Flowserve Corporation (FLS) Q1 2011 Earnings Report, Transcript and Summary

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 Flowserve Q1 2011 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. Mike Mullin. Sir, you may begin your conference.

Thank you, operator. Good morning, and welcome to Flowserve's First Quarter 2011 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 2 hours following the end of this call. The replay will stay on this site for 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 Dick Guiltinan, Senior Vice President of Finance and Chief Accounting Officer; and Dean Freeman, Senior Vice President, Finance and Treasurer. Following our commentary, we will begin the Q&A session. Regarding any forward-looking statements, I will refer you to yesterday's earnings release and the 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 our answers to questions related in any way to projections or other forward-looking statements, are subject to Flowserve's Safe Harbor. Now I would like to turn it over to Mark to begin the formal presentation. Mark?

Thank you, Mike, and good morning, everyone. Let me start by saying I'm pleased with our first quarter results. When you consider that we have generally faced challenging markets for more than 2 years now, it is significant to note that our employees have been able to maintain this level of quarterly performance at this stage of the economic cycle. Their strong dedicated work gives me increased confidence that Flowserve is very well positioned to benefit when the expected stronger portion of our business cycle fully arrives. Our short cycle end markets, which typically recover faster during the economic cycle and our long cycle markets saw double-digit growth in the quarter, notably in North America. The improvement in bookings in our FCD and IPD operations, which tend to be weighted toward short cycle markets, reflected in this positive development. As we anticipated, we continue to see competitive challenges in our Long Cycle business, which typically lags in the economic cycle as capacity is still chasing price. While we've seen some EPD project activity impacted in the short term by the events in Japan and the Middle East, nothing has shaken our belief that there will be attractive growth in infrastructure spending in our markets over the next few years as emerging markets develop and mature markets recover. In the meantime, we are working to remain selective and internally disciplined in our project bid selection process as pricing continues to be competitive on large project bids. We were particularly pleased to see continued traction in our Aftermarket strategies, with 9% growth in quarterly bookings over 2010 and improved core end markets across all regions. Our growth in Aftermarket bookings is more evident of both of our ability to succeed during that tougher portions of the economic cycle and the continued effectiveness of our Aftermarket strategy. Broadly, across our core end markets we saw bookings growth in oil and gas, chemical and our general industry markets where we saw increased orders in our distribution channels. We also saw sequential improvement in the power market. Bookings were $1.16 billion, with a book to bill of $1.17 million, representing an increase both year-over-year and sequentially. This increased our backlog $2.8 billion, which is up 8.4% versus the end of the year. Looking at our financial results for the first quarter, earnings per share were $1.72, which included some below the line currency-related benefits, partially offset by other items. We maintained solid margin performance with reported margins of 13.1%, negatively impacted by the lower margins in our long cycle project backlog as we entered 2011, as well as the impact of lower fixed cost absorption and increased commodity cost. Largely offsetting these headwinds were strong Aftermarket execution, realignment savings, supply chain initiatives and cost management. Our adjusted margins were 13.7%, excluding the effects of realignment in Valbart. We expect Valbart to become a solid contributor over the balance of the year. While our Long Cycle business will remain choppy and competitive in the near term, we expect continued growth in our Short Cycle business volumes, which we believe is indicative of the improving general economic outlook. We expect that as volumes continue to pick up, pricing will follow. This becomes all the more important when you consider the influence of recent inflation in commodity cost. As I mentioned, we've seen continued traction in our Aftermarket strategies and our outlook remains positive. We continue to invest in market expansion and product service offerings. An example of this is our recently announced acquisition of a small Wireless Data business, which increases our technical capabilities and integrated solution offerings. The technology helps our customers manage their assets and maintain equipment reliability. Looking at recent global events, we continue to closely monitor developments in the Middle East and North Africa. The vast majority of our employees and assets are located in Saudi Arabia and the United Arab Emirates. Where we had people in areas of more intense unrest, we took action to move them to safety in early March. We experienced some limited shipment delays, which were reflected in our first quarter earnings. We continue to assess the conditions in the region as protracted unrest has the potential to delay or cancel additional shipments as well as customer investments. The tragic events in Japan did not result in injury to our employees or physical damage to our facilities. Our Niigata manufacturing facility is on the West Coast of Japan and our QRC assets are located southwest of Tokyo and are actively engaged in supporting the reconstruction efforts. Looking at all this from a strategic perspective, it is vital to the success of our business that we continue to understand our customers and create solutions that best fit their needs. We do this through leveraging our global project pursuit in Aftermarket network and delivering integrated technical solutions to the most complex process applications around the world. Our consistent Aftermarket performance and solid performance during the last 2 years demonstrates the value our customers place on our commitment to delivering promised solutions. As economies around the world continue to recover, our diverse regional and end market exposures in our manufacturing base present both opportunities and challenges. While events in MENA and Japan have impacted activity, North America and Latin America have seen increased investment, particularly in oil and gas. Higher oil prices and crack spreads have increased many of our customers' capital budgets, while the stronger Euro impacts the competitiveness of our European manufacturing base. Higher feedstock costs for our chemical customers have generally not slowed structural investments focused on long-term demand, while power investments have been relatively weaker due in part to the events in Japan. Bottom line, we will continue to manage our business with a long-term focus, driven by our core priorities, including disciplined profitable growth as we work to create additional value for our customers and shareholders. I remain extremely proud of our employees as they have continued to perform in a challenging environment and once again delivered outstanding results. And now, I'll turn it over to Dick Guiltinan to review the financials. Dick?

