Flowserve Q1 2009 Earnings Call Transcript

| About: Flowserve Corporation (FLS)

Flowserve Corp. (NYSE:FLS)

Q1 2009 Earnings Call

April 30, 2009 11:00 AM ET


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

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


Charlie Brady - BMO Capital Markets

R. Scott Graham - Ladenburg Thalmann

Kevin Maczka - BB&T Capital Market

Hamza Mazari - Credit Suisse

John Moore - Robert W. Baird

William Bremer - Maxim Group


Good morning. My name is Christie and I will be your conference operator today. At this time, I would like to welcome everyone to the Flowserve First Quarter 2009 Earnings Release 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 will now turn today's conference over to Mr. Paul Fehlman, Treasurer and Vice President of Investor Relations.

Paul W. Fehlman

Thank you, Christie. Hello everyone and thank you for joining us. Welcome to Flowserve's first quarter 2009 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.

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 the earnings presentation slides via our website, please click on the click here to listen via phone icon at the bottom of the event details page.

I'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; Mark Blinn, Senior Vice President, Chief Financial Officer in Latin American Operations; Tom Pajonas, the President of our Flow Control Division; and Dick Guiltinan, our Chief Accounting Officer. Following our commentary, we will begin the Q&A session.

Regarding any forward-looking statements, I'll refer you to yesterday's earnings release and 10-Q filing and today's earnings presentation deck for the 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 anyway to projections or other forward-looking statements are subject to Flowserve's Safe Harbor.

Now I'd like to turn it over to Lew to begin the formal presentation. Lew?

Lewis M. Kling

Thanks, Paul and good morning. It's a pleasure to welcome you to our 2009 first quarter conference call. During the next few slides, I plan to discuss many of the company highlights for the first quarter as well as many of the primary performance metrics was achieved during this period.

I also plan 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 current situation, but also on the long-term drivers of demand, which we have discussed in detail during the 2008 year-end conference call that we still believe is still applicable today.

We have also continued to evaluate our operating environment and continue to gather a wide array of both internal and external data to support our operating and investment decisions. While it's fair to say that there continues to be uncertainty in the global marketplace such as the broad base hesitation we saw in the fourth quarter of last year and into the first quarter of this year, I can also say that we continue to see benefits and opportunities that companies like Flowserve that can differentiate themselves through superior product and service offerings, on-time delivery, strong customer partnerships and the latest differentiate, a solid balance sheet.

We also remain cautiously optimistic based on our relatively stronger pump booking performance during the latter part of the first quarter, which has continued into the early part of the second quarter.

As we announced last quarter, we have also begun to execute plans using our strong cash position to reduce or optimize certain non-strategic manufacturing facilities as well as more aggressively driving further initiatives that will better support lowering our overall cost structure.

While we see projected 2009 realignment cost of up to $40 million during the year, we also believe we can achieve that amount in annual run rate savings during the latter part of 2009 with full benefits expected in 2010.

Slide three provides an overview of the notable highlights achieved during the first quarter of 2009. When comparing this quarter with the first quarter of 2008, we find a very different environment. You will recall that commodity prices were booming in 2008, oil has reached (ph) $140 per barrel and U.S. dollar was considerably weaker. In fact, the euro reached $1.57.

In addition, early hints of recession were still being denied and sub prime was not even a household word. Before that change, I'm still pleased to report that the first quarter was another strong earnings quarter for Flowserve with superior execution and excellent financial results, culminating in many respects to another outstanding quarter of accomplishments by the company.

We posted record first quarter earnings per share of $1.64 which included $9.9 million or $0.13 of realignment charges as well as an additional $9.9 million in negative impact from foreign currency.

Despite these headwinds, our first quarter earnings per share was up nearly 8% over the previous year's first quarter results. These record earnings per share for the quarter demonstrate the continuing success of our operational excellence initiatives, strength of our backlog and strong aftermarket platform and continued support from our customers.

I'm also particularly proud to announce that before realignment charges of $9.9 million we reached our 2010 operating margin goal of 15%, 21 months earlier than we targeted back in 2005.

This was achieved through our constant focus on cost and efficiency with significant improvements in both gross margin and SG&A expense. You should also note that we still got more work to do in these areas to continually improve our operating platform. In other words, we're not done.

Due to our strong backlog, solid orders and continually improving operating platform, we are reaffirming our previously stated 2009 earnings per share target range of $6.75 to $7.50 per share, which includes the full impact of up to $0.50 per share in realignment costs for the year and the negative currency effects of the first quarter.

Our bookings performance for the first quarter represented a decline of 32.3% versus the prior year or a 25.1% decline versus the prior year when we consider the 7.2% negative currency impact. It should be noted that this comparison was against the highest bookings quarter in the history of Flowserve, $1.43 billion, which was approximately 31% over the first quarter of 2007, and also included the significant amount of business with thrusters.

These specialty products are large underwater positioners that look like large satellite positioned electric outboard motors used on floating oil platforms, oil production ships to maintain their relative position with the seabed. The thruster market with though a nice windfall last year, had remained dormant for almost 20 years, and is not part of our long-term strategic growth portfolio of pumps, valves and seals.

Therefore, if we normalize our bookings by removing the $74 million of thruster orders booked by the pump division in the first quarter of 2008 and as well as the $1 million booked in the first quarter of 2009 and adjust the currency headwinds on a normalized pump, valve and seal bookings would have been down approximately 21% year-over-year, but in line with 2007 quarterly levels.

It's also important to understand that although the first quarter bookings were affected by some uncertainty in our markets, our bidding opportunities have remained very active, our pipeline of large project opportunities is still good and our aftermarket bookings remains stable with upside potential.

And although we experience some delays in the customer order placement process that began during the fourth quarter and continued into the first quarter, we still have not seen significant level of cancellations in our backlog.

And as I've stated earlier, we remain cautiously optimistic based on our relatively stronger pump bookings performance during the latter part of the first quarter, which has continued into the early part of the second quarter. It's also significant to note that our book-to-bill ratio at the end of first quarter was still approximately one, despite tough market conditions.

