Flowserve CEO Discusses Q3 2010 Results – Earnings Call Transcript

Oct.28.10 | About: Flowserve Corporation (FLS)

Flowserve Corporation (NYSE:FLS)

Q3 2010 Earnings Conference Call

October 28, 2010 11 AM ET

Executives

Paul Fehlman – VP, IR and Financial Planning & Analysis

Mark Blinn – CEO and President

Kyle Ahlfinger – Chief Marketing Officer and VP

Tom Ferguson – SVP and President of Flowserve Pump Division

Tom Pajonas – SVP and President of Flow Control Division

Richard Guiltinan – Principal Financial Officer, Chief Accounting Officer, Senior Vice President of Finance and Controller

Dean Freeman – SVP of Finance and Treasurer

Dick Guiltinan – VP, Finance and Chief Accounting Officer

Analysts

Hamzah Mazari – Credit Suisse

Charles Brady – BMO Capital Markets

Mike Halloran – Robert Baird

Nathan Jones – Stifel Nicolaus

Wendy Caplan – SunTrust Robinson Humphrey

Kevin Maczka – BB&T Capital Markets

Mark Barbalato – Vertical Research Partners

Paul Mammola – Sidoti & Company

William Bremer – Maxim Group

Jamie Sullivan – RBC Capital Markets

Karen Finerman – Metropolitan Capital Advisors

Charlie Brady – BMO Capital Markets

Operator

Welcome to Flowserve’s Q3 Earnings Call. There will be a question-and-answer session at the of today’s presentation.

(Operator Instructions)

I would now like to turn today’s call over to Paul Fehlman.

Paul Fehlman

Thank you, operator. Good morning, and welcome to Flowserve’s third quarter 2010 earnings conference call. Today’s call is being webcast with our earnings presentation via our website at flowserve.com. Simply click on the Investor Relations tab to access the webcast and the accompanying presentation.

For those of you that are listening today’s call through our dial-in phone number, and also wish to follow along with the earnings presentation slides via our website, please click on the Click Here to Listen Via Phone icon at the bottom of the event details page. The webcast will be posted at flowserve.com for replay approximately two hours following the end of this call. The replay will stay on the site for an on-demand review over the next few months.

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

Regarding any forward-looking statements, I’ll refer you to yesterday’s earnings release and 10-Q filing and today’s earnings presentation slide deck for Flowserve’s Safe Harbor Statement on this topic. All of this information can be found on Flowserve’s website under the Investor Relations section. I encourage you to read these statements carefully with respect to our conference call this morning. The information in this conference call, including all statements by management plus their answers to questions related in any way to projections or other forward-looking statements are subject to Flowserve’s Safe Harbor.

Now I’d like to turn it over to Mark to begin the formal presentation. Mark?

Mark Blinn

Thanks Paul, and good morning, everyone. Before starting with the third quarter results, I should say that we are especially proud of our employees and operating platform, which have enabled us to maintain strong operating margins during the downturn in the business cycle. We were also pleased with the stability of our third quarter bookings, marking the 8th consecutive quarter with bookings around $1 billion, as well as a continued growth of our aftermarket business, which was up 5% year-over-year in the quarter.

During the quarter, we saw a number of things that impacted both revenues and margins. As expected, business activity in certain regions slowed for summer vacations and fewer projects shipped. We also had some planned shipment pushed into the fourth quarter due to customer project schedule and test certification delays on these large orders. And, finally, as we work to improve the industrial products business, we had some production delays and took some actions with short-term costs to drive long-term benefit.

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

As we look at our markets, over the last year, we have not only talked about the competitive price environment, but also the general market uncertainty. We still believe that our longer cycle business like our large projects activity and EPD will remain choppy into 2011. But we now see more evidence that our short cycle OEM and aftermarket businesses appear to have started recovering, especially in developing markets with slower growth in mature markets.

Our increased aftermarket as well as our FCD and IPD bookings support this analysis. That’s not to say that there are not good large project opportunities to be captured. Rather it’s highlighting the capacity is continuing to chase these projects in the near term.

We see opportunities in the Middle East, in Brazil as the country develops its oil and gas capabilities, and in China as they continue to develop the country’s infrastructure.

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

We also pursued strategic localization by investing in emerging market growth through adding local employees, increasing our manufacturing footprint and our QRCs, plus strengthening our strategic local partnerships. Our continued objective is to be a strong local player in important markets like Brazil, Saudi Arabia, China, India, and Russia, all of which increasingly require local content.

We have expanded our product offering in the company by acquiring Valbart, which allows us to expand our valve technology into more highly engineered critical equipment for the oil and gas industry, and this addition also increased our portfolio solutions for our customers to help pull through other valve products. We’ve been doing all this, while remaining very disciplined in our cost control initiatives, as shown by the year-over-year reduction in SG&A of $64 million year-to-date.

Through these initiatives plus our realignment work, we have positioned the company to operate more efficiently in the current markets and to be able to quickly capture profitable growth as the cycle turns out.

Another way to look at our business is to look at the following four areas. Aftermarket, long cycle engineered product, flow control valve business and industrial product division; the last two of which are primarily short cycle OEM businesses.

Our aftermarket business has grown and has shown resilient margins and has produced steady earnings performance through the cycle. Our long cycle engineered project business continued to expand its global capabilities in emerging markets and leveraged operational realignment efforts, while dealing with the pricing pressures.

While the flow control valve business participates in some large valve projects and has grown its nuclear business, it is geared more toward the short cycle and has grown its margins this year, increased its bookings, and has meaningfully added to its product portfolio through the acquisition of Valbart.

IPD is a work-in-progress in the near term as we made recent changes at short-term cost to improve its long-term outlook, which has already supported by its increased quarter bookings. I am confident IPD will capitalize on its growth prospects through a committed team of employees that is driving towards an operating margin objective.

Reflecting on my travels over the past year in meetings with customers, operations teams, management, and shareholders, I am proud of the way the Flowserve team has performed in this market, met the customers’ needs and return value to the shareholders.

As we look over the next three to five years, we believe that our markets will grow. Global energy infrastructure markets will respond to the needs for power, chemical markets will rise with emerging market GDP and the needs of their growing consumer segment, and access to clean water will become one of the most critical problems in the world. We have created a balance sheet to support our growth initiatives through organic and inorganic means, while helping to offer strength and stability through the down cycle.

