The Daily Magic Formula Stock for 11/19/2008 is Flowserve Corp. According to the Magic Formula Investing Web Site, the ebit yield is 17% and the EBIT ROIC is 50-75 %.
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Flowserve Corporation is a world leading manufacturer and aftermarket service provider of comprehensive flow control systems. Unless the context otherwise indicates, references herein to â€śFlowserve,â€ť â€śthe Companyâ€ť and such words as â€śwe,â€ť â€śourâ€ť and â€śusâ€ť include Flowserve Corporation and its subsidiaries. We were incorporated in the State of New York on May 1, 1912. We develop and manufacture precision-engineered flow control equipment, such as pumps, valves and seals, for critical service applications that require high reliability. We use our manufacturing platform to offer a broad array of aftermarket equipment services, such as installation, advanced diagnostics, repair and retrofitting. We utilize a footprint of Quick Response Centers (â€śQRCsâ€ť) around the globe to deliver these aftermarket services.
We sell our products and services to more than 10,000 companies, including some of the worldâ€™s leading engineering and construction firms, original equipment manufacturers, distributors and end users. Our products and services are used in several distinct industries across a broad geographic reach.
We have pursued a strategy of industry diversity and geographic breadth to mitigate the impact on our business of an economic downturn in any one of the industries or in any particular part of the world we serve. For information on our sales and long-lived assets by geographic areas, see Note 17 to our consolidated financial statements included in this Annual Report on Form 10-K for the year ended December 31, 2007 (â€śAnnual Reportâ€ť).
We conduct our operations through three business segments:
â€˘ Flowserve Pump Division (â€śFPDâ€ť) for engineered pumps, industrial pumps and related services;
â€˘ Flow Control Division (â€śFCDâ€ť) for engineered and industrial valves, control valves, actuators and controls and related services; and
â€˘ Flow Solutions Division (â€śFSDâ€ť) for precision mechanical seals and related products and services.
FINANCIAL INFORMATION ABOUT SEGMENTS AND GEOGRAPHIC AREAS
In addition to the information presented below, Note 17 â€śBusiness Segment Informationâ€ť of the notes to our consolidated financial statements contains additional information about our business segments and geographic areas in which we have conducted business for fiscal years 2007, 2006 and 2005.
FLOWSERVE PUMP DIVISION
Through FPD, we design, manufacture, distribute and service engineered and industrial pumps and pump systems, submersible motors, replacement parts and related equipment, principally to industrial markets. FPDâ€™s products and services are primarily used by companies that operate in the oil and gas, chemical processing, power generation, water treatment and general industrial markets. Our pump systems and components are currently manufactured at 28 plants worldwide, of which 8 are located in North America, 11 in Europe and 9 in Latin America and Asia. We also manufacture a small portion of our pumps through several existing foreign joint ventures. We market our pump products through our worldwide sales force and our regional service and repair centers or through independent distributors and sales representatives.
In April 2007, Flowserve entered into a joint venture agreement with Changsha Pump Works, a Chinese pump manufacturer that is owned by Xiangtan Electric Manufacturing Co. This joint venture will focus on the domestic Chinese power and water markets and will add approximately 2.7 million square feet in manufacturing capacity, which will be brought online in late 2008. This relationship with Changsha Pump Works also expands our operational platform to support low-cost sourcing initiatives and capacity demands for markets outside China.
In June 2006, Flowserve entered into a joint venture agreement with the Al Rashaid Group to build the largest original pump equipment service and repair and learning center facility in Saudi Arabia. In addition to service and repair, the facility is designed to have the capability to engineer, assemble and test new and upgraded pumping equipment. Construction of the 220,660 square feet complex will be located at the Al Rashaid Oil Field Center in Dhahran, Saudi Arabia and should be completed by the end of second quarter of 2008.
We manufacture more than 150 different active pump models, ranging from simple fractional horsepower industrial pumps to high horsepower engineered pumps (greater than 30,000 horsepower). Our pumps are manufactured in a wide range of metal alloys and with a variety of configurations, including pumps that utilize mechanical seals (sealed pumps) and pumps that do not utilize mechanical seals (magnetic-drive and other pumps).
We provide engineered aftermarket services through our global network of 76 service centers and QRCs, some of which are co-located in a manufacturing facility, in 28 countries. Our FPD service personnel provide a comprehensive set of equipment maintenance services for flow management control systems, including repair, advanced diagnostics, installation, commissioning, re-rate and retrofit programs, machining and full service solution offerings. A large portion of our FPD service work is performed on a quick response basis, and we offer 24-hour service in all of our major markets.
