Africa account for roughly 60% of the forecasted investments from 2011 to 2015. In summary, the key industry markets we serve continue to forecast long-term investment growth driven by increasing demand for energy, potable water and consumer goods that require of variety of bulk chemicals in their production process. Much of this forecasted demand growth, as well as the planned investments, are focused in regions whose economies are experiencing accelerated growth. This growth has been supported by increases in urban middle-class populations and a desire by governments or companies to increase their business influence around the globe. As we look to these longer-term opportunities for growth, we believe Flowserve is well positioned to compete, considering our reputation in the markets we serve, the growth of our geographical presence and our investments to expand our flow management capabilities through both internal development and acquisitions.

Turning to the last slide in this section, let's take a look at our overall aftermarket business. The graphics provided give two views of the aftermarket and original equipment business. On the left, you can see bookings comparisons for both year-to-date and third quarter for 2010 compared to 2009. On the right are the same refs for revenues.

In aftermarket bookings, we continue to experience growth in the third quarter. This contributed to a year-to-date growth in aftermarket bookings of 7.9% compared to the same period in 2009. Overall, we continue to see opportunities in aftermarket, particularly in our parts and integrated solutions business. Some sectors of the service business remains challenging with some customers, as they continue to utilize their on resources to perform required service work or extend the time between maintenance shutdowns. As we have discussed, this is not unusual, considering the impact of the economic recession on the industries we serve.

In closing, I would like to relate a couple of our key strategies for our aftermarket business. During previous earnings discussions, we have shared our key strategies which focus on our business objectives and provide guidance when considering the investment options we have to grow our Company. Two of these key strategies are disciplined profitable growth and customer intimacy. As we focus on improving our customer intimacy, we see the aftermarket business as an important part in building sustainable long-term relationships. Also, as we drive for disciplined profitable growth, the aftermarket business remains a critical component of our long-term growth strategy. Now, I'd like to turn the conversation over to Tom Ferguson, President of Flow Solutions Group. Tom?

Good morning, I'm Tom Ferguson, President of the Flow Solutions Group which encompasses the engineered and industrial product divisions. Generally speaking, I am pleased with the overall performance of the Flow Solutions Group but will admit, we have some areas I'd like to see improved. Our focus on our end-user customers, operational excellence through strategic growth initiatives continue to provide a platform to drive bookings growth while generating solid sales and income performance. We have continued to drive sales process discipline and carefully balance our project win rates with pricing and factory loading considerations. We have continued to see pricing pressure in most OE sectors, as more of our customers focus on first cost. We did struggle with some isolated operational disruptions during the quarter, which impacted our execution and customer satisfaction metrics, primarily within the industrial products division.

For the Engineered Products Division, or EPD, Q3 bookings growth of 6.3% was driven primarily by focusing on targeting strategic projects. Market activity levels in our core market sectors continue to be mixed. We were, however, pleased with our aftermarket business which strengthened in the face of continued low customer maintenance spending levels, particularly in North America and Europe. Our end-user focus and integrated solutions group initiative continue to offset the natural tendency of refineries to pull pump repairs back into their own shops.

As we've noted before, we are not a quarter-over-quarter business and, generally, track better to half- over-half comparatives. Third quarter sales were down 5.4%, primarily due to the lower backlog entering the quarter, but also impacted by many customers not needing delivery of equipment yet. Gross margin was down 200 basis points, in spite of a favorable aftermarket to original equipment mix, continued focus on operational excellence and some realignment savings. The impact of the low market level of project pricing last year resulted in lower backlog margins coming into the second half of 2010. Despite the tough pricing environment, we are generally satisfied with our operating income margin of 18.1%. This was driven by benefits from our previous realignment actions and continued emphasis on SG&A controls, as well as a tremendous emphasis on the aftermarket.

Moving on to the industrial product division, let me say that I remain optimistic about the opportunity this new structure provides us to focus on these products and markets, but must note that we have several operational issues to correct. As a reminder, while IPD does have shorter cycles than EPD's original equipment, it is still not a quarter-over-quarter business. With that said, for Q3, the industrial products division saw increased bookings on an FX neutral basis of 6.9% versus Q3 of 2009.

We did begin to see slightly improved activity in the global chemical market but are having to develop and improve some key product lines before we can take full advantage of this activity. Sales in Q3 were down 24.4% on an FX adjusted basis, driven primarily by isolated production disruptions and lower shippable backlog due to recovering, but comparatively weaker, end markets. Gross margins were down 330 basis points to 23.8% due to significantly lower sales. Realignment saving CIP and supply chain efforts were not enough to offset the 27.7% sales decrease. SG&A was reduced by 20.4%, driven by cost containment and realignment efforts. Overall operating margin at 6%, excluding realignment cost, was down 500 basis points versus 2009.

This was primarily due to lower fixed cost absorption on the lower quarterly sales volume I talked about earlier. We appointed a seasoned flow serve pump leader as vice president, general manager for IPD at the beginning of the quarter. During the past 90 days, he has refocused and accelerated our realignment program to better position the IPD businesses for the core markets they serve. This realignment program will continue into 2011. While we acknowledge that we will continue to experience quarterly volatility in the short-term, we remain focused on achieving the 14% to 15% operating margins by 2015, as we noted on the last call.

We remain cautiously optimistic about the opportunities we see in oil and gas in the Middle East, Russia, Latin America and Asia. We're also seeing increasing opportunities in the power and desalination markets in Asia, Latin America and the Middle East, but these are slow to come to fruition. We have been successful in booking several larger, longer lead time aftermarket jobs that leverage our integrated solutions technical capability and have been growing our mechanical seal bookings as well. We still face challenging end markets as we approach 2011, but Flowserve is well positioned to leverage discreet opportunities for growth in our core energy and infrastructure markets in both original equipment and aftermarket solutions.

While we have historically been strong in our as near products and markets, the separation of engineered and industrial allows us to focus more on the key success factors for our industrial products and markets. We have taken steps to increase our marketing and technology focus on the IPD pump and seal products, but are not likely to see the full effect of these moves for a few more quarters. We are increasing the focus on significantly improving the IPD operating platform, while fully integrating our supply chain efforts across our internal manufacturing sites. This will provide more focus to low cost sourcing and platform optimization.

To put this all in perspective, we started the year focused on the integration of the pump and seal divisions, but with that substantially complete, we will now intensify our focus on the industrial key success factors that should allow us to generate significant growth in margin improvement. I am optimistic about the opportunities this new structure offers us in the Flow Solutions group. And, now, over to Tom Pajonas to cover the Flow Control Division.

