Welcome to Flowserve's Quarter One Earnings Call. [Operator Instructions] I would now like to turn today's call over to Paul Fehlman.

Thank you, operator. Hello everyone, and thank you for joining us. Welcome to Flowserve's First Quarter 2010 Earnings Conference Call. Today's call is being webcast with our earnings presentation via our website at www.flowserve.com. Simply click on the Investor Relations tab to access the webcast and the accompanying presentation. Before we get started on the presentation, I want to point out a couple of important items. First, for those of you that have accessed today's call through our dial-in phone number and also wish to follow along with the earnings presentation slides via our website, please click on the Click Here to Listen Via Phone icon at the bottom of the event details page. I'd also like to note that our webcast will be posted on our website for replay approximately two hours following the end of this call. The replay will stay on the site for an on-demand review for 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, Vice President and Chief Marketing Officer; Dean Freeman, Vice President, 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?

Thank you, Paul, and good morning, everyone. First, I will take a moment to review our first quarter results and highlight a few important trends. We had a solid quarter with earnings per share of $1.42, which included $0.32 of charges related to the Venezuelan currency devaluation as well as other below-the-line items related to other currency valuations versus the dollar and a penny of net realignment charges. Bookings for the quarter were $1.07 billion, representing an increase both year-over-year and sequentially, and this was our sixth consecutive quarter of bookings around $1 billion. Year-over-year, operating margins were down slightly on an adjusted basis as the benefits of our realignment initiatives, supply-chain management, operating efficiency and a steady aftermarket business offset some of the headwinds from price and volume. And I'm especially proud of our operations management and the people in the field who continued to execute well while also substantially completing the integration of the Pump and Seal divisions to align our business for future growth. Moving on to the current global economic environment. In general, economic indicators are showing some signs of improved market conditions. We saw continued signs of growth in emerging and developing markets, especially China, India, Brazil, the Middle East and Russia. Also the stabilization of market commodities and the stabilization of the price of oil supported capital investment planning in the activation of large projects postponed from previous periods. And while GDP forecasts support improving market conditions, we currently remain cautious in our assessment of the U.S. and other material markets. We're also keeping a close watch over currency volatility in Europe as weakness in the euro can negatively impact reported earnings, but from a business perspective, can make our European operations more cost competitive over time. When you look at our business, we…

Thanks, Mark and good morning. I'd like to take a few moments to discuss perspectives relative to our key industries, geographies and our aftermarket business. First, let's look at Slide 7, which shows a comparison of our 2010 versus '09 first quarter bookings splits by our key industries. As can be seen by the bar graph, we experienced overall bookings growth period-to-period, driven predominantly by an increase in our oil and gas business. As Mark noted, this growth was supported by increased activity in the oil industry, including re-engagement relating to major projects which were postponed in previous year periods. Looking forward, the planned investments in the oil industry vary by different regions. The international oil companies are forecasting a majority of their capital spending on exploration and production, whereas planned projects announced by the national oil companies include production, transportation and refining. The current level of the price of oil and its relative stability appear to be supporting these investments as well as a revived interest in tougher applications such as oil sands. In natural gas, forecasted spend in the area of liquefied natural gas or LNG continues to show favorability as third-party project databases detail planned additions which will almost double capacity by 2015 from the base of 2009. In the power generation market, industry forecast show that fossil fuel will continue to play an important role in investments proposed through 2015. Over this period, projections indicate potential additions in excess of 700 gigawatts of generating capacity utilizing fossil fuel designs. It is worth noting that nuclear power continues to gain interest around the globe as a long-term viable source of electricity which is cleaner for the environment and cost effective to operate once the facilities are up and running. In recent months, China and India both have…