Through the efforts of the employees at Flowserve, we have positioned the business appropriately for recovery in the longer term project business that we believe will remain choppy into 2011, but has great opportunities beyond, and we have continued to grow our present in emerging markets and the aftermarket regions.

Overall, what gives us confidence in our platform is that we have the resources to successfully implement IPD improvement initiatives; we have growing backlog; and despite all the challenges I called out earlier, we posted adjusted operating margins of over 14% in the quarter.

Bottom line, our third quarter results are additional evidence that we are effectively dealing with the short-term realities of this environment, while continuing to position our company for long-term growth.

I’ll now turn it over to the management team to go into more depth on our markets, our operations, and our financial results. Kyle?

Kyle Ahlfinger

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

Moving to the next slide, we have provided a view into the forecasted capacity additions around the world in four key industry areas, oil refining, power generation, bulk chemical and desalination. This chart reflects the capacity, which may come on line from 2011 to 2015, from projects which are classified as either in the construction or the planning phase. We utilized a number of sources to prepare this overview which are denoted at the bottom of the slide.

The first point to note is the importance of China and the Middle East relative to the forecasted capacity expansion. More than one-third of the potential investment in power and chemical is related to China, while the Middle East leads the way in oil refining expansion and accounts for almost half of the projected expansion in desalination.

Looking at the forecast for oil refining, the graphic shows that there are projects being considered in all of the geographical regions. Approximately, one-third of the forecasted production volume is based on expansion of existing refineries. This is the predominant component of the projected investment in the mature regions.

In the power industry, the forecasted capacity expansions cover all forms of power generation including renewable. At least two-thirds of these projected investments will continue to use fossil fuel with the majority using coal and natural gas.

China and India remain the largest participants in forecasted capacity expansion from 2011 to 2015. In China’s recently released 12th five-year plan, the government announced plans to add 390 gigawatts of capacity over this timeframe. This represents more than one-third of the forecasted expansion. The graph of the chemical industry is focused on projects related to a specific selection of bulk chemicals as denoted on the slide. From this mix of products, urea, ammonia and ethylene account for almost two-thirds of the projected capacity.

From a geographical perspective, China, Middle East and India account for approximately two-thirds of the forecasted investments. This aligns with their previously announced strategies to become significant players in this market area.

The last graph on the right shows the data related to the desalination market. These forecast numbers cover multiple methodologies with reverse osmosis accounting for approximately three-quarters of the proposed capacity additions. As for geographical influence, the Middle East and Africa account for roughly 60% of the forecasted investments from 2011 to 2015.

In summary, the key industry markets we serve continue to forecast long-term investment growth, driven by increasing demand for energy, potable water and consumer goods that require a variety of bulk chemicals in their production process. Much of this forecasted demand growth as well as the planned investments are focused in regions whose economies are experiencing decelerated growth. This growth has been supported by increases in urban middleclass populations and a desire by governments or companies to increase their business influence around the globe.

As we look to these longer term opportunities for growth, we believe Flowserve is well positioned to compete considering our reputation in the markets we serve, the growth of our geographical presence and our investments to expand our floor management capabilities through both internal development and acquisitions.

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

In aftermarket bookings, we continued to experience growth in the third quarter. This contributed to a year-to-date growth and aftermarket bookings of 7.9% compared to the same period in 2009.

Overall, we continue to see opportunities in aftermarket, particularly in our parts in integrated solutions businesses. Some sectors of the service business remains challenging with some customers as they continue to utilize their own resources to perform required service work or extend the time between maintenance shutdowns. As we have discussed, this is not unusual considering the impact of the economic recession on the industries we serve.

In closing, I would like to relay a couple of our key strategies with our aftermarket business. During previous earnings’ discussions we have shared our key strategies, which focused on our business objectives and provide guidance when considering the investment options we have to grow our company.

Two of these key strategies are disciplined profitable growth and customer intimacy. As we focus on improving our customer intimacy, we see the aftermarket business as an important part in building sustainable long-term relationships. Also as we drive for disciplined profitable growth, the aftermarket business remains a critical component of our long-term growth strategy.

Now, I’d like to turn the conversation over to Tom Ferguson, President of Flow Solutions Group. Tom?

Tom Ferguson

Good morning, I’m Tom Ferguson, President of the Flow Solutions Group, which encompasses the engineered and industrial product divisions. Generally speaking, I am pleased with the overall performance of the Flow Solutions Group, but we’ll admit we have some areas I’d like to see improved. Our focus on our end-user customers, operational excellence and strategic growth initiatives continue to provide a platform to drive bookings growth, while generating solid sales in income performance.

We have continued to drive sales process discipline and carefully balance our project win race with pricing and factory loading considerations. We have continued to see pricing pressure in most OE sectors as more of our customer focus on first cost. We did struggle with some isolated operational disruptions during the quarter which impacted our execution and customer satisfaction metrics primarily within the industrial products division.

For the engineered products division or EPD, Q3 bookings growth of 6.3% was driven primarily by focusing on targeting strategic projects. Market activity levels in our core market sectors continue to be mixed. We were however pleased with our aftermarket business which strengthened in the face of continued low customer maintenance spending levels, particularly in North America and Europe.

Our end-user focus and integrated solutions group initiative continued to offset the natural tendency of refineries to pull pump repairs back into their own shops. As we have noted before, we are not a quarter-over-quarter business, and generally track better to half-over-half comparatives. Third quarter sales were down 5.4% primarily due to the lower backlog entering the quarter, but also impacted by many customers not needing delivery of equipment yet.

Gross margin was down 200 basis points in spite of a favorable aftermarket to original equipment mix, continued focus on operational excellence and some realignment segments.

The impact of the lower market level of project pricing last year resulted in lower backlog margins coming into the second half of 2010. Despite the tough pricing environment, we’re generally satisfied with our operating income margin of 18.1%. This was driven by benefits from our previous realignment actions and continued emphasis on SG&A controls, as well as a tremendous emphasis on the aftermarket.

Moving onto the industrial product division, let me say that I remain optimistic about the opportunity this new structure provides us to focus on these products and markets, but we must note that we have several operational issues to correct.