Thanks, Tom, and good morning, everyone. My name is Tom Pajonas, President of the Flow Control Division. In summary, I am pleased to report the third quarter solid performance this year for FCD.

Overall, new equipment bookings and sales have sequentially increased in each of the last three quarters of 2010. Distributor orders for the first three quarters have remained solid while distributor sales have sequentially increased in each of the last three quarters of 2010. Overall, our on-time deliveries have exceeded 92%, despite supplier capacity constraints.

As far as the financials are concerned, we have a few slides. The first slide shows FCD financials as reported, including the Valbart acquisition. In addition, we have included for your reference, slides that breakout of Valbart operation, including the impact of purchase price accounting. Q3 bookings were $335 million versus the prior year of the $333 million, including our Valbart acquisition. The booking comparison also included a large $45 million booking in Q3 of 2009 in the nuclear business. With the exception of this nuclear order, the chemical, oil and gas, pulp and paper, mining and water businesses all experienced increases versus Q3 2009. Also, bookings by destination increased in Russia, Middle East, Africa, Asia, India and China. Sales were $313 million versus the prior year of $293.5 million. Sales for Q3 by destination versus prior period increased in North America, Russia, China, as well as Latin America. Sales of new equipment has increased in each of the last three quarters sequentially.

Gross margin, as reported, was lower in Q3 versus prior Q3 due to mix, shifts of revenue into Q4, overall pricing pressure and Valbart purchase price accounting, due diligence costs and operations. Continued SG&A control, offset by mix and pricing pressure, resulted in a 14.9% Q3 operating margin and a 15.7% operating margin year-to-date, including Valbart on an adjusted basis. Excluding Valbart and realignment, the Q3 operating margin was 16.9% on an adjusted basis and 16.6% year-to-date adjusted, which we were pleased to obtain under the current market conditions. Backlog is at $696 million, including Valbart of $78.4 million at the end of third quarter, compared with $485 million at the end of 2009. A strong book to bill of 1.07 in Q3 and 1.17 year-to-date, without Valbart, drove a strong increase in backlog.

Notwithstanding market uncertainty, there are a number of encouraging things happening. In the power market, the global markets for new nuclear construction continues to be active in the US, India and China. Several other nuclear initiatives are beginning to unfold in the Middle East, the UK and France.

Nuclear maintenance, repair and operation activity continues to be stable, as plant life extensions and upgrades are executed. The fossil fuel market is stagnant in the US and Europe, but increasing in India and China, especially on the super critical side. Low-cost natural gas prices and lower electricity consumption could pose a risk to the high level of nuclear activity. Our chemical business has seen an upswing in MRO business from our traditional North America, European and Middle Eastern markets. In India, we are involved in a number of new petrochemical projects, but the market is highly competitive.

In the oil and gas business, the shale gas area of North America continues to accelerate. Both the Marcellus and Barnett shale regions continue with the strong natural gas drilling activity, as well as the construction of new pipelines to tie into existing transmission lines. There is also a marketplace discussion around increased automation and instrumentation of transmission pipelines based on recent events. Liquefied natural gas projects continue to maintain strong. Floating LNG products are increasingly being considered by energy companies seeking to commercialize remote natural gas fields.

There's also been an increased level of activity in front end engineering for new capacity in both gas processing and downstream refining. In particular, activity related to project increase has resulted in increased proposal support for Saudi Arabia, Abu Dhabi, Qatar, Kuwait, Algeria and West Africa. Increased customer investments in the mining industries are showing positive effects in Latin America and South Africa. While the pulp and paper business remains stagnant in North America, Brazil has begun to experience some positive movements. Capital investments continue in new air separation plants and products for alternative energy markets for solar.

Previously, we discussed our growth programs: portfolio selling, localization, emerging markets and automation. I would like to give a brief summary here. In the area of portfolio selling, we have completed our acquisition of Valbart in the trunnion ball space for oil production and gas transmission applications. The integration plan is about 60% complete with attractive synergies identified on the selling side. This acquisition is core to our portfolio selling strategy.

We continue to see strong pressure from nationalized oil companies and power companies to increase the level of local contact. This localization of our product base supports our historical drive for a global network of quick response centers, regional manufacturing and value added service. We continue to invest in the Middle East, China and Latin America, in order to drive the localization strategy. Our emerging markets strategy has taken shape in the area of nuclear site mediation, as we continue to develop adjacent parts to support this developing market. And, in the area of automation, we see this as a critical part of our valve offerings and will be building on our heavy duty pneumatic actuator.

In summary, the FCD platform continues to perform well. Our emphasis on supply management, operational efficiency, new products and market development should add to an already solid base. And, now, over to Dick Guiltinan.

Thanks, Tom. Good morning, I'm Dick Guiltinan, Chief accounting Officer. We've covered a lot of information so far, so let me address the consolidated results.

The strengthening of the euro against US dollars late in September gave a very favorable mark to market on our cash flow hedges, basically offsetting the charge we took last quarter. That development helped support our forecast for the full year 2010 year results stated in our press release. But, the year-to-date currency effect is still a net charge of about $22 million, which includes $8.4 million charge for Venezuela devaluation. Results of Valbart for the quarter were impacted by acquisition related costs, purchase accounting effects and typically slow summer seasonality. These purchase accounting effects involve establishing the fair value of acquired inventory and backlog of Valbart. These adjustments are amortized as sales are recognized, which will substantially reduce operating margins on the Valbart sales from the acquired backlog over the balance of the year. We've included an analysis of Valbart results of operations of the FCD materials to help with your review. These acquisition related costs and purchase accounting effects amounted to about $0.05 per share charge in the third quarter.

Let me move to the third quarter highlights. Q3 EPS was $1.84, including realignment charges of $0.03, the Valbart related charges of $0.05 and $0.17 of currency benefits. Bookings grew moderately year-over-year about 2.6%. Excluding currency headwind, bookings increased 4.8%. Sequentially, bookings declined, reflecting, in part, a very large EPD product order in the second quarter of about $80 million . Increased bookings in the oil and gas markets were a primary feature in all three segments.

Valbart bookings for the quarter were about $15 million. Backlog of $2.7 billion at September 30, 2010, is up more than $300 million since the beginning of the year. Sales for the quarter were down about 7.6%, or 4.5% excluding currency headwinds. Lower original equipment sales in EPD and IPD reflect their lower volume of backlog at the start of 2010, including relatively lower backlog pricing than the prior year. FCD sales increased by 6.5% including $12 million from Valbart. About 74% of total sales in the quarter were delivered outside the US. Third quarter gross profit margin of 34.3% reflected the less favorable pricing in the Company's beginning of year backlog compared to the prior year.

