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Flowserve Corp. (NYSE:FLS)

Q4 2008 Earnings Call

February 26, 2009 11:00 AM ET

Executives

Paul W. Fehlman - Treasurer and Vice President of Investor Relations

Lewis M. Kling - President and Chief Executive Officer

Mark A. Blinn - Senior Vice President, Chief Financial Officer, and Latin America Operations

Analysts

Michael Schneider - Robert W. Baird

Charles Brady - BMO Capital Markets

Scott Graham - Ladenburg Thalmann & Co

William Bremer - Maxim Group

Wendy Caplan - Wachovia Securities

Michael Salinsky - RBC Capital Markets

Operator

Good morning. My name is Ashley and I will be your conference operator today. At this time, I would like to welcome everyone to the Flowserve 2008 Earnings Conference Call. All lines have been place on-mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions).

Thank you. I would now like to turn today's conference over to Mr. Paul, Treasurer and Vice President of Investor Relations. You may begin your conference.

Paul W. Fehlman

Thank you, operator. Hello everyone and thank you for joining us. Welcome to Flowserve's 2008 earnings conference. 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 website and the accompanying presentation.

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

Joining us today are Lew Kling, President and CEO of Flowserve; Mr. Mark Blinn, Senior Vice President, Chief Financial Officer and Latin America Operations, Dick Guiltinan our Chief Accounting Officer. Following our commentary we'll begin the Q&A session.

Regarding any forward-looking statements, I'll refer you to yesterday's earnings release and 10-K filing and today's earnings presentation slides deck for Flowserve's Safe Harbor statement on this topic. All of this information could 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 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 Lou to begin the formal presentation. Lew.

Lewis M. Kling

Thanks Paul. It's a pleasure to walking you to our 2008 fourth quarter and year-end conference call. I'm pleased to report that the fourth quarter was another outstanding quarter for Flowserve with strong execution and outstanding financial results culminating in another record year for the company.

These record sales and earnings per share for both the quarter and the year demonstrate the continuing success of our operational excellence initiatives, the resilience of our diverse global end markets and the strength of our product portfolio and aftermarket platform. We also exceeded the previously announced high end of our 2008 earnings per share target range of 7.20 to 7.50 per share with the following result of 7.74 per share up nearly 74% over the previous year.

In addition, we generated very strong annual cash flow of over $400 million resulting in a net debt to book capital ratio of 5.2%. Through our constant focus on costs and efficiency, we have also continued to improve on both our gross margins and operating margins. We are also reaffirming our previously stated 2009 earnings per share target range of 675 to 750 per share, which includes the full effect of up to $0.50 per share in realigning cost for the year.

In addition, we announced last night that we've increased our dividend by 8%, reflecting our confidence in our cash flows, which allows us to return additional capital to our shareholders while still positioning us to maintain a strong balance sheet and financial flexibility for the future. There in the next few slides I'll discuss some of the company highlights both for the fourth quarter and the full year, as well as many of the primary performance metrics we've achieved during the period.

I have also planned to discuss what we're seeing in our major markets oil, gas, power, water and chemical; and also spend some time not only on the short-term trends we're experiencing, but also on the long-term drives of demand. I'd like to add we continually evaluate our operating environment and are careful to gather a wide array of internal and external views to support our operating and investment decisions. While it's fair to say that there continues to be uncertainty in the global financial markets, as well in our specific markets, I can say we see benefits and opportunities for companies like Flowserve that can differentiate themselves through superior product and service offerings, strong customer partnerships and a solid financial foundation.

As we have recently announced, we are also executing strategies to reduce and optimize certain non-strategic manufacturing facilities as well as lowering our overall cost structure with a rejected 2009 realignment price tag of the $40 million during the year. Over the past several years, we have been very operationally focused to deliver significantly improved results to our customers and share holders. And now we have the opportunity to use our strong cash position to more aggressively drive further cost reduction initiatives that will better support the alignment of our core products, markets and geographies.

It's also important to understand that our bidding opportunities have been remained active and that although we saw some delays in the customer order placement process during the fourth quarter, we have not seen a significant level of cancellations in backlog. Obviously in this environment, we will continue to closely monitor our opportunities as well as any potential delays or cancellations and plan to be prepared to respond quickly to any significant changes.

Slide three provides an overview of the notable highlights achieved during 2008. We delivered record annual earnings per share of 7.74, up nearly 74% over the previous year. This earnings performance was driven by a combination of robust sales and strong operating income performance, plus benefits detailed in our Form 10-K reported of $0.38 per share from tax matters and $0.22 per share from foreign currency activities.

We also delivered record annual bookings in excess of $5.1 billion, up over 18% or 13% excluding the impact of currency and the acquisition of the remaining 50% external interest in the company's Niigata Worthington joint venture. In addition, we had record sales for the year of nearly $4.5 billion, up 18.9% or 14% excluding the impact of currency and the Niigata Worthington joint venture acquisition. With record bookings of over $5.1 billion and record sales of nearly $4.5 billion, our year-end backlog increased 24% to a record $2.8 billion.

We also continued to perform on our objectives of improving our operating margin, gross margin and SG&A performance. Operating margins improved 280 basis points to 13.7% and gross margins were up 210 basis points to 35.3%. We also continue to drive SG&A efficiency by taking out an additional 80 basis points of SG&A cost achieving an SG&A level of 22% of sales.

Finally, our cash flow generation was particularly strong with cash generated from operations of $406 million. This allowed us to invest approximately $130 million in the business, buyback a total of $165 million in Flowserve's stock significantly increased our dividend paid out to our shareholders during 2008, support several other important uses of cash and still achieve a net debt to book capital ratio of approximately 5% at the end of the year.

Slide four shows the highlights during the fourth quarter, where we delivered record earnings of $2.03 per share, up over 21% versus the fourth quarter of 2007, including an $0.18 gain from foreign currency activities. Bookings during the quarter were $1.02 billion, down 8.2% versus the fourth quarter of 2007, including approximately 7% currency headwind which result in almost flat bookings on a constant currency basis versus a year ago.

I'd also like to note that this was the eighth consecutive quarter of bookings in excess of $1 billion. And despite all the economic uncertainties in the news, this was the second highest fourth quarter bookings level ever achieved by the company, demonstrating the resiliency of our sales force and the strength of our product lines. We also executed extremely well on manufacturing throughput in the fourth quarter driving sales of $1.17 billion, up 5.4% or approximately 13% on a constant currency basis, due to an 8% currency headwind.

Again our margins improved during the quarter with operating margins up 120 basis points to 13.6% and gross margins up 220 basis points to 35.2%. I also wanted to point out that SG&A increased by 90 basis points versus the fourth quarter of 2007 to 21.9%, which is equivalent to an effective 110 basis point decrease, when we exclude the 2008 discrete bad debt accrual of $703 million and a 2007 gains from an asset sale and discrete legal matters.

And finally, we achieved extremely strong cash flow from operations of $211 million for the quarter allowing us to finish the year with over $470 million on the balance sheet. Slide five covers the key financial metrics in the traditional of P&L format for both the fourth quarter and the full year. I fit most of these highlights already, but I do want to point out that the effect of foreign currency in the fourth quarter results. As you can see in constant dollar terms, our fourth quarter bookings sales, gross profit and operating income were much stronger than the as reported numbers.