As a reminder, well IPD does have shorter cycles than EPD’s original equipment, it is still not a quarter-over-quarter business. With that said, for Q3, the industrial products division saw increased bookings on an FX neutral basis of 6.9% versus Q3 of 2009. We did begin to see slightly improved activity in the global chemical market that are having to develop and improve some key product lines before we can take full advantage of this activity. Sales in Q3 were down 24.4% on an FX adjusted basis, driven primarily by isolated production disruptions and lower shippable backlog due to recovery but comparatively weaker end markets.

Gross margins were down 330 basis points to 23.8%, due to significantly lower sales. Realignment savings CIP and supply chain efforts were not enough to offset the 27.7% sales decrease. SG&A was reduced by 20.4%, driven by cost containment and realignment efforts.

Overall operating margin at 6% excluding realignment costs was down 500 basis points versus 2009. This was primarily due to lower fixed cost absorption on a lower quarterly sales volume I talked about earlier. We appointed a seasoned Flowserve pump leader as Vice President and General Manager for IPD at the beginning of the quarter. During the past 90 days, he has refocused and accelerated our realignment program to better position the IPD businesses for the core markets they serve. This realignment program will continue into 2011.

While we acknowledge that we will continue to experience quarterly volatility in the short term, we remain focused on achieving the 14% to 15% operating margins by 2015, as we noted on the last call.

We remain cautiously optimistic about the opportunities we see in oil and gas in the Middle East, in Russia, in Latin America, and Asia. We are also seeing increasing opportunities in the power and desalination markets in Asia, Latin America, and the Middle East, but these are slow to come to fruition.

We remain successful in booking several larger and longer lead time aftermarket jobs to leverage our integrated solutions technical capability and have been growing our mechanical seal bookings as well.

We still face challenging end markets as we approach 2011, but Flowserve is well positioned to leverage discreet opportunities for growth in our core energy and infrastructure markets in both original equipment and aftermarket solutions.

While we have historically been strong in our engineered products end markets, the separation of engineered and industrial allows us to focus more on the key success factors for our industrial products and markets. We have taken steps to increase our marketing and technology focus on the IPD pump and seal products, but are not likely to see the full effect of these moves for a few more quarters.

We are increasing the focus on significantly improving the IPD operating platform while fully integrating our supply-chain efforts across our internal manufacturing sites. This will provide more focus to low-cost sourcing and platform optimization.

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

And now over to Tom Pajonas to cover the Flow Control Division.

Tom Pajonas

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

Overall, new product bookings and sales sequentially increased in each of the last three quarters of 2010. Distributor orders for the first three quarters have remained solid, while distributor sales have sequentially increased in each of the last three quarters of 2010.

Overall, our on-time deliveries have exceeded 92% despite supplier-capacity constraints. As far as the financials are concerned, we have a few slides.

The first slide shows FCD financials and as reported, including the Melbourne acquisition. In addition, we have included for your reference, slides that break out the Melbourne operation, including the impact of purchase price accounting.

Q3 bookings were $335 million versus the prior year of $333 million, including our Valbart acquisition. The booking comparisons also included a large $45 million booking in Q3 of 2009 in the nuclear business. With the exception of this nuclear order, the Chemical, Oil and Gas, Pulp and Paper, Mining and Water businesses all experienced increases versus Q3 2009. Also bookings by destination increased in Russia, Middle East, Africa, Asia, India and China.

Sales were $313 million versus the prior year of $293.5 million. Sales for Q3 by destination definition versus prior period increased in North America, Russia, China as well as Latin America. Sales of new equipment has increased in each of the last three quarters sequentially.

Gross margin as reported was lower in Q3 versus prior Q3 due to mix, shifts of revenue into Q4, overall pricing pressure and Valbart purchase price accounting, due diligence cost and operations. Continued SG&A control offset by mix and pricing pressure resulted in a 14.9% Q3 operating margin and a 15.7% operating margin year-to-date, including Valbart on an adjusted basis.

Excluding Valbart and realignment, the Q3 operating margin was 16.9% on an adjusted basis and 16.6% year-to-date adjusted, which we were pleased to attain under current market conditions.

Backlog is at $696 million, including Valbart of $78.4 million at the end of third quarter, compared with $485 million at the end of 2009. This strong book-to-bill of 1.07 in Q3 and 1.17 year-to-date without Valbart drove the strong increase in backlog.

Notwithstanding market uncertainty, there are a number of encouraging things happening. In the power market, the global market for new nuclear construction continues to be active in the U.S., India and China. Several other nuclear initiatives are beginning to unfold in the Middle East, the U.K. and France. Nuclear maintenance, repair and operation activity continues to be stable as plant life extensions and operates are executed.

The fossil fuel market is stagnant in the U.S. and Europe, but increasing in India and China, especially on the supercritical side. Low-cost natural gas prices and lower electricity consumption could pose a risk to the high level of nuclear activity.

Our Chemical business has seen an upswing in MRO business from our traditional North American, European and Middle Eastern markets. In India, we are involved in a number of new petrochemical projects but the market is highly competitive.

In the Oil and Gas business, the shale gas area in North America continues to accelerate. Both the Marcellus and Barnett Shale regions continue with the strong natural gas drilling activity, as well as the construction of new pipelines to tie into existing transmission lines. There is also market-based discussion around increased automation in instrumentation on transmission pipelines based on recent events.

Liquefied natural gas projects continue to remain strong. Floating LNG projects are increasingly being considered by energy companies, seeking to commercialize remote natural gas fields. There’s also been an increased level of activity in front-end engineering for new capacity in both gas processing and downstream refining. In particular, activity related to project inquiries has resulted in increased proposal support for Saudi Arabia, Abu Dhabi, Qatar, Kuwait, Algeria and West Africa. Increased customer investments in the mining industries are showing positive effects in Latin America and South Africa.

While the pulp and paper business remain stagnant in North America, Brazil has begun to experience some positive movements. Capital investments continue in new air separation plants and products for alternative energy markets for solar.

Previously, we’ve discussed our growth programs: portfolio selling, localization, emerging markets and automation. I would like to give a brief summary here.

In the area of portfolio selling, we have completed our acquisition of Valbart from the trunnion ball space for oil production and gas transmission applications. The integration plan is about 60% complete with attractive synergies identified on the selling side. This acquisition is core to our portfolio selling strategy.

We continue to see strong pressure from nationalized oil companies and power companies to increase the number of all local content. This localization of our product base supports our historical drive for a global network of Quick Response Centers, regional manufacturing and value-added centers.