Thank you, Mark. Good morning. This is the Dick Guiltinan. Mark has briefly touched on the highlights for the quarter, so I'd like to cover the bookings and sales analysis and the key aspects of the consolidated financial results. Starting with the bookings analysis, the top graphics compare our bookings performance for the first quarters of 2010 and 2011 by industry. Bookings for the 3 months ended March 31, 2011, increased by approximately $91 million or 8.5% as compared with the same period in 2010. The increase included currency benefits of approximately $19 million. Driving this increase is growth in the oil and gas sector and FCD, which has been a strategic focused in the basis for the acquisition of Valbart. Increased bookings in general industries, in FCD and IPD, partially offset decreased customer bookings in power generation industry across all divisions. The bottom graphic shows our original equipment to Aftermarket bookings mix for the first quarters of 2010 and 2011. The increase for the first quarter of 2011 was primarily attributable to increased original equipment bookings in FCD and IPD and increased Aftermarket bookings in EPD, partially offset by decreased original equipment bookings in EPD. The consistent consolidated mix percentages year-over-year reflected diversity of our global platform. The bullets at the right of the slide provide a good analysis of the mix. The Aftermarket bookings grew 9%. Our longer cycle bookings such as the EPD original equipment bookings are down 5%, while the shorter cycle activities such as FCD and IPD original equipment bookings have grown 22% and 16%, respectively. Turning to the next slide. Sales for the 3 months ended March 31, 2011 increased by approximately $38 million or 4% as compared with the same period in 2010. The increase included currency benefits of approximately $20 million. Our revenues were impacted by lower shippable backlog, project schedules and customer delays and to a lesser extent, disruptions related to the unrest in the Middle East and North Africa and the natural disasters in Japan. Valbart sales were approximately $30 million. The sales growth is primarily attributable to increased sales of original equipment products in FCD, which was driven by all regions and included shipments of previously delayed large projects. And increase in after market sales in EPD, which are primarily driven by Asia Pacific and Latin America. These increases were partially offset by decreased original equipment sales in EPD and IPD, primarily in Europe. The bottom graphics show our OE to Aftermarket sales mix for the first quarters of 2010 and 2011. These graphs demonstrate the favorable sales mix shift toward higher-margin Aftermarket sales experienced in 2011, underscoring the success of our end user strategy. Tom and Tom will discuss the divisions booking sales and margin performance in more detail later. Turning to the consolidated financial results, I would like to focus on the comparative margins. We noted last year that the first quarter of 2010 still had some pricing benefits from long cycle backlog booked in 2008. And that the relatively better priced backlog was being shipped through the second quarter of 2010. As anticipated in the first quarter of 2011, our margins reflected business booked in the more competitive pricing environment. As we've discussed over the past several quarters, we have mitigated the impact of competitive pricing with low-cost sourcing, supply chain initiatives, realignment of the operating platform and other cost reductions. In addition, we are pleased with the growth of our Aftermarket and Short Cycle business volumes that also helped to offset the effect of the lower volume on absorption and lower margins in our Long Cycle business. Our earnings for the quarter were also slightly impacted by ongoing unrest in the Middle East and North Africa and the natural disasters in Japan. Under the circumstances, I believe the gross margin of almost 35% and the operating margin above 13% represents solid performance. Our focus on the SG&A continued with cost efficiency efforts underway. The increase over 2010 of approximately $11 million reflects the addition of Valbart, increased FCD selling expenses in line with the growth in their business, negative currency effects, support for localization and strategic projects. But our focus on cost is not simply into cutting. We're continuing to invest in our people in the high-growth markets using some of the reduction benefits to support our growth initiatives. You will note the large swing in Other Income for the quarter, reflecting the negative currency effects of the strengthening U.S. dollar and the loss from the devaluation of the Venezuelan Bolivar in the prior period compared to the positive currency effects from a weakening dollar during the first period of 2011. Given the currency volatility I think it's worth reviewing again the potential impacts of currency rate movements on our results. Of that, 70% of our business is international and denominated in local currencies. As such, significant movements in the currency rates can have significant earnings impact. Translation of foreign operations with stronger foreign currencies provides a benefit in operating income. We estimated that operating income for the quarter included about $4 million of translation benefit compared to the first quarter of 2010. We also used foreign exchange contracts to hedge our future cash flows arising from some orders in our backlog. These contracts are mark- to-market each quarter, though the underlying orders may remain in backlog for some time. Ultimately, these orders normally move through our inventory through shipment to cash collection in later periods. Some of the gains on forward contracts this quarter will be offset by higher cost in U.S. dollar terms when the underlying orders are manufactured in our international plants. In addition, the strengthening of the euro against the dollar also impacts the competitiveness of our European plants as they bid on U.S. dollar denominated orders. Supply chain efforts, hedging programs and cost controls are into keeping the plants as competitive as possible in the stronger euro environment. We also work to balance our capacity in U.S. and other low-cost plants to manage the stronger euro. Just a quick comment in our tax rate of 25.7%, which was below our estimated structural rate of about 28% due to the mix of foreign earnings and certain discrete items in the quarter. We still consider our structural rate to be about 28% for the balance of the year before any impacts of discrete items. Turning to cash flows, our cash flow used by operating activities during the first quarter of 2011 is somewhat heavier than our historical first quarter cash outflow. Cash flow from operations in the first quarter reflected increased working capital, driven mostly by increased inventory. Our raw materials inventory was up over December 31, 2010, as our plants ramped up to satisfy growing orders, especially in the Short Cycle and Aftermarket businesses. The work in progress inventory increased, reflecting the larger backlog, work on new orders and some delayed shipments. The strength of our balance sheet allows us to move aggressively to support the increasing backlog. The timing of capital expenditure dispersed, which resulted in an outflow of cash of about $24 million in the quarter, which is about 20% of our estimated total CapEx for the year. This level of first quarter CapEx is somewhat higher than comparable quarters in the last 2 years when we are focused on the financial crisis and realignment. Cash flow from financing activities reflect a small increase in cash returned to shareholders through cash dividend payments and share repurchases. In summary, our cash balance at the end of the first quarter of 2011 was about $289 million, which along with the demonstrated strong cash generation capabilities of our operating platform provides a good foundation to execute on our higher backlog and support our capital program in addition to other funding needs for the balance of the year. Turning to the earnings guidance for the year. As Mark said, we are pleased with our performance for the quarter. We continue to expect the planned increases in shipping volumes from our higher backlog and solid Aftermarket activity will offset the competitive pricing environment that we have been living with in our Long Cycle businesses. Our performance improvement, CIP and supply-chain efforts have provided cost savings and have mitigated some of the pricing headwinds and commodity price increases we've recently seen. The IPD turnaround is starting to achieve results. Valbart is gaining traction and is providing pull-through opportunities. With a good first quarter behind us, we are reaffirming our guidance for the year at $7.10 to $8 per share. The breadth of our original range set when the dollar to the euro rate was about $1.37 anticipated some of the currency volatility. The immediate impact of the mark-to-market gains this quarter will be offset by higher cost of sales if the orders are shipped from international plants in later periods. Future currency volatility could have significant impacts on our results from quarter to quarter. The ultimate effects of the Middle East and North Africa unrest and the recovery in Japan are difficult to predict at this point, but we're monitoring these events carefully. Now let me turn it over to Tom Ferguson.