This means, we're able to achieve our record first quarter earnings per share, while only slightly eating into our strong backlog.

As you can see in the chart, sales were up 3.2% over last year to $1.02 billion, the highest first quarter sales in the history of the company, despite a 10.1% currency headwind, demonstrating the resilience of our backlog and our strong aftermarket performance.

As I've described earlier, excluding the $9.9 million of realignment charges taken into the first quarter, we did reach our 2010 goal of achieving 15% operating margin well in advance of our stated target date as operating margins improved 330 basis points to 15.3%.

Including the $9.9 million of realignment charges, operating margin increased 240 basis points to 14.4%.

Gross margins were up 110 basis points to 35.9%, including 16 basis points of realignment charges. And we continue to drive SG&A efficiency, lowering SG&A an additional 140 basis points achieving the level of 22% of sales including 30 basis points of realignment charges.

As you can see in slide four, in the first quarter of 2009, there was a significant shift in our bookings away from general industries and thrusters.

Although power and chemical became a large percentage of our bookings, they were lower than 2008 on a relative dollar basis, reflecting a general business uncertainty and a resulting industry hesitation which we saw in the fourth quarter that continued... we saw in the fourth quarter and continued into the first quarter.

Most strikingly, the lower graph shows the significant reduction in original equipment bookings due to the uncertainty in the market, while the aftermarket business remained relatively stable.

Slide five breaks down our sales for the first quarter by region and by mix. As you can see, there were minor shifts in sales away from Latin America and North America towards Europe, Middle East, Africa as well as the Asia-Pacific region. The original equipment and aftermarket sales mix remained relatively stable with a slight shift towards the more original equipment as we continue to ship our backlog of strong project bookings from earlier periods.

Slide six covers the key financial metrics in a traditional P&L format for the first quarter. I think most of these few highlights already, but I do want point out the effect of foreign currency on the results. As you can see in constant dollars, our bookings, sales and operating income was significantly stronger than the as reported numbers.

Slide seven, which I'm sure is familiar to most of you, demonstrates the quarterly progression of bookings growth over the past five years. As I mentioned earlier, our bidding opportunities have remained very active. Our pipeline of large project opportunities is good, and our aftermarket bookings remains stable with upside potential as many of our project shipments over the last few years start exiting their warranty period.

Again, as we normalized bookings for currency headwinds and exclude the thruster bookings in the first quarter of the prior year, were down only 21% versus the first quarter of 2008.

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 and collected advance cash to protect us from any significant negative impact if cancellations were to occur.

Slide eight shows the quarterly progression of our strong sales growth over the past five years. During this time we have grown almost exclusively on an organic basis, which demonstrates how well positioned the company's products and services are for the markets we serve, as well as our interim investments in capital and R&D have enabled support growth in our business. And where we have made acquisitions, such as the remaining 50% of Niigata Worthington, we have been very pleased with the results.

As a reminder, the as reported sales in the first quarter of 2009 shows a 3% improvement over the first quarter of 2008, but would been up approximately 13% in constant dollar terms without the 10% currency headwind.

Now let's take a look at what drives investment and long-term infrastructure opportunities. Slide 10 is one I'd shown in previous presentations. This illustrates the multiple drivers, which includes global spending on infrastructure related projects such as those in oil and gas, power, chemical and water industries.

As we have discussed in the past, the key takeaway from this slide is that several of these drivers influence spending even in uncertain economic times such as the environment we find ourselves in now.

Investments have added dimension and are no longer just driven by large independent U.S. and European companies trying to create shareholder value and internal rates of return. They may be driven by unique drivers affecting that particular country.

For example, the growth in global population along with the advancing urbanization is challenging the world's ability to provide portable water to all parts of the globe, leading to an increasing need to invest in technology such as desalination solutions.

Another example involves continuing investments for energy independence by advancing the capabilities of alternative energy sources, which in turn reduces the overall need for hydrocarbon based energy. The third example is the growing need to refurbish, upgrade optimize or make more efficient the infrastructure in place today.

These changes are likely to be driven by economics or the growing cost to greater regulation to achieve continually increasing environmental, health and safety standards. Much of this energy infrastructure was put into place many years ago, when crude was cheaper, near the surface and lighter and power plants didn't have the stringent carbon requirements, complex recovery or regulatory issues they have today.

This is requiring significant investment to keep these facilities viable in today's increasingly regulated and complex environment.

An interesting aspect, influence infrastructure spend which is written out of the current economic uncertainty is the advent of stimulus programs being instituted by many governments around the world. Many of these programs were start to accelerate activities in the area of road work, bridge refurbishment, general construction and basic services which is designed to create jobs.

New investments have a compounding effect on their local economies which promote investments in our core industries because of the increase in demand for their input products such as electricity, asphalt, chemical byproducts and many others.

By creating new employment opportunities these investments also help improve consumer confidence leading to improved spending behaviors which should drive increased demand for our customers, products and services.

Slide eleven looks at the oil and industry market. The latest launched 2009 forecast relative to global demand for oil have been adjusted downward from those issued at the beginning of this year. The outlook now shows an overall decline in demand in 2009 compared to 2008 with the return to positive demand growth in 2010.

This return to positive growth next year is important since oil production investments are not made on the spot price of oil, but rather on the projected price when the project is completed, usually three to five years out. This softening of demand in 2009 has been driven by a true decline in mature market demand where transportation has significantly been reduced and aggressive distributed de-stocking programs has also helped to reduce demand.

This decline in the material markets has been partially offset by continuing growth of demand in developing markets around the globe, particular in regions such as the Middle East, China, India and Brazil, which remain committed to building out their infrastructure.

In addition, there continues to be investments made in aftermarket activities with the focus on operational optimization of existing facilities particularly in downstream refining operations.