We continue to invest in the Middle East, China and Latin America in order to drive the localization strategy. Our emerging markets strategy is taking shape in the area of nuclear site remediation as we continue to develop adjacent products to support this developing market.

And in the area of automation, we see this as a critical part of our valve offerings, and will be building on our heavy-duty pneumatic actuary.

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

Richard Guiltinan

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

The strengthening of the euro against the U.S. dollar late in September give a favorable mark-to-market on a cash flow hedges, basically offsetting the charge we took last quarter. That development helped support our forecast for the full year 2010 year results stated in our press release. But the year-to-date currency effect is still in net charge of about $22 million, which includes $8.4 million charge for Venezuela devaluation.

The results of Valbart for the quarter were impacted by acquisition-related costs, purchase accounting effects and typically slow summer seasonality. These purchase accounting effects involve establishing the fair value of acquired inventory in backlog of Valbart. These adjustments are amortized as sales recognized, which will substantially reduce operating margins on the Valbart sales from the acquired backlog over the balance of the year. We have included an analysis of Valbart results of operations as FCD materials to help with your review.

These acquisition-related costs and purchase accounting effects amounted to about $0.05 per share charge in the third quarter.

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

Valbart bookings for the quarter were about $50 million. Backlog of $2.7 billion at September 30, 2010, is up more than $300 million since the beginning of the year. Sales for the quarter were down about 7.6% or 4.5%, excluding currency headwinds.

While were original equipment sales in EPD and IPD reflect their lower volume of backlog at the start of 2010, including relatively lower backlog pricing than prior year. FCD sales increased by 6.5%, including $12 million from Valbart. About 74% of total sales in the quarter were delivered outside the U.S.

Third quarter gross profit margin of 34.3% reflected the less favorable pricing in the company’s beginning of year backlog compared to the prior year. Lower manufacturing cost absorption on lower sales and the impact of Valbart purchase accounting effects. These decreases were partially offset by increased mix of aftermarket sales.

Consolidated aftermarket sales mix was about 39% compared to 37% in 2009. Low-cost sourcing, positive impacts the realignment programs and other continuous improvement projects also helped increase the company’s gross profit margin for the quarter.

SG&A decreased about $20 million, reflecting an ongoing focus on cost control and increased savings from and decreasing cost of realignment programs. Quarterly corporate expense continued at reduced levels compared to 2009.

Valbart transaction-related costs included in the third quarter were about $1.4 million in addition to purchase accounting effects of $1.2 million. Operating margin of 13.3% included about 20 basis points of realignment charges and about 60 basis points related to the net effect of the Valbart acquisition.

Other income net includes the positive mark-to-market and cash flow hedges of $18.5 million, I mentioned earlier, offset by transaction-related currency losses of $4.4 million.

We also recognized the $2.6 million gain from the sale of a small foreign joint venture interest in other income net.

Our tax rate for the third quarter was about 25.5%. For the nine months ended September 30, 2010, the tax rate approximated 26.8%. Both rates reflect the net impact of foreign operations and resolution of tax audits and lapses of certain statutes of limitations.

Based on all that you’ve heard on the call today, we updated the full year EPS target range to between $6.70 and $7.15 per share, including approximately $20 million, approximately $0.26 per share in realignment charges and an estimated after-tax charge of $8.4 million, approximately $0.15 per share related to the Venezuela currency devaluation. This guidance was based on the euro to the U.S. dollar exchange rate at the end of the third quarter.

Turning to the year-to-date highlights. Year-to-date EPS was $4.89, including $0.33 of currency-related charges that we’ve discussed over the last several quarters. The bookings increased year-to-date of 8.7% and the sales decreased year-to-date of 8.7%, reflect the same drivers as the third quarter.

Year-to-date operating margins and gross margins reflected the pressures previously noted in the third quarter. The impact of lower sales and relatively lower pricing during the nine months was partially offset by realignment savings, supply chain benefits and other cost control initiatives. Year-to-date consolidated aftermarket sales mix was about 39% compared to 36% in 2009.

Turning to realignment. In 2010, we focused heavily on the integration of pumps and seals into FSG and the resulting changes in the FSG customer-facing organization. FCD also moved on to new realignment plans and programs as earlier projects were completed.

So far, we have programmed about $87.5 million in the approved realignment plans since we first announced these programs in 2008. For the third quarter, realignment charges were $2.1 million. The year-to-date amount is $10.2 million. Our plans indicate about $7.5 million in the fourth quarter realignment costs but we’re continuing to review additional opportunities in IPD. 2010 EPS guidance reflects the previously communicated $20 million realignment plan for the full year.

Realignment savings in Q3 2010 approximated $25 million. The year-to-date savings approximated $65 million. We estimate the full year of 2010 realignment savings to approximate $93 million. We also estimate an annual run rate savings from realignment by 2011 of about $115 million, assuming current foreign exchange rates and successful completion of the approved programs.

Turning to our Q3 2010 cash flows. Our cash position remains strong. We’re able to self-fund the acquisition of Valbart for about $200 million during the quarter. We have used about $17 million of cash flow for operations year-to-date. Remember, we have historically generated a significant amount of our full year cash flow in the fourth quarter.

Increase in working capital in Q3 2010 reflects additional work in progress on projects, an increase in raw materials in preparation for additional projects and an increase in finished goods that reflects some delay and customer acceptance of completed projects.

Capital expenditures are $21 million for the third quarter bring the total year-to-date CapEx to about $46 million. We now forecast approximately $100 million in full year CapEx.

We have been focused on executing earlier realignment initiatives so that completion of some planned 2010 capital expenditure projects was moved to later in the year.

Cash return to shareholders via dividends and repurchases of common shares totaled $27 million in the third quarter. And we ended the quarter with approximately $311 million of cash on hand and a net debt of $225 million.

Now, we’ll return to Paul to wrap up. Paul?

Paul Fehlman

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

Question-And-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Hamzah Mazari with Credit Suisse.

Hamzah Mazari – Credit Suisse

Good morning. Thank you. We’re having a bit of a hard time just figuring out given the bolts and gears, what the margin profile of your backlog looks like. You’ve called out negative pricing for a while now. You have some operation issues during the quarter, curious to see if you can help us understand how much the hit to your margins were these operating issues just so investors can get a sense of what the underlying margin run rate looks like?