Lower manufacturing cost absorption and lower sales and the impact of Valbart purchase accounting effects, these decreases were partially offset by an increased mix of aftermarket sales. Consolidated aftermarket sales mix was about 39%, compared to 37% in 2009. Low-cost sourcing, positive impacts of realignment program and other continuous improvement projects also helped increase the Company's gross profit margin for the quarter. SG&A decreased about $20 million, reflecting an ongoing focus on cost control and increased savings from and decrease and cost of realignment programs. Quarterly corporate expense continued at reduced levels, compared to 2009. Valbart transaction rate cost included in the third quarter were about $1.4 million, in addition to purchase accounting effects of $1.2 million. Operating margin of 13.3% included about 20 basis points of realignment charges and about 60 basis points related to the net effect of the Valbart acquisition. Other income net includes the positive mark to market and cash flow hedges of $18.5 million I mentioned earlier, offset by transaction related currency losses of $4.4 million.

We also recognized a $2.6 million gain from the sale of the small foreign joint venture interest in other income net. Our tax rate for the third quarter was about 25.5%. For the nine months ended September 30, 2010, the tax rate approximated 26.8%. Both rates reflect the net impact of foreign operations and resolution of tax audits and lapses of certain statute of limitations. Based on all that you have heard on the call today, we updated the full-year EPS target range to between $6.70 and $7.15 per share, including approximately $20 million, approximately $0.26 per share in realignment charges and an estimated after-tax charge of $8.4 million, approximately $0.15 per share related to the Venezuela currency devaluation. This guidance was based on the euro to the US dollar exchange rate at the end of the third quarter.

Turning to the year-to-date highlights. Year-to-date EPS was $4.89, including $0.33 of currency related charges that we've discussed over the last several quarters. The bookings increased year-to-date of 8.7% and the sales decreased year-to-date of 8.7% reflect the same drivers as the third quarter. Year-to-date operating margins and gross margins reflected the pressures previously noted in the third quarter. The impact of lower sales and relatively lower pricing during the nine months was partially offset by realignment savings, supply chain benefits and other cost control initiatives. Year-to-date consolidated aftermarket sales mix was about 39%, compared to 36% in 2009.

Turning to realignment. In 2010, we focused heavily on the integration of pumps and seals into FSG and the resulting changes in the FSG customer phasing organization. FCD also moved onto new realignment plans and programs, as earlier projects were completed. So far, we have programmed about $87.5 million in approved realignment plans, since we first announced these programs in 2008. For the third quarter, realignment charges were $2.1 million. The year-to-date amount is $10.2 million. Our plans indicate about $7.5 million in fourth quarter realignment cost, but we are continuing to review additional opportunities in IPD. 2010 EPS guidance reflects the previously communicated $20 million realignment plan for the full year.

Realignment savings in Q3 2010 approximated $25 million. The year-to-date savings approximated $65 million. We estimate the full year 2010 realignment savings to approximate $93 million. We also estimate an annual run rate savings for realignment by 2011 of about $115 million, assuming current foreign exchange rates and successful completion of the approved programs. Turning to our Q3 2010 cash flows. Our cash position remains strong. We were able to self fund the acquisition of Valbart for about $200 million during the quarter. We have used about $17 million of cash flow for operations year-to-date . Remember, we have historically generated a significant amount of our full-year cash flow in the fourth quarter. Increase in working capital in Q3 2010 reflects additional work in progress on projects and increase in raw materials in preparation for additional projects and an increase in finished goods that reflect some delay in customer acceptance of completed projects.

Capital expenditures of $21 million for the third quarter bring the total year-to-date CapEx to about $46 million. We now forecast approximately $100 million in full year CapEx. We have been focused on executing earlier realignment initiatives, so the completion of some planned 2010 capital expenditure products was moved to later in the year. Cash returned to shareholders via dividends and repurchases of common shares totaled $27 million in the third quarter. And, we ended the quarter with approximately $311 million of cash on hand and a net debt of $225 million. Now, we'll return to Paul to wrap

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

(Operator Instructions) We will pause for just a moment to compile the Q&A roster.

Your first question comes from the line of Hamzah Mazari with Credit Suisse year, please go ahead with your question. Thank you good morning. Just first question, we're having a bit of a hard time just figuring out given the (inaudible) what the margin profile of your backlog looks like. You've called out negative pricing for a while now. You've had some operation issues during the quarter. Curious to see if you can help us understand how much (inaudible) to your margins. Were these operating issues just so investors can get a sense of what the underlying margin run rate looks like? You've given your Q4 guidance out there, curious to see if you can tell us what EBIT margins that implies for Q4 since you've put that out there. So, I'm not asking for guidance besides what you're given, just further clarification and color on how you think about the underlying margin trends in your business going forward.

Sure Hamzah, this is Mark. I think what you've heard on the call and in our comments was there's really three things that impacted margins. Price, which we been talking about, volume, which we'd also talked about before, especially in Q3, and then the operational issues. Let me kind of walk through -- generally, the volume and the operations had the most impact on our margins year-over-year and sequentially.

Looking -- taking a step back, looking at the operations side around IPD, you see it's 6% margin, there were running roughly at 10% margins earlier in the year. That's about 400 basis points. And on their sales, you can see that's about $7 million. So, it just quick math in the third quarter, that would have been about a 70 basis point impact. So, as to kind of break them out, those are the ways to look at it. There is the impact of price, but the bigger impact in the quarter, both year-over-year and sequentially, were the volume in the IPD issues.

That's very helpful, I appreciate that. The second question was around pricing. Can you just give a little more color? Is pricing getting more negative sequentially, is that flattening out, is there a difference between pricing on your highly engineered product versus the commodity side? Just trying to get a sense of are things getting worse here or are we sort of stable?

Well, the way I broke down the business is you can look at it, the four aspects of it, the long lead cycle, the aftermarket and then the shorter cycle business. I think what we talked about for some time is that the long cycle project business, a lot of which is in the EPD OE,has been very price competitive for some time. And we've actually called that to be choppy into 2011. Basically, what you have there are very, very large projects, and there's capacity that competing for those projects and has been for some period of time. So, this pricing environment has existed, but it's still volatile, really going into 2011. We see some opportunity certainly out there on projects and if you hear about the growth prospects, we are encouraged longer-term for this business.