Slide six, which I'm sure is familiar to many of you demonstrates the quarterly progression of bookings growth over the past five years. As I mentioned earlier our bidding opportunities have remained active, though we did see some delays in the customer order placement process during the fourth quarter due to both customer uncertainty as well as some re-bidding of projects that have not yet been booked, as customers are trying to capture lower commodity prices, materials such as steel that comprise a significant amount of cost of new projects like refineries or chemical processing plants.

I'd also like to point out again that on a constant dollars basis, bookings in the fourth quarter were down only slightly more than 1% versus the fourth quarter of 2007. And I'd also like to emphasize again that we have not seen a significant level of cancellations in our backlog and we believe that we have negotiated terms and conditions in our contracts to protect those from any significant negative impact if cancellations where to occur.

Slide seven shows the strength of our bookings performance on an annual basis over the past five years and serves as a reminder that Flowserve is not a quarter-to-quarter business as the large project bookings can and always have been somewhat lumpy throughout the year. Slide eight shows the quality progression of our strong sales growth over the past five years. Just as a reminder, the as reported sales in the fourth quarter of 2008 shows a 5% improvement over the fourth quarter of 2007; but would have been approximately 13% in constant dollar terms without the 8% currency headwin.

Slide nine shows the five year annual progression of sales almost exclusively on an organic basis, which demonstrates how well positioned the company products and services are for the markets we serve as well as how our internal investments in CapEx and in R&D have been able to support the growth of our business. Slide 10 sums up the annual performance of several of our other key metrics over the past five years. Beginning with earnings per share, we have been able to drive significant improvement in the bottom line through a combination of strong top line growth and our constant focus on costs, operating efficiency, portfolio management and our investments to drive low cost manufacturing and process standardization.

We've also benefit from tax planning, currency hedging and a well managed balance sheet. The result has been to significantly and successfully leverage our revenues to nearly a 15 times increase in earnings per share while sales has increased less than two times during the same period. Our year-end backlog has also grown significantly over the past five years and should give us momentum in 2009 to help push us through any order delays I described earlier.

Our return on asset success is perhaps the best indicator of our ability to drive operational leverage over the past several years through our lean initiatives, our continuous improvement, our efforts to use low cost sources, and our strategy to use Multiple Work Shifts rather than adding Brick & Mortar. In addition as I have discussed many times we have focused heavily on cost reductions and continuous improvement with the goal of reaching a 15% operating margin by the end of 2010. As you can see we continue to have a track record of driving improved operating margin and we will continue driving for future improvements in the current cycle.

And finally as I described earlier, we have driven a strong balance sheet through a disciplined strategy of simplifying and reducing our debt load and providing a platform of financial strength and stability to help weather any economic cycle and be positioned to take advantage of any potential opportunities that may emerge.

Now, let's take a look at the outlook for our core served markets. Slide 12 is one I have shown during the previous discussions, which illustrate the multiple drivers that influence global spending on infrastructure related projects, such as those in oil, gas, power, chemical, and more other industries.

Historical, most of the investments in these infrastructure projects were done by large independent U.S. or European companies to create shareholder value and internal rates of return. We now find these investments are being driven by other factors as well, including a change in demographics the ageing of infrastructure worldwide, desire to become independent from other countries, and the economic growth required for job creation and social stability.

For example, ageing infrastructure eventually, reaches a point where it must be addressed. This spent can show up as either aftermarket type business or as major capital projects in order to upgrade a facility to handle new type of products or to meet revised environmental or operating regulations. Demographics can also include investment regardless of the economic cycle. Fundamentally, as population grows particularly in urban areas, the infrastructure has to be developed to support this growth. This is one of the primary driver's for the large projected investments in power generation over the next couple of years. Therefore, what I'd like you to take away from this slide is that even in tough economic times, several of these drivers could continue to support increased infrastructure spend.

Slide 13 gives an outlook for the oil industry from a demand and supply perspective. As I have previously stated, this industry is experiencing delays in some of the planned major projects around the globe due to the overall uncertainty in the market and the opportunity to reduce project costs from lower commodity prices such as steel. There are also some oil companies announcing reductions in planned capital spending in 2009, compared to 2008. Most of these companies are independent refiners such as Bolero and Tessaro. ConocoPhilips is one of the major integrated oil companies that have also announced plans to reduce capital spending in 2009.

On the other hand, many of the other major oil companies such as Exxon Mobil, Shell and Chevron have announced their intentions to continue with their capital spending plans based on the fact that these investments are for longer term growth that they feel would be required three more years from now.

In fact Petrobras has recently announced plans to increase their capital investment to a $174 billion over the next five years. Therefore we are continuously staying in contact with our end user customers, support their investment planning schedule even as it changes with current conditions. On a global scale we have seen historically high growth rates over the past few years especially as China and India's demands surged.

As we have recently seen projected demand growth has softened significantly over the past several months. For example at the beginning of 2008 the consumption growth rate for oil was projected to increase approximately 2 million barrels per day over 2007. By the fourth quarter these projections changed to a point of basically showing no growth from 2007 to 2008. The January 2009 demand forecast from the Energy Intelligence Administration, now shows demand through 2010 remaining relatively flat compared to 2007. This drop in demand is driven primarily by two areas of consumption; these are transportation, and non-energy use. The global news has been reporting for several months the decline in travel and cargo transport. The non-energy use is related to feed stock with petrochemical and chemical facilities.

These industries have gone through fairly aggressive destocking programs, which reduces their inventories, therefore driving down demand for more oil. But there are a few bright spots to remember. The first is the long-term outlook for oil remains favorable. The second is that factors contributing to short term demand in the situation could rapidly change in a favorable direction with a renewed positive global economy and the third is that long-term investment is not driven by the spot price of oil, but rather by the projected long term supply and demand forecast in addition to the political and social needs of the country.

On the supply side of oil, it is important to note that many of the current producing fields are reaching or have passed their peak production point. Meaning they are now experiencing a rate of depletion on an annual basis. The 2008 World Energy Outlook report projected this depletion rate at approximately 6.7% per year. This will require new fields to be developed and brought online just to maintain current production levels. Many of these new fields require more complex recovery methodologies than in the past, such as deep sea recovery, tar sands recovery and heavy crude recovery. Flowserve's engineering and technical capabilities are always serving many of these advanced recovery methodologies.

Slide 14 is another illustration that we have shown in past presentations. We continue to monitor the oil industry to better understand where our opportunities exist. Since as the price of oil moves, the amount of oil investment generally moves as well. As we have previously discussed, oil investments usually continue in most areas until the price of oil stretches the economics by either being too high or too low. It's also important to note that the optimally priced oil range varies with different type's oil and for different regions of the world. It is far more costly to get oil out of the tar sands of Canada than it is to produce the light sweet crude from the Middle East. Therefore there isn't one specific price range driving or challenging spending.

What it is more important for the industry is the stabilization of oil pricing. This allows for a better understanding into the financial returns of the proposed investment. With a volatile market for oil prices, many capital investments are difficult to properly evaluate and as we have stated many times, our customers do not make long-term investment decisions based on the spot price of oil. What they do want to see a stable market place to better evaluate their planned investments going forward.