Good morning. I'm Tom Ferguson, President of the newly-formed Flow Solutions Group which encompasses the Engineered and Industrial Product divisions. Let me start by saying we are pleased with the Engineered Product division's performance for the quarter. Our focus on our end-user customers, operational excellence and our strategic growth initiatives continue to provide a platform to drive bookings growth while generating solid sales and income performance. Q1 bookings growth of 23% was driven primarily by oil and gas and power project activities. While it's too early to call a trend, we did see a marked increase in the number of original equipment project releases in the quarter. As end-user confidence has improved in the broader economy, commodity prices have stabilized and engineering construction companies begin ramping up to meet committed startup schedules. We had strong performance in oil and gas, power and LNG projects. We're also pleased with our Aftermarket business, which was relatively stable in the face of low customer maintenance spending levels, particularly in North America. Our end-user focus and integrated solutions initiative offset the natural tendency of refineries to pull back repairs into their own shops. Customers in the refining sector are still deferring maintenance while those in the chemicals sector have finally we started spending. The power sector has been spending pretty consistently throughout the past few quarters. By using our global opportunity management and sales and information tools, we continue to drive our project performance discipline. Our customer focus to end-user strategy allowed us to sustain strong customer satisfaction survey metrics and helped us maintain 92% on-time delivery to customers' requested date. Sales were down slightly due to lower backlog entering the year. Gross margin was also down slightly due to the market pricing impact as we have discussed over the past year. This impact…

Thanks, Tom. Good morning, everyone. My name is Tom Pajonas, President of the Flow Control division. I'm pleased to report another quarter of solid performance concerning bookings, gross margin and operating margin that signify the health of the business. Before I turn my attention to a discussion on the market dynamics and our keys to growth, I would like to spend a few minutes on the core financials. Bookings in Q1 2010 were $319 million versus the prior year of $303 million or a 5.3% increase, primarily due to the strength of oil and gas and power markets. Sales were down 13.8% versus prior year. This was largely due to a decrease in prior year orders, while being partially offset by a growth in our Aftermarket business. Gross margin increased 130 basis points due to favorable product mix, realignment of savings and material savings in spite of the lower volumes and pricing headwinds. SG&A expenses were approximately $5 million lower than prior year due to realignment efforts and overall cost control. Operating income of $40 million in Q1 resulted in a 15.7% operating margin. Now let's spend a few minutes talking about the current market dynamics. The majority of our incremental growth in original equipment orders is coming from emerging economies investing in nuclear power generation and oil and gas exploration and production projects. In the area of our customers' MRO business, which as you know is Maintenance, Repair and Operations, we have begun to see an uptick in demand as distributors have started to reverse their previous destocking efforts. End users have started to release funds to catch up on maintenance activity that was previously deferred. In the oil and gas market, the stronger activity is coming from North Africa, Middle East and Asia-Pacific. Specifically, proposal activity will remain…

Thanks, Tom. Good morning. I think you can sense from my colleagues' presentations that we were pleased with our financial performance for the quarter. Let me cover a few key consolidated highlights. Earnings per share was $1.42 including charges of $0.16 for the Venezuela currency devaluation and realignment. The strengthening of the U.S. dollar also caused other currency losses primarily from hedging activities of about $0.16 a share. I will discuss both in more detail later. Bookings for the quarter were just above $1 billion. Bookings increased about 11% over 2009, up 5.6% on a constant currency basis. On a sequential quarter basis, bookings grew 14.1%. The stronger bookings quarter helped to increase backlog to $2.4 billion. Sales for the quarter were $959 million, down 6.4% over 2009, or 11% on a constant currency basis. Our Aftermarket sales were stable compared to the prior year. The decline in Original Equipment reflects the timing of last year's large project shipments and the lower backlog at the beginning of this year. The relative stability of the Aftermarket shows the resilience of that part of our business during a challenging economic environment. Gross margin increased 40 basis points to 36.3% including realignment charges. If you adjust for realignment charges, our gross margin was flat year-over-year despite the pricing headwinds we previously discussed and the effect of reduced absorption from lower volumes. We believe our efforts to scale and optimize the business through realignment, our CIP, low-cost sourcing and supply chain programs and our focus on other cost reductions have helped to reduce some of the impact of these challenges. Operating margin was 14.8%. When adjusted for the realignment charges in both 2010 and 2009, our operating margin was down about 40 basis points over Q1 of last year, reflecting the lower leverage of…

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

[Operator Instructions] And your first question comes from Jamie Sullivan.