Good morning. Generally speaking, I am pleased with the overall performance of the Flow Solutions Group. 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 and income performance. We have continued to drive sales pricing discipline and carefully balance our project win rates and market share targets with factory loading consideration. We've also continued to see competitive pricing in most Long Cycle original equipment markets, as many of our customers focus on first cost for new projects. We made progress on improving our Industrial Product divisions operational performance but still have work to do. For the Engineered Product Division, Q1 bookings growth of 1.7% was driven primarily by growth in seals in the Aftermarket. Both of these areas benefited from our focus on Integrated Solutions Base programs. Market activity levels are at core market sectors continue to be mixed, and our longer cycle OE bookings fell versus last year primarily due to price selectivity. We are pleased however with our Aftermarket business which continued to strengthen, particularly in North America and Latin America. Service and solutions opportunities have grown as end user customers show greater interest in energy efficiency and operating cost reduction. Sales were down 1.5% primarily due to the lower OE you backlog entering the quarter versus 2010. The gross margin decrease of 110 basis points adjusted to exclude realignment charges was primarily due to pricing from beginning of the year backlog and the impact of decreased sales on the absorption of fixed costs, although partially offset by a sales mix shift to higher margin Aftermarket sales, operational efficiencies and savings from realignment programs and supply-chain initiatives. We are generally pleased with our operating income margin of 17.5%. This was driven by continued focus on SG&A controls, pricing discipline, realignment benefits and a strong emphasis on the Aftermarket. While Original Equipment bookings fell 5% in Q1 versus prior year due to our pricing selectivity, Aftermarket bookings grew to 9% due to the focus on offering solutions to our customers and continued growth of our accuracy network global. Our recent equipment sales fell 25% due to lower projects shipments for the quarter, but were offset by strong Aftermarket sales as we continue to see results from our emphasis on customer-driven solutions. Overall, the bookings were up for the quarter versus prior year. And while we see fairly stable oil and gas opportunities on the horizon, the Japan nuclear crisis has caused some nuclear projects in the opportunity pipeline to be canceled or delayed. While other power projects such as fossil, gas, solar, geothermal, wind and biofuels are proceeding, in the short term, these may not fully offset any potential extended reduction in the higher value nuclear arena. The broader question revolves around the impact of Japan on the overall global nuclear market. Compared to Q1 2010, Aftermarket sales growth in North America, Latin America and Asia offset much of the drop in our Original Equipment sales. There was also a slight sales and margin impact from events in the Middle East, North Africa and Japan. These are important markets for FSG, and we continue to monitor the different situations very closely. In the face of competitive pricing, we continue to increase our efforts on lower-cost sourcing, effective cost management and productivity improvement using our well-established continuous improvement programs. We're also positioned for growth to take advantage of the markets as they do improve. We invested in more strategic localization efforts by expanding the scope of our new facility that is already under construction in Brazil, approving a new highly engineered block at our [ph] India site and purchasing the land for a new world-class factory near our existing Suzhou, China site. We also continue to improve our [indiscernible] network by increasing resources in the ones we have opened recently. We continue to differentiate our Integrated Solutions Group there are Technology Advantage and LifeCycle Advantage programs. We will drive growth by targeting emerging markets and Aftermarket opportunities through strategic localization and enhanced Aftermarket and technology offerings, including our recent acquisition of FEDD Wireless. FEDD gives ownership of wireless performance monitoring and diagnostics technology used on pumping systems. Moving on to 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, and can note that we are beginning to see the progress that we anticipated. For Q1, the Industrial Product Division side increased by 15.7% versus Q1 2010. We did begin to see improve activity in the global chemical market and recently released the next phase of a new chemical process pump line. Gross margins were down 240 basis points versus prior year to 25.6% on significantly lower sales, but were up sequentially for the second quarter in a row. Realignment savings, continuous improvement and supply-chain efforts were helpful, but not enough to fully offset the 10.1% sales decrease. SG&A was reduced by 5.6%, driven by cost containment and realignment benefits. Overall operating margin of 8.2% excluding the realignment cost, was down 270 basis points versus 2010. This was primarily due to the reduced sales volume caused by the lower starting backlog at the beginning of the quarter. Additionally, there was a small impact on overall performance due to the disruption in the Middle East and North Africa. As we work to improve performance in the division, IPD has positioned itself for growth while improving its operating platform is maintained steady bookings in the face of mixed market dynamics. Original Equipment bookings were up 16% and even more importantly, Aftermarket bookings were also up 16% year-over-year. Original Equipment sales were down 16% due to low starting backlogs and weak bookings during much of last year, especially in the attractive chemical market. Aftermarket sales were up by 3%, leaving a nice volume of Aftermarket in the current backlog. In the second half from 2010, we began executing a focused recovery plan under a new divisional leadership. We invested in operational improvements and accelerated key realignment actions. Renewed emphasis was placed on product development to address product gaps in key markets. As we have noted before, we are committed to working to generate operating margins of 14% to 15% by 2015. We have already seen several synergies of all from integrating pumps and seals. 2011 will be a year of driving the benefits of the new structure in terms of customer focused, operational excellence and strategic growth. While the markets remain choppy, I am optimistic about the opportunities this structure offers us in the Flow Solutions Group. And now, over the Tom Pajonas to cover the Flow Control division.

Thanks, Tom, and good morning, everyone. This is Tom Pajonas, I'm pleased to report on a solid performance for the quarter for the Flow Control Division. In summary, the Flow Control valve market can be described as choppy and price competitive. In addition, there are some general regional uncertainty in the Middle East. And some concerns surfacing in the Nuclear business as a result of the Japanese nuclear situation. We are continuing to monitor these areas for any effects on the overall Long Term business. In terms of the financials, orders for Q1 2011 were up 18.3% compared to Q1 of 2010 on the strength of chemical, general industries and oil and gas bookings. Sales for Q1 2011 increased over 31.8% from Q1 2010. Operating income increased 18.5% over Q1 2010 results. Excluding realignment and acquisition effects, the base business had an operating margin of 15.8% for Q1 2011 as compared to 15.7% for Q1 2010 on the same basis. While we are experiencing choppiness in the longer lead time Valve business, we are seeing improvement in the shorter lead time businesses, particularly in chemical, pulp and paper [indiscernible] and our Aftermarket businesses. Capital investments in the chemical and petrochemical industry appear to be recovering based on the project activity in the Middle East region. Customers in general are telling us that they are seeing increased demands for certain base materials such as PTA, and PX used in plastics. The MRO business continues to do well in the chemical area. Activity in South America pulp and paper remains strong with several projects in Brazil and Uruguay preceding. The business in Russia and Europe are starting sooner, stronger than prior year, with Russian distributors placing orders based on anticipated demand. In Power [ph], we did book nuclear valve for China and Korea during the first quarter of 2011 as certain approved customer nuclear projects are proceeding. However, the recent situation in Japan has impacted planned nuclear new construction at least in the short term. In China, the government is reviewing new plant and nuclear projects while a review of the design safety is being conducted. Similar reviews are being conducted by various countries throughout the world, so there may be a delay in some new nuclear project approvals. The MRO activity remains stable across both fossil and nuclear power markets. The nuclear MRO market continues to be driven by life expansion and upgrades. The natural gas not resurfacing particularly in North America based on the availability and prices of natural gas. On the oil and gas side of the business, engineering procurement and construction awards are driving strong proposal activity for major oil and gas projects in the Middle East. The most active markets are Saudi Arabia, UAE and Kuwait. In other developments, coal seam production is generating strong gas development and LNG activity in Australia. Oil sands activity previously delayed is heating up in Canada driven by oil prices. New developing shale gas regions within the U.S. continue to drive investment in gas gathering and pipeline construction. We are seeing the Aftermarket business for control valves improving in Western Europe and North America. LCD will continued to maintain our focus of disciplined, probable growth. Our localization of that does continue to proceed well as special with our white Flow Control joint venture in Saudi Arabia receiving Aramco's plant approval. This allows control valve orders to be manufactures locally in support of Saudi localization. This also allows us to expand in one of our high growth areas of oil & gas. The Aftermarket initiatives continue to produce sustainable results over the long term, while our emphasis in low-cost sourcing and supplier development supports our continued localization. Also, we continue to invest in our research and technology areas, particularly in diagnostics, material development and coatings as well as our automation products. Leveraging the capabilities of our sales force concerning portfolio selling will be an important driver for our business going forward, and will be one of the several initiatives mentioned about the drive a probable growth oriented business. And now over to Mike Mullin.