FPD New Product Development
Our investments in new product research and development have consistently led to the production of more reliable and higher efficiency pump designs. In line with our end-user strategy, the majority of our new FPD products and enhancements are driven by our customersâ€™ need to achieve higher production rates at lower costs. As a result, we continually collaborate with our customers in developing advanced technical solutions to improve the availability and productivity of their pumping systems. This type of technology advancement is best demonstrated by our recent release of the IPS Tempo product. The flagship of our Intelligent Pumping Series , IPS Tempo is a product developed and designed to incorporate our operating intelligence and protection logic in the control of pumps installed at unmanned locations. Much of our new product development is applied to projects where customer funding is available to support the investment.
We are prominent in the development of equipment and systems to harness alternative and renewable energy sources. One such project is the German Geothermal Motor Development (â€śGGMDâ€ť) program. One of our pump engineering teams has focused on the challenges of reliably pumping geothermal product fluid at elevated temperatures. The design review was completed in September 2007 and a field test unit is expected to be installed in September 2008. The standard expectation by customers of an equipment life performance of six to 12 months will be more than surpassed by our productâ€™s performance expectancy of three to five years of continuous operation before maintenance or replacement. The GGMD program is expected to result in as many as four U.S. patent applications.
In addition to product and technology development, FPD research and development personnel continue to support many of the organizations leading the industry (HI, API, ISO, Europump) and have been recognized as leaders in pump technology. For example, Bruno Schiavello, our hydraulics specialist, was awarded the prestigious 2006 ASME Fluids Machinery Design Award for his many years of service in the fluids design discipline.
None of these newly developed pump products or services required the investment of a material amount of our assets or was otherwise material.
FPDâ€™s customer mix is diversified, including leading engineering procurement and construction firms, original equipment manufacturers, distributors and end users. Our sales mix of original equipment (â€śOEâ€ť) products and aftermarket products and services diversifies our business and somewhat mitigates the impact of economic cycles in our business.
The pump industry is highly fragmented, with more than 100 competitors. We compete, however, primarily against a relatively limited number of large companies operating on a global scale. Competition is generally based on delivery times, expertise, price, breadth of product offerings, contractual terms, previous installation history and reputation for quality. Some of our largest pump industry competitors include ITT Industries, Ebara Corporation, KSB Inc., The Weir Group PLC, Sulzer Pumps and United Technologies Corporation.
The pump industry has undergone considerable consolidation in recent years, primarily caused by (i) the need to lower costs through reduction of excess capacity and (ii) customersâ€™ preference to align with global full service suppliers in simplifying their supplier base. Despite the consolidation activity, the market remains highly competitive. Based on independent industry sources, we believe that we are the largest pump manufacturer serving the oil, chemical and power generation industries, and the third largest pump manufacturer overall. We believe that our broad range of pumps for the oil, power and chemical industries, our strong customer relationships, our more than 100 years of experience in pumping equipment, and our reputation for providing quality engineering solutions are our major sources of competitive advantage.
FPDâ€™s backlog of orders as of December 31, 2007 was $1.8 billion, compared with $1.3 billion as of December 31, 2006. We expect to ship over 87% of our December 31, 2007 backlog during 2008.
FLOW CONTROL DIVISION
FCD, the second largest business segment within Flowserve, designs, manufactures and distributes a broad portfolio of industrial valve products, including actuators, controls and related equipment. In addition, FCD offers energy management products such as steam traps and condensate recovery systems. FCD leverages its experience and application know-how by offering a complete menu of engineered services to complement its expansive product portfolio. FCD products used to control, direct, and manage the flow of liquids and gases, are an integral part of any flow control system. Typically, our valve products are customized, being engineered to perform specific functions within each of our customerâ€™s unique flow control environments.
Our products are primarily used by companies that operate in the chemical, power generation (nuclear, fossil, coal gasification and renewable), oil and gas and general industries including aerospace, water, mining and pharmaceutical. We have 40 sites worldwide, including 20 principal manufacturing facilities, of which five are located in the United States (â€śU.S.â€ť), and 20 QRCs. A small portion of our valves are produced through a foreign joint venture.