A quick question on the realignment charges. You mentioned that the $15 million is under consideration. You have $20 million in the guidance. I'm just wondering how that might play out throughout the year, that $15 million would be in the back half? And then would that $15 million under consideration be additive to the $110 million in savings that you're projecting so far?

These are programs and the accounting in terms of how these things roll out depend on whether they're related to facilities and people in terms of when you take the charge. Yes, we should see some additional benefit from these and you'll see them probably during the course of this year is what I'd estimate at this point. We're still working through them and part of it is, as Tom talked about, is driving some of his initiatives in IPD.

Just one follow-up on IPD, how much of that business is aftermarket? You mentioned it was largely parts versus service and some of the other segments.

Yes, Jamie, we've kind of kept our aftermarket at a corporate level, a company level really because we leverage aftermarket across all of our facilities and divisions. But I'll tell you, a bulk of the aftermarket does come in out of the engineered group, EPD.

Just in terms of pricing, you had some mention of it in the release. I'm just curious, if we think about three or six months ago directionally, is the pricing pressure relieving a little bit?

We talked about this. It's been steady pricing pressure and we haven't, at this point, called that that pressure's off. And as you think about pricing, think about it in terms of cycle times of manufacture a product. So what we saw last year when we started to see the price impact was in some of our shorter-cycle product offerings. It hit more immediate but things that were in backlog reflected the price from 2008. So the effective price takes time to in a sense work over our P&L basically related to the cycle times of the products that we're manufacturing. But it's still a very competitive market.

Your next question comes from Charlie Brady.

With respect to the Slide 15 on the Industrial Products division and the sort of goals for operating margin, could you expand on that and what that would be for the EPD division and maybe even Flow Control?

I think the -- and I'll let Tom talk to this. The discussion around IPD was related specifically to that division. As Tom talked about, some of the benefit of really breaking this out is focus. And also as you look at that division, now it can start engaging in global processes and really start leveraging some global capabilities and what Tom has done is put a plan in place to drive that margin improvement in that division. Now that's not to say that we're going to continue to focus that on our other divisions as well but this is something specifically we wanted to call out because the bottom line is we know we've got work to do on this division. Tom do you have anything you want to add?

Yes, I think on the Engineered Product division, we're pretty comfortable with the margins that we're at. We're driving for growth and we'll continue to expand globally and look to grow our products and markets, versus IPD, which clearly has lower margins and as Mark just said, we think we can improve those fairly quickly by focusing more on platform optimization and continuing to drive operational excellence and integrating the supply chain across the division. So different opportunities between the two divisions.

Between EPD and IPD, how much of the business goes through distribution?

The IPD division has a higher content of distribution. So if you think about it holistically, the Engineered division is going to be much more customer-centric and oriented around the engineering contracting firms. IPD has that content as well but that's going to be the more highly distributed product. If you look at the product characteristics that Tom talked about, those lend themselves to distribution.

But would it be similar to a makeup that Flow Control has?

It'll be trending that way but it's not quite to the same level in terms of distribution.

Can you give us the breakdown of backlog by EPD and IPD and Flow Control?

Charlie, is it in our disclosures? Let us look that up for you Charlie, and we'll get that to you in just a minute.

Your next question comes from Hamzah Mazari.

This is actually Chris Parkinson on behalf of Hamzah. Just given the fact that your backlog went up, your bookings number was solid and visibility's improving, could you add a little more color on your potential uses for cash and capital allocation going forward?