Thanks, Tom. Operator, were are ready to open the line for Q&A.

[Operator Instructions] Your first question comes from the line of Charlie Brady with BMO Capital Market.

Back on the last comment on FCD and the nuke business, the Nuclear business is a relatively small piece of that and broadly speaking a relatively small piece of Flowserve in general, correct?

Yes. In general, it's an important part of our business. We've talked about this before. You look in our power sector. We participate broadly across coal fired and other applications as well. But the point is it is high margin business for us and has presented good consistent opportunities, for example, if you remember back in 2009, the Valbart had a $50 million order. So it's not something that we ignore, but it's not a majority overall of our Power business.

Do you think what's going on with the review of projects outside of that for existing plants, obviously reviews are going on. Is that presenting an opportunity for you as reviews go on to look at what's already in place?

It can. That's a fair point, in all of the business guys, the little further what tends to happen, you saw the Macondo oil spill last year and it tends to cause a pause, everybody reevaluates. And then they look, for example, the United States they're going to make sure they understand -- focus on the Greenfield. And then look at existing facilities for recertification and oftentimes that may lead to upgrade requirements on existing facilities, especially if Greenfield opportunities are going to be difficult to permit. So yes, it can present opportunities. I think our note here is what typically happens and it's the same thing you saw last year in the oil and gas industry, as everybody takes a step back, pauses, they look at the regulatory environment, assess risk and opportunities in their existing facilities, and you've pretty much seen that around the world. All related to what you saw last year there was a Gulf oil spill and oil & gas industry that impacted the region and you saw the activity, what happened in New England gas. This was a nuclear event and that has far-reaching impacts overall to the industry itself. The whole industry is very tight and they watch these things very carefully. So that tends to be what you see in the form of a reaction. But also to your point, that's right, these people are going to make sure that operating facilities are up to grade.

And I would add, Charlie, that these type of events, although unfortunate tend to drive back to multinationals that have very solid quality programs. Documentation becomes more of an issue, certifications deep into the supply chain. So we tend to, I would say, benefit from these events unfortunately.

So the general comment is it's just the projects, particularly the Greenfield project expansion. They had some in the United States and other regions of the world are being certainly being evaluated. And what that will tend to do is like what you saw last year, is to pause, and they'll make a decision to go forward or not in the oil & gas industry. You saw move forward on some of the projects certainly around the world. It's yet to be seen what will happen in the Gulf.

As a follow-up on FCD. As we look at the Aftermarket business it sounds like it's seeing some pretty good strength and it was 50% of the sales mix here in the quarter, I guess the same with the bookings mix. Do you see that moving up on the Aftermarket business that is moving up towards what was it was last year kind of in the high teens, maybe gained 20% as we go through 2011?

Charlie, this is Tom again. I mean if you look at the past and you go back to 2008, 2009, we were probably in the high 30s in the '08 time period. In the '09 time period, we moved up to the high 40s per quarter. And now we're sitting at the high 40s, mid-50s. So but I would say in our particular business the Aftermarket doesn't swing is much. It would tend to be more steady in the Aftermarket by would say, were at a different plateau in the business.

Yes, and this has been an area of strategic focus. If you followed our business for a very long time our former cell [ph] division, the blocks and develop a lot of the end user strategies and what was the Pump division. Now they're combined with FSG. Tom has taken a lot of these strategies and put them into his business in forms of initiatives. What you're seeing in the mix, Charlie, is as much the Short Cycle business growth is anything else. Really, what we tend to focus on is the absolute growth in dollar terms of our Aftermarket business and more importantly the backlog, which is certainly significantly increased year-over-year in our Aftermarket business and even from year end. So that's probably the better way of looking at it and really the reason we started commenting generally around Long Cycle, Short Cycle and Aftermarket to really look at it more in terms of absolute terms, mix will depend. His mix is as much as what's happening in the short cycle OE business as anything else.

Fair enough. And then I was also talking on the Valve business, too, because the obviously tends to have a smaller portion of pure Aftermarket business. And I'm just wondering does that business, it obviously as a margin impact as that business moves up 300, 400, 500 basis points on a mix shift, there's a meaningful impact on margins pretty high margin business and we expect that business to see an impact? Because it sounds as though the Aftermarket business in valves is pretty strong right now.

Yes. I mean it is. And we talked about this before, the Valve business is different than the rotating equipment because a lot of the Aftermarket comes in the form of a replacement valve. They’ll just cut it out and often times it may go through a distributor as well. Tom's still able to still command I would say good margins on that type of quick turn replacement equipment which is OE. But fair point is, he drives his end user strategy and grows his Aftermarket business that's absolutely good margin business similar to what you see in the FSG side.

Your next question comes from the line of Mark Barbalato with Vertical Research Partners.

So when I look at Q1, Q1's typically a low-volume quarter. You had delayed shipments and you're still working through the low margin backlog and you had the Valbart headwind. Should we think of Q1 as a low order mark for operating margin?

As you know, we typically won't guide on margins going forward. But our comment, if you remember on the third quarter call, was historically, Q1 has tend to be a lower absorption quarter and you can really, you can see typically lower sales. And why that occurs is there's a big push at year end. Our customers want the product and everything. So Q4 tends to be historically has been a very strong shipment, which tends to bring down backlog. So that's the impact on the first quarter of the year. We also commented before that what we've seen is that the first half of the year is going to be more challenging as we work through these things. Generally, when you take a step back and look at the business going forward, our Short Cycle and our Aftermarket businesses are certainly showing some promise in terms of increased volumes and increased penetration. And that's consistent. Certainly the Short Cycle with what you're seeing is recovering economies around the world. Our Long Cycle business, which will tend to lag, what goes on around the world for a period of time, is still competitive and choppy, which we've seen for a period in time. So what we commented is after the second quarter last year is on the long cycle. We're living in the pricing environment that was really started towards the beginning of 2009. It's just you won't see it in our P&L necessarily because it is long cycle. Going back to the comment, that's why in '09 pricing we had a pricing benefit overall because that was 2008 and some 2007 pricing. So that's the best way to think about our business going forward.

Sure. And then I guess as we head into Q2, are we going to be working through -- I mean will we have worked through most of the lower margin backlog?

Well, to my comment earlier, on the Long Cycle backlog, it can be there a year to a year and a half. So the pricing environment you're in, in that will manifest itself through the P&L for a period of time. So as you look out, right now we're in a competitive pricing environment in the Long Cycle business and we have been. That's going to be working itself. That will be in our P&L for 2011. The other impacts though the short cycle, if you heard our comments, volumes increasing, which can help not only on absorption but as price follows which typically happens as capacity starts to fill that up, distributors tend to restock then you can get some pricing power in that environment as well. And then also just the growth of our Aftermarket business. We have higher Aftermarket backlog and that's high margin business.

My last question is Valbart was a little bit of a headwind this quarter does that turn positive in Q2? How should I think about that?

