Flowserve (FLS)

Q2 2010 Earnings Call

July 29, 2010 11:00 am ET

Executives

Tom. Pajonas - Senior Vice President and President of Flow Control Division

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

Kyle Ahlfinger - Chief Marketing Officer and Vice President

Mark Blinn - Chief Executive Officer, President and Director

Paul Fehlman - Vice President of Investor Relations, Financial Planning & Analysis

Dean Freeman - Senior Vice President of Finance and Treasurer

Thomas Ferguson - Senior Vice President and President of Flowserve Pump Division

Analysts

Wendy Caplan - SunTrust Robinson Humphrey Capital Markets

Hamzah Mazari - Crédit Suisse AG

Kevin Maczka - BB&T Capital Markets

Charles Brady - BMO Capital Markets U.S.

Paul Mammola - Sidoti & Company, LLC

William Bremer - Maxim Group LLC

R. Scott Graham - Boenning and Scattergood, Inc.

Jamie Sullivan - RBC Capital Markets Corporation

Michael Halloran - Robert W. Baird & Co. Incorporated

Presentation

Operator

Good morning. My name is Michael, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 2010 Earnings Conference Call. [Operator Instructions] Thank you. I would now like to turn the conference over to Mr. Paul Fehlman. Sir, you may begin your conference.

Paul Fehlman

Thank you, operator. Good morning, and welcome to Flowserve's Second Quarter 2010 Earnings Conference Call. Today's call is being webcast with our earnings presentation via our website at flowserve.com. Simply click on the Investor Relations tab to access the webcast and the accompanying presentation.

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

Thank you, Paul, and good morning, everyone. First, I will take a moment to review our second quarter results and highlight a few important trends. We had another solid quarter, with earnings per share of $1.62. This included the impact of $0.10 per share of net realignment charges and $0.19 of net after-tax currency effects below the operating lines. Bookings for the quarter were $1.13 billion. This represented an increase both year-over-year and sequentially, and it was our seventh consecutive quarter of bookings around $1 billion.

Looking at our order book, two things I think are important to point out. First, our book-to-bill ratio for the quarter was 1.18 and 1.15 year-to-date, as we saw some projects released into the market. Second, our aftermarket bookings grew to around 40% of overall bookings during the second quarter to $449 million. That's up almost 10% versus last year and about 13% sequentially, reflecting that our end-user focus and investment continues to create aftermarket growth opportunities.

Looking at margins year-over-year, operating margins were stable despite lower revenues. The benefits of realignment, supply-chain management, cost-saving initiatives and the steady aftermarket business have offset some of the margin headwinds from price and volume. It is also important to point out that we've continued to position the company to drive disciplined, profitable growth.

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

Now let's look at a few aspects related to our business outlook. Many of our markets are still feeling some of the effects from the recent financial crisis and economic recession. And during the last quarter, events around the world caused concern as to whether we might face another recession. For example, the news related to Greece and other European countries created concern over sovereign debt. The oil spill in the Gulf of Mexico caused concerns over the future of deepwater drilling and production. There was a level of uncertainty about China's ability to maintain its aggressive growth. Pending financial legislation placed uncertainty on the availability and cost of capital. And we also saw volatile fluctuations of currency exchange rates around the world.

With all of this uncertainty, we believe that over the near term, our market opportunities will remain choppy, meaning that some of the sectors and markets will present opportunities and some will remain challenged. But over the long term, many of our markets are positioned for growth, particularly in developing and emerging markets, as the needs created by their economic growth plans should support future capital investment in critical areas like oil, natural gas, power generation and water. This is why our investments in these regions are a priority in positioning Flowserve to participate in this future growth. These markets, however, remain subject to competitive pricing conditions as we continue to see pricing headwinds.

Our approach to this challenge is to maintain discipline in the business we pursue, focus on operational excellence and constantly review our operations and processes to optimize our cost structures. This continuing management discipline contributed to our margin performance in the quarter.

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

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