You’ve given your Q4 guidance out there, curious to see if you can tell us what EBIT margin guidance implies for Q4 since you’ve already put it out there. So, I’m not asking for guidance besides what you’ve given just further clarification in color and how to think about the underlying margin trends in your business going forward.

Mark Blinn

Sure, Hamzah. This is Mark. I think what you’ve heard in the call and in our comments was there’s really three things that impacted margins. Price, which we’ve been talking about. Volume, which we’ve also talked about before, especially in Q3, and then the operational issues. Let me kind of walk-through.

Generally, the volume in the operations had the most impact on our margins year-over-year and sequentially. Taking a step back, looking at the operations side around IPD. You’ll see at 6% margins there running roughly a 10% margins earlier in the year. That’s about 400 basis points. And on their sales, you can see that’s about $7 million. So, just quick math in the third quarter that would’ve been about 70 basis point impact.

So, as you kind of break them out, those are the ways to look at it. There is the impact of price but the bigger impact in the quarter both year-over-year and sequentially were the volume and the IPD issues.

Hamzah Mazari – Credit Suisse

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

Mark Blinn

Well, the way I broke down the business as you can look at it, the four aspects of it, the long lead cycle, the aftermarket and then the shorter cycle business. I think what we’ve talked about for some time is that the long-cycle Project business, a lot of which is in the EPD OE, has been very price competitive for some time. And we’ve actually called that to be choppy for 2011.

Basically, what you have there are very, very large projects and there’s capacity that it’s competing for those projects, and has been for some period of time. So, this pricing environment has existed but it’s still volatile really going into 2011. We see some opportunities certainly out there on projects. And if you hear about the growth prospects, we’re encouraged longer term for this business.

If you look at the other three aspects, the Aftermarket business is growing. That’s remained stable and price at a high-margin business. So, pricing is really tied, for us, from our standpoint, to growth, which you’ve seen.

The other business, IPD and FCB, those are shorter-cycle businesses. And what we’ve talked about our comments was we’re actually seeing sign of recovery. Recovery brings two things to the three things that impacted us this quarter. One it brings incremental volume, but also it gives you pricing power into the recovery. So, as you look at those four aspects of the business, the long cycle is we expect to remain volatile in the pricing, those are important projects and we’ll stay disciplined. The other three, we see encouraging signs on price.

Hamzah Mazari – Credit Suisse

Okay, that’s fair enough. Just a question on your bookings. You guys are sole inspector to the Aramco refinery is that – you signed that in August. Does that going to start beginning to hit at the end of the year? How should we think about that project?

Mark Blinn

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

Hamzah Mazari – Credit Suisse

Okay, great. I’ll get back in the queue. Thank you.

Mark Blinn

Thanks, Hamzah.

Operator

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

Charles Brady – BMO Capital Markets

Hi, thanks. Good morning, guys.

Mark Blinn

Good morning, Charlie.

Charles Brady – BMO Capital Markets

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

Richard Guiltinan

You mean versus – I’m sorry, Q3 versus last year?

Charles Brady – BMO Capital Markets

No. If I look at the backlog you have sitting in today.

Richard Guiltinan

Right.

Charles Brady – BMO Capital Markets

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

Richard Guiltinan

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

As you look at our business, Q3 historically has tended to be our lowest quarter in terms of absorption. So, when you come into a quarter like this, where we really felt a substantial impact from the pricing environment we’ve been calling out for a period of time, coupled with volume, then you see the impact it can have on margins from this quarter.

So, as you look at our backlog at this point in time, long cycle business, it’s the same pricing, really, we’ve seen over the last number of quarters and we’re starting to see some opportunity in the pricing and our backlog in our shorter cycle businesses. Certainly, the increase in the aftermarket backlog that you can see from Kyle’s slide, you’ll look at the increase in bookings, that’s higher price or higher margin business. That’s probably a good way to think about our backlog.

Charles Brady – BMO Capital Markets

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

Richard Guiltinan

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

Dean Freeman

Yes, to answer your question directly, Charlie, about what we’re seeing is roughly about a third. If you look at the Engineered Product Division as an example, about a third of that margin degradation is related to absorption. The Industrial business has significantly more exposure to absorption given their platform and given the volume decreases that they’ve seen.

The other thing that’s driving absorption, obviously, our backlog. Certainly, in the Engineered Products division is up 9%, it’s up significantly in the FCD businesses. So, there’s a lot of activity in the beginning of the quarter. There tends to be a lot of period costs. And when you’re still working on long cycle product and you’re still flushing through that conversion, it makes the absorption that much more magnified. But about a third of the third quarter, our margin degradation overall is related to absorption.

Charles Brady – BMO Capital Markets

Thanks, that’s helpful. With regard to IPD and the production delays, are we through that or are we seeing that continue into Q4 maybe into Q of ‘11 rather.

Tom Ferguson

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

Charles Brady – BMO Capital Markets

All right. One more and I’ll jump back in queue here. Just on purchase accounting, should we anticipate purchase accounting for Valbart on a go-forward basis?

Richard Guiltinan

Dick Guiltinan. Yes, you will. The purchase accounting adjustments, we call that are related to the acquired backlog. Obviously, if you look at the information we presented of $12 million in sales is not all the acquired backlog that we disclose. So, the way to think about that is the sales of the period were burdened by that $2.9 million of purchase accounting. We’ve got about $47 million of backlog to flush through over the balance of the year or early part of next year, but mostly over the balance of the year.

Charles Brady – BMO Capital Markets

Okay, thank you.

Mark Blinn

Hey, Charlie, one thing I want to comment just to clarifying Dean’s comments as well. We breakout kind of volume absorption separately. So, in his comments around absorption, that’s just pure plain absorption. There’s also the volume component. So, if you add the two volumes and the absorption together, it’s about two-thirds of the impact in the margins.

Operator

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

Mike Halloran – Robert Baird

Good morning, back on that absorption question, when we think about incremental margins on a go-forward basis, how would you think about those for your IPD and EPD segments?

Richard Guiltinan

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

So as we look forward, we see that certainly the increased volumes are going to start to offset some of the margin impact you’ve seen from volumes.