Well, what we commented is it's going to continue this year. As we talked about, we anticipated with this acquisition that you work through the acquired backlog that there is purchase accounting effects and everything with bringing the integration. But we're really pleased with this acquisition. I think Tom commented we've seen good pull through opportunities in the oil and gas business. It certainly helped us with some of our strategic relationships. It's a critical piece of equipment for the oil and gas industry. So we expect it to be a contributor really through the year and typically, you talk about these for about three or four quarters and then it's on to business as usual.

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

Question on the long cycle business. You've talked a lot about the price pressure you have started to see in 2009. It sounds like the environment hasn't changed much so that, that could actually continue in the P&L into 2012 with what's in the backlog. Is that sort of the right way to think about it?

It really depends on when the choppiness subsides and things tend to pick up. Right now, it's still choppy. So if you -- Jamie, we have percentage of completion, accounting and everything that if it picks up, you do see some benefit from it over the relatively short term, but just think about it to my comments earlier. Now one thing I'll caveat, cycle times have come in. So the fact that we carried a lot over into 2010 was reflective of the environment in 2008 where I can tell you price was chasing capacity and lead times extended out. In the environment now, time is money so lead times tend to come in. But that is a fair point as choppiness -- if it does continue into this year and we've talked about it over the near term, we continue to see that, that will lag into our P&L and could go in the P&L into 2012.

And then can you talk a little bit more about the delayed shipments maybe if we could quantify the exposure of the backlog, when you might have some visibility on whether those would be canceled or an update there?

Well, you've seen our -- you followed our cancellations. We've had very few cancellations. A lot of this is more around on the delayed shipments. Is inspectors available, customers don't need equipment at that necessarily at that point in time. We've seen kind of that effect in our business for the last couple of quarters where there has been certainly some delayed shipments. And frankly some of them, as Tom talked about, as IPD is continuing to improve, they are getting some of this past due backlog out of their business. So it is an area of focus. Certainly on the issues that we can control, that is the past due backlog that we work on that we can get out to our customers, a lot of it is just customers aren't ready to take that piece of equipment. But keep in mind the way contracts are structured and obviously with the advanced cash, it's often rare that the equipments are ready to go and they cancel it.

And then maybe you could comment a little bit more about input costs in some of the shorter cycle businesses, is that hurting right now? And similar to other companies, you'll raise prices following on. There's a little bit of a lag. How should we think about that?

That's the right way. On our long cycle business, when we bid these projects, we lock-in most of the -- almost all of the economics associated with that at that point in time. But on the shorter cycle business you -- as commodities increase, you can pass it on but there tends to be a lag effect and same thing as the commodity prices go down. And remember, when we're talking about commodities, we're not only talking about material cost that you would expect to see in a piece of our equipment but also in transportation and other things as well. You can tend to pass those on but their -- as you hear with other businesses, there is an overall lag and after that lags then you can pass the pricing through overall to the customer.

Typically about a quarter or so on the short cycle in that lag?

You know it really depends on the piece of equipment. A quick turn seal can be a matter of weeks, one of our valves, it could be a couple of months or maybe even extend beyond a quarter as well. I think the other thing that's important is we work very hard in all instances to make sure we use our supply chain effort and everything that continue to mitigate it as well. So what we'll do in an environment where material costs come up is start to look more broadly at our supply-chain sources to see if we can take advantage of opportunities. But clearly to your point, when material costs come up and commodity costs come up, it does provide a headwind to our business. But remember at the end of the day, a lot of what we provide when you look at our Engineered Product and our aftermarket is more around the human capital content to the business. And what I mean by that is aftermarket margins remained fairly stable, somewhat independent of commodity costs because really what they're paying for is that uptime and reliability.

And just one last quick one on the power business, do you talk a lot about nuclear? Some other companies have talked about opportunities popping up in other methods of power generation. Have you seen any of that in discussions with customers or potential customers?

Yes, this is Tom Ferguson. We have seen that in the alternative energies, solar, biofuels, we're seeing more gas turbine driven power plants, combined cycle, things like that. So we're well positioned with a full product line for the power sector. And so some of the opportunities that have been delayed on the nuclear side are being offset by these other areas.

You know, Jamie, it goes back to the comment I made earlier in my original comments is bottom line and end of the line, there is a need for energy both power and oil and gas. And if one opportunity is delayed or foreclosed, another opportunity will present itself. That may create, like I talked about, the oil spill, is it may create a short-term in our industry three to six months. It could be, in short-term, delay in a project that's coming on line because what happens is if the nuclear facilities delayed, there is not somebody just saying, "All right, let's just bring up this fossil power plant over here." But the bottom line is you look at the underlying drivers in our business, the demand for energy is going to continue over the next couple of years. So as these events occur, which are unfortunately out of our control, it may tend to have short-term impacts on the market. But long-term, the demand is going to need to be met. And that's what gives us confidence as we look out over the next couple of years that there is going to be demand for infrastructure.

And then, Jamie, I would also add. One of the things you see is a very low and high-availability of natural gas which tends to create some opportunities, particularly in North America here for the combined cycle plants, and then China and India still driving heavily into the coal market.

Your next question comes from the line on Hamzah Mazari with Crédit Suisse. Hamzah Mazari - Crédit Suisse AG: The first question is just on the IPD business. If you could just update us on the integration work you've done there, what's remaining? And the product gap that you guys are closing, is that done with -- what needs to happen from now on to get to sort of double-digit margins in that business?

Yes, this is Tom Ferguson. We've made a lot of progress in IPD over the last couple of quarters. We haven't completed everything yet, but the majority of, say, the implementation of the ERP platforms and things like that is behind us. We're still fine tuning and that will go on for another quarter or two. The focus now is on expanding our distribution, focusing on the new products. We rolled out the first phase or the next phase of the new chemical ISO pump. We got another phase to go, but we're now in a much better position than we were. And then we got a couple of other product gaps to fill, but they are not huge pieces of the business, they just help us have a broader portfolio for the chemical processing sector.

You know, Hamzah, what we talked about last year is it starts with leadership, and we've got a leadership in that organization. We're very pleased with it. So I would say that one is we're very happy with what we have there, and that's really where it starts. Hamzah Mazari - Crédit Suisse AG: And then I know you gave a lot of color on sort of the backlog. But you guys mentioned that your second half is going to be stronger than the first and there are various puts and takes to that. But isn't some of that cycling through lower-priced backlog as well? That's my first question related to that. And then second one, how do you think about the choppiness of the long cycle business starting to subside? Is that just excess capacity driven, or is there something else structurally that needs to happen there?