Together, our valve, actuator steam trap, and automated valve accessory offerings represent one of the most comprehensive product portfolios in the flow control industry. Our products are used in a wide variety of applications, from the more customary general service operations to the most extreme of environments, involving high degrees of corrosion, temperatures and/or pressures. FCDâ€™s â€śsmartâ€ť valve technologies, which integrate high technology sensors, microprocessor controls and digital positioners into a high performance control valve, permit real time system analysis, system warnings and remote services. These â€śsmartâ€ť valve technologies were developed in response to the growing demand for increased automation, improved process control efficiency and digital communications at the plant level. We are committed to further enhancing the quality of our product portfolio by continuing to upgrade our existing offerings with cutting-edge technologies.
John R. Friedery, age 51, was elected as a director in August 2007 and serves as a member of the Audit Committee. Mr. Friedery is currently Senior Vice President, Ball Corporation; President, Metal Beverage Packaging, Americas and Asia, a provider of metal and plastic packaging for beverages, foods and household products, and of aerospace and other technologies services. He previously served as the Chief Operating Officer, Packaging Products Americas, and the President, Metal Beverage Container operations, as well as other leadership roles in Ball Corporation since 1988. Prior to his employment with Ball Corporation, he served in field operations for Dresser/Atlas Well Services and in operations, exploration and production for Nondorf Oil and Gas.
Joe E. Harlan, age 48, was elected as a director in August 2007 and serves as a member of the Finance Committee. Mr. Harlan is currently the Executive Vice President, Electro and Communications Business with 3M Company, a technology solutions provider to the electrical, electronics and communications markets worldwide. He served as President and Chief Executive Officer of Sumitomo 3M Ltd. from 2003 to 2004. Prior to his career with 3M Company, he held a number of leadership positions with General Electric Company, including serving as Vice President of Finance for GE Lighting Group (USA).
Michael F. Johnston, age 60, has served as a director since 1997. He serves as Chairman of the Finance Committee and as a member of the Corporate Governance and Nominating Committee. Mr. Johnston is the Chief Executive Officer and Chairman of the Board of Visteon Corporation (â€śVisteonâ€ť), an automotive components supplier, and has served as Visteonâ€™s President, Chief Executive Officer and Chief Operating Officer at various times since 2000. Before joining Visteon, he was employed by Johnson Controls, Inc., a company serving the automotive and building services industry, as President of North America/Asia Pacific, Automotive Systems Group, from 1999 to 2000, President of Americas Automotive Group from 1997 to 1999 and in other senior management positions since 1991. He is also a director of Visteon and a director of Whirlpool Corporation, an appliance manufacturer.
Kevin E. Sheehan, age 62, has served as a director since 1990. He serves as non-executive Chairman of the Board of Directors and also serves as a member of the Finance Committee. He also serves as an alternate director of all other committees for any committee member not in attendance at a committee meeting. He served as the Companyâ€™s Interim Chairman, President and Chief Executive Officer from April 2005 to August 2005. He is a partner in Cambridge Ventures, a venture capital firm focused on investments in early stage growth companies. He is the Board Chairman of two private companies, Contour Hardening and CIK Enterprises, neither of which are connected to Cambridge Ventures. Prior to joining Cambridge Ventures, he was Managing Director of CID Capital for 12 years. Before joining CID Capital in 1994, Mr. Sheehan was employed by Cummins Engine Company, a manufacturer of diesel engines and related components, for 22 years in various management capacities.
Gayla J. Delly, age 48, has served as director since January 2008 and serves as a member of the Audit Committee. Ms. Delly currently serves as President of Benchmark Electronics Inc., a company that provides contract manufacturing, design, engineering, test and distribution services to manufacturers of computers, medical devices, telecommunications equipment and industrial control and test instruments. Ms. Delly is a certified public accountant. She previously served as Executive Vice President and Chief Financial Officer of Benchmark Electronics Inc. from 2001 to 2006, and as Corporate Controller and Treasurer from 1995 to 2001. Prior to joining Benchmark Electronics Inc., Ms. Delly served as a Senior Manager in the Audit Group of KPMG.