Mike Halloran – Robert Baird

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

Richard Guiltinan

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

Mike Halloran – Robert Baird

Makes sense and then staying on the EPD margin side, I’m just trying to get a sense for why margins were down sequentially. I know the revenue levels for EPD were comparable if not even a little bit up, Q3 versus 2Q; margins on an adjusted basis I think we’re down a couple of hundred basis points. I mean what drove that because on that comparable revenue level, I’m imagining that absorption is probably a little bit less the issue, was pricing a bigger concern there on a sequential basis just with the backlog or were some of the disruptions impacting that too.

Richard Guiltinan

I mean it was roughly half and half volume and price sequentially and, you know, lot of that price, which we called that last time, keep in mind, we really saw the last of our very high price backlog go through in the first half of this year so it’s about half and half and it’s tough to just look at revenues alone and in terms of absorption because it’s where – where the plan is, where the revenue is coming from, but I’ll just tell you it’s half and half sequentially.

Mike Halloran – Robert Baird

Makes sense, I appreciate the time.

Operator

Your next question comes from the line of Nathan Jones with Stifel Nicolaus; please go ahead with your question.

Nathan Jones – Stifel Nicolaus

Morning guys.

Mark Blinn

Good morning Nathan.

Nathan Jones – Stifel Nicolaus

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

Mark Blinn

Yes Nathan we talked about that, you know, a lot of it you can see in the increased in the finished goods and our inventory, you know, that’s the kind of reflective along with the fact to keep in mind, we typically build in the third quarter for the fourth quarter. So it is not unusual that our inventory levels and our working capital starts to build in to the Q4 and historically you have very large shipments in Q4. I think the reason that we called it out is just to let you know and this is not unusual to the industry is, you know, this happens from time to time that customers will, you know, not necessarily have it scheduled to take it in at the point in time certainly when you want it to go out in Q4, you know, at the end of the quarter Q2, Q3, Q4 or whatever, their schedules may not be accordingly, you know, this is not to say they’re canceling them. This is just to say that they’re pushing out delivery of these projects and, you know, we’ve certainly seen this before in the industry. It doesn’t cause us concern, it’s just a fact. So, that’s just a trend and it particularly – you know, if you take all these things and look at Q3 and again being our lowest absorption quarter it has probably a more dramatic impact in this quarter than it does in our other quarters and I think that’s why we’ve consistently said don’t call one quarter as a trend, we’re not a quarter to quarter business.

Nathan Jones – Stifel Nicolaus

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

Mark Blinn

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

Nathan Jones – Stifel Nicolaus

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

Mark Blinn

The discrete benefit around the currency?

Nathan Jones – Stifel Nicolaus

(inaudible).

Mark Blinn

Oh the tax, I’m sorry I’ll let Dick talk to that, thanks Nathan.

Dick Guiltinan

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

Let me turn to the tax rate, you know, what we’ve said through planning in foreign operations we look at the structural rate about 28% and then the discrete items are episodic, they come as either a tax audit is completed or as statute lapses and it’s tough for us to predict exactly when regulatory group will complete an audit or if the statute will actually lapse without additional activity. So, we still think around 28% for the structural rate and as I said our year-to-date rate was 26.8. You know, Nathan one thing to follow up on and we’ve said this before these items are things we plan into. So they aren’t just, you know, necessarily windfalls. It’s just the way you have to accrue taxes now around FIN 48 but it tends to be choppy. But some of the things, some of the benefits we are getting are from some of the planning initiatives that we have put in place, that we invest money in. So there’s money in our SG&A that we aim to drive benefits in the tax line and some of what you’re seeing here is that.

Nathan Jones – Stifel Nicolaus

Okay perfect, thank you very much I’ll get back in queue.

Operator

Your next question comes from the line of Wendy Caplan with SunTrust Robinson Humphrey, please go ahead with your question.

Wendy Caplan – SunTrust Robinson Humphrey

Thank you, good morning.

Dick Guiltinan

Good morning Wendy.

Wendy Caplan – SunTrust Robinson Humphrey

You’ve talked about passing on business that was unattractive, can you talk about – give us an update on the quarter on that and was that a meaningful – did that have a meaningful impact on the absorption at the – on the manufacturing floor?

Dick Guiltinan

Well that’s one of the things we have to consider, you’re exactly right Wendy. I mean we have remained disciplined. We have talked about the fact that on these large, large projects capacity is chasing price out there at this point in time. And so when we evaluated in our sales process we look at issues around after market opportunity, the strategic relationship with the customer, what the price is, how that’s going to impact us because as you know if we take an unprofitable job you have to market it through right then and also the impact of absorption as well.

So, I would tell you that what we’ve seen has been fairly consistent over the past number of quarters is that we have to pass on opportunities that, you know, don’t fit our, you know, needs in terms of the strategic nature of it, you know, the profitability profile or being absorbed in our plant.

Wendy Caplan – SunTrust Robinson Humphrey

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

Dick Guiltinan

Well, some of that meaning what? I mean a project…

Wendy Caplan – SunTrust Robinson Humphrey

Some of the less attractive projects.

Dick Guiltinan

Yes, I mean it could be in the backlog just keep in mind if something is unprofitable when you take it in, you have to mark it through right then, you can’t wait.

Wendy Caplan – SunTrust Robinson Humphrey

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

Dick Guiltinan

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

Wendy Caplan – SunTrust Robinson Humphrey

Sure.

Dick Guiltinan

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

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

Operator

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

Kevin Maczka – BB&T Capital Markets

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

Mark Blinn

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

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

Kevin Maczka – BB&T Capital Markets

Okay. And then how about on the engineered product side market? I know you’ve mentioned there was a large order in Q2 that didn’t repeat. Is that a similar seasonal issue there or is that a more of a case where you didn’t win some bids you expected to or the end markets just simple aren’t cooperating yet?

Mark Blinn

It’s not a matter of that. I think it’s just the choppiness we talked about. One large order – let’s see, two years ago, we had a very large order in the third quarter. So I would hate to say that we never see them in the third quarter. It can’t – again for the other reasons, it can’t tend to be maybe on the margins somewhat lighter on the project side.

But these things are choppy, they’re big projects, there is a long process to get these things identified, engineered, inspect, bid, and booked ultimately. And so it’s just going to create some choppiness overall in these large project orders. And so if you look beyond that, what we’ve talked about is kind of the run rate OE business and the aftermarket business kind of peeled back these large projects which we’ve identified you for years have remained pretty stable if not grown. And when we look over the horizon, it’s short cycle business, that’s not these large projects. And we start to see some encouraging signs in that area that that supports that base bookings level as well.