If you look at the other three aspects, the aftermarket business is growing. That's remained stable in price, that's a high margin business. So, pricing is really tied for us, from our standpoint, to growth, which you've seen. The other business, IPD and FCD, those are shorter cycle businesses. And what we talked about in our comments was we are actually seeing sign of recovery. Recovery brings two things to the three things that impact us this quarter. One, a brings incremental volume. But also, it gives you pricing power into the recovery. So, as you look at those four aspects of the business, the long cycle is we expect to remain volatile in the pricing . Those are important projects and will stay disciplined. The other three we see encouraging signs on

Okay. That's fair enough. And then, just a question on your bookings. You guys are sole spectre to the Aramco (inaudible) refinery. Is that -- you signed on in all this. Is that going to start beginning at the end of the year? How should we think about that project?

Well, what we talked about in the release was it could come as early as Q4. As you said, we got involved in a project early on, the process that goes to engineering contracting firms, and they do their work. So, there really in control of the progress, but we could see some bookings -- well, we actually saw one in the Q3 for a specific product, but we could see those bookings start to come online in the fourth quarter.

Okay, great. I'll get back in the queue, thank you.

Thanks, Hamzah.

Your next question comes from the line of Charlie Brady with BMO Capital Markets. Please go ahead with your questions.

Hi, thanks, good morning, guys.

Good morning, Charlie.

I just want to go back on the margins again here, just so I can try to understand this. If I look at your backlog today, the -- is the margin in your current backlog worse, equal, same than margins in Q3, excluding unusual items?

You mean versus -- I'm sorry, Q3 versus last year?

No, if I look at these -- the backlog you have sitting today --

Right.

-- the margin on that backlog, how does that compare to the margin you just had in the quarter -- in the third quarter if I don't count these unusual items that hurt margin?

Well if you look at it generally, it's pretty similar on the long cycle business, because we've seen that pricing environment fairly sustained. You look at the other three, we started to see an inflection in the third quarter in recovery. Probably didn't see a lot of price increase, may have seen some, but the other thing relating to margins you see in our Q3 ending backlog is more volume, which will give us better absorption.

Don't underestimate the impact of absorption. As you look at our business, Q3 historically has tended to be our lowest quarter in terms of absorption. So when you come into a quarter like this where we really felt a substantial impact from the pricing environment we've been calling out for a period of time coupled with volume, then you see the impact it can have on margins from this quarter. So, as you look at our backlog in this point in time, long cycle business, it's the same pricing, really, we've seen over the last number of quarters. And we're starting to see some opportunity in the pricing in our backlog on our shorter cycle businesses. Certainly, the increase in the aftermarket backlog that you can see from Kyle's slide, if you look at the increase in bookings, that's higher price or higher margin business. That's probably a good way to think of our backlog .

Okay. If I go to the absorption point for a minute, can you give us some granularity on the margin impact in Q3 that came from absorption issues? And then specifically, how much slid into Q4 that you just couldn't recognize in Q3?

Well, I'll let Dean give you kind of the breakout by the divisions, but part of what you can see that slid into Q4 is the increase in our finished goods. That's usually a good indicator in our cash flow business and our inventory. And again, this is issues around timing and sequencing into these projects. But Dean, you wanted to comment generally --

Yes, just to answer your question directly, Charlie, about -- about what we're seeing is roughly about a third. If you look at the engineered products division, as an example, about a third of that margin degradation is related to absorption. The industrial business has significantly more exposure to absorption given their platform and given the volume decreases that they've seen. The other thing that is driving absorption, obviously, our backlog, certainly in the engineer products division is up 9%, it's up significantly in the FCD businesses. There is a lot of activity in the beginning of the quarter. There's a lot of activity in the beginning of the quarter, there tends to be a lot of period cost. And when you're still working on long cycle product and you're still fleshing through that conversion, it makes the absorption that much more magnified. But about a third of the third quarter margin degradation overall is related to absorption.

Thanks. That's helpful. And with regard to the IPD and the production delays, are we through that, or are we seeing that continue into Q4 and maybe into Q11 -- 2011, rather?

Charlie, this is Tom. The -- I think -- we're not completely through them. We had a couple of plants that we're working with to improve, the realignment was heavily directed at the IPD side. And those actions are going to continue over the next couple of quarters. And just by their nature, they are somewhat disruptive to those operations. But I do think the -- with the new leadership team in place, they've got there first quarter under their belt, and they're looking to take, and they are taking various solid actions to mitigate the performance as much as possible and the disruptions as much as possible. But we've still got a couple of quarters to go through before I'd say we're fully on our feet again.

Alright, one more and I'll hop back in queue here. Just on purchase accounting, should we anticipate purchase accounting for Valbart on a go forward basis.

Charlie, Dick Guiltinan. Yes, you will. The purchase accounting adjustments we called out are related to the acquired backlog. Obviously, if you look at the information we've presented, the $12 million in sales isn't all of the required backlog the we disclosed. So, the way to think about that is sales of 12 -- the period were burdened by about $2.9 million of purchase accounting. We've got about $47 million in backlog to flesh through over the balance of the year or early part of next year but mostly over the balance of the year.

Okay. Thank you.

Charlie, one thing I wanted to comment, just clarifying Dean's comment as well. We break out volume absorption separately so on his comments around absorption, that's just pure plant absorption. There is also the volume component. So, if you add the two, volume and the absorption together, it's about two-thirds of the impact on the margins.

Your next question comes from the line of Mike Halloran with Robert Baird. Please go ahead with your questions.

Morning. Back on that absorption question. When we think about incremental margins on a go forward basis, how would you think about those for your IPD and EPD segments?

Well, as I think to Dean's comments, if you kind of break it out, at least what was the year-over-year and the sequential impact in the EPD division, most of it being volume related volume/absorption that as volumes come back,we'll start to get some of the benefit from those additional amounts. And keep in mind, if you think about the long cycle nature of our business and some of the efforts we've gone through around realignment, we -- even though we saw a lower project activity this year and you're starting to see it in our volumes and absorption this year, starting earlier this year, we started to see increased bookings. And so what we need to do is prepare for that ahead of time. You don't go out and just hire engineers on the spot, you've got to get ready for it. So, part of what you're seeing is that we kept the resources in place to start taking advantage of some of the increased load. So, as we look forward, we see that certainly the increased volumes are start to offset some of the margin impact you've seen from volumes.

And I think that makes sense. I'm just curious if for every incremental revenue dollar you start pushing through your P&L. Are you guys thinking 25%, 30% incremental margins on that, or something better?

Well, that's a good question. It really does depend up by plant. At a plant, you get to certainly levels of efficiency, and that's really what we're trying to plan for in our sales in operation and through our realignment. You can get to the point where actually the incremental margins are higher than that when you push them through. So, I would say, Mike, it's kind of a curved linear. You get better absorption as you get those plants full, and then you can actually get them to where they are in a sense over absorbed, and you're starting to have to manage through outsourcing some of your component manufacturing and the like. But -- so what happens is as those things increase in volume, they get more efficient.