We talked about our uses of cash on the year end call and really what we wanted to do, an important message, was keep ourselves a number of options in terms of how we deploy cash. If you've looked at our capital expenditures, we're targeting $110 million to $125 million of cash this year, a lot of it in the expansion and new revenue opportunities. We also have a systematic way of returning cash to the shareholder in the form of dividends, which we increased in the first quarter in sharer purchases. And then we also continue to look at then organic opportunities there as well. So pretty much what we've talked about on the year end call, we're still moving forward with that very disciplined use of cash.

If you look at your basic portfolio right now in the engineer versus industrial as well as commodity, it looks about 2/3 engineered, do you expect that profile to maintain constant going forward and how should we begin to think about that?

Let me see if I understand your question. Can you say that question again? I'm not sure I understand.

Basically if you look at your current portfolio, it looks like it's about 2/3 engineered. Do you expect that percentage to remain constant going forward or?

Well, we actually want to grow both of them and if you look at our business over the last 10 years, we've probably gone from about a third engineered to 2/3 engineered. But keep in mind, on things around mix, engineered versus industrial, we don't ever intentionally want to limit any of those. We want to grow all of those at the same time. So we're going to continue to focus on the engineered and, as Tom talked about, growing that business. But also if you think about the opportunities and a balance of a plant to package some of these products and capabilities, we definitely want to grow these industrial products as well because they're critical. You just don't want to show up on the engineered side.

Your next question comes from Scott Graham.

On the Aftermarket, I saw that we had, with currency some growth there, however without currency, kind of flattish. And I'm wondering, we had a pretty good fourth quarter bookings-wise I'm talking by the way. We had a pretty good fourth quarter of bookings and that followed kind of flattish numbers as well. Is there something that happened in the fourth quarter or was there something that happened in the first quarter? This is a fairly stable business. You had a fairly easy comparison from the year ago period in Aftermarket so I'm just wondering why maybe that number wasn't a little bit better on the bookings?

This is Tom Ferguson. I think that the key issue is yes, we did have our entire customer-facing organization within the Flow Solutions Group merging together and being integrated between the Pump and Seal divisions coming together. So there was some disruption but probably not huge but a little bit of that. And then in general, we have in the core refining market a lot of the repairs when refinery margins are squeezed, those repairs tend to stay inside the gates of the refinery. So while we still get parts business, we don't get the full value of the solution offering. And that was just something we saw in the first quarter versus the fourth quarter last year where some of the customers had money to spend.

Tom, with the refining margins a little bit better in the last two months, are you seeing a little bit of a change there or is it still kind of steady with what you're saying?

I think we're seeing a whole lot of things stabilize and especially in North America and Europe. You look at, say, towards the end of the quarter, we did see that stabilization but at the same time, we were finishing up all of our customer-facing integration meetings in February and March. So kind of a dual dynamic between market stabilization and also our organization getting fully focused on back in the field.

I have two other questions. First, the pressure that we have been seeing recently on the euro, can you maybe talk a little bit about how that plays out for you guys on whether it's operating income line or whether it's the other line? Is there anything that you guys are looking at that might be some type of earnings hit? I know that the decline in euro certainly has a modest impact on earnings but can you talk about how that looks at today's euro rate? And then the second question is I see you bought some shares in this quarter. What's the remaining on the current authorization if you would?