Kevin Maczka – BB&T Capital Markets

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

Mark Blinn

Let me just comment generally, we made the acquisition in the middle of July, all right? The – you can – you know everything that happens with an acquisition, it’s a great business, and Italy is typically a place that goes on vacation during the month of August. So – and we’re working through our integration plans.

I mean if you look at it just the sales that we’ve posted for the quarter that was basically just reflecting the month of September. And – but we had the full quarter of SG&A and other things that were sitting there. So I certainly would not be alarmed by that. It is something that we anticipated when we went into this acquisition.

More and more now with the way you have to account for acquisitions, you basically you have to as Dick said, write up everything in your backlog in purchase accounting. So as we flush through that backlog that we acquired and more importantly we’re seeing additional bookings come in as we flush that through really over the first two quarters it can impact the results. But when we get beyond that it gets back to the characteristics of what we talked about, we’re very comfortable with that.

Kevin Maczka – BB&T Capital Markets

Okay, great. Thank you.

Mark Blinn

You’re welcome.

Operator

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

Mark Barbalato – Vertical Research Partners

Hi, actually this is Mark Barbalato. Thanks my taking my question. We’ve covered a lot of ground here, but can you just give us a little bit more color on your M&A pipeline?

Mark Blinn

Well, Mark, we don’t really talk a lot about M&A specifically, especially any kind of specific transaction we’re looking at. I mean we just acquired Valbart. I think more and more what we’ve talked about is we see opportunities to grow our business organically.

If you look at the opportunities, short cycle business, the projects being choppy into 2011, but we certainly see opportunity when that choppiness subsides, because there is a lot of demand for infrastructure out there. And we’ll carefully consider asset opportunities that fit our strategic needs.

If you look at Valbart, that really fit our oil and gas strategy, it’s a very highly engineered piece of equipment and it’s critical to the process. So those are the things that we entertain from time to time.

Mark Barbalato – Vertical Research Partners

Okay, thank you very much.

Mark Blinn

You’re welcome.

Operator

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

Paul Mammola – Sidoti & Company

Hi, good morning, everyone.

Mark Blinn

Good morning, Paul.

Paul Mammola – Sidoti & Company

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

Tom Ferguson

Hi, this is Tom Ferguson. Yes, some of our problems in IPD have led to lower on-time deliveries than we like to see. And I think that has put some pressure on as I mentioned in my comments some pressure on our opportunities, because we are seeing some market growth opportunities that we were not at the moment able to take advantage of the way we like to.

I would say that that we’ll see those on-time deliveries improve back to a more normalized level as we get through the last couple of actions we’ve got to take. But it has – to answer your question as openly as I can, it did have an impact and it has had an impact with some of our customers’ willingness to give us some business.

Paul Mammola – Sidoti & Company

Okay.

Tom Ferguson

But we still do have considerable opportunities and it hasn’t affected all of our plants. So we do have opportunities in the markets to take advantage of and we are leveraging our IPD plants that have capacity and that are operating well.

Mark Blinn

One other thing, so let me comment on that too, the opportunity of being able to focus on this division, if you looked historically and we’ve provided some supplemental data at the beginning of the year, we ran around 11% plus or minus margins. And it participated heavily in hydrocarbon activity over the last couple of years. And as Tom commented last time, it didn’t work on some of the product development around the chemical industry which Tom has brought focus to.

So when you look at the opportunity in the IPD and this is what gives us confidence is we’re focused on and we’ve identified the issue, we have a good leader in place, and we’ve got the resources to bring the bear. We’re working on the product development to take care of that.

As Tom talked about, we’re working on the delivery issues. I mean we’re certainly all over that. And those markets are showing signs of recovery. So there is three things that are certainly supporting this and we have actually seeing bookings go up. So if there was no opportunity, those bookings would not have gone up certainly sequentially. So we’ll get through these issues, we’ve got them identified, they do take a little bit of time, but before we intend to take advantage of market opportunities.

Paul Mammola – Sidoti & Company

Okay, so that kind of understands your timeframe. When you first commented on IPD, the operating margin I think it was at 12% and you’re looking to push that to 15% through the cycle, what’s – at this point, what’s the timeframe to get back to even or to the 11% or 12% range from where we are now?

Mark Blinn

Well, from our standpoint, as quickly as we can. But what Tom talked about is just realistically these take certainly quarter or two to work through these. I mean we’ve put a leader in place. And basically when you do that in a business, things change and they change pretty quickly and that does have an impact, we anticipated some of that, and we’re certainly working through it. But as we look into next year, we’re looking to drive improvement.

And as to your point if as I’ve said earlier, if the margins would have been around 10%, in the quarter it have would be overall about a 70 basis point and point to consolidated margins. So believe me we’re very, very focused on this. And it’s one of the benefits and opportunities to break in and out the way we did.

Paul Mammola – Sidoti & Company

Okay. And then finally, you had good commentary around excess capacity and what you’re seeing in terms of pricing. But can you give us a sense of what you think your market share has done over the past nine months given some of that capacity that’s out there?

Mark Blinn

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

Paul Mammola – Sidoti & Company

Okay thanks for your time.

Operator

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

William Bremer – Maxim Group

Good morning, gentlemen.

Mark Blinn

Good morning.

William Bremer – Maxim Group

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

Mark Blinn

I’m sorry, what are having material issues connected with input or material pricing issues?

William Bremer – Maxim Group

No just in terms of pricing issues.

Mark Blinn

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

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

William Bremer – Maxim Group

And then what’s going to the Valbart acquisition for SG&A? What type of additional SG&A should be used as a run rate going forward here

Mark Blinn

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

Dick Guiltinan

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

Mark Blinn

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

William Bremer – Maxim Group

Okay.

Tom Ferguson

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

Dick Guiltinan

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

William Bremer – Maxim Group

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

Mark Blinn

Our overall capacity, we talked about this William before. We don’t necessarily have ubiquitous capacity. So what I can tell you is we may in some of our highly engineered plants, they may have been a little – they may be under absorbed in Q3, but they’re getting ready for some of the incremental projects that we’ve been booking.