Slide 15 gives an overview of the supply and demand aspects of natural gas. The long-term demand forecast for natural gas remains favorable while the short term demand fluctuates primarily with the price and the ease of access to natural gas. When a good delivery infrastructure exist and the marketplace is favorable, the use of natural gas increases. In addition, when and in the issue of carbon emissions, natural gas rises as a preferred fuel source for it's clean burning properties. Also as urban populations grow, the need for natural gas to heat homes and to supply commercial enterprises supporting the urban population, grows as well. On the supply side, the challenge is not finding or recovering the gas. It is getting a produced gas to the consumption market in an economic manner.

Pipeline delivery is the most cost effective approach over short distances. However as the transport distances reach and exceed 1500 miles, pipelines becomes less economical and sometimes even impractical. Since the distances between the net producing regions such as the Middle East, North Africa and Russia and the net consuming regions such as the Americas, Europe, and Asia are greater than 1500 miles, alternatives to pipeline transports are necessary. Therefore there is an increasing investment in liquefied natural gas as a method of long haul transportation. This process produces a liquefied state which allows as much as 600 times the volume to be shipped versus gas in its natural state. There are a number of liquefaction and regasification plants planned over the next several years and Flowserve's engineered product solutions combined with our cryogenic capability, provide the opportunity to gain market share in this very important market.

Slide 16 takes a look at the power industry. On the demand side, significant worldwide growth in generating capacities projected going forward. The 2008 world energy outlook report forecast between 2007 and 2030, new capacity would have to be added which is approximately equal to the global capacity online as of 2007. The data also shows that almost 90% of the growth in demand will come from the developing regions of the world, with China and India leading the way. The capacity additions projected by the 2008 world energy outlook for China alone are greater than the current iron (ph) line capacity of the United States today. From a supply perspective, this demand growth is projected to be met through a variety of generating technologies.

Coal and natural gas are still forecasted to be the primary fuel sources for power generation, but the projections for nuclear power generation are showing strong increases worldwide. The fuel sources with the highest projected percentage growth rates over the period are the renewables; such as solar, geothermal, biomass, hydrogen and others where we have directed significant levels of our internal and company funded investments.

Slide 17 illustrates the dynamics of the water industry. The demand side of water is well understood but the real issue is the availability of fresh water sources to meet the projected needs of the ever increasing demand. As can be see in this slide, the total water on our planet consists mostly of salty water. In fact 97% of all water on earth is salt based. The remaining 3% is fresh water. However nearly all of it is not readily available for use. Almost 70% of the source of fresh water lies in the ice and snow around the globe with only about six-tenths of a percent, of the 3% of the fresh water being easily assessable and therefore usable today. With this in mind, along with the fact that many areas of the world, which need fresh water are not near fresh water sources. Therefore new methods of obtaining, producing and transporting potable water will be required to meet expected demand. The industry forecasters believe that desalination is a key solution to this problem. Global Water Intelligence forecasts significant growth in desalination over the next decade.

We believe there are investments in providing engineered solutions through both thermal processing and salt water reverse osmosis, positions us well with the projected increase in investment opportunities to desalination. We also believe that we have the leading flow control technology for moving large sums of water as well as water management, which will allow us to pursue major water projects around the globe that are focused on managing the movement of water from sourced locations to the areas where it is needed the most.

Slide 18 shows the concerning conditions in the chemical industry. With this industry's demand having close coupling with the overall consumer spending, has experienced a more significant downturn than the industries we have just discussed. Many of the chemical majors have seen demand for their end products drop at a significant rate. This is driving a number of the major cost reduction actions, examples of which are shown at the bottom left of the slide.

As you can see the number of staff reductions and plant idling's or closures is significant. But there is still a few bright spots in the chemical industry from our perspective as a supplier. One is the planned increase in maintenance and upgrade spending to optimize the facilities, which will continue to operate in order to increase efficiencies and market competitiveness. Another area of opportunity is in the developing regions, which continue to invest in building infrastructure to support their current and future indigenous requirements. This includes investments in the Middle East, India and Asia. That's why we believe our investments in expanding our presence in these developing markets, our specialty products designed for chemical applications, and our after-market infrastructure positions us well to pursue the projecting investment opportunities, which should continue through this economic recessionary period in the chemical industry.

Slide 19 shows an overall view of what we feel differentiates us from our competitors. There are two key areas, which anchor this differentiation. The first is our customer centric culture. Not only do we focus on the buying decision drivers of on time delivery, product quality, and local service, but we focus on working very closely with our customers. The second anchor is a strong balance sheet. What is truly interesting is the apparent recent growth in importance of a strong balance sheet to our clients as they reevaluate the strength of their supplied base in this uncertain time. We leverage the strength of these two anchors to our end user strategy, a drive for technology leadership and our global footprint supporting our customers, our partners, our manufacturing operations and our strategic sourcing initiatives.

As you look at slide 20, you can see the range and diversity of our recent global projected wins. We had been successful across our markets and regions around the globe as our customers continue to demonstrate long-term trust in Flowserve as a dependent business partner. Now that we've looked at the market and what motivates our customers to buy from us let's look at our attention to what we're doing at Flowserve to help ensure our future success. In previous discussions we have referenced on going operational excellence initiatives, designed to improve our overall performance on a global scale. We continued to focus on our key strategies to enhance our ability to take advantage of market opportunities no matter what part of the economic cycle we are in.

Our management teams remain focused on leveraging low cost countries to source materials, locate manufacturing and provide engineering services. We continued to work to minimize our fixed cost structure and create more flexibility by utilizing temporary employees and leveraging a Multiple Shift Structure versus adding more Brick & Mortar. Further integrating our global ERP systems and developing global engineering platforms to provide more efficient sharing of information and quicker response time by our operations to customer needs around the world. We have also strengthened our focus on process standardization around the globe, driving to common machine centers and engineering procedures to help improve consistently, lower operating costs and increased speed to market.

On a global scale, we continue to evaluate our operational structure to ensure we are working to optimize our assets and where applicable reduce our non-strategic manufacturing footprint. We believe that effectively driving all these key strategies around the globe helped position us to continue to perform well. Slide 22 shows an overview of our aftermarket growth strategy. The chart in the left represents our aftermarket revenues from 2004 through 2008 and as you can see, highlights significant growth during this period.

We believe this growth is a direct result of our end-user strategy, which focuses on creating greater value for our customers through expanded after-market services. By maintaining proximity to our customers through our use of the network of over 150 quick response centers worldwide, working with our customers to optimize their equipment operation for both Flowserve and competitor products, training their people on our products and minimizing their downtime, we can develop long-term relationships that should provide continued business opportunities into the future. This after-market growth strategy is truly one of the aspects of Flowserve that helps make us different, and along with our global diversification, positions us to continue to win business through all phases of a business cycle.

Slide 23 takes a look at many of our developments around the world in alternative energy sources. We have several active development projects either underway or in the advanced stages of development. These include projects to add products for applications in clean coal, solar power, bio fuel, geothermal, wind and compressed natural gas including liquefied natural gas that we discussed earlier. An exciting addition to this portfolio was our recent announced commercialized systems for natural gas and biogas European refueling stations for automobiles, trucks and buses through our Flowserve compression systems joint venture launched in 2008.