Well to your first question around the second half, a lot of that was what we've seen in the growth in our aftermarket backlog and the short cycle business picking up. As that kind of gets in place, we saw that as a benefit to the back half of the year. And then overall, what you'll see in choppiness in terms of the pricing environment in the long cycle business is that the pricing can, as we talked about earlier, can remain in your P&L for a period of time. But as volumes start to pick up, then you work through the absorption issues because as Tom talked about in EPD, with the OE decline, there was some anticipated absorption issues. And I think this goes back to some of our earlier comments, is we were thoughtful as we look at projects. You can fill facilities with projects that don't have the type economics and maybe deal with the absorption issue. But you have a greater impact long-term because if you need that capacity and a good opportunity comes, it's spoken for. So that's a way. To think of our long cycle businesses is choppiness means, and certainly in the pricing environment, the price component, that we don't expect and necessarily see a benefit on the price side in our P&L and it will lag because it is long cycle. Comments around the second half were driven really by what you saw in the short cycle business. The growth in the aftermarket business. We've talked about Valbart coming online as well. Tom seeing traction in the Industrial Products Division. Really those were a lot of the drivers and what we saw in the back half of the year. Hamzah Mazari - Crédit Suisse AG: And then just last question, just on your balance sheet, how are you thinking about leveraging that? You've done some small, very small acquisitions. How should we think about your appetite there and getting into some adjacent product categories? Do you still have a lot of internal work to do and you're going to keep the balance sheet the way it is or are you ready to use it?

Well, we've been ready to use it for a period of time. But to your point, and I think we made the comment on the year-end call, we've been fairly internally focused in 2009, 2010 around the realignment effort. Although we did make an acquisition, we're very pleased in 2010 in Valbart because the opportunity certainly presented itself. But we are certainly looking at opportunities and willing to use our balance sheet which we believe we have a lot flexibility in our balance sheet as you look at opportunities out there. So I think the message around that is we are -- there is still some internal activities that we're doing but far fewer than we've seen in the last two years in our business.

Your next question comes from the line of Scott Graham with Jefferies & Company. R. Scott Graham - Jefferies & Company, Inc.: The cycling through of this backlog is just something that I'm trying to maybe get a better handle on here because conference call comments in the third quarter of last year were kind of maybe introductory into that suggesting that you know, I know that these things ship out over the next, over their next 4 to 8 quarters. Nevertheless, your sales numbers have been pretty good during that period suggesting that there has been some runoff of that backlog. So is it fair to say that we should anniversary that late in the year? Anniversary defined as when I think the margins stabilize? It just seems that when you look at the bookings in the business and the shipments and then you turn around and compare it to the backlog, it seems as if we should be cycled out most of this stuff third or fourth quarter of this year.

Well, what you saw was really going back to 2009, is we started cycling into the lower, the more price competitive environment really during the course of 2009, it increasingly through 2009. But remember, to be in 2009 had a lot of that prior period backlog, a majority of that. And so what you saw is a tailed off as we talked about through the first half of 2010. So our comment around the third quarter is we're now kind of living in a pricing environment that on the booking side, we've been in for a year, a year and a half now. So to that point, that's kind of the environment we're in. And if that means choppy and competitive, that means that is kind of the same impact on that long cycle economics is you're talking about. The other thing that we talked about that impacted us in Q3 was around absorption as well and our backlog is up. So that should help with that. So we'll be -- when, to their comments earlier, when pricing starts to improve in our long cycle business, you do see some short-term benefit, but really that will lag in your P&L depending on what the average cycle time or the duration of that backlog is, those times have come in. So it's been in the P&L. On the pricing side, the impact has been relatively stable since towards the end of the year. But we're just going to be living with it for a while until the market -- the long cycle market start to pick up. R. Scott Graham - Jefferies & Company, Inc.: Understood. Let me maybe just ask this question in a second way and I appreciate that response, Mark. If we look back at last cycle, right, you guys were fully in those same chairs and saw when pricing did start to improve. Now last cycle was something maybe a little bit peculiar from the standpoint that everything seem to be going gangbusters for a long period of time. Nevertheless, this cycle, particularly on the oil and gas side, looks pretty strong right now, early innings, that kind of thing. I guess I'm a little bit surprised that we haven't started to see a little bit less of that competitiveness. What do you think is causing sort of the improvement in pricing to be delayed this cycle versus last cycle?

I mean I think generally, it's the available capacity that's out there. Now it is starting to fill up overall in our industry. We talk last year, let's go upstream a little bit to the engineering and contracting side that would seem large participation by creating contracting firms. As you listen to the Westerns and their comments, they've starting fill up and the westerns are starting to see more activity. So as capacity in our industry starts to fill up, then you'll start to see the pricing opportunity come back. And Tom said customers are focused on, first, cost. They have been -- they went from the price chasing capacity in '08 quickly to first costs in '09 and they like it and they'll let go of it reluctantly. But the fact is as capacity starts to fill up, people become more selective or their capacity is full so they can bid on the opportunity, then price will start to come back into the environment, and it is what we saw on the last cycle. It is certainly what we saw in the last cycle. I think the difference when you look at us. And when we talked about how we performed through the cycle, we've been very pleased. You see in our industry much wider swings in earnings through the cycle and we really been pleased with ours as it's been relatively stable. But what's different from the last cycle, obviously, is our certainly our bigger footprint and a larger business but the growth in our aftermarket business, overall. That certainly has been key and our ability to maneuver globally. They are seeing -- even through these difficult times, there's been opportunities somewhere in the world. R. Scott Graham - Jefferies & Company, Inc.: Next question has to do with the cash flow, which I guess you're a much larger working capital user in the first quarter of this year than you were last year and even more than you were in the last four or five years. How should we read that? Is that to protect yourselves against raw materials? Is that based on near-term bookings that must be shift? How do we read that?

I'll comment high-level and turn it over to Dick. Backlog is up well over $400 million year-over-year, and that's one of the things that impacts it. Go ahead, Dick?

Scott, with that said, I'll rest my case. Now, let me go through a little bit. I think there's a couple of different pieces to it. We typically do have, as you said, a very heavy first quarter. A lot of the use of cash, increasing use of cash quarter-over-quarter came out of the inventory efforts. We talked about the ramp up on the short cycle and aftermarket side, so seeing increases in raw materials kind of is very consistent with that. And then also we had a very heavy fourth quarter shifting [ph] level, so we're kind of now into ramping up on the next projects in the cycle, so you see work in process increasing as well and our progress going to [ph] down on a little bit based on how the fourth quarter closed out versus the phasing in the first quarter. If we look at those three elements, that's the biggest and most of the driver of the increase.

One general way to think about it and then further color is when our book to bill is greater than one, that will tend to burden our balance sheet. And another reason we do and we do this intentionally is we talked about how we mitigate material cost with really contemporaneous purchase of componentry in this long cycle business. Historically, you may have seen businesses manage to just-in-time inventory, which means they would delay the purchase of that. But we use our balance sheet: one, to secure the cost in case. There -- we saw copper rise in 2007 such that motors, which can be 30% of the piece of -- the cost of equipment went up significantly and you can get squeezed there if you didn't advance procure that component. So I think we do that. And the other reason is on-time delivery is a motor -- you cannot ship that pump skid until the motor is there. So you feel a lot better if it's sitting there in the plant ready to go even before you're done manufacturing the pump. So I think that's some other elements just to understand our business. But typically, when the book to bill is over 1 and even in the downturn and in the industry you saw over the last couple of years, our book to bill average still in the 0.9, 4 or 5 range. So we didn't see a big balance sheet liquidation, which you traditionally seen in our industry. But as the book to bill is greater than 1, it will tend to put pressure on our working capital and a lot of that clears towards the end of the year. R. Scott Graham - Jefferies & Company, Inc.: All right, that makes sense. This last question has to do with the prior question and also my question about -- and your response that there is excess capacity around the world. Well, we have a balance sheet here that can -- I know that it's a big market but certainly start to remove some of that capacity from around the world through acquisition means. Could you talk about your acquisition pipeline? You bought Valbart and you like the acquisition and certainly oil and gas probably will be a good one. But is there anything larger that you're looking at on the horizon here to maybe help yourself both with earnings and with capacity shrink in the market?