Our investments in establishing and expanding global manufacturing assets, expanding our global network of quick response centers, establishing strategic joint ventures to strengthen our emerging market access and enhancing our relationship with key original customers have all served to provide a position of strength in pursuing the growth opportunities in these developing regions.

In addition, our continuing investments in expanding and advancing the portfolio of Flowserve products for the oil industry such as those required for complex recovery applications and to meet the needs of advance refining processes have also provided the opportunity to expand our market share in this critical industry.

Slide 12 gives us an overview of the natural gas market. The latest March 2009 forecast relative to demand shows continued growth over the next couple of years. One of the key drivers of this growth demand is the projected expansion of the gas fire power generation with a forecasted compound annual growth rate of 4% over the 2008 to 2013 time period.

One of the major factors supporting this growth is the lower operational cost of natural gas, where prices have dropped more than 30% since January. This drop in natural gas prices has been predominantly driven by significant increases in global inventories causing supply to exceed demand.

This industry continues to also see investment plans for the expansion of liquefied natural gas or LNG. Since net producing countries and net user countries are more than 500 miles apart.

We also believe we have a leading market position in cryogenic product offerings to the LNG market. That is product's capable withstanding temperatures exceeding 273 degree centigrade below zero. This positions us well to pursue these projects to support the global expansion of LNG operations currently underway or planned for the future.

As we've discussed on previous... in our calls, we also see future market opportunities and the use of natural gas as a transportation fuel source via compressed natural gas or CNG, which is one of the factors in our decision to develop our joint venture with Linde in Austria to design, manufacture and support CNG refueling stations in the European Union.

This joint venture Flowserve Compression Systems GmbH launched in 2008 is already delivering products to service this alternative fuel market opportunity. The combination of Linde's compression technology with Flowserve's flow management and manufacturing capabilities positions us to pursue the CNG refueling market opportunities worldwide as well as future opportunities in biomass and hydrogen alternative fuel solutions.

Slide 13 takes a look at the power industry. The forecasted consumption for electricity continues to show significant incremental demand growth over the next five years with China leading the way with greater than 30% projected incremental demand increase.

Much of this demand growth we met through the addition of power generation capacity over the next five years with the primary fuel source coming from fossil fuels, both coal and natural gas, which fits well with our portfolio of product capabilities for the power industry.

Project activity in the area of nuclear power generation continues to ramp up in many parts of the global market. We are seeing new orders and new project planning occurring in many regions of the world, with China having the most aggressive growth plans, followed closely by India.

Due to the timeframe to design license and build these nuclear power reactors, it will be approximately five years before this source of electricity begins to help meet today's growing global demand. But environmental and energy security requirements continue to drive robust investments for nuclear power generation worldwide.

In addition, environmental concerns continue to buy the support for investments in energy alternatives, such as solar, wind and geothermal to name a few.

Wind is forecasted to be the predominant source for supplying alternative energy with solar gaining promise in regions where the intensity and availability of sunlight work (ph) through a sustainable energy source.

Our long standing experience and credentials (ph) in the power industry positions us well for growth opportunities in both traditional and alternative power generation markets.

I'd like to share one example of how we are expanding our presence in the alternative energy market, specifically solar power.

Slide 14, gives an overview of the solar power industry with specifics on one clinical application. Global solar investments have been projected to exceed $40 billion over the next 15 years. The most active regions of the world today include countries such as Spain, United States, Mexico, Australia and South America.

New entrants considering investments to alternative energy source include countries like Morocco, Algeria and Israel. Even the European Union has announced plans to analyze the potential of solar power with a possible long-term investment of as much as €400 billion to meet future energy needs for the region.

One particular application where Flowserve fills a critical and difficult technology need is in Molten Salt Heat Transfer. This application uses the sun's energy to heat salt solutions to a molten state which efficiently holds on to the heat, allowing it to be transferred to the steam generation unit, the making of electricity. This molten salt is highly corrosive and abrasive requiring flow management products capable of withstanding this environment over an acceptable form as timeframe.

On market leadership, our position in surface hardening technology and long standing expertise in these harsh flow control environments positions us well for growth opportunities projected in this segment of the alternative power solutions.

I would also like to point out that our potential business opportunity in this solar power application stretches well beyond the corrosive and abrasive components. It also includes the pumps, valves and seals utilized in the steam management and the power generating portions of the power plant.

Slide 15, shows the continuing challenges within the global chemical industry. The current economic conditions around the world are hindering consumer spending, which has significantly reduced the need for majority of end products produced by the chemical industry.

As we have all read in the global press, this drop in market demand has led to a number of plant closures, lay-offs and overall financial weaknesses at many of the major chemical companies around the world.

On the lower left side of the chart, there is a sampling of current news showing the challenges being faced by individual chemical companies as well as the industry itself. But there is a positive longer term outlook to this story to consider. First, the global GDP and world trade forecast show moderate rebound to growth in 2010 with GDP growing 1.1% and world trade growing 1.7% as stated in the March 2009 report from the Economist Intelligent Unit.

Second, as reflected in the current news showing at the lower right of the chart, investments are continuing in developing regions of the globe, supported by positive forecast of demand growth in countries like China, India and Brazil as well as infrastructure build out in areas such as the Middle East in preparation to meet future and indigenous (ph) demand.

Slide 16 looks at the dynamics impacting the future of the water industry. As populations grow and urbanization advances in many regions of the globe, the world face in is an increasing number of people, looking in areas experiencing major shortages relative to supply affordable water.

As we have discussed many times before, we're a leading supplier of volute pumps, designed specifically for managing the movement of large volumes of water from the source to where it is needed.

Another critical area where we have strengthened our market position is in desalination. Desalination market has experienced strong growth even in the tougher economic times with projections of doubling capacity around the globe by 2016, supported by planned capital investment, which has been estimated at approximately $64 billion by independent industry analysts.

This investment translates to approximately 37 million cubic meters per day of capacity, either currently under construction or in the planning phases, which the majority of these planned project utilizing reverse osmosis membrane (ph) technology to desalination.