Makes sense . And then staying on the EPD margin side, I'm just trying to get a sense for why margins were down sequentially. I know the revenue levels for EPD were comparable, if not even a little bit up, 3Q versus 2Q. Margins on an adjusted basis I think were down a couple hundred basis points. What drove that? Because on that comparable revenue level, I'm imagining that absorption is a little bit less of the issue. Was pricing a bigger concern there on a sequential basis, just with the backlog? Or were some of that disruptions impacting that

It was roughly half and half, volume and price, sequentially. And a lot of that price we called out last time keep in mind we really saw the last of our very high price to backlog go through in the first half of this year. So was about half and half. And it's tough to just look at revenues alone in terms of absorption, because it's where the plan is, where the revenues is coming from. But I'll just tell you it's half and half sequentially,

Makes sense. I appreciate the time.

Sure.

Your next question comes from the line of a Nathan Jones was Stifel Nicholas, please go ahead with your question.

Good morning, guys.

Good morning, Nathan.

I wonder if you could help us out with how much of the revenues were pushed out from the third quarter into the fourth quarter.

Yes Nathan, we talked about that. A lot of it you can see any increased in the finished goods in our inventory. That's kind of reflective, along with the fact that, keep in mind, we typically build in the third quarter for the fourth quarter. So it is not unusual that our inventory levels and our working capital starts to build into the Q4 and historically, you have very large shipments in Q4.

I think the reason that we called it out is just to let you know, and this is not unusual in the industry, is this happens from time to time that customers will not necessarily have it scheduled to take it in at that point in time. Certainly, when you want it to go out in Q -- at the end of the quarter, Q2. Q3. Q4 or whatever, their schedules may not be there accordingly. Now, this is not to say they're canceling them. This is just to say they're pushing out delivery of these projects. And we certainly have seen this before in the industry. It doesn't cause us concern, it's just a fact. So, that's just a trend, and particularly, if you take all these things and look at Q3 and again, it being our lowest absorption quarter, it has probably a more dramatic impact in this quarter than it does in our other quarters. And I think that's why we've consistently said don't call one quarter as a trend, we're not a quarter-to-quarter business.

Yes, it does seem though that during the quarter there were, just judging from the inventory build that there was, a fairly significant amount of what you felt was going to get delivered in the third quarter been pushed out to the fourth quarter. Help me get comfortable with that being an isolated incident and not being, revenues are getting pushed to the right.

Well, we don't want to sit here and say -- well, first, of all, we are aware of all these projects, were are very focused on them, we work with the customers to make sure they get deleveraged. Are we going to say absolutely nothing will push from Q4 to Q1? No. That can happen, it's happened before but also keep in mind there is a big significance to year ended not only in our business but in our customers. But also keep in mind, there is a big significance to year end, not only in our business, but in our customers' business as well. They typically run annual cash budgets, so there often is a desire, both on the customer and on our side, to get things cleaned up basically and shipped by year-end. And if you look over the last number of years, go before 2009 where we had very,very high backlog ,and if one thing didn't go out, you'd pull another thing and ship it out. Alright? As you go back into prior years, you'd see the same phenomena.

Okay. And just one thing on taxes in the quarter. Can you quantify the discrete benefit that you received in the quarter and give me an idea of what a good run rate is for the tax rate?

The discrete benefit around the currency?

Around the orders.

The tax. I'm sorry, I'll Dick talk to that. Thank, Nate.

Nathan, before I talk about the taxes, I'd just to follow-up on Mark's comment because I want to be sure you're clear on how we're thinking about that finished goods, okay? If you look at our sequential inventory June to September, you'll see a significant increase and you referred to a significant increase. But remember, there's about $50 million of Valbart in their too. So you've got to have a normalization of Valbart versus the ultimate build in finished goods, and it's not as significant, I think,as it your question may have implied.

Let me turn to the tax rate. What we said through planning and foreign operations, we look at the structural rate's about 28% and then the discrete items are episodic. They come as either a tax audit is completed or a statute lapses. And it's tough for us to predict exactly when a regulatory group will complete an audit or if the statute will actually lapse without the additional activity. So, we still think around 28% for the structural rate and as I said, our year-to-date rate was 26.8%.

Nathan, one thing to follow-up on, and we've said this before, these items are things we plan into. So, they aren't just necessarily windfalls. It's just the way you have to accrue taxes now around 1048 that it tends to be choppy. But some of the benefits we're getting are from some of the planning initiatives that we put in place that we invest money in. So, there's money in our SG&A that we aim to drive benefits in the tax line, and some of what you're seeing here is that.

Okay. Perfect. Thank you very much, I'll get back in queue.

Your next question comes from the line of Wendy Caplan with SunTrust Robinson Humpheries. Please go ahead with your question.

Thank you, good morning .

Good morning Wendy.

You've talked about passing on business that was unattractive. Can you talk about -- give us an update in the quarter on that? And was that a meaningful -- did that have meaningful impact on the absorption in -- on the manufacturing floor?

Well, that's one of the things we have to consider. You're exactly right, Wendy. We have remained disciplined. We have talked about the fact that on these large, large projects, capacity is chasing price out there at this point in time. And so when we evaluate it in our sales process, we look at issues around aftermarket opportunity, the strategic relationship with the customer, what the price is, how that's going to impact us because as you know, if we take an unprofitable job, you have to mark it through right then. And also, the impact of absorption as well. So, I would tell you that what we've seen has been fairly consistent over the past number of quarters is that we have to pass on opportunities that don't fit our needs in terms of the strategic nature of it, the profitability profile of being absorbed in our plant .

So, we would expect that to continue and obviously, if this were considered "strategic" whether again, it's related to the amount of aftermarket expected or the strategic nature of the business relationship with the customer, we would expect that some of that would still squeak into the backlog.

Well, some of that meaning what? A project --

Some of the last attractive projects.

Yes, it could be in the backlog. Just keep in mind if something is unprofitable when you take it in, you have to mark it through right then. You can't wait.

Right, right. And Dick, can you talk a little bit about working capital? 25% of sales this quarter. What's your expectation year end? And secondly, do you expect, given the $100 million of CapEx, and that implies about what, $50 million in 4Q and the pension contribution, I think you said $30 million to $40,000,000 for the year. Do you expect to be cash flow user or generator by the end of the year?

Hi, Wendy. Yes, there are a lot of questions in there. Let me try to go through them and if I miss one, cycle back with me.

Sure.