Well, obviously we don't comment specifically on M&A or M&A opportunities. But there is certainly a range of asset prices that we're considering. And really, Scott, our focus is on growth, expanding our product capabilities, expanding into markets, also looking for ways to expand the value proposition. And what we talked about, we bought a ceiling system business a couple of years ago really to completely outfit the skid and also to leverage the aftermarket capabilities. So we are looking. The fact as you've seen is there has been activity and the price of assets have certainly gone up overall in the industry, but there is still good opportunities out there. So we don't -- we do have a flexible balance sheet. So we really focus on the strategic benefit of the opportunity and then look at the integration aspects of it, the risk return profile of the acquisition in and of itself and also we consider the impact overall to our balance sheet. So we do have a lot of flexibility. We -- comments earlier, while we're still internally focused, we have less internal activity which gives us the opportunity to certainly be more flexible in what we consider in the assets out there. But that's the way we're going to look at it is really around focusing on growth and there could be the opportunity to certainly take some capacity out there, but those will present opportunities and installed base. We'll also consider that against the alternative of just going out and building and getting close to that customer. And you've seen that, we've built quite a bit. I'll remind you I guess in the -- over the last three years, we spent about $100 million of capital in growth opportunities. That's like an acquisition for us. Really what we do is we can -- what Valbart gave us was speed to market. We wanted to get to that market quick and typically you pay a premium over building it yourself but you get access to the market, and we like that.

Your next question comes from the line of Kevin Maczka with BB&T Capital Markets. Kevin Maczka - BB&T Capital Markets: Mark, a lot of talk today on the call about this long cycle pricing dynamic. And I wanted to revisit your comment on the short cycle side and we've had this anticipation for some time now that as volumes return, pricing will follow, and you made that comment again this morning. So with volumes returning, are you seeing that now? I'm just wondering what -- if you can comment more on the current pricing dynamic you're seeing right now? How much is it improving if at all?

Well, our comment, you know is right. As volumes pick up, pricing should follow. And we certainly seen it in some areas, not across the board but as distributors, restock and we've seen that activity, price tends to follow. And being that is short cycle business, it tends to recover quicker with the economy. So we do expect and anticipate that the pricing should follow.

Yes, and I would add, there is still material price pressure even on the shorter cycle business. It certainly hasn't returned to the level that it was in the past but the volumes have definitely increased in Q1 here as you've seen in the overall numbers and that's going to help out on the absorption. But we do have still competitors that are putting a lot of price pressure out there as well as the material prices are relatively high compared to what they were in the past. So it hasn't worked this way out yet. Kevin Maczka - BB&T Capital Markets: And then going back to your comment about the better second half than first half. So if we're going to be living with this long cycle pricing and margin dynamic throughout most of this year perhaps, is the short cycle dynamic the biggest issue here or benefit, if you will, that's going to drive a better second half? Or is there some other unique aspect of your low-cost sourcing initiative or your supply chain initiatives or something else that we should expect to really move the needle and be visible in the second half?

I think it's all of the things that I mentioned earlier. Yes, short cycle should provide a benefit. One, certainly as volumes increase, that gives you better absorption and better leverage overall in the business. And then if pricing follows, you get a benefit from that as well. But also as I commented, we have a significantly higher aftermarket backlog. So that certainly presents an opportunity as we look out into the year. And then the other things that we talked about, it is going to be around continued focus on continuous improvement, supply chain, cost controls. Also Valbart, we've talked about its contribution and we expect it to be a contributor to the balance of the year. And as Tom commented, it's -- he's seeing improvement in the Industrial Products Division. So really as we look out towards the back half of the year, we have a number of things that kind of give us that outlook as to the opportunities in the back half. Kevin Maczka - BB&T Capital Markets: Okay, and then just finally, on share on the long cycle, Mark, can you comment on your assessment of your market share there with I guess in EPD with bookings down five and OEM sales down 25, are you perhaps losing some, walking away from some business as you maintain your price discipline? Or give us an update there, if you will.

Well, but you know in -- you'll hear this general in the industry by being discipline, that does mean you walk away from some opportunities and it's because it's not strategic or it doesn't have the economics that you want and you always consider that against loading a facility. So I think what that means is that we're selective in how we approach these projects overall.

And I'd add that one of our key focus areas is on maintaining our installed base so that we can continue to support the future aftermarket growth. So while we may you know be given some slight amount of market share on the longer cycle projects, we're still very focused on making sure we're building the installed base in the areas that are loyal aftermarket customers and in the right kinds of applications that generated good solid aftermarket. So we focus on a lot of things. And our win rate has bounced around a little bit but it's not bouncing significantly.

Your next question comes from the line of Robert Barry with UBS.

Thanks for taking the questions. Just a couple of quick ones. Can you tell us how much of the backlog is nuclear?

No, we don't break out our backlog specifically by product offering.

It sounds like you said though it was less than 50% of the power backlog, is that right?

No, what I said in the power business is it doesn't represent a majority or a big proportion of our power business, overall.

Okay, and then on Valbart, in what quarter do you expect they will be accretive?

Well, we just talk generally for the year. We expect it to be accretive and contribute for this year. And as we talked about and we anticipate it and we've been still cycling through some of the effects of the acquisition, but it certainly has come online. I mean I think another thing to point out is the bookings opportunities that it’s presented to us have been very encouraging, but we expect it to be accretive for the year and certainly to be a contributor.

Yes, I was just wondering if it might not be until the fourth quarter since -- third quarter I think is the seasonally low point for it anyway.

Yes, well you know Ro [ph], we don't provide quarterly guidance and certainly not bound to a specific acquisition.

Yes, fair enough. I guess just my last question is on trying to understand the dynamic in IPD around the revenue. When I look at what the bookings have been for the past four quarters, really, north of $200 million for these solid lease though on the last couple, and I think of that as cycling through within the quarter give or take. So seeing the revenue down fair amount sequentially and year-over-year well below the $200 million, I'm just trying to understand that dynamic. Is that related to the delayed deliveries you talked about, or is there also something else going on there that I'm missing?

I think it's mainly really the impact we see overall on our business. Q1 tends to be, if you look sequentially, tends to -- is often been lighter than Q4. A lot of stuff goes out the door in Q4 for -- is talked about, that's when our customers want it. They have many of these international companies have annual cash budgets. So they want the product delivered towards the end of the year, and that's where we have collection efforts. So Q1 tends to be, and we talked about this in Q3, like year-over-year I think it was what Tom talked about is really reflected of the lower booking environment as they came into this year versus last year. So I think, but it's more really the Q1 lower volume, sales volume levels that we've traditionally seen in our business.