When the driving factors behind the increase in planned use of reverse osmosis membrane technology is that it is become a viable broad-based commercial process to the advancements made in energy recovery devices, which significantly reduce the operational cost to produce pulp water.

Slide 17 provides an overview of our April 21, 2009 acquisition of CALDER AG, a leading supplier of critical proprietary energy recovery technology used in the reverse osmosis desalination process.

We are very excited about the potential of this acquisition as it brings together the longstanding leadership position to both Flowserve and CALDER to create a uniquely powerful integrated systems solution, which will reduce the operational cost of global desalinization for our customers.

We believe by linking the product technologies of Flowserve pumps with CALDER's energy recovery methods and utilizing Flowserve's global footprint and distribution system. We are well positioned to serve most of the outstanding opportunities in this high growth desalinization market around the globe.

Slide 18, gives an overview of what we feel differentiates us from our competitors. As learned in the past, there are two key areas which anchor our differentiation. The first is our customers centric culture. Not only do we focus on the buying decision, our drivers of on-time delivery, product quality, reliability and local service, we also focus on our end-user strategy, which includes being very close to our customers.

The second anchor is our strong balance sheet. We integrate the strength of these two anchors through the three areas. One is our end-user strategy, which helps to ensure that our products, solutions and services are in line with our customers' requirements today and in the future.

The other tool of globalization is technology leadership. Our customers take a great deal of comfort in the fact that we strive to be local to their operations and that we continually challenge the envelope of applied technology to help ensure that we provide optimized solutions for their needs today and in the future.

Slide 19 shows our compound average annual growth rate for aftermarket business for the past 10 years. As you can see, we performed at an impressive 21.2% over this period. Our aftermarket is always driven by the desire that fuel remains readily available to heat homes and automobiles, lights turn on when it gets dark and the water flows when the force is turned on.

The important point to note is that in tougher economic times, when capital for original equipment orders softens, the spend on aftermarket still continues and may even offer growth opportunities as facility operators look to outsource fixed costs and increased operating efficiency.

We believe that with our expand global network of quick response centers, our outstanding engineering capabilities to assist customers with optimizing there operations, and our persistent focus on becoming a company of choice for aftermarket services, we are very well positioned to grow market share around the globe and important aftermarket component of our business.

I want to thank you for your time and attention this morning. I will now turn the discussion over to Mark Blinn for a comprehensive look at our first quarter financials. Mark?

Mark A. Blinn

Thank you, Lew and good morning everyone. Before I review our full financials, I want to briefly review some results for the quarter which highlight our bookings in aftermarket, our strong operating platform and our strong balance sheet.

First, with respect to bookings, bookings were slightly less than 1 billion for the quarter at 968 million, down 32% year-over-year, but down 21% if you adjust for currency and the thruster orders. We did maintain a good book-to-bill ratio of 0.95, resulting in a strong backlog of $2.67 billion. We also saw continued performance in aftermarket with increases in Asia-Pacific, Latin America and the power sector, offsetting our exposure in the chemical markets in North American oil and gas.

In the aftermarket during the quarter, we saw the impact from uncertainty in the markets in fewer commissioning spares, but we did see bookings begin to strengthen in March.

A great indicator of our strong operating platform is our operating margin which expanded 240 basis points to 14.4%, or 330 basis points to 15.3%, if you exclude realignment. This was driven by strong gross margin improvement of 110 basis points, including 60 basis points of realignment. And also despite a 200 basis point shift mix to original equipment.

We also saw continued SG&A reduction as a percent of sales, down 140 basis points, including 30 basis points of realignment. And we saw an improvement in corporate expense year-over-year of 50 basis points to 2.3% of sales.

Looking at our balance sheet, the first quarter is historically a net cash flow use; you see (ph) our largest, yet we finished the quarter with over $200 million in cash.

The next slide looks further at our strong operating platform and the trends over the last four years. You can see sales were up 60% over the last four plus years. Backlog, up over 260%, growth in gross margin and great overhead efficiency in SG&A and corporate expense.

Meanwhile, if you look at our manufacturing footprint, it's down slightly. Now I want to point out, this is not the same capacity we had four years ago. We've taken out less efficient capacity and added capability in growth regions like China, Middle East and India.

Now turning to the results for the quarter on slide 24. As Lew indicated, we delivered strong operating margins driven by tremendous operating leverage. Also, as illustrated by the further right column, we face strong currency headwinds resulting from the strengthening dollar.

Bookings were $968 million, down $461 million over the prior year. This was driven by a decline in project orders and the impact of foreign currency as well as with thrusters. Sales were up $31.4 million to $1.25 billion and gross profit improved $22 million to $368 million, with gross margin improving 110 basis points to 35.9%. This was driven by operational excellence, pricing and volume leverage and it does, as I mentioned, include the impact of 60 basis points realignment and 200 basis points of mix shift.

SG&A declined year-over-year by $7.2 million to $225 million and SG&A as a percent of sales improved 140 basis points to 22%, including 30 basis points of realignment. Reported operating income increased $27.8 million to $147 million and operating margin improved strong 240 basis points to 14.4% or 330 basis points to 15.3% excluding realignment.

Looking at other income and expense, over the last year this has been primarily driven by the changes in foreign currency. Last year we saw a substantially weaker dollar and during the quarter in 2008, we had $16.5 million of income in this line. This year, with the stronger dollar, we had $9.3 million of expense.

The year-over-year change is $26 million in this line. When you add that to the $24 million negative currency impact in operating income, we had a $50 million year-over-year impact from currency and yet we delivered stronger earnings of $4.2 million to $92.3 million.

Reported earnings per share were $1.64, $0.12 over last year and if you exclude the impact of realignment, they were $0.25 over the last year, a significant year-over-year improvement with tremendous operating leverage.

Looking at the pump division. The pump division saw strong saw margin improvement during the quarter. Bookings were $550 million, down $340 million versus prior year, driven by foreign currency and a decline in project orders, primarily in the oil and gas and general industries.