Charles M. Rampacek, age 64, has served as a director since 1998. He serves as the Chairman of the Corporate Governance and Nominating Committee and as a member of the Organization and Compensation Committee. Mr. Rampacek is currently a business and management consultant in the energy industry. Mr. Rampacek served as the Chairman of the Board, President and Chief Executive Officer of Probex Corporation (â€śProbexâ€ť), an energy technology company providing proprietary oil recovery services, from 2000 to 2003. From 1996 to 2000, Mr. Rampacek served as President and Chief Executive Officer of Lyondell-Citgo Refining, L.P., a manufacturer of petroleum products. From 1982 to 1995, he held various executive positions with Tenneco Inc. and its energy related subsidiaries, including President of Tenneco Gas Transportation Company, Executive Vice President of Tenneco Gas Operations and Senior Vice President of Refining. In 2005, two complaints seeking recovery of certain alleged losses were filed against former officers and directors of Probex, including Mr. Rampacek, as a result of the bankruptcy of Probex in 2003. These complaints were defended under Probexâ€™s director and officer insurance by AIG and settlement was reached and paid by AIG with bankruptcy court approval in the first half of 2006. An additional complaint was filed in 2005 against noteholders of certain Probex debt, of which Mr. Rampacek was a party. A settlement of $2,000 was reached and similarly approved in the first half of 2006. Mr. Rampacek is also a member of the Board of Directors of Enterprise Products GP, LLC, which is the general partner of Enterprise Products Partners L.P., a publicly â€” traded limited partnership that provides mid-stream services for the oil and gas industry, and serves on its Audit, Conflicts and Governance Committees.
Christopher A. Bartlett, age 64, has served as a director since 2002 and serves as a member of the Organization and Compensation Committee. He also served as director of the Company from 1988 to 1993. Dr. Bartlett is a Professor of Business Administration, Emeritus, at Harvard University. Prior to his academic career, he was a general manager of Baxter Travenolâ€™s French subsidiary and a consultant at McKinsey & Co. Currently, Dr. Bartlett serves as an advisor to chief executive officers and as a management consultant on international strategic and organizational issues to several major corporations. Mr. Bartlett will retire effective as of the date of the 2008 annual meeting of shareholders and will not serve the remainder of his term expiring at the 2010 annual meeting. We thank Mr. Bartlett for his years of exemplary service on the Board.
William C. Rusnack, age 63, has served as a director since 1997 and serves as Chairman of the Organization and Compensation Committee and as a member of the Corporate Governance and Nominating Committee. He is currently a private investor and independent corporate director. Mr. Rusnack was President, Chief Executive Officer, Chief Operating Officer and director of Premcor Inc. at various times from 1998 to 2002. Before joining Premcor, Inc., Mr. Rusnack served for 31 years with Atlantic Richfield Company, (â€śARCOâ€ť), an integrated petroleum company, most recently as Senior Vice President of ARCO from 1990 to 1998 and President of ARCO Products Company from 1993 to 1998. He is also a director and member of the Audit and Executive Committees, as well as Chairman of the Organization and Compensation Committee of Sempra Energy, an energy services company, and is a director and member of the Executive Committee, as well as Chairman of the Audit Committee of Peabody Energy, a coal mining company.
Rick J. Mills, age 60, has served as a director since 2007 and serves as a member of the Audit Committee. He is currently a Vice President of Cummins Inc., a manufacturer of large diesel engines, and President of the Components Group at Cummins Inc. He was Vice President and President â€” Filtration Business from 2000 to 2005 and held other key management positions from 1970 to 2000. Mr. Mills is also a director and member of the Audit Committee and Nominating and Governance Committee of Rohm and Haas, a global company producing specialty chemical polymers and biologically active compounds.
Roger L. Fix, age 54, has served as director since 2006 and serves as a member of the Organization and Compensation Committee. Mr. Fix is the President and Chief Executive Officer of Standex International Corporation (â€śStandexâ€ť), a publicly traded diversified manufacturing and marketing company. He has been its Chief Executive Officer since 2003, President since 2001 and director since 2001. He was its Chief Operating Officer from 2001 to 2002. He is also a member of Standexâ€™s Executive Committee since 2003. Before joining Standex, he was employed by Outboard Marine Corporation, a marine manufacturing company, as Chief Executive Officer and President from 2000 to 2001 and Chief Operating Officer and President during 2000. He served as its director from 2000 to 2001. He served as Chief Executive of John Crane Inc., a global manufacturer of mechanical seals for pump and compressor applications in the process industry, from 1998 to 2000 and as its President â€” North America from 1996 to 1998. He was President of Xomox Corporation, a manufacturer of process control valves and actuators, from 1993 to 1996. He was also employed by Reda Pump Company, a manufacturer of electrical submersible pumping systems for oil production, from 1981 to 1993, most recently as Vice President and General Manager/Eastern Division. He was also employed by Fisher Controls Company, a manufacturer of process control valves and pneumatic and electronic instrumentation, from 1976 to 1981.