They had a $220 million fourth quarter, so that has headwind on the backlog.

Fair enough. And then just finally, when you were talking about the working capital change, you called out, among other things, the delayed shipments having an impact there. And I was just wondering if you could kind of to mention how much of the change in the working capital related to that?

That -- I mean he was just commenting generally on work-in-process. We talked about the last couple of quarters that there has been shipments delayed because customers aren't ready to take at some of the past due backlog. Those are the things that, as you look year-over-year, really into working capital compare. But I think most of the impact that you're seeing at our working capital is what we talked about around the increased backlog. And we've got our backlog at $2.8 billion is as big as we've seen since I think we entered 2009. So what that will tend to do is it will make a claim on your working capital and build working capital.

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

I guess what I'm trying to get my arms around is this cycle of lower competitive pricing began, say, mid 2009, can you give us an idea broadly of what innings do you think we ran only in like the seventh inning of this, or are we in more like the fifth at this point? And given the underlying commodity markets, what's your take in terms of how long potentially can this capacity get taken out? And then my second question is just on each of your segments, can you give us an idea of what each segment is currently operating at in terms of capacity as a percentage?

Well, let me -- on the first question, what we commented is we see this choppiness kind of into 2011. So that's our current view. There's certainly projects we see out on the horizon over the next couple of years that we have a sense for that we think will start to eat up this capacity in our industry. And by the way, the capacity has been used over the last couple of years. So it's not a matter that we're at the levels that the industry is at the levels that it was last year, it's starting to move up. But really, our view right now on our comments have been around 2011. In terms of capacity utilization by segment, we don't provide that data out there specifically. But generally when you look at our capacity, we do manage it globally on the highly engineered. So we have the ability to move manufacturing across our various capacity depending on the lead times. And I think the other thing that we've been doing is all of our capacity isn't necessarily ubiquitous. So we have specific products. We manufacture in specific locations. We've been working consistently to make those efficient and also to start creating capacity in emerging parts of the world mainly it does give us an opportunity certainly on relative cost, but moreover, gives us the presence in those local markets where increasingly local contents require, and we have strong capabilities there to address the market. So we think of our capacity not as one-size-fits-all and we manage it as an overall percentage. We manage up site-by-site, relative to each project that we look at, but also more strategically in terms of where does that capacity need to be to support the customer, to support the QRC in the area. So we've been, as you've seen, we've been adding capacity really in the emerging parts of the world. Tom talked about that. Our facility in Brazil, we acquired some land in China next to our existing facilities to expand our capabilities there. We're looking to continue to expand in India. Well those are the three markets that are showing a tremendous amount of growth over the next couple of years.

And then just a housekeeping question. I appreciate the color on it, Mark. On the SG&A line, Valbart is completely baked in?

Yes.

Is this sort of the new run rate we should be utilizing going forward?

Well, that's going to depend on what happens with the currency. I mean currency had an impact on our reported SG&A as well. But the way to look at it is, I think around Dick's comments is we'll continue to focus on costs in this SG&A line. Our backlog is growing, so we'll focus on leveraging our SG&A. But we could run this run rate down if we decided not to invest in some of our emerging market opportunities, our technologies, and we're just not going to do that. So I think our focus is going to be on maintaining an efficiency in our SG&A line and continuing to drive that. So we still have opportunities to be more efficient, I can tell you. We stay very focused on that, but also we want to make sure that we're doing some requisite lead time investing in our business, and I'm getting engineers in the parts of the world where we need them.

Your next question comes from the line of Jeff Beach with Stifel, Nicolaus. Jeffrey Beach - Stifel, Nicolaus & Co., Inc.: You mentioned earlier in your comments that North America is strengthening and the emerging markets are stable. Can you highlight a couple of the end markets where there is differences in the trends and whether there is a difference in the trends in OE and aftermarket between North America and the emerging markets?

Yes, I'll comment generally and let Tom and Tom fill in. I mean generally, what you saw in North America was in a lot of the oil and gas capacity. Some of the deferred maintenance came back online. So you've seen promise in that area. The flip side is what we talked about earlier in the nuclear side, a lot of that activity has stopped at this point in time as they're evaluating opportunities. I think around the world, what you've seen is continued investment in the Middle East. There have been some areas where there has been unrest, where some project activity has been delayed. As you can imagine in Libya there's -- that's an oil-rich country and we certainly participated there. There's not a lot going on at this point in time. And so it really can kind of depend on country-by-country. But generally in the Middle East, they are continuing to invest in their capacity to increase production long-term. Also, they are driving very hard to move away from just being a crude oil exporter into more of a refined product exporter so that they can get more of the value proposition of the refined product. In Brazil, you've seen certainly in the oil and gas, the major oil company has acquired a significant amount of reserves and they have investment to basically monetize those reserves. It's on the horizon. That's generally -- any other comment, Tom?

On the FSG side, we have seen North America has strengthened on the aftermarket and particularly with refineries now doing some deferred maintenance and spending some money in those areas as well as we've seen the end markets like chemical and some of the general industry in North America pickup as well. I guess to continue with what Mark said, Latin America has been active, especially on the oil and gas side and we're heavily into the downstream. So there has been quite a bit of that. And then the Middle East is just a very significant area, and naturally the oil and gas is active. But also things like power generation, desalination, those markets are active in the Middle East as well. So it's not just oil and gas for us.

And I would just add to a few additional comments. On the power side, as Mark has indicated, North America is going through I would say we're looking at the environmental regulations and probably is flat right now. India and China is still going along pretty good. We have the nuclear business in China still progressing with the U.S., progressing but looking at the designs. Combined cycle looks like it's moving pretty good around the world. The shale gas in North America looks pretty good in there looking at how things are now in Canada, you got the chemical business in the Middle East as they move the chemical business closer to feedstocks now. And as people now find a lot of gas around the world to move in that, that way. And then we these other markets like pulp and paper are -- it seems like it's coming on strong back in, particularly in Latin America. You've got district heating in Russia where you got the distributors now stocking once again, not to the pre-2007, 2008 levels, but they are stocking again. You have mining, which everybody's after their raw materials. So that market seems to be fairly strong in Australia and other places in Latin America. So there's some good movement in different markets. Jeffrey Beach - Stifel, Nicolaus & Co., Inc.: And you touched on a couple of markets within general industrial. But is general industrial the pickup you're seeing broad-based globally, or is it focused around one of your geographic markets?

It's more broad-based than we've seen before and which makes sense. It tends to be as economic cycles start to trend up, it tends to be one of the first to participate. If you remember last year, the mining industry saw on the engineering contracting side, they saw a tremendous growth in the infrastructure opportunities in the mining. That's typical when you see economies start to recover.

And at this time, there are no further questions. I'd like to turn the call back to Mike Mullin for any closing remarks.

Thank you, Michael. I would just like to remind everybody that this webcast will be available on our website for replay in approximately two hours, and thank you all for joining.

Thank you, ladies and gentlemen. This concludes today's conference call. You may now disconnect.