Sales increased $38.5 million to almost $600 million and gross profit improved a strong $24.1 million to almost $199 million. Gross margin improved 200 basis points to 33.1% and this does include 45 basis points of realignment.

SG&A decreased slightly to $95.7 million and SG&A as a percent of sales improved $120 basis points in the pump division to 16% including 10 basis points of realignment impact.

Reported operating income was up $25.1 million to $103.6 million and operating margin improved 330 basis points to 17.3%. And if you exclude the impact of realignment, operating margins improved 380 basis points year-over-year. The pump division delivered outstanding margins, while continuing to invest in strategic growth opportunities.

Looking at the supplemental slide that we have on slide 26 which breaks out projects and aftermarket in the pump business, you can see the impact of the drop of projects and the impact of currency. The result was we saw 14% booking shift to more aftermarket.

We did see a decline in aftermarket orders in the pump business, but if you consider the impact of commissioning spares and the impact of currency, our aftermarket was stable which we are pleased with considering the market uncertainty in the beginning at year.

The Flow Control division saw a continued operational improvement and benefits from cost controls. Bookings were 303 million, down 87 million versus the prior year, driven primarily by foreign currency and weakness in the chemical and general industries.

Sales were down slightly to $297.2 million. The gross profit increased $1 million to $107.2 million and gross margin improved 70 basis points to 36.1%, with the slight impact from realignment.

SG&A year-over-year decreased $4.5 million to $62.4 million and SG&A as a percent of sales improved 130 basis points to 21%, including a 10 basis point impact from realignment.

Reported operating income improved $4.5 million to $47.6 million and margins improved 160 basis points to 16%. If you exclude the impact of the realignment, their margins improved 180 basis points. The valve division has delivered consistent operational improvement for the last four years.

The seal division sustained a high margin result. We're executing on many of their realignment initiatives. Bookings were $133 million down, $38 million versus the prior year driven by a drop in project orders and the impact of foreign currency. I will note that their aftermarket orders were up year-over-year by 6%.

Sales were down $6.9 million to $143.7 million and gross profit was down $3.7 million to $62.3 million, but this does include $3.1 million of realignment, and SG&A was up $2.1 million to $43 million, also including $2.7 million of realignment.

If you look at the reported operating income, it was impacted by the realignment charges, down $6.2 million to $20.7 million. But if you adjust the realignment, their operating income was just down $400,000 and their operating margin improved 50 basis points to 18.4%.

As you can see, the seal division responded very quickly with realignment initiatives while maintaining a stable aftermarket business.

On the next few slides starting on slide 29, I'm just going to spend a moment to detail our actual and forecast realignment costs. Looking at the bottom right quarter, you can see that during the first quarter, we saw 9.9 million of cost.

You can see how it's broken out by division and by P&L line item. For the full year on the next slide, you can see that we currently have detailed plans which result in $36.5 million of realignment charges.

We do anticipate an additional $4 million in the seal division bringing us up to the 40 million that we talked about earlier.

As I mentioned on the last call, our realignment efforts have been ongoing for a number of years and we've accelerated many of them into 2009. Also, we expect to start seeing the benefits from this realignment in the back half of 2009 and more important we expect to see the full benefits of over $40 million in 2010.

Looking briefly at primary working capital on slide 31, you can see that working capital remain stable and we finished d quarter with a strong cash advance balance of 408 million to secure our backlog.

Looking at first quarter cash flows as I mentioned, the first quarter has historically being our largest use of cash and cash flow from operations was a use of $180 million consistent with last year and capital expenditures we spent $44 million, which included investments and growth initiatives, geographic expansion in the Middle East, growth in markets like nuclear and aftermarket.

We also spent $21 million in dividends and share repurchases. The result is we finished the quarter with a very strong balance sheet with over $500 million of cash in committed debt capacity. Looking at our full year cash projections, we still estimate the capital expenditures to be around $100 million. We did pay a dividend of $0.27 a share in April. We have 128 million remaining under our share repurchase program.

We do anticipate 55 to 75 million of pension contributions. We already made a 25 million contribution in April. We will spend money on our realignment costs and we'll also use our balance sheet for strategic acquisition opportunities like the CALDER acquisition we completed April 21st.

Looking forward, as we mentioned we are reaffirming our full year EPS target range of $6.75 to $7.50 a share including approximately $0.50 a share of realignment cost. We're very pleased with our aftermarket business and we are very well positioned looking forward.

We have a solid backlog and we're also investing in growth initiatives; our integrated services group, which will drive incremental aftermarket opportunities, our CALDER acquisition which will make us a preeminent player in desalination, also geographic investment in Brazil, the Middle East, in QRCs, which will give us critical geographic presence near key customers.

We have a great balance sheet which gives us flexibility and we're continuing to work on our operating platform to realign the cost and SG&A reductions. The bottom-line is that management is confident that we have a strong position, a strong operating platform and a strong balance sheet which makes us well positioned to deal in the current environment and more importantly to take advantage of future opportunities.

And with that, that concludes my comments and I'll turn it over to Q&A to Paul. Thanks.

Paul W. Fehlman

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

Question-and-Answer Session


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

Charlie Brady - BMO Capital Markets

Hi, thanks. Good morning guys. And congratulations on a pretty strong quarter and hitting that 15% margin, though... the much earlier than we thought.

I just had a question, Mark, on the... can you give us a little more detail with regards to gross profit improvement, gross margin improvement, kind of breakdown... how much of that is coming from the higher volume versus pricing and CIP initiatives and then specifically to pumps, the impact on the specialty pumps shipments in the quarter and is that something that those type kind of pump products are going to be shipped throughout the remaining of 2009 or was that a one-off type of event.