Let me start at the back end. I said on my remarks earlier, if you look at us, historically, we've always had a very strong cash flow order in the fourth quarter, in part just because of the magnitude of shipments that go out in the fourth quarter cyclically. So, we would expect that historically and expect going forward to be a significant generator of cash in Q4. You've mentioned the pension, we contributed through nine month $30 million of pension. That's what we'd planned to do, that's done. And on the CapEx side, we still look at about $100 million. I know that's back end loaded, but as I said in my comments earlier, some of the projects were pushed a little bit later so we could focus on realignment and some other activities, but we still believe we will get that spent.

When I think about the 25%, a couple things. One, I looked at the 25% and also tried to factor out Valbart a little bit, just so I can look at kind of our sequencing. And I also think about our working capital, not as much in relation to the last 12 months sales as I do as to where is our backlog and where is it going? And if you look at how our backlog builds over the quarters, us ramping up some of our inventory is typically consistent with how our working capital should perform as we build some raw materials in advance of projects and execute on our work in progress. And as we talked about earlier, the finished goods is up a little bit.

Okay. Thank you very much.

Your next question comes from the line of Kevin Maczka with BB&T Capital Markets. Please go ahead with your question.

Thank you. I guess Mark, I'd like to ask a couple more questions on the bookings. If you could just talk first about the aftermarket and then the engineered products. On the aftermarket, we had a nice sequential increase in Q2 and then a sequential decline here in Q3., How much of that is seasonal, or how worried should investors be about that?

I wouldn't worry about that, because there certainly is an element in the third quarter, as we've talked about. Think about what occurs in Europe. August is typically a vacation month. There's not a lot of service activity that's going on during that period of time. Also look for example in in the northern hemisphere, the power plant. Right? And the third quarter is typically when temperatures are typically are at the hottest. They're not going to bring the power plant down for servicing. So, there are elements around the Q3 that has historically kept our aftermarket light.

The fact is, if you look at the aftermarket we booked in the third quarter and just compared to a year or two ago in the quarters, we are above even some of the historically strong aftermarket quarters. This business is growing. So, we're definitely very encouraged. Look at the year-to-date numbers. The growth that we've seen year-over-year in our aftermarket has been very strong. So, we are very encouraged by the aftermarket growth. We're seeing that aftermarket backlog is building.

Okay, and then how about on the engineered products side, Mark? I know you mentioned there was a large order in Q2 that didn't repeat. Is that similar seasonal issue there, or is that more of a case where maybe you didn't win some bids you expected to, or the and markets just simply aren't cooperating yet?

It's not a matter of that, I think it's just the choppiness we've talked about. One large order -- let's say two years ago, we had a very large order in the third quarter. So, I would hate to say that we never see them in the third quarter. It can -- again, for the other reasons, it can tend to be maybe on the margin somewhat lighter on the project side. But these things are choppy. They're big projects. There is a long process to get these things identified, engineered, speced, bid and booked ultimately. And so it's just going to create some choppiness overall in these large project orders. And so if you look beyond that, what we've talked about is the run rate OE business and the aftermarket business, kind of peel back these large projects which we've identified for you has remained pretty stable, if not grown. And when we look over the horizon at the short cycle business, that's not these large projects. And we start to see some encouraging signs in that area that supports that base bookings level as well.

Okay. And then just shifting gears to Valbart, if I can ask one question there. Can you just comment on the margins there in the quarter? It looks like that was breakeven . It was, of course, much higher than that for the trailing year that you disclosed when you acquired it. How much of that is seasonality versus something else going

Let me just comment generally. We maybe acquisition in the middle of July, alright? You know everything that happens with an acquisition, it's a great business, and Italy is typically a place that goes on vacation during the month of August. So -- and we are working through our integration plans. If you look at it, just the sales that we posted for the quarter, that was basically just reflecting the month of September. And then -- but we have the full quarter of SG&A and other things that were sitting there. So, I certainly would not be alarmed by that. It is something we anticipated when we went into this acquisition. More and more now with the way you have to account for acquisitions, you basically have to, as Dick said, write up everything in your backlog in purchase accounting. So, as we flesh to that backlog that we acquired and more importantly, we're seeing additional bookings come in, as we flesh through, really over the first two quarters, it's going to impact the results. But when we get beyond that, it gets back to the characteristics of what we talked about. We're very comfortable with that here,

Okay, great. Thank you.

You're welcome.

Your next question comes from the line of Jeff Sprague with Vertical Research Partners. Please go ahead with your question.

Actually this is Mark Barbalato, thanks for taking my question. We covered a lot of ground here, but can you just give us a little more color on your M&A pipeline?

Well Mark, we don't really talk a lot about M&A specifically, especially any kind of specific transaction we're looking at. We just required Valbart. I think more and more, what we've talked about is we see opportunities to grow our business organically. If you look at the opportunities, short cycle business, the projects being choppy into 2011. But we certainly see opportunity when that choppiness subsides because there's a lot of demand for infrastructure out there. And we will carefully consider asset opportunities that fit our strategic needs. If you look at Valbart, that really fit our oil and gas strategy. It is a very highly engineered piece of equipment, and it's critical to the process. So, those are the things that we entertain from time to time.

Okay, thank you very much.

You're welcome .

Your next question comes from the line of Paul Mammola with Sidoti & Company. Please go ahead with your question.

Hi, good morning everyone.

Good morning, Paul.

If I can take you back to IPD for a minute, is on-time delivery there a problem and if so, is that sort of feeding into bookings pressure?

Yes, this is Tom Ferguson. Yes, some of our problems in IPD have led to lower on-time deliveries than we like to see. And I think that has put some pressure on, as I mentioned in my comments, some pressure on our opportunities because we are seeing some market growth opportunities that we were not at the moment able to take advantage of the way we'd like to. I would say that we'll see those on-time deliveries improve, back to a more normalized level as we get through the last couple of actions we've got to take. And -- but it has -- to answer a question as openly as I can, it did have an impact and it has had an impact with some of our customers willingness to give us some business. But we still do have considerable opportunities, and it hasn't affected all of our plants. So, we do have opportunities in the markets to take advantage of, and we are leveraging our IPD plants that have capacity and that are out operating well.

One of the things -- let me comment on that too. The opportunity of being able to focus on this division, if you looked historically and we provided some supplemental data at the beginning of the year, it ran around 11% plus or minus margins, and it participated heavily in hydrocarbon activity over the last couple of years. And as Tom commented last time, it didn't work on some of the product development around the chemical industry, which Tom has brought focus to. So, when you look at the opportunity in the IPD, and this is what gives us confidence is we're focused on it, we've identified the issue, we have a good leader in place and we've got the resources to bring to bear. We're working on the product development to take care of that, as Tom talked about.