Diane C. Harris, age 65, has served as a director since 1993 and serves as a member of the Finance Committee. She is President of Hypotenuse Enterprises, Inc., a mergers and acquisitions service and corporate development outsourcing company. Ms. Harris was Vice President of Corporate Development of Bausch & Lomb Incorporated, an optics and health care products company, from 1981 to 1996, when she left to form Hypotenuse Enterprises, Inc. as its President. She was a director of the Association for Corporate Growth from 1993 to 1998 and its elected President from 1997 to 1998. Ms. Harris is also a director of the Monroe Fund, an investment company.
Lewis M. Kling, age 63, has served as President, Chief Executive Officer and as a director since 2005. He served as Chief Operating Officer from 2004 to 2005. Before joining the Company, he served as Group President and Corporate Vice President of SPX Corporation from 1999 to 2004 and as a member of the Board of Directors of Inrange Technologies Corporation from 2000 to 2003. Mr. Kling also served as President of Dielectric Communications, a division of General Signal Corporation, which was purchased by SPX Corporation, from 1997 to 1999. He is also a director of Eastman Chemical Company, a manufacturer of chemicals, fibers and plastics.
James O. Rollans, age 66, has served as a director since 1997. He serves as the Chairman of the Audit Committee and as a member of the Corporate Governance and Nominating Committee. He is an independent corporate director and corporate financial advisor. Mr. Rollans was President and Chief Executive Officer of Fluor Signature Services, a subsidiary of Fluor Corporation, a major engineering, procurement and construction firm, from 1999 to 2001. He served as Senior Vice President of Fluor Corporation from 1992 to 1999, as its Chief Financial Officer from 1998 to 1999 and from 1992 to 1994, as its Chief Administrative Officer from 1994 to 1998 and as its Vice President of Corporate Communications from 1982 to 1992. Mr. Rollans is also a director of Encore Credit Corporation, a mortgage finance company, and a director of Advanced Medical Optics, Inc., a developer and manufacturer of ophthalmic surgical and contact lens care products.
MANAGEMENT DISCUSSION FROM LATEST 10K
We are an established industry leader with a strong product portfolio of pumps, valves, seals, automation and aftermarket services in support of global infrastructure industries including oil and gas, chemical, power generation and water management, as well as general industrial markets where our products add value. Our products are integral to the movement, control and protection of the flow of materials in our customersâ€™ critical processes. Our business model is influenced by the capital spending of these industries for the placement of new products into service and aftermarket services for existing operations. The worldwide installed base of our products is an important source of aftermarket revenue, where products are expected to ensure the maximum operating time of many key industrial processes. The aftermarket business includes parts, service solutions, product life cycle solutions and other value added services, and is generally a higher margin business and a key component to our profitable growth.
We have experienced favorable conditions in 2007 in all of our focus industries, especially oil and gas. Market pricing for crude oil and natural gas, in particular, has supported increased capital investment in the oil and gas market, resulting in many new projects and expansion opportunities. Favorable market conditions have resulted in corresponding growth, much of which is in the developing areas of the world where new oil and gas reserves are under development. We have seen a particular increase in investment in complex recovery reserves such as tar sands, deepwater and heavy oil where our products are well positioned. We believe the outlook for our business remains favorable; however, we believe that oil and gas prices will fluctuate in the future and such volatility could have a negative impact on our business in some or all of the geographical areas in which we conduct business.
We continue to execute on our strategy to increase our presence in all regions of the global market to capture aftermarket business through the current installed base, as well as to secure new capital projects and process plant expansions. The opportunity to increase our installed base of new products and drive recurring aftermarket business in future years is a critical by-product of the favorable market conditions we have seen. Although we have experienced strong demand for our products and services in recent periods, we face challenges affecting many companies in our industry with a significant multinational presence, such as economic, political and other risks.