Mark Blinn

Let me start with the latter one. No, those aren't one-off. If you recall, we've been talking about specialty pump equipment over the last couple of years. And if you would respect to loose comments around complex recovery and complex processes, these specialty pumps and specialty equipment are becoming more prevalent around refineries and some of the caustic opportunities, cryogenic, all the things that we've been talking about, for example the CALDER technology that we have is around the complex process.

As to your question around gross margin, a significant contributor is still operational excellence in this business. We have seen a benefit from pricing and volume leverage in our business. But we've seen a significant contribution from operational excellence. So we still have a lot of opportunity in terms of our gross margin because we're still levering the initiatives that we have on the operational excellence side.

Charlie Brady - BMO Capital Markets

Thanks. I'll get back in queue.

Mark Blinn



Your next question comes from the line of Scott Graham of Ladenburg.

R. Graham - Ladenburg Thalmann

Hey, good morning.

Unidentified Company Speaker

Good morning, Scott.

R. Graham - Ladenburg Thalmann

Hey. Just really, one question, one follow-up. The bookings number in the pumps business was obviously a number that we were somewhat disappointed and if you can kind of maybe get us little bit behind. I know the thrusters bookings on the OEM side, I suspect had an impact on that minus 50. But, what does that minus 50 look like on the OEM side, ex that? And what would you say that the pick up in March makes that number look like now?

Mark Blinn

Well, I don't want to give any detail on what we provided. But if you look at year-over-year, couple of things. One, we had obviously a very difficult compare. You had thruster orders that were in last year. But as we look at the bookings in terms of the view, you have to remember, I mean these bookings adjusted for currency at levels we saw in 2007 when the market was still growing quite a bit.

And so when -- as you look behind that. A lot of this was in projects, projects as Lewis talked about that we saw delays in. But also what you saw in the first quarter and we talked about this briefly in last call is a tremendous amount of uncertainty in January and February.

I mean, even think about it all personally, during January and February personally you just, you did know what was the future was going to be and that created a lot of uncertainty and our comment around March and particularly in the aftermarket was we saw the activity come back on line and normalize as a lot of the uncertainty in the global markets past. I know there are still some going forward, but if you recall in January and February, there was no visibility into the future in the global financial markets.

R. Graham - Ladenburg Thalmann

All right. I guess point my Mark was when you look at the pumps number of minus 50. I was just actually kind of hoping for a little bit more maybe numerical clarity on what that number feels like today?

Mark Blinn

Yeah, well I mean, the only thing I can do is bring you down to the first quarter and give you the additional information around what we saw beginning in March. And the other thing to talk about is when you looked at the aftermarket orders, you did see a decline in commissioning spares which attach the projects.

With that aside in the currency, aftermarket was very stable and I also want to point out, aftermarket was also impacted by the uncertainty in the first two months of the quarter as well, but beyond the truster orders. The fact that you look at our book-to-bill, you look at some other drivers that Lewis talked about out there, you look at how we're positioned in the market place in terms of our global presence in our value add, and I think that's where you can draw your conclusions of what the bookings opportunities will be.

R. Graham - Ladenburg Thalmann

Okay. The next question surrounds the cost opportunity here now. Obviously you guys are really -- looks like your terrific execution mode on this realignment, but let's say for example, that the bookings are maybe closer to reality where they are now or what may be weaker than what you would expect. Maybe it's the best way to put it. Let's say along the lines of a minus 20 as opposed to something better than that. What's the trigger for the next round of cost cutting at the company to adjust the structure particularly for 2010? I don't think that there is much of a concern for '09. But for 2010, what's the next trigger here that you would think Mark would... that we should be looking for? Is it a bookings number? Is it something other than that?

Mark Blinn

No. We're following bookings. We're following what the market does, but I can assure you that all three divisions do have detailed plans with particular points based on metrics of where they can creating what we would call the next round of changes. So therefore we do have detailed plans in place and we'll trigger those if need be.

R. Graham - Ladenburg Thalmann

All right. Very good. Thanks a lot.


Your next question comes from the line of Kevin Maczka of BB&T Capital Markets.

Kevin Maczka - BB&T Capital Market

Gentleman, good morning.

R. Graham - Ladenburg Thalmann

Good morning Kevin.

Kevin Maczka - BB&T Capital Market

I guess I'll ask my question around the aftermarket. You saw the deceleration flattish aftermarket revenues and pump after market revenues declining. So I guess my question is how of that business is replacement demand from customers. Customers just saying, hey, I've got a worn part. I need you to replace it versus I want to outsource my entire maintenance function or something along those lines. That maybe might not be a sensitive to the slowdown that's going on right now?

Mark Blinn

Well, the after market has a number of components to it. It does have replacement parts. It has service. It has spares. But, also as you talked about it as the outsourcing, really the reliability contract and efficiency contract that they put on us which has been an increasing amount of our business.

And so, again what you saw in the first quarter around the aftermarket and you look year-over-year its still a very, very stable business, but people were just holding up off on our purchase decisions, even around and they even deferred some of there maintenance activities. They can't defer them forever, but they certainly defer them just trying to get an outlook on the environment. So what you saw during the one thing we did seen impact on as I mentioned earlier is a commissioning spares and what those are basically when you start up the facility you have spares there because there are anticipated breakages on certain pieces of equipment as you start up a system and you have the spares there. Those obviously -- those orders attached to new projects, but we still seen strength around service. These things have to stay in a state of repair. People still need replacement parts and also what we've seen is an increasing desire to really in a sense outsource for the lack of a better term, the service work to us and this will be in the form of reducing fixed cost if they have their own maintenance capabilities.

Really looking to Flowserve to make sure they maintain the efficiency of the process in the state of repair.

Lewis Kling

I would have to that Kevin that over the last several years we see more and more of our clients taken the position of outsourcing more they work as their resources retire and so on and so forth. So that trend is continuing and is some what escalated based on the current situation out there and the overall market. And the other thing I would add is, we also see a lot emphasis now on increased efficiency requirements in the refinery, the power business and that also tends to drive a lot of the aftermarket work in our business.