This joint venture with Linde in Austria provides Flowserve with the opportunity to build refueling systems utilizing Linde's patented ionic compression technology. Our initial focus has been on compressed natural gas and biogas stations with the opportunity to expand into compressed hydrogen fuelling stations as the market develops.

With the European unions pushed to replace 20% of petroleum based products with alternatives, we believe that we have a great growth opportunity in this emerging market. As we have discussed in the past and repeated in this presentation, we believe there will be continuing investments in infrastructure, development and aftermarket support during all phases of the business cycle.

This is driven by the obvious need to keep oil and gas flowing, water and critical chemicals available and electricity on. We have also found that customers will continue to select suppliers who deliver on time, deliver an effective product and can provide a global support network even during challenging times. As I have mentioned earlier, an interesting addition to this list has risen out of the current economic recession. Many of our customers are now asking for a status of our balance sheet so they may confirm that we will be around for the duration of their project and their continuing operations.

Therefore we've added a fourth dimension to what we believe customers will continue to buy Flowserve product and services and that is our ability to maintain a strong balance sheet and operate through the long haul. I believe that our leadership and strength come from our demonstrated ability to deliver on these core customer requirements which in turn positions us well to continue to be successful in the future. And now I'd like to turn the discussion over to Mark Blinn for a further review of the financials.

Mark A. Blinn

Thank you, Lew and good morning everyone. As Lewis discussed, we had a terrific year in 2008 and while we all faced challenges in the current global economy, I want to reiterate and highlight a few key trends in our performance that give us confidence as we face market opportunities and challenges. The first is our strong year-end back log. We ended 2008 with 2.83 billion of backlog and we expect to ship over 87% in 2008 2009, excuse me.

Anyway the second thing is the strong growth of our aftermarket business, with continued strong execution of our aftermarket strategies. We saw our aftermarket business e grow in the fourth quarter, 5% and for the year 14%, including a full year growth in FPD of 16%. As you look at aftermarket revenues, there are $1.6 billion in 2008 representing a 33% increase over two years.

Next an important measure of efficiency, execution and improvement of our operating platform is our significantly improved operating margin. As Lew mentioned, operating margin expanded 280 basis points driven by operational excellence, migration to higher end products, improved pricing; volume leverage resulting in a gross margin improvement of 210 basis points despite a 200 basis point mix to more original equipment. We also saw improvement through cost containment, as SG&A reduced is 80 basis point as a percent of sale. I will note that corporate costs were less than 300 basis points of sales at 276 basis points.

In the fourth quarter as Lew mentioned, we saw an increase of 90 basis points and SG&A to 21.9%. This was impacted by a discrete 2008 bad debt accrual of 7.3 million or 60 basis points, as well as comparing the prior year, we had gains of $15 million in the fourth quarter of '07 which didn't recur, which had about a 140 basis point impact. We've also generated strong cash flows and we've done this while continuing to take prudent action with our cash, including using $64 million to eliminate our factoring arrangements, investing 51 million in our U.S. pension and using 27 million in our Niigata working capital.

Our leverages declined to 5% net debt, book-to-book capital resulting in a very strong balance sheet, which gives us stability and flexibility. Finally we have improved our tax book profile through tax planning. We saw benefits of $0.38 in 2008 with a full year tax rate of 25%. Bottom line is that the company is well positioned for 2009 and beyond.

Before discuss the financials, I want to review currency. As we discussed previously about two-thirds of business is international and we do use forward currency contracts to hedge future cash flows. When we gave guidance in October, we had anticipated a currency headwind in Q4 earnings, which did not fully materialize. We'd expected $0.40 and about half that materialized. This was driven by the strengthening in the Euro particularly in the last two weeks of the year and the strengthening of the Japanese yen. As well other un-hedged currencies weakened during the quarter providing a benefit. Since the end of 2008, a lot of these currencies have weakened back to level from the last call. It is important to note that our '09 guidance reflects current currency rates.

Turning to slide 29 and looking at our full year and quarterly results, you can see that year-over-year, we did get a benefit from currency, resulting from a weaker dollar and in the fourth quarter it was negatively impacted from a strengthening dollar. Bookings were down 91.2 million to 1.24 billion. Sales increased 59.6 million to 1.169 billion and gross margin in the quarter improved 220 basis points to 35.2%. SG&A in the quarter increased $22.5 million to $255.7 million. If you exclude the impact of the bad debt and the benefits in '07 SG&A was flat. Interest expense of operating income increased $21.6 million to 159 million and operating margin in the quarter improved 120 basis points to 13.6%.

Interest expense for the quarter and the year were down primarily because we had a step down in our credit facility. We saw lower market rates and lower balances. The result for the quarter earnings increased $18.5 million to 114.4 million and earnings per share increased $0.36 to $2.03. For the year, bookings increased 787 million to over $5.1 billion and sales increased $711 million for the year to just less than $4.5 billion. Gross margin improved 210 basis points to 35.3% despite a full year mix shift of 200 basis points to more original equipment. SG&A increased $128 million to $984.4 million and I'll point out that over half of this was selling related expenses and SG&A as a percentage of sales improved 80 basis points during the year.

Operating income increased $203 million to $613 million representing almost a 50% nominal increase and more importantly continuing with three time's leverage of sales. Net earnings increased $186.6 million to $442.4 million and earnings for the year increased almost 74% of $3.28 to $7.74. It is important to point out that incremental operating margins for the year were a strong 28.5%.

Turning to the pump divisions, the pump division had a great year with strong orders, growth in aftermarket and strong margin improvement. Looking at the quarter, bookings were down and $94.7 million to $587.4 million, on an organic basis, there were down 10%. Sales increased $26.2 million to $681.3 million and gross margin for the quarter improved 230 basis points to 30.9%. Strong improvement gross margin with operational excellence, pricing and absorption driving it despite at 200 basis point mix shift. SG&A in the quarter increased $10.1 million to $101 million and if you exclude the benefit of 2007 for an asset sale and a legal resolution, SG&A was flat. Operating income increased $11.5 million to $109.8 million and operating margin for the quarter improved 110 basis points to 16.1%.

Looking at the full year in the pump division, bookings increased $489 million to over $3 billion and sales increased $490 million to over $2.5 billion. Gross margin improved 280 basis points to 31.3% and SG&A increased just less than $70 million to $397 million with over half of this being selling related expense. Operating income improved $117 million to $391 million and operating margin improved 240 basis points during the year to 15.5%.

Turning to the Flow Control division, the valve division had another great year highlighted by strong pipeline growth, continued margin expansion and prudent cost controls. For the quarter, bookings were relatively flat at just slightly less than $300 million. This did include a 7% currency headwind. Sales for the quarter increased $31.6 million to $346 million and gross margin improved 140 basis points to 36.4%. SG&A increased $8.79 to $75.2 million and if you include the impact of 7.3 million of additional bad debt reserve, you will see that SG&A was relatively flat for the quarter year-over-year.