Let me take the first one and I'll let Dean take the second one. Here's kind of a way currency flows through our P&L. As you know, what we do is we hedge cash flows. So oftentimes, for example, a Middle East contract will be denominated in dollars but we may manufacture that in Europe and so what we'll do is in that instance, we'll convert that dollar contract back to euros to keep our revenues and cost matched. The way it flows through our P&L is first, it'll come through the other income expense line on the market a hedge which we mark quarter-to-quarter. Typically, much of that offset or much of the asset that it is hedging is sitting in backlog, which does not come through the P&L in the same period. The second thing that is impacted by currency is when we recognize the revenues, then we start marking the revenues through our P&L oftentimes in other income expense. And then ultimately, we collect the cash flow. And so what you can see is that the immediate impact of the euro, and you saw the negative impact in this quarter, is going to be the other income expense line. The last thing, if you think about our business is we don't hedge our P&L. We hedge cash flows but we don't hedge in our P&L and what I mean by this is as the dollar strengthens and you translate our foreign revenues all the way through the P&L back to dollars, it'll create an earnings headwind on you. It impacts your earnings. So as the dollar weakens, along with many multinationals, they get a benefit from it and as the dollars strengthens, it creates a negative impact to their earnings. I think the one difference we have as we were thinking about it from some other multinationals is our hedges. They sit above the line because we're hedging those cash flows and they're not deemed for accounting purposes effective hedges for purposes of taking them below the line, so we have to take that mark through. So that's kind of a long tutorial but the bottom line is, and we watch it carefully as I mentioned, is as the dollar strengthens, that does impact our earnings short term and you can see on the translation. Now the important thing to consider long term for our business is it makes our European facilities, and we have quite a few of them that are very strategic to us, much more competitive in the global arena. So long term, it really benefits us in terms of making those facilities more competitive. Dean, do you want to talk quickly about the share repurchase program?

Sure. We brought in 112,500 shares in the first quarter. To date, we have spent $218 million against the approved program. It puts us about $82 million remaining on the program. And obviously, as we move forward, we'll continue to consider our capital deployment strategies, the use of our cash moving forward and any subsequent share repurchase program.

[Operator Instructions] And your next question comes from Jeff Beach. Jeffrey Beach - Stifel, Nicolaus & Co., Inc.: I have a couple of questions about your new corporate structure. First question is, is this structure unique in the industry or do some of your other competitors use this structure as well to approach the market? And second, when you're changing here, there's got to be some changes in the sales organization or the key person on some of the accounts changing it and I'd just like you to walk you through that and how you try to minimize disruption as you may change the sales force to approach your clients?

I think in general, I'd say it's not necessarily a unique structure. There was one of our competitors, I think that broke out their engineered and industrial division as well. Now I do think we have many distinct elements about our business, which is probably the subject of a longer conversation. I mean, I think the way we thought about this to your point was around the customer. How can we take care of the customer better? How can we serve the customer better? And then also one of the benefits is around focus. As Tom talked about, the breakout of the Industrial Pump division really helps us focus on global processes which is what that division and what those products need. And I think in terms of the process, Tom talked about it, but Tom?

Yes, I think for the customer facing or sales and distribution service organizations, we had gone through integrating the end user side of pumps and seals in North America several years ago. So we took the learnings from that and made sure that as we now did it on a global basis, we'd put specialists in place to ensure that the front-line salespeople had support. So if they came from seals, they had resources they can go to for pump expertise and vice versa. So that was one of the changes we made based on our learnings from North America. Secondly, we have a strong customer service order acquisition support group that stayed intact and so that stayed in place. And even though we were integrating the end user sales forces where a lot of the impact was but the reality is that we still have probably 50% or 60% of the customers are still covered with both a pump and a seals sales engineer at the end-user level based on their choice, based on the customer having that preference. And so the ones that are now covered, they still have the same relationships because in almost every case, we either took the pump person that was calling on that refinery or chemical plant or we took the seal person. So the relationships stayed intact. It was just putting the backend support behind them. So all the customers I've talked to, minimal disruption in general. And they're all looking forward to seeing better response and a broader set of solutions being offered to them.

[Operator Instructions] And your next question comes from Karen Finerman.

Anything on the acquisition front?

Well, we don't comment specifically on acquisitions but as we talked about in our year-end call, Karen, that is one of the components of our cash deployment strategy.

Obviously, I know you wouldn't comment on specific ones but are you finding things to look at? And when you think about acquisitions, what's the kind of size that would be something that would be interesting to you?