We currently employ approximately 15,000 employees in more than 55 countries who are focused on key strategies that reach across the business. See â€śOur Strategiesâ€ť section of this Managementâ€™s Discussion and Analysis of Financial Condition and Results of Operations (â€śMD&Aâ€ť) for a discussion of our key strategies. We continue to build on our geographic breadth through the implementation of additional Quick Response Centers (â€śQRCsâ€ť) with the goal to be positioned as near to the customers as possible for service and support in order to capture this important aftermarket business. Along with ensuring that we have the local capability to sell, install and service our equipment in remote regions, it becomes equally imperative to continuously improve our global operations. Our global supply chain capability is being expanded to meet global customer demands and ensure the quality and timely delivery of our products. Significant efforts are underway to reduce the supply base and drive processes across our divisions to find areas of synergy and cost reduction. In addition, we are improving our supply chain management capability to ensure it can meet global customer demands. We continue to focus on improving on-time delivery and quality, while reducing warranty costs as a percentage of sales across our global operations through a focused Continuous Improvement Process (â€śCIPâ€ť) initiative. The goal of the CIP and lean manufacturing initiatives are to maximize service fulfillment to customers through on-time delivery, reduced cycle time and quality at the highest internal productivity. This program is a key factor in our margin expansion plans.
As discussed in Note 13 to our consolidated financial statements included in this Annual Report on Form 10-K for the year ended December 31, 2007 (â€śAnnual Reportâ€ť), a number of putative class action lawsuits were filed against us, certain of our former officers, our independent auditors and the lead underwriters of our most recent public stock offerings, alleging securities laws violations. By Orders dated November 13, 2007 and January 4, 2008, the trial court granted summary judgment in favor of us and all other defendants on all of the plaintiffsâ€™ claims. The trial court also denied the plaintiffsâ€™ request for class certification. We strongly believe that any appeal or other effort by the plaintiffs to overturn the trial courtâ€™s denial of class certification or entry of judgment would be without merit, and intend to oppose any such effort vigorously. Additionally, on January 2, 2008, the court entered an order granting our motion to dismiss all claims under a related shareholder derivative lawsuit that was originally filed on March 14, 2006 and allowed the plaintiffs an opportunity to replead. A notice of entry of the dismissal order was served on the plaintiffs on January 15, 2008.
We have resolved investigations by the Securities and Exchange Commission (â€śSECâ€ť) and the Department of Justice (â€śDOJâ€ť) relating to products that two of our foreign subsidiaries delivered to Iraq from 1996 through 2003 under the United Nations Oil-for-Food Program. We negotiated a settlement with the SEC in which, without admitting or denying the SECâ€™s allegations, we agreed to (i) a stipulated judgment enjoining us from future violations of the internal control and recordkeeping provisions of the federal securities laws, (ii) pay disgorgement of $2,720,861 plus prejudgment interest of $853,364 and (iii) pay a civil money penalty of $3 million. Separately, we negotiated a resolution with DOJ. The resolution results in a deferred prosecution agreement under which we will pay a monetary penalty of $4,000,000.
We believe that we are a world-leading manufacturer and aftermarket service provider of comprehensive flow control systems. We develop and manufacture precision-engineered flow control equipment such as pumps, valves and seals, for critical service applications that require high reliability. We use our manufacturing platform to offer a broad array of aftermarket equipment services such as installation, advanced diagnostics, repair and retrofitting.
Operations are conducted through three business segments that are referenced throughout this MD&A:
â€˘ Flowserve Pump Division (â€śFPDâ€ť): engineered and industrial pumps, pump systems, submersible motors and related services;
â€˘ Flow Control Division (â€śFCDâ€ť): engineered and industrial valves, control valves, actuators, controls and related services; and
â€˘ Flow Solutions Division (â€śFSDâ€ť): mechanical seals, auxiliary systems and parts and related services.
Our product portfolio is built on more than 50 well-respected brand names such as Worthington, IDP, Valtek, Limitorque, and Durametallic. This portfolio is believed to be one of the most comprehensive in the industry. The products and services are sold either directly or through designated channels to more than 10,000 companies, including some of the worldâ€™s leading engineering and construction firms, original equipment manufacturers, distributors and end users.
Our products and services are used in several distinct industries: oil and gas, chemical, power generation and water management, as well as a number of other industries that are collectively refer to as â€śgeneral industriesâ€ť.
Demand for most of our products depends on the level of new capital investment and planned maintenance expenditures by our customers. The level of capital expenditures depends, in turn, on capital infrastructure projects driven by the need for oil and gas, power and water, as well as general economic conditions. These are related to the phase of the cycle in their industries and the expectations of future market behavior. The levels of maintenance spend are driven by the reliability of the equipment, planned downtime for maintenance and the required capacity utilization of the process.