We're working on the delivery issues, we're certainly all over that. And those markets are showing signs of recovery. So, there's three things that are certainly supporting this, and you've actually seen bookings go up. So, if there was no opportunity, those bookings would not have gone up, certainly sequentially. So, we'll get through these issues ,we've got them identified. They do take a little bit of time, but we fully intend to take advantage of market opportunities.

Okay, so to understand your timeframe, when you first commented on IPD, the operating margin I think was at 12% and you were looking to push that to 15% for the cycle. At this point, what's the timeframe to get back to even or to the 11% or 12% range from where we are now?

From our standpoint, as quickly as we can. But what Tom talked about is just realistically, these take certainly a quarter or two to work through these. We put a leader in place and basically, when you do that in a business, things change, and they change pretty quickly, and that does have an impact. We anticipated some of tha,t and we're certainly working through it. But as were look into next year, we're looking to drive improvement. And to your point, as I've said earlier, if the margins would have been around 10% in the quarter, it would have been overall, about a 70 basis end point to consolidated margins. So, believe me, we're very, very focused on this, and it's one of the benefits and opportunities of breaking it out the way we did.

Okay, and then finally, you had a good commentary around excess capacity and what you are seeing in terms of pricing. But can you give us a sense of what you think your market share is over the last nine months, given some of that capacity that is out there?

Keep in mind, a lot of that -- a lot of these project opportunities, there are certainly people bidding on them. But you've got to have the capabilities, the engineering capabilities out there. So, we've certainly won our fair share of these opportunities. If you look at the (inaudible) that we talked about earlier this year, a lot of that, we were successful because of our capabilities. So, I'd say overall, we're participating well in these projects that are out there. I certainly think we're taking share on the aftermarket side. So, in the aggregate, as you look across this, I think we're getting share increase. But do keep in mind, these projects are competitive.

Okay. Thanks for your time.

Your next question comes from the line of William Bremer with Maxim Group. Please go ahead with your question.

Morning, gentlemen .

Good morning.

Can you give us an idea of what particular end markets are having material pricing issues at this time?

I'm sorry -- what are having material issues connected with inputs or material pricing issues?

No, just in terms of pricing issues.

Well, again, on these -- going back on these large projects, they're global in nature. All the big competitors see them. So, it's going to be less region specific . Now having said that, when we talked about localizational requirements, it's really those competitors that have that presence there that are going to be able to compete on those projects. So, I'd say generally, if you're looking at pricing on these large projects, they're fairly competitively bid on a global basis.

If you look specifically in regions around the world, as Tom commented, in Europe and North America, it's less a matter of price, more around volume. On some of the aftermarket, they're doing some of the insourcing. These markets are starting to move up a little bit . We're starting to see some opportunity in chemical, and that will bring price opportunity associated with it. In the emerging markets of the world, as it these short cycle businesses start to cycle up, we see certainly pricing opportunities there

And then let's go into the Valbart acquisition. For SG&A, which -- what type of additional SG&A should we be using as the run rate going forward here?

Dick, do you have the incremental at SG&A for the quarter?

Yes. Bill, I think if you look at the materials Tom presented, the legacy or the acquired SG&A out of that third quarter was about $2.7 million, and at this point I'm not sure that I need to say anything else about run rate.

Yes, that has most of the quarter. It didn't have the 15 days in July.

Okay.

One thing that I would point out is on that slide 20, on the Valbart PPA numbers that you see there, it does include due diligence and integration costs, which obviously won't repeat themselves, of approximately $1.4 million in Q3.

So that obviously could be stripped out of those -- that PPA number you see there.

To your question though, takes the ops component and just multiply by six-fifths, and that gives you kind of the run rate on SG&A.

And also, can you give us an idea of what you're capacity is running at right now as a percentage?

Our overall capacity? We've talked about this, William, before. We don't necessarily have ubiquitous capacity. So, what I can to you is we may -- in some of our highly engineered plants, they may have been a little -- they may be under absorbed in Q3, but they're getting ready for some of the incremental projects that we've been booking. If you look across more of our industrial products, as Tom talked about, we have some opportunity to drive some capacity efficiency there which by -- in another word, means we have excess capacity. And so we have been certainly working on that more episodically. But I think one thing to keep in mind, we may be running below full capacity utilization in our highly engineered plants, but it is critical, these are important facilities to us, that we keep that capacity available to take advantage of the opportunity, because you don't put that capacity on overnight.

Right, good point. And then finally, I guess this is over to Tom. Can you give us a little color on the nuclear activity? The proposals out there quite strong, but yet you got net gas at $3.70 a BTU. How is it looking going forward?

I think that's a good question. And based on the price of natural gas, based on the capacities that the people are beginning to build up on the natural gas side, the question is coming up, could have an effect on the overall nuclear build business? It's a question that now everybody is beginning to ask. I'm not sure in terms of how that's going to end up, but at least through Q3, our nuclear activity has been pretty strong, the life extension and up rate business has been going well. China and certainly India have not seemed like they've pulled back at all as a result of that,because they want a good mixture of projects. But that is a question that is important to keep in eye on.

William, particularly in the areas that have a lot of natural gas resources, so when you look at the margin in the United States and places like Russia, when you look at some of the project activity they have there, they made tilt more towards combined cycle. And other areas where they may not have certainly an indigenous source of natural gas, it's kind of a toss up.

Okay gentlemen, thank you.

Your next question comes from the line of Jamie Sullivan with RBC Capital Markets. Please go ahead with your question.

Hello, good morning.

Good morning, Jamie

Just to follow-up on some of the backlog questions. I want to make sure I understand. So, the -- as we entered into 2009, that's when we started to see some price pressure, and that continued. It sounds like what you're saying is that it leveled out this year. But getting back to the backlog, does the backlog now represent what the current environment -- pricing environment is like, or is pricing was pressured throughout 2009 we're going to be shipping projects that reflect that downward trajectory of pricing, and we won't fully realize that until the middle of next year.

Well, I think for the most part, what you saw sequentially from Q2 to Q3 was a substantial impact from the pricing environment that we're in right now. As I said, in the long cycle projects, it will certainly remain choppy. But we have the other aspects of our business which show price opportunity. But it's been a competitive price environment. We started talking about that in the beginning, middle part of last year. It's just what you saw -- even coming into 2010, we had some of that backlog from the prior periods that came through that was very high margin backlog, and that tends to happen in this.