Kevin Maczka - BB&T Capital Market

Okay. And then as a follow-up to that, you had a couple of big announcements lately about new QRCs opening in the Middle East. I'm just wondering if you can quantify all your expectations, maybe not this year but longer term or in anyway that you can in terms of how that roll out will continue to progress?

Unidentified Company Speaker

We're not going into forward numbers. I was over there to open up the one in Dahalan (ph) and one in Dubai. These are large QRCs, pretty much almost full factories with learning centers and test equipment especially in the Saudi unit. That's because our customers there need this equipment, they need the QRC nearby. In fact at the presentation ceremony when we opened up the one in Saudi Arabia, we had probably 70 customers there and on the day as besides our partner, were two higher ranking members of Ramco who made speeches also on public TV, CNBC and every other channel that's in the Middle East.

So very, very well received and the one in Dubai, I think had 70 customers. So it's going to actually promote an awful lot of usage of Flowserve product in the region going forward.

Kevin Maczka - BB&T Capital Market

Okay gentlemen. Thank you.


Your next question comes from the line of Hamza Mazari of Credit Suisse.

Hamza Mazari - Credit Suisse

Thank you. Just a question surrounding your costs -- the cost side, as well. Could you give us little more color on how to think about your cost structure going forward in terms of fixed deposits variable and going forward as well how much low hanging fruit do you have on the cost side remaining? How should we be thinking about that?

Unidentified Company Speaker

Couple of things on the, in the SG&A line, just keep in mind generally about half of that cost is selling related, which is variable with in a sense with our top line.

In terms of the opportunity, we still have plenty of opportunity and we talked about the metric of driving SG&A to 20% as a percent of sales. We still have some work to do there on the corporate side as well.

So, there is still an opportunity to leverage that. Some of which you see in the realignment is aimed at that in terms accelerating some of the initiatives that we had before to drive that level of fixed cost leverage. So, we still have plenty of opportunity. As I mentioned on the gross margin line, we have opportunity around some operational excellence initiatives as well. So really, we're fall along (ph) a lot of these processes but there is still as Lew mentioned a lot of work to do to drive costs out of this business.

Lewis Kling

I mean, I would also add to that Mark that we've been working on Six Sigma for the last several years, and we'll continue to work on that aspect. But there is other areas that are newer areas that are looking at producing additional gross margin opportunities lean remanufacturing, value engineering. We continue to drive our low cost sourcing models both across all three divisions. So we have not exhausted as Mark has indicated, our opportunities in the business and we'll continue to drive those accordingly.

Hamza Mazari - Credit Suisse

Okay. Thank you. Just one follow-up. Could you talk a little bit about the resiliency of your backlogs? How much of your exposure is late cycled to projects that are already near completion, where your product is say 3, 4% of the total cost of that project. So you're cancellation rate remains pretty low relative to maybe some of your competitors?

Mark Blinn

I think your question answered the question. It's right on. I mean, a couple of things when you look at our backlog first. We are related cycle. There is a tremendous amount of work that's been done on a project by the time they put orders on Flowserve. The other thing to keep in mind is the advance cash balance that we have. It was $408 million at the end of quarter, and also the terms and conditions that we have in our contracts. So we're very confident in the strength of our backlog. And as you look again as I mentioned earlier, you looked at the book-to-bill, we delivered tremendous earnings with 0.95 book-to-bill, which mean we didn't erode a lot of our backlog this quarter.

Hamza Mazari - Credit Suisse

All right, very good. Thanks.


Your next question comes from the line of Jamie Sullivan of RBC Capital Markets.

Unidentified Analyst

Hey, this is Nice Christie (ph) here filling in for Jamie today. I've got one quick question for you. I know in your last call, you mentioned some of your cost realignment you were trying do them sooner rather than later. And in the first quarter, it only went through about a quarter of your intended amount for the year. Could you give us some kind of update on the timing of what's left to do, what will have in next quarter, what we'll have in back half of the year?

Unidentified Company Speaker

Yeah, we planned to probably have most of it done by the end of the second quarter, because we really buy the -- getting near the end of the year, we want to have our run rate of savings up to where we want be and obviously get full impact in 2010. So we are accelerating to get it done by the first half.

Unidentified Analyst

Great. And just a follow-up, does that include that little less that you mentioned, above and beyond the 36,500 on that slide?

Unidentified Company Speaker

Well, that was the 4 million in seal. Yes, that's included.

Unidentified Analyst

Great. Thank you so much.


Your next question comes from the line of John Moore of Robert W. Baird.

John Moore - Robert W. Baird

Good morning, guys.

Unidentified Company Speaker

Good morning.

Unidentified Company Speaker

Good morning.

John Moore - Robert W. Baird

First question within projects, I know the multipliers been rising for about the past two to three years or so are your coated multipliers now declining? And if not, at what point would you expect that to start happening?

Unidentified Company Speaker

Well, a couple of things. I mean these are and always have been competitive bids and what you saw, let's talk generally about pricing. As you certainly saw an increase in the pricing environment last year, a lot of that was driven by materials and input costs as well. And we did see accordingly multipliers rise. A lot of that was because of our operational excellence initiatives as well.

So certainly, as you can imagine in this environment, you see pressure on pricing but we've also been able to turn to our suppliers and drive pricing to sustain very good multipliers in our business. So, we're not suggesting that the multipliers are going to completely evaporate, because we're able to drive a lot of benefit though our cost structure as well.

John Moore - Robert W. Baird

Okay. All right, and then just one follow-up here with, I guess with the pump orders down 25% this quarter, I am just trying to figure out how we should think about that in terms of organic revenue growth? Does that translate into organic revenue growth being down 20% to 25% in the back half of this year in pumps?

Unidentified Company Speaker

Well, again, don't call a year by the quarter, first and foremost, and we don't give revenue guidance going forward. We've stuck to our earnings guidance as we talked about earlier. I think, more of I look at the book-to-bill, we didn't erode a lot of our backlog. Look at what we've been able to deliver on our backlog when we generated through revenue in terms of earnings. And also, I think we need to take in consideration what happens to the market. One of the reasons we specially don't want to consider the first quarter in isolation is a lot of the uncertainty that existed in January and February.