Operating income increased $6.4 million to $51.5 million and operating margin improved 60 basis points in the quarter to 14.9%. For the full year in the valve division, bookings increased $241 million to just slightly less than $1.5 billion and sales increased $218.5 million to $1.381 billion. Gross margin for the year improved 110 basis points to 36% and I do want to note that this is the fourth year of consistent gross margin expansion. SG&A increased $38.4 million to $287.3 million and over half of this spend was selling and R&D related. Operating income in the valve division for the year increased $54.7 million to $218.4 million representing an operating margin improvement of 170 basis points to 15.8%.

Turning to the seal division, the seal division also had a great year highlighted by solid top line growth, sustained high margins and continued investment to expand their global platform. For the quarter, bookings of 155 million and sales of 158 million were flat to 2007. This did include an approximate 7% currency headwind. Gross margin in the quarter improved 430 basis points to 47.9%. SG&A in the quarter increased $5.5 million to $46.7 million. This does include $1 million of realignment costs taken in the fourth quarter. For the quarter, operating income increased $600,000 to $30.7 million and operating margin improved 60 basis points to 19.4%.

For the full year bookings increased $76 million to $669 million and sales increased $89 million to $654 million. Gross margin improved 110 basis points to 45.8% for the full year. They have consistently held these margins at or about 45% for a number of years. SG&A increased $30.5 million to $179 million and well over half of this was selling, investment in systems and investments in QRCs. Operating income for the year in the seal division increased $15.8 million to $127.3 million and operating margin declined slightly to 19.5%.

Now I'll look briefly at the balance sheet and cash flows. Looking at primary working capital on slide 33, you can see that receivables during the year increased to $142 million. I do want to point out this does include the impact of $64 million of eliminating factoring -- factored receivables. Inventory increased $155 million during the year. Most of this was driven by the work in process in the pump division. And very important, advanced cash increased $176 million during the year, which not only helps us offset working capital, but helps us secure our backlog.

Looking at our cash flows, we had a very strong fourth quarter resulting in the generation of $411 million of cash during the quarter and $406 million of operating cash flow during the year. We also invested in our company spending $127 million in capital expenditures. This included expanding our test capabilities, investment in India, Brazil, standardizing our machinery to reduce costs, investing in strategic product expansion and investing in R&D systems. We also returned $216 million to the shareholder in the form of dividends and share repurchases. If you look at some metrics around our balance sheet, you can see that we had plenty of debt capacity and cash on hand, which provided us with $776 million of available capacity

Looking at 2009 on our plans for cash, we do estimate the capital expenditures would be around $100 million in 2009. This will include investment in the Middle East, additional QRCs, investment to support our nuclear business, investment in IT systems, and expanding our capabilities, in low cost manufacturing facilities. As Lew mentioned we also increased our dividend by 8%. We also have availability under our current share repurchase program, we do estimate U.S. pension contribution of 55 to 75 million, and we do intend to spend up to $40 million in realignment costs. With all these investments above we still have the opportunity for strategic acquisitions.

Before I go to 2009 outlook, I want to spend a moment on the realignment cost and cost optimization. It's important to point out that this has been an ongoing effort, but we are going to accelerate it into 2009. As Lew mentioned, this involves reducing and optimizing certain non-strategic manufacturing facilities. This will also include headcount reduction, through performance management and reductions in force, continued focus on SG&A expense reduction, and accelerating continuous improvement. As we execute this program, we will update you during the year.

Turning to 2009, as Lew mentioned, we have reaffirmed our full year 2009 EPS target range of 2009 EPS target range of $6.75 to $7.50. This does include the up to $240 million of realignment costs. We also believe that we're well positioned to capture aftermarket businesses we have in the past. We've got a very strong backlog, a very strong balance sheet. We will be accelerating realignment actions and we also stayed focused on SG&A cost, driving to our goal of 20%. As I mentioned before, we believe this company is very well positioned for 2009 and beyond. And now I'll turn it over to Paul for questions and answers.

Paul W. Fehlman

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

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the line of Mike Schneider with Robert W. Baird.

Michael Schneider - Robert W. Baird

Good morning guys

Lewis Kling

Good morning Mike.

Mark Blinn

Good morning Mike.

Michael Schneider - Robert W. Baird

First I guess I need to say that Lew and gang its just an incredible transformation you guys have done with this business over the last seven years. So, I have to give you due plenitude but this is truly incredible that you arrived at this point in the cycle with basically no debt and highest margins you have seen and best global platform you have seen in this company's history.

Lewis Kling

That's right, you know Mike thank you. And you do have that historical perspective and that's why we are optimistic going into these market opportunities and challenges.

Michael Schneider - Robert W. Baird

So on to the business now I guess the question I have is really around the aftermarket, if we look at the key difference you guys have invested an immense amount of money to try and cushion this business in the down cycle with an aftermarket presence. And during the quarter it looks like aftermarket revenue was just up a point or two. Did you see any change in maintenance schedules or maintenance budgets at your major customers and the orders being up 5%. That's a clear deceleration, just maybe give us some insights as to what's going on in this period with the refineries and other customers in this aftermarket business?

Lewis Kling

Yeah, I mean, let me answer the question straight on. I mean the 5% in itself didn't concern us in terms of the end of the trend or any indication that we are not executing on those strategies. I mean as you can, as you can imagine Mike and I think you mentioned in it in your note, with what happened in the fourth quarter of last year, I think it basically paralyzed everybody. And so we are actually quite pleased to see that we continued to execute well and got 5% growth in that period of time and what we feel is, we are going to continue to execute on our strategies and drive to take share and ultimately with the market goes as well. So as we said before, we can call one quarter a trend especially a quarter like we had in Q4 where all companies in the global economies were facing a tremendous amount of uncertainty

Michael Schneider - Robert W. Baird

And as you budget say the next two, three years of an immediate forecast if we assume project activity remains very soft and energy prices stay roughly where they are today. Would you in any given year expect your aftermarket business to go backwards even modestly or is this a business based on the installed base over the last few years that has embedded growth even in a pessimistic scenario like that?

Lewis Kling

See I think that the latter point is the point here is that a lot of the installed base that you've seen that we've been putting into place or still are putting into place is really going to come online for aftermarket this year and beyond. So we've talked about it. The benefit of the installed base that we put in we think will start to benefit us going forward. Also keep in mind a lot of the growth that you've seen in the aftermarket business in the last year and a half is not just been on the heels of our installed base. It's been capturing aftermarket opportunities from customers, competitors and the local replicators as well. So we still think the aftermarket opportunity is out there for us to continue to execute.

Michael Schneider - Robert W. Baird

Okay. And then on the pump project business, you mentioned cancellations have been fairly minor and it appears to be in the numbers. The outlook though for pricing on projects, we have had companies even a competitor this morning mentioning that they have had quotes coming back for requotes as ENCs (ph) were to capture lower input cost. Can you describe just what is indeed occurring with project pricing and if you can put any ranges around it to give us some sense as to whether we're talking double-digit price declines or relatively modest price declines?