The oil and gas industry represented approximately 41% and 43% of our bookings in 2007 and 2006, respectively. High petroleum prices generally drove additional investment in upstream (exploration and production) petroleum projects and significantly contributed to the increase in bookings. Many of these projects were in Asia, Africa, the Middle East and Latin America and reflect opportunities with national, international and other major oil companies. Based on the current and future expectations of oil and gas price levels as compared with historical levels, oil and gas companies are encouraged to evaluate new resources and technologies and explore different options such as oil sands, deepwater, heavy oil and the Arctic region.
In the downstream segment of the industry (refining and transportation), we experienced increased investment in 2007 due to a greater global demand for larger amounts of refined products stimulated by the rapid economic growth in developing countries and general demand growth in the rest of the world. The available refining capacity is not adequate to meet the current demand growth forecasts for the developing markets like China and India. The refineries are additionally pressured by new clean fuel regulations, which result in activities such as revamps and upgrades to address these environmental concerns. These situations have been positive for our products as oil and gas companies try to address the supply to the market with increased capacity and the right quality of products to meet tightening regulations. The outlook for this segment of the oil and gas industry is heavily dependent on the demand growth from the developing geographies.
The chemical industry represented approximately 17% and 15% of our bookings in 2007 and 2006, respectively. Even with the increase in oil feedstock, this industry has been able to pass along price increases for their products, allowing profitability among major chemical companies to maintain levels supportive of capital investment. In the North American market, the weakness of the dollar has provided a platform of global competitiveness for domestically based chemical companies. This demand has driven increased capital investments to upgrade facilities and expand output capacity. The investment in new manufacturing facilities in China has also contributed to the growth in this industry. Although the global chemical industry is in a more mature phase of its cycle, output growth predictions provided by independent third parties for 2008 are modestly higher than for 2007. As for the emerging field of biotechnologies, we are seeing increased investments for pilot operations and research to bring these alternative products to market. We are currently working with key customers in this area in the development of products to serve this future industry. The outlook for the chemical industry remains favorable on a global scale; however, regional economic slowdowns and exchange rate changes could have an adverse impact on this industry in the respective markets.
The power industry represented approximately 12% and 13% of our bookings in 2007 and 2006, respectively. This industry continued to see capital investment growth due the increased power demands in the developing countries such as China and India and capacity increases in mature markets including the United States (â€śU.S.â€ť). Many of the projects in 2007 were designed as coal-fired power plants due to the increasing costs of natural gas and the long lead time for clean-coal and nuclear. The revenue opportunity from sales of our products at a coal-fired plant typically can be three times that of a natural gas power plant.
Planned investments in nuclear power generators increased over the past year with a significant increase in proposed power plant projects. In the U.S., more than 30 submittals to the Nuclear Regulatory Commission are expected for new nuclear power plants. China is projected to develop projects to bring on line as many as two nuclear plants per year for the next 20 years, according to government sources. Our product offerings have maintained â€śN-stampâ€ť certification (required for nuclear applications) through the slowdown in nuclear power plant construction allowing us to continue to support the aftermarket business for existing facilities. This positions us well for the pending growth in investment in nuclear globally.
We are seeing increased activity in alternative energy sources such as geothermal and coal gasification where we are working with key customers in the development of products to serve this portion of the power industry. The outlook for the power industry is favorable due to the increasing power demand in the developing countries and infrastructure improvements needed in the mature markets. However, economic slowdowns or recessions could delay the demand for additional power pushing major capital projects out into the future.
Worldwide demand for fresh water and water treatment continues to create requirements for new facilities or for upgrades of existing systems, many of which require products that we offer, especially pumps. We believe we are a global leader in the desalination market, which is an important source of fresh water in the Mediterranean area and the Middle East. We expect that this trend in desalination will expand from the traditional areas, as previously mentioned, to other coastal areas around the globe. This is a significant market for pump and valve actuation products. In both 2007 and 2006, the water market represented approximately 6% of our bookings.
General industries comprises a variety of different businesses, including mining and ore processing, pulp and paper, food and beverage and other smaller applications, none of which individually represents more than 5% of total bookings in 2007 and 2006. General industries also includes sales to distributors, whose end customers operate in the industries we primarily serve. General industries represented approximately 24% and 23% of our bookings in 2007 and 2006, respectively. In 2007, we saw favorable growth in these businesses with the mining and ore processing industry showing increased investment. This portion of our business tends to have stable performance due to the diversity of industries and their respective different business cycles.
Our customers include engineering contractors, original equipment manufacturers, end users and distributors. Sales to engineering contractors and original equipment manufacturers are typically for large project orders and critical applications, as are certain sales to distributors. Project orders are typically procured for customers either directly from us or indirectly through contractors for new construction projects or facility enhancement projects.