So, I think as usual as we talked about, you need to look at this business over a period of a couple of quarters. A lot of it depends on what happens in the markets, which are certainly out of our control, what is within our control is how we execute in those markets, our ability to take market share and get closer to the customer, which we've had a lot of success.

John Moore - Robert W. Baird

Okay. That's helpful guys. Thank you.

Unidentified Company Speaker

Thank you.


Your next question comes from the line of Kerry Kelly of Ironworks Capital. Kerry Kelly, your line is now open. (Operator Instructions) Your next question comes from the line of William Bremer of Maxim Group.

William Bremer - Maxim Group

Good morning, gentleman. Nice quarter.

Unidentified Company Speaker

Thank you.

Unidentified Company Speaker


William Bremer - Maxim Group

Can you touch a little bit on possibly the timing of the SG&A towards the 20% figure?

Unidentified Company Speaker

As soon as possible, ASAP. I think that's the answer to the question now. Let me comment a little more generally. We have been working on that quite a bit over the last couple of years. One thing to keep in mind is and we talked about this historically. That number certainly could have been lower, if we'd have decided not to invest in QRCs, not to invest in some of our aftermarket initiatives.

So, I think the point is, is we're going to balance growth opportunities which will impact SG&A to a certain degree against driving cost out of the business as well. I mean we've invested and brought a lot of capabilities into this business that we don't want to let go off because the markets are going to be there for us going forward. So, I would say we are driving. In this environment it's given the opportunity for us to accelerate some of the initiatives. We're committed to getting it down to 20% or below.

William Bremer - Maxim Group

Okay, great. Also can we touch upon the pricing in the environment right now, in term of contracts having to be re-bid in this environment? Can you give us a little more color on that?

Unidentified Company Speaker

Well, I mean there are ... a lot of our business goes through the distributors and the distributor pricing is over our tops. If we take a look at the metal prices, most of the metal prices have also come down from their 2008 levels. So, there is continued price pressure overall from our clients. Now with that said, I would also indicate that our clients in this day and age are still looking for on-time delivery which is one of the basic tenants that we have as a business and our on-time delivery is up significantly and probably one of the best in the industries. So that continues to be an important driver.

Our positioning relative to the aftermarket as more of these companies switch to looking at their operational cost, they also are looking at that component now. So, while we're seeing price pressure we also see other drivers coming into the equation as they evaluate these proposals and we are very positioned ... we're positioned very well considering those other drivers.

Mark Blinn

And it's Mark. A lot of that is consistent with what we see in pump and seals, although there is less content that goes through distributors in those businesses. And around price as we talked about when price was going up I mean they still are willing to pay a fair price, but they want an engineered product that works and can be supported and so we're still seeing the value from our ability to deliver that even though as I commented earlier, in this environment you certainly see a pressure on pricing is much because the cost of the inputs have gone down is anything else.

William Bremer - Maxim Group

Okay. And finally maybe a little color on the acquisition of CALDER. That market is extremely robust, a lot of strong multiples in that market and can you give us the opportunity of how quickly you believe you can ramp that business up?

Lewis Kling

Well, CALDER was a smaller business in Europe and we feel through our distribution because remember we have hundreds and hundreds of sales people, I think they had about one, we feel we can probably ramp it up pretty quickly. They had a tremendous technology and when you add that to our flow control ability and our distribution ability, one plus one should equal somewhere north of five I mean it should work out very well.

Mark Blinn

Let me add a little bit to that Bill, we have got a history of taking technology and complex applications like this and levering them on our platform. And one thing to understand about this business and this technology is, it is basically one of primary drivers that is made wide use commercial application of DeCell basically viable as it reduced the cost of the whole process.

So that's why we are very exited about this because as Lew mentioned, they definitely have a platform that we can leverage. It's right in our sweet spot in terms of complexity. It's right in our sweet spot in terms of aftermarket opportunity.

William Bremer - Maxim Group

Can you give us senses of how many potential projects are in queue there?

Mark Blinn

Did you say projects, well I mean it's really this is a core process around any of the desalination processes worldwide. So it really attaches to the opportunity around global DeCcell projects.

William Bremer - Maxim Group

Hey. Gentlemen thank you. I will hop back in queue.


Your next question comes from the line of Kerry Kelly (ph) of Ironworks Capital.

Unidentified Analyst

Hi can you hear me this time?

Mark Blinn

Yes. We can.

Unidentified Analyst

Sorry about that before. Are you seeing a pick up in re-bidding then from customers trying to capture some of the lower commodity costs? Is it I have been hearing that a lot in the oil and gas area?

Lewis Kling

No. Its let so on the re-bidding out of the backlog, determine when we uses re-bidding as we talked about before, a lot of this projects are fairly far a long when they put orders on us. What we do see our customers now realizing that the labor cost and material cost have gone down, are basically going back and re-budgeting and some times re-bidding on the general contracting firms. We see from time to time things re-bid out of a backlog but that hasn't been a significant amount.

Unidentified Analyst

Okay. In the margins that are in the backlog are you expecting them to be similar what you're experienced here in Q1?

Mark Blinn

Well. I don't want to give margin guidance, revenue guidance what we out there is EPS guidance. But keep in mind what we do focus on our multipliers and on our margins. We still have room on the operational excellence side, which gives us the ability to respond to the pricing environment that's out there. So we're focused on driving margins not only through operational excellence, but also in fixed cost controls.

Unidentified Analyst

Okay, great thank you.


There are no further questions at this time. Gentlemen, are there any closing remarks.

Paul Fehlman

No, but I'd like to thank everyone for joining us on the call today and we hope to see you at one of our many investment events this year.

Thank you very much.

Lewis Kling

Thank you very much.


This concludes today's conference call and you may now disconnect.

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