Mark Blinn

Well, I mean a couple of things, as I pointed to the advance cash and Lew talked about our contracts, I mean we have firm fixed pricing in these contracts. Now what we -- as Lou mentioned, what we certainly have seen is these projects may have been budgeted in the beginning of last year and as they went to go bidding, the world (ph) incentive change.

And by the way so did ours. A lot of it cost in materials and labor costs had gone down, so they basically re-budgeted and wanted to consider that in the bidding process. We had the opportunity to do that as well. That's not to say a costumer won't comeback and say the world is changed we want you to take our price down, but we haven't seen a lot of that activity up to this point.

Michael Schneider - Robert W. Baird

And even on current bidding that is quotes that are going out today. Are you seeing merge-ins beginning to fall as the cycle loosens here and as capacity becomes available?

Mark Blinn

Two things that you're seeing out there. You are seeing you do see some pressure on pricing and again what we do is we look to our suppliers and try to preserve and capture that margin through driving that value through our supply base as well. And so you certainly will see that environment out there and as Lew talked about, there's still bid activity. Does that answer your question Mike?

Operator

Our next question comes from the line of Charlie Brady with BMO Capital Markets.

Charles Brady - BMO Capital Markets

Hey thanks. Good morning Lew. Good morning Mark. I like Mike's comments. Obviously a tremendous transformation this company over the past several years. It's refreshing to see that. Can just walk me through the, what the roll out on the alignment costs might be. How should we assume that might roll out across '09?

Lewis Kling

Well, obviously when you look to take costs out, speed it one of the most important factors, but you've got to make sure that you're thoughtful as to how you approach the business. And the reason we call these realignment Charlie is a lot of these you're going to see about the line. We will certainly talk about them, but these are continued optimization efforts. So our approach is to be very thoughtful, but execute with speed so that we can capture the benefits and our goal is to take these realignment costs and get a better than one-to-one return on them on a permanent basis in our business. So of course the sooner you can get them online the better.

Charles Brady - BMO Capital Markets

Is that are waiting towards one of the, or two of the segments versus another one. And I'm assuming pumps, valves may be more than seals?

Lewis Kling

Not really. I mean we are looking at these across all the three divisions and by the way corporate is. And I think the way we've rolled out this program and it is really a program that we'll manage very tightly. Its really looking for what the best opportunity for return is this year and beyond. So you know some of the point, I want to point out is we this year we may not get the full benefit of the dollar necessarily, but what it will do is improve our platform long term. So we don't want to be short sighted with this effort. We definitely want to be long term.

Charles Brady - BMO Capital Markets

Okay. And with respect to the bad debt accrual. Am I correct -- did I hear you correctly that that came out of flow control entirely. It's about 200 basis point hit there?

Lewis Kling

Yeah, the discrete one, the $7.3 million was in the flow control business. Keep in mind Charlie that we are not saying that was all our bad debt accrual. We have a regular bad debt accrual process basing on ageing of receivables. This was an outlying (ph) that occurred at the end of the year as we took a conservative approach as to some customers.

Charles Brady - BMO Capital Markets

Yeah, I guess I was trying to look at the operating level, the segment level that margin looks around 15 or so. If you're back in that the actual performance of that segment is probably a bit better. There wasn't a sharp drop off in Q4 in terms of margin performance of valves?

Lewis Kling

You're exactly right and if you follow that segment, they are consistently improving their margin. So if you exclude the impact, they had a higher margin, which is consistent with the way they've have been operating the business. They had a strong margin improvement in the fourth quarter, strong margin improvement for the year, and this is a division that has been very tightly controlling their cost. What I wanted to point out was if you look at full Euro quarter-over-quarter corporate pump and valve SG&A, it was really relatively flat. If you exclude these one time items and I think that's an important message. So you are write on that the valve division has been really holding cost while driving margin improvement.

Charles Brady - BMO Capital Markets

Here's one more and I'll hop back in the queue here. In terms of tax rate and what your expectation might be in 2009?

Lewis Kling

We've been steadily improving our tax rate. We did have the benefit of items and some of those that were generated from tax planning. So we think we'll continue to plan, but we see a rate plus or minus 28%. What I do want to caution on that is what I don't know is the impact of FIN 48, because that does create volatility in the company's tax rates, and I don't know what the U.S. administration is going to do with corporate tax rates.

Charles Brady - BMO Capital Markets

Thanks.

Lewis Kling

You're welcome.

Operator

Our next question comes from the line of Scott Graham with Ladenburg.

Scott Graham - Ladenburg Thalmann & Co

Hey good afternoon. Very nice quarter guys.

Mark Blinn

Thanks Scott.

Lewis Kling

Hi Scott.

Scott Graham - Ladenburg Thalmann & Co

Couple of questions of course. Could you talk us through the OEM pumps booking decline of 30% and recognizing of course there is some noise with the whiplash that we all felt in the fourth quarter, but just trying to get a handle on what are some of the facts that you think drove that number down. What would you argue would be sort of the real run rate in the bookings for OEM pumps right now?

Mark Blinn

Well its tough to say what the real run rate was, because there was such a drastic current in terms of the global economy. But as Lew mentioned I think a month and a half ago we did see one large order, a very significant order, that got pushed out. And so if that's any indication of the trend, it was pushed out for two to three quarters basically to go and reprice the underlying project. You also had a currency impact as well. But I think it's really hard to say what a normal run rate would have been because of what happened in the global economy. Our sense is would it cause everybody to do is probably people did in their households as well is just to stop and think for a period of time. What I come to back to is what Lew talked about in his presentation is these projects are not decisions that you necessarily make on the margin. They are long-term decisions. So I think there was an element of wait and see. But we think some of the underlying drivers of project spend are going to be out there. Capital spend doesn't go away and what we need to focus on is that spend does decline as capturing more share.

Unidentified Analyst

Mark, I'm with you on that and I do understand that. The thing is that from what I remember from the company back before you guys got here and this number might have changed. But from what I remember, 70% of OEM pumps are engineered for a specific project, roughly 30% are not. And I guess it's... I'm with you on the 70% being pushed back and booking that will take place. But I guess I am more concerned about the 30% and again, if that number is correct to this day. And maybe if you can marry the answer to we are two months into first quarter. And I am wondering kind of what that OEM pumps run rate looks like right now on the bookings side. Is it still at that 30 level or is it maybe a softer minus 20 or 15 or what have you?

Mark Blinn

Yes, Scott, as usual, I don't want to comment on anything during the first quarter this year and I think I understand your question a little bit better. The point I want to make and you are the historian on our company is we've certainly seen and we talked about this, a migration to more engineered pumps. So when you followed the business a number years ago, we had a lot of standard industrial products that were made for stock. And what you do see in that and it pertains to a certain degree to our valve business is if that goes through distribution channels or distributors, distributors get focused on cash flow and tend to start destocking their inventory for a period of time, turning to now the supplier focused on just in time inventory.

So we did see a little bit of that in the fourth quarter as you saw everybody kind of stop and got focused on cash flow. I think the call to action and the respond is when they do need this product, the distributors are going to have to turn to a supplier who can supply it very quickly. And that's where we think our on time delivery is going to help. But we certainly did see an impact in the traditional products business. And over the years, we've migrated to more engineered products because it really supports our strategy around getting the aftermarket behind it.