When you saw us going from ' 08 to '09, and we talked about projects getting delayed, that's typically when capacity starts challenging -- chasing price very quickly. So, it turns fairly quickly at that point in time. Oftentimes can overshoot and then tends to stabilize as they see that project opportunities will come. So, in choppiness, and we've talked about choppiness for quite some time, it creates a type of pricing environment that we've been in. As those things are to firm up and you start to see some growth, what happens is price starts to come back.

Okay. And I guess as we think about 4Q and just looking at the midpoint of what the guidance range implies for the quarter, it looks like there's a pretty nice sequential uptick in margins north of 15% adjusted. And it sounds like in IPD, the -- you'll continue to have some headwinds there on the margin side, so the margins will largely be driven by EPD and the valves division. And my thinking about that the right way?

Well, I think that's a good way to think about it. If you look in Q4, historically that's been a strong volume, so it tends to take away what we saw was the biggest impact in Q3 was the volume/absorption issues. The question and what area we really need to focus on is getting IPD, start driving those improvement capabilities, because that will drive margin improvement, volume, price independent.

Can you give just a little more detail on what the production issues were in IPD. Was it supply chain, was it product quality, was it -- what was happening there in those few plans?

Yes, this is Tom. We -- in two of our large sites, we implemented an ERP platform. And while we've been doing that relatively well in many of our sites now for the last two or three years, we had more problems in those sites than we anticipated. And so I think that had a disruption level to a couple of larger sites. The others weren't really as much operational problem as it was just lack of backlog and a lack of stuff to ship and stuff to work on. So, -- but we had roughly 40% of our plants that had those kinds of issues in IPD.

Plus, Jamie, there's just a natural impact when you change leadership and basically reset the bar. And on the margin that you've got to get people refocused during that period of time, and that's what happens in business. But very confident in the leader we have in place.

Okay. Thanks.

Your next question comes from the line of Karen Finerman with Metropolitan. Please go ahead with your question.

Hi, guys. You had touched on that you are seeing some of your customers do in-house servicing as opposed to using you guys. Can you talk about that a little more and give us some idea of how significant that is?

Yes, we've talked about that for a couple of quarters. What you see during these period of times, especially with an independent refiner, is they -- to manage their budgets, if they have mechanics resources available, they'll try to pull in some of the standard repair work or day-to-day work internally as opposed -- because they're just trying to manage their budgets as carefully as they can. That's not to say any of the high-end upgrades or anything like that they do internally. It's just more standard maintenance that they will tend to pull in. You'll see that. And now what you're seeing though is spreads are starting to widen, and these independent refiners are starting to gear up a little bit. And as they start to do that, the work starts to go back outside.

So, what we've called that out as a trend, really in the mature markets is that's usually a phenomena when you go into the type of economic situation that we've seen for the last year is a they'll tend to try to pull that work in some. So, when we look at our ability to grow our aftermarket business despite that headwind, it's a round, kind of tilting away the mature markets from the standard repair work and into value add work in the mature markets and the growth of our presence in the emerging markets.

Okay. One other question. Where are you on your buy back?

To date, Karen -- this is Dean Freeman. We've gone through about $240 million of our $300 million approved program, so we have got about $60 million remaining on the program.

Okay, thanks.

Your next question comes from the line of Hamzah Mazari with Credit Suisse. Please go ahead with your question.

Yes, thank you for taking my call again. I realize it's a quarter-over-quarter business, and I appreciate all the color. I'm just wondering if you guys can give us a direct number for implied margins at Q4. It seems like it's 15.5, but you guys haven't said directly. And then, if you could just tell us how much was postponed at Q3. I realize you said it may come in Q4. Just trying to gauge your confidence level, given there's still a lot of uncertainty out there and your stock's reacting to that. Thanks.

Yes . Well, I don't want to give anything outside the guidance we've given basically for the year, and if you net out the first three quarters, that basically -- you can do the math around Q4. And so that -- our guidance is our guidance out there. If you look historically, Q4 it tends to be -- has historically been our heaviest shipment quarter in our business overall. As you look at what was basically available for customers at that period of time,as we look into Q4, we know those projects, as I talked about, we're very focused on them, we're working with the customer. As I said also, from the customers' standpoint, oftentimes they have the incentive to go ahead and accept delivery in Q4 because in many emerging parts of the world, they have annual budgets and they have annual cash budgets. And those are the ones that you kind of use or lose.

Having said that, a lot of these are dependent on their, certainly there project timelines and if they don't need it, we run the risk from time to time that they may not take it at that point in time. I think what's important, and this is why we don't talk about a quarter-to-quarter business, is they will take the product . They will take the skid at some point in time. We will realize the value of that in our financial statement. From time to time can push from one quarter to another. And so I think it's just important to think about our business over rolling periods. These things are there, they are there ready to be shipped. And if you look at our cancellations year-to-date, they been very, very small. Cancellations out of backlog have been

Alright. Thank you.

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

Thanks. To follow-up on that realignment, did I hear you correctly? Obviously, it looks like another $10 million in Q4 to get here your annual number, but you said $7.5 million. Is that projects you already have planned and there's another little bit that's probably going to happen,but not specifically identified yet?

Charlie, it's Dick. That's exactly right. The $7.5 million is part of already approved programs, and we're looking at other programs right now pending approval of the executive team.

Can you give me some granularity on how that, either $7.5 million or how the $10 million would fall across the three segments?

I can. I can tell you that as you look up what we've done over the last, basically year and three quarters, we started last year with more of our sort cycle businesses taking costs out. We had a lot of backlog on our highly engineered sites. So, we were -- we kind of delayed implementing those initiatives towards the end of the year and into this year. And then also, we've taken the -- basically integrated pump and seal division, there were things associated with that and brought the focus to the IPD. So, as you look at it now, a lot of our realignment activities are oriented around the industrial products division.

So, you should expect that that'll be a focus of the remaining amounts that we've talked about. And again, what Dick did is he went through what we have planned and approved to date and the benefits that we see from that . So, one thing to keep in mind is if we are talking about amounts that we are considering and that haven't been formally approved, there will be benefits associated with that in addition to the $115

Okay. There will be something in all three business segments though, correct?

Yes, there probably is because just, Charlie, just probably more than you want to know, the way you have to account for this is when it's typically have asset related, it has to be -- it doesn't occur, you don't accrue for it up front like you used to historically. And so we have actions that even we took earlier this year that will creep into the fourth quarter, and some, a little may spill over into next year that relate to the disposition of assets. That's just when you have to account for it .

Okay. Thank you.

You're welcome.

There are no further questions at this time. I'd like to turn the call back over to Paul Fehlman for closing remarks.

Thanks, operator. I'd like to remind everyone that the webcast will be available on our website for replay in approximately two hours, and I'd like to thank everyone for joining us today on the call.

Thank you. Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.