What we are finding is the market for acquisition especially for strategics and even to a certain degree financials is coming back around. So what you're seeing over the last couple of years is couple of years ago, there was a lot of competition from the financial sponsors. Last year, there was a lot of disruption and concern over financing. Now it seems to be stabilizing. So we've regularly looked at opportunities out there but it seems that the market in general is much more prone to opportunities. In terms of size, I mean, we think really the way we look at it, we've got a lot of flexibility in terms of our capital structure. We first focus on the strategic value and I think in one of my comments we talked about disciplined profitable growth. And then we think about fit to existing capabilities, how we'd leverage it across our platform. The leadership that we have in place and the like and then we think about how we're going to finance it with our capital structure. We do have a lot of flexibility but what I'd tell you is we're going to stay disciplined on this.

Your next question is a follow-up question from Scott Graham.

This is actually a really easy question on the savings chart, Page 22. 2010 estimated savings, I got that obviously. I know that you started to get some savings from your restructuring in '09 and I think you'll have carry-forward into '11 so of the 110, could you tell us the '09 piece of versus the '11 piece?

We actually kind of look at it all together, Scott, because in some areas, they're not all that discrete. I actually don't have that information in terms of the breakout. It's one program that we've kind of done over a period of time. So that stated, we have right now is $110 million run rate off of all this. We'll update that though if that changes. The others thing Scott, I think you can look at and just from a historical perspective, we had some disclosures last year with the initial program and the expanded program that you could probably go through and see how those generally breakout, but I think it is important to note that these things are really blended together. So the 110 is really off the whole continuum of these efforts which is a Continuous Improvement Process.

Your next question is a follow-up question from Charlie Brady.

On the Venezuelan charge, your $0.16 this quarter, you're still expecting that $0.25. So is that other $0.09 going to hit Q2 or is there any way we can have a sense of when that's going to come back?

Charlie, it's Dick Guiltinan. At the moment, we're watching it very carefully. The immediate effect of the devaluation is already in the first quarter. What's not clear yet are kind of the indirect effects; what happens to the economy and then indirectly what happens to the carrying value of our assets or ability to remit payments or dividends. So that's still playing through. We're going to watch that quarter-to-quarter but I can't really update that today.

It sounds as though your initial estimate of $0.25 in Q1 is turning out to be, if nothing changes from now, it's less than what you thought.

Yes. I think what I said earlier is the initial estimate or the loss on the evaluation was 12.4. We then applied for essential items rate on certain payments and when we got those, that's a preferential rate so we had a gain of about 3.5 that offset our initial estimate.

But as you saw in our guidance, we still have an estimate of approximately around $0.25 for the reasons that Dick talked about there and we'll update you. And if, in fact, we don't see that that is a good estimate anymore, then we'll update accordingly.

On the realignment, the remaining, I guess $0.25 there, have you guys disclosed out how that might fall the next three quarters?

No, we haven't. Those are the things that are still under consideration and as I mentioned earlier in my comments, Charlie, how they impact quarters is as much determined by how we implement the plans as they are by the accounting form in the actions you take. Typically, structural-type actions the expense will occur over periods. Historically, companies would take the charge all at once in one period but now it's much more regimented in terms of how you accrue the expense as you saw last year. I think the important thing is we need to be very project-oriented and thoughtful about how we do this. So at this point, we do have the additional amount certainly under consideration and as we get finality around that, we'll provide information like we do in our Q around the estimated cost benefit in the periods where we expect it to occur.

That incremental 15 is beyond the $0.26 in total realignments you've already called out, correct?

No, we talked about 20 for this year and as Dick talked about, we had a net expense in Q1 of less than $1 million. We've got additional $4.5 million really that's carryover, to my point about how you account for things in prior periods and the additional 15 takes you to the 20. Those are things that are under consideration.

And there are no further questions and this concludes today's Flowserve's Quarter One Earnings Conference Call. You may now disconnect.