Unidentified Analyst

All right. Okay. So you did sense that there might have been some destocking impacts in that number. That's really all I was looking for on that question. I have two other questions for you. The organic bookings in aftermarket and the other two businesses were up and in the press release, you guys are always very clear on where the hot points, where the strengths were. You think you are right now in a position with your QRCs around the world to continue to find ways into the incremental revenue opportunity that you might not have been able to one or two years ago? Are you situated enough with your QRCs where you can kind of chase the revenue right now as things come up?

Mark Blinn

Well, situated enough means we are done, and I don't want to suggest that we are done. But I do think we have significantly improved that platform. For example, we are going to be opening a QRC, which is basically a large manufacturing facility in the Middle East. We are building one in Vietnam to support a petrochemical facility. There is a number of stories that I can go through that we are also building them in other parts of the Middle East as well to support the growing business.

So the answer to your question is absolutely yes. I think we have certainly increased our platform in terms of QRCs, our penetration rate in terms of service technicians, field technicians and alliance agreement that will support the growth in our aftermarket strategy. Also keep in mind add on to that a lot of the installed base we've put in over the last couple of years and are still putting in... keep in mind, our backlog was up year-over-year, a lot of that installed base is going to come off of warranty in the future and provide aftermarket opportunity.

Unidentified Analyst

I completely agree with that, okay. Last question is this is more of a housekeeping one. This other income line gives the analyst fits, and my hope would be that you could maybe put some type of parameters on what you think this number might be in 2009.

Lewis Kling

Well, I'll tell you what. I'll answer the question, if you tell me the euro, the yen, the sterling, the peso, the Canadian dollar are going to be.

Unidentified Analyst

Well I'm going to have to get back to you on that, but.

Lewis Kling

Glad you didn't... if it is, I think we can start another business here. But that's really what's driving it Scott is, simply put, because we have to under the accounting rules treat our foreign currency hedges as what they call speculative hedges. We are not speculating. But the fact is we have to mark those through other income expense. At the same time, you are marking certain amount of your balance sheet items through there. So it just creates a lot of volatility. And you basically have the underlying often times backlog and your marking your hedge in other income expense. And that's what creating a lot of the volatility.

But I think going back to the theme is we saw, we had planned and forecast that the euro was going to be at 127, and it ended up at 140 at the end of the year. So we got a little bit of a pick up relative to our expected headwind. We'll try to provide clarity on that to let you know what changed. But to give you a forecast for the year, one thing is for certain is I'll be wrong.

Unidentified Analyst

All right, let me... Mark, I have to get an answer from you on this one, at least some type of bigger than a bread box. And here is what I mean by that. If we just assume the currencies did nothing for the rest of the year, would we see other income kind of revert back to the mean, which historically has been about a $5 million, $10 million, $15 million number income?

Mark Blinn

If currencies remain relatively stable, then the volatility of the other income expense line would go down significantly.

Unidentified Analyst

And revert maybe to what we've seen in the past?

Mark Blinn

I don't know where those were in the past, so I don't want to give you a specific number. But I can tell you, look over... look in the first quarter and the last quarter last year. The euro was relatively stable, other currencies were relatively stable and the mark in the other income expense line was slight. There was more that was going on in the hedges there. But you've got to keep in mind gains or losses on the sale of assets are going to be in there. There is a number of line items, but it's fair to say that if currencies remained stable and don't fluctuate, particularly at quarter end, that line should remain relatively stable at whatever rate it is.

Unidentified Analyst

I'm with you. Okay, very good. Thanks a lot and congratulations on the quarter.

Lewis Kling

Thanks Scott.

Operator

Our next question comes from the line of William Bremer with Maxim Group.

William Bremer - Maxim Group

Good morning gentlemen, very nice quarter.

Lewis Kling

Good morning. Thank you.

William Bremer - Maxim Group

Scott I think referenced exactly where I was going in terms of CapEx, in terms of building out the QRCs. Besides increased deployment there, where else can we start seeing some of this capital, some of your cash on hand being deployed?

Mark Blinn

In terms of capital expenditures, I mean we still have investments in our systems which drive cost reductions, efficiency and better visibility across our network. As I mentioned, with the advent of what's going on in the nuclear industry, we have teed up to spend some capital on expanding some of our nuclear capabilities and products this year. And also we've talked about this, our investment in the Middle East. As we said, we call those QRCs.

That's how we're going to use our capital is to make sure that we have the right geographic expansion, that we increase our QRC platform and that we go ahead and drive continued efficiency. I mean one of the important things in this market right now is we have very good low-cost manufacturing presence around the world. And we want to make sure that we expand those capabilities in this market to keep our cost of production down.

As to other capital, it's just the things or cash, the things that we highlighted. I mean we've been very conservative about making sure that our U.S. pension fund is adequately funded. We do return value to the shareholder in the form of dividends and share repurchases. So that's how we intend to use our cash.

William Bremer - Maxim Group

When I look at your other markets that you are pursuing, can you sort of break down which ones you are investing more so or more immediately so to?

Mark Blinn

I think it was some of the things that I talked about in my comments earlier. I mean last year we opened an additional manufacturing facility in India. We're investing in Brazil. We have invested in China. We are investing in the Middle East. But also let's step away from geographic expansion, look at our investment we have made in geothermal, we've also made in LNG capabilities and some of the joint ventures that Lew talked about earlier and in solar and wind. We are spending our money on product expansion. We're spending our money in geographic expansion. And all the while what we're doing is working on standardizing our platform to make sure we drive global visibility and efficiency.

William Bremer - Maxim Group

Okay, great. And let's just touch base on the stock buyback plan that you have allotted. What do you see in 2009 there?

Mark Blinn

As I said, we have $135 million available on our program. We don't comment specifically on how many shares that we are going to buy back. It is an open and active program and that's generally what we do. We just view it is an opportunity to return value to the shareholder, but without any specifics for this year. But we will report on it as we go along and let you know what we did.

William Bremer - Maxim Group

Very nice quarter gentlemen, thank you.

Mark Blinn

Thank you.

Operator

(Operator Instructions) Your next question comes from the line of Wendy Caplan with Wachovia.

Wendy Caplan - Wachovia Securities

Thank you. Good morning.

Mark Blinn

Good morning Wendy.

Wendy Caplan - Wachovia Securities

As we look at your assumptions for '09, can you talk about kind of how you're operating? That is are you operating under the assumption that your business demand for products will deteriorate as '09 unfolds, will improve, will stay the same? And then I have a couple of follow ups to that.

Mark Blinn

Okay, well, Wendy, without providing any specifics in terms of trends and I will comment as we did before. One, as we look into '09, we do look at our 2008 year-end backlog. It remains cash (ph) pricing and margin and net backlog. We also look at how we're going to execute on our aftermarket strategies. In our forecast, we do take into consideration the current market environment. We also look in terms of getting at what our anticipated results that we give in the guidance, where we think we'll be in terms of our cost controls and also the value we'll drive through the realignment costs. We still have opportunity to drive efficiency and cost control in the business. So that's... and I think finally, to add on top of that, one of the things we'll do is look at the opportunities to continue to take market share regardless of where the capital spend goes.