If you look across more of our like industrial products as Tom talked about, we have some opportunity to drive some capacity efficiency there which by in another word means we have excess capacity, and so we’ve been certainly working on that more episodically. But I think one thing to keep in mind, we may be running below full capacity utilization in our highly engineered plants, but it’s critical, these are important facilities to us that we keep that capacity available to take advantage of the opportunity, because you don’t put that capacity on overnight.

William Bremer – Maxim Group

All right, good point. And then finally I guess this is over to Tom, can you give us a little color on the nuclear activity, the proposal is out there quite strong, but yet you got nat gas at $3.70 Btu. How is it looking going forward?

Tom Ferguson

I mean I think that’s a good question. And based on the price of natural gas, based on the capacities that the people are beginning to build up on their natural gas side, the question is coming up, could that have an effect on the overall nuclear build business. It’s a question that now everybody is beginning to ask.

I’m not sure in terms of how that’s going to end up. But at least through Q3, our nuclear activity has been pretty strong. The life extension and operate business has been going well. China and certainly India have not seen like they pulled back at all as a result of that, because they’ll want a good mixture of projects. But that is a – it is a question that is important to keep an eye on.

Mark Blinn

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

William Bremer – Maxim Group

Okay gentlemen, thank you.

Operator

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

Jamie Sullivan – RBC Capital Markets

Hi, good morning.

Mark Blinn

Good morning, Jamie.

Jamie Sullivan – RBC Capital Markets

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

Mark Blinn

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

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

Jamie Sullivan – RBC Capital Markets

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

Mark Blinn

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

Jamie Sullivan – RBC Capital Markets

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

Tom Pajonas

Yes, this is Tom. Yes, we – two of our large sites we implemented ERP platform and while we’ve been doing that relatively well in many of our sites now for in the last two or three years, we had more problems in those sites than we anticipated. And so I think that had a disruption level to a couple of larger sites. The others weren’t really as much operational problem as it was just lack of backlog and lack of stuff to ship and stuff to work on. So but we had roughly 40% of our plants that had those kinds of issues in IPD, plus Jamie there is just a natural impact when you change leadership and basically kind of reset the bar, and on the margin you got to get people refocused during that period of time and that’s what happens in business. But very confident in the leader we have in place.

Jamie Sullivan – RBC Capital Markets

Okay, thanks.

Operator

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

Karen FinermanMetropolitan Capital Advisors

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

Mark Blinn

Yes, we’ve talked about that for a couple of quarter. What you see during these periods of times especially with an independent refiner is they – to manage their budgets if they have mechanic resources available they’ll try to pull in some of the standard repair work on day-to-day work internally as oppose – because they’re just trying to manage a budget as carefully as they can. That’s not to say any of the high end upgrade or anything like that they do internally. It’s just more standard maintenance that they’ll tend to pull in, you’ll see that.

And now what you’re seeing though is spreads are starting to widen and these independent refiners are starting to gear up a little bit and as they start to do that, the work starts to go back outside. So what we’d call that out as a trend really in the mature market is that’s usually a phenomena when you go into the type of economic situation that we’ve seen for the last year is they’ll tend to try to pull that work in some.

So when we look at our ability to grow our aftermarket business, despite that headwind, it’s around kind of tilting away in the mature markets from standard, I’d say repair work and into value-add work in the mature markets in growth of our presence in the emerging markets.

Karen FinermanMetropolitan Capital Advisors

One other question, where are you on your buyback?

Dean Freeman

To-date Karen, its Dean Freeman. We’ve gone to about $240 million of our $300 million approved program. So we got $60 million remaining on the program.

Karen FinermanMetropolitan Capital Advisors

Okay, thanks.

Operator

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

Hamzah Mazari – Credit Suisse

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

Mark Blinn

Well I don’t want to give anything outside to guidance we’d given basically for the year. And if you net out the first three quarters that’s basically you get to the math around Q4. And so that’s – our guidance is our guidance out there. If you look historically Q4 tends to be historically has been our heaviest shipment quarter in our business overall. As you look at what was basically available for customers at that period of time, as we look into Q4 we know those projects are talked about. We’re very focused on them, we’re working with the customer. And as I said, also from the customer standpoint often times, they have the incentive to go ahead and accept delivery Q4 because in many emerging parts of the world, they have annual budget and they have annual cash budget.

And those are the ones that you’re kind of use or lose. Having said that a lot of these are dependent on their, certainly their project timelines and if they don’t need it, we ran on the risk from time-to-time they may not take it at that point in time. I think what’s important and this is why we don’t talk about quarter-over-quarter business is they will take the product, they will take the sched at some point in time. We will realize the value of that in our financial statement from time-to-time can push to one quarter and another.

And so I think it’s just important to think about our business over rolling periods. These things are there, they’re ready to be shipped and if you look at our cancellations year-to-date, they’ve been very, very small. Cancellations at a backlog have been very small.

Hamzah Mazari – Credit Suisse

All right. Thank you.

Operator

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

Charlie Brady – BMO Capital Markets

Thanks. Just a follow-up on the realignment, did I hear you correctly, obviously it looks like another $10 million in Q4 to get to your annual number but you said $7.5 million. Is that targets you’re going to plan and there is another little bit that’s probably going to have them but not specifically identified yet?

Richard Guiltinan

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

Charlie Brady – BMO Capital Markets

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

Mark Blinn

Well I mean I can tell you that as you look up what we’ve done over the last basically year and three quarters, we started last year more of our short cycle businesses taking costs out. We had lot of backlog on our highly engineered sites. So we were, kind of delayed implementing those initiatives towards the end of the year and into this year. And then also we’ve taken the – we basically integrated pump and seal division. There were things associated with that and brought the focus to the IPD.

So as you look at it now, a lot of our realignment activities are oriented around the industrial products division. So you should expect that that will be a focus on remaining amounts that we’ve talked about. And again what Dick did is he went through what we have planned and approved to-date and the benefits that we see from that. So one thing to keep in mind is that we’re talking about amounts that we’re considering and then haven’t been formally approved there will be benefits associated with that in addition to the $115 million.

Charlie Brady – BMO Capital Markets

Okay, there will be something in all the three business segments though, correct?

Mark Blinn

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

Charlie Brady – BMO Capital Markets

Okay, thank you.

Mark Blinn

You’re welcome.

Operator

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

Paul Fehlman

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

Operator

Thank you ladies and gentlemen. This does conclude today’s conference call. You may now disconnect.

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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

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