Wendy Caplan - Wachovia Securities

Okay. But to not to beat a dead horse certainly, but the demand for your products specifically, do you think that they will... given the backlog that you have today, you expect that they will stay the same? Is that what you're saying, just to clarify?

Lewis Kling

I mean we think the demand for our products is going to remain out there. I mean it's going to depend on us to execute on this. And actually, we think that demand for our aftermarket capabilities is going to go up as a lot of our costumers look to outsource some of their maintenance activities. And also our ability with our strong balance sheet we think is going to give us the opportunity for additional penetration both on the OEM and on the aftermarket side. And as I commented earlier, a lot of our traditional industrial products, we've certainly seen some of the distributors in a destocking mode. But if those products are needed, we will be able to respond quickly and if we can respond quickly and if we can support these products, we are going to have demand for our product.

Wendy Caplan - Wachovia Securities

Okay. And just to follow up with that, what are the metrics, the specific metrics that you are focused on that would allow you to see whether things were again deteriorating, staying the same or improving?

Mark Blinn

Well we look at some of the things that we comment about when we have these discussions in terms of the overall market. As Lew commented, we look at bid activity out there. We have very close relationships with our customers. We are talking to them all the time. I don't know that there is necessarily a metric around that, but one thing to keep in mind is our businesses employ a sales and operation process, basically where there are constant communications with the customers and these businesses look globally across their opportunities and their manufacturing platforms to see where they can move work, what type of margin they're going to need in the business and what the aftermarket opportunity is going to be.

So it is very metric-driven in terms of how we look at opportunities, how we bid these opportunities and what we think the total revenue stream is going to be on that. We also look in terms of the aftermarket business. As we talked about, this is a business that really grows traditionally with installed base on an absolute basis. We have seen our growth rates well above that. That's an important metric for us as we want to continue to drive, capture of this aftermarket business in excess of the market growth.

I think the other metric that we look at in terms of performance is how we're doing on SG&A as a percent of sales and our gross margin improvement. We think that is a very important efficiency metric to understand what is going on in our business.

Wendy Caplan - Wachovia Securities

Okay, fair. And if we were to look at your recent project wins, can you give us a sense of is there... are there... is there more or less competition versus a year ago in terms of those that are looking to win that project? What are your hit rates on projects relative to where they were a year ago and what are we seeing in terms of the margin that you are able to derive from those, or bid those projects versus a year ago?

Mark Blinn

Well, let me... the competitive environment that's out there, competition has always been out there. What we saw actually when the market was growing at a very, very rapid rate is often times some of the customers who actually split bids because they were concerned about the timing of their supply base. So as we look at bid opportunities now, what they're focused on is being able to deliver on time, because regardless of the environment out there, time is money.

I think the other thing that they're looking it is your ability to support it. So the competitive environment has always been out there. As you know, on many of the highly reengineered pumps in the oil and gas business, we often run up against a very good competitor, Solzar. And so what we're seeing out there is continued competition, and it's really up to us to make sure that we continue to execute and deliver against that.

In terms of the win rates, we don't talk publicly about our win rates out there. But we certainly will say we are getting our fair share of the business. And also we talked about what you are seeing in pricing out there is there was a lot of price appreciation in these overall projects. A lot of it was because the underlying supply base and the cost was appreciating as well. So as those things start to temper out in the marketplace, using our SNOP (ph) process, we continue to monitor that price to make sure that we are capturing the margin that we need in that business. Keep in mind as prices stabilize or moderate or even decline in terms of the orders, we have the opportunity to go and manage our supply base on that side as well to drive the price and preserve margin.

Wendy Caplan - Wachovia Securities

Okay. And one more for you Mark, if you don't mind, the scrubbing of your receivable. There were some... you mentioned the bad debt accruals this quarter. Are there any... as you look at your receivables, how aggressive are you scrubbing them and are there any that look particularly worrisome at this point? How would you characterize that please?

Mark Blinn

We are spending. As we commented on the last call, we are spending a tremendous amount of time looking at our costumers and their wherewithal, looking at our supply base, all of our bank constituencies, everything. So it's fair to say that over the last three or four months, we have significantly ramped that up. And what you saw in our year-end financials was a result of that, fairly consistent bad debt reserve except for the additional bad debt reserve we took in the valve business. So I would generally say this, we feel this was relatively isolated to this one small group of customers. But we still have a very, very robust process. We haven't seen a significant deterioration of the credit quality of our customers. Also, keep in mind often times, on these large projects, we may either have advanced cash or letters of credit supporting our bid.

Wendy Caplan - Wachovia Securities

Thanks very much.

Mark Blinn

You're welcome.

Operator

And your next question comes from the line of Jamie Sullivan with RBC Capital.

Michael Salinsky - RBC Capital Markets

Hey it's Mike Salinsky in for Jamie. Hey, I've got two questions. First of all, to follow up on the bad debt. So just to sort on I guess verify, you did not increase your provision for bad debt in '08 versus '07, is that correct, or not in a major way at least?

Mark Blinn

Well, I mean we certainly... it didn't reach the line $7.3 million that we referred to.

Michael Salinsky - RBC Capital Markets

Sure, outside of that.

Mark Blinn

Yes. But normally, our bad accrual is upward, between 15 and $20 million is the net against receivables. And so absent the $7.3 million isolated or event-driven bad debt accrual, it was pretty much in line with consistent patterns, especially with the increase in receivables out there.

Michael Salinsky - RBC Capital Markets

Okay, okay. And then another question is about potential contributions to pension in'09. I know you had to a range of 55 to 75 million. If you find yourself I guess with your overall cash uses, whatever is CapEx or pension expense or share repurchases. You had extra cash that you didn't use. Let say you didn't use your CapEx to the extent that you were expecting that you got better pricing or just found less to do (ph). If you had extra money, which use of cash would you allocate it to? Would it be additional pension contributions? Would it be just additional share buyback or any color there would be appreciated.

Mark Blinn

Well I mean I think to your point, choices that we make around our cash we don't feel are mutually exclusive. So if I did one, doesn't necessarily mean I can't do another.

With respect to the pension contribution, that amount is really driven by where funding requirements go in terms of the Pension Guaranty Corporation. And last year what we did is we topped up our U.S. pension plan. Obviously, our plan with many other companies saw a decline in their assets. So what we want to do is make sure that pension asset is secure for our employees, that we fund the requirements to reduce insurance premiums on that pension. So that's going to be the way we drive that decision is really towards what's best for the employees and what we can do to make sure we minimize the cost in terms of insurance out there. As to other priorities, we evaluate them on a continuous basis and we are really look at it in terms of what's the best return to the company and the shareholder at that time.

Michael Salinsky - RBC Capital Markets

Okay. All right, thanks good luck.

Lewis Kling

Thank you.

Mark Blinn

You're welcome.

Operator

There appear to be no more questions at this time. I will now turn the call back over to Mr. Fehlman

Paul Fehlman

Okay, very good. I would like to thank everybody for joining us on the call today. We hope to see you at one of our many investor events this year. Have a great day.

Operator

This concludes today's Flowserve 2008 earnings conference call. You may now disconnect.

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Source: Flowserve Q4 2008 Earnings Call Transcript
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