OUR RESULTS OF OPERATIONS
We define a booking as the receipt of a customer order that contractually engages us to perform activities on behalf of our customer with regard to manufacture, service or support.
Total bookings in 2007 increased by $701.7 million, or 19.4%, as compared with 2006. The increase includes currency benefits of approximately $208 million. Increased bookings are primarily attributable to strength in the oil and gas and chemical markets for all of our divisions. Additionally, the power industry continues to be strong for FPD and FCD, and the water and mining industries are contributing to the growth in FPD.
Bookings for continuing operations in 2006 increased $685.1 million, or 23.4%, as compared with 2005. Total bookings in 2006 increased by $594.7 million, or 19.7%, as compared with 2005. The increase includes currency benefits of approximately $24 million. Total bookings in 2005 include $90.4 million of bookings for GSG, a discontinued operation that was sold effective December 31, 2005. Increased bookings are primarily attributable to strength in the oil and gas industry, which has positively impacted each of our divisions, particularly in North America and the Middle East. The power, chemical and water industries have also contributed to the improvement.
Backlog represents the accumulation of uncompleted customer orders. Backlog of $2.3 billion at December 31, 2007 increased by $646.6 million, or 39.7%, as compared with 2006. Currency effects provided an increase of approximately $140 million. The increase in total bookings reflects an increase in project work and orders for engineered products, which naturally have longer lead times, as well as expanded lead times at the request of certain customers. By the end of 2008, we expect to ship over 88% of this backlog. Backlog of $1.6 billion at December 31, 2006 increased by $635.9 million, or 64.0%, as compared with 2005. Currency effects provided an increase of approximately $101 million. The increase resulted primarily from increased bookings as discussed above.
Sales in 2007 increased by $701.6 million, or 22.9%, as compared with 2006. The increase includes currency benefits of approximately $178 million. The increase is primarily attributable to continued strength in the oil and gas markets, which has positively impacted both original equipment and aftermarket sales for FPD. Additionally, FCD is experiencing strong project sales across all valve markets and FSD is experiencing increased aftermarket and project sales in Europe, the Middle East and Africa (â€śEMAâ€ť) and North America, respectively. In 2007, original equipment and aftermarket sales increased 27% and 18%, respectively, as compared with 2006.
Sales in 2006 increased by $365.8 million, or 13.6%, as compared with 2005. The increase includes currency benefits of approximately $39 million. The increase in sales is primarily attributable to continued strength in the oil and gas industry, particularly in North America and the Middle East, which has significantly impacted FPD and FCD. FCD has also been positively impacted by strength in the process valve industry, particularly in Asia. Additional capacity has enabled FSD to increase its aftermarket sales.
Sales to international customers, including export sales from the U.S., were approximately 66% of sales in 2007 compared with 67% of sales in 2006 and 65% of sales in 2005. Sales to EMA were approximately 38%, 42% and 39% in 2007, 2006 and 2005, respectively. Sales into the Asia Pacific region were approximately 16%, 15% and 14% in 2007, 2006 and 2005, respectively. We believe that our sales to international customers will increase as a percentage of total sales, as we believe our highest revenue growth opportunities are in Asia, the Middle East and Latin America.
Gross profit in 2007 increased by $240.4 million, or 23.9%, as compared with 2006. Gross profit margin in 2007 of 33.2% increased from 32.9% in 2006. Gross profit margin in 2007 was positively impacted by higher sales, which favorably impacts our absorption of fixed manufacturing costs, as well as various CIP and supply chain initiatives. Our CIP initiative is driving increased throughput on existing capacity, reduced cycle time, lean manufacturing and reduced warranty costs as a percentage of sales. Our supply chain initiatives focus on materials costs savings through low cost supply sources, long-term supply agreements and product outsourcing. While both original equipment and aftermarket sales increased, the rate of growth of original equipment sales exceeded that of aftermarket sales. As a result, original equipment sales increased to 63% of total sales in 2007, as compared with 62% in 2006. The aftermarket business consistently provides more favorable gross profit margins than original equipment sales.
Gross profit in 2006 increased by $136.7 million, or 15.7%, as compared with 2005. Gross profit margin in 2006 of 32.9% increased from 32.3% in 2005. Gross profit margin in 2006 was positively impacted by various CIP and supply chain initiatives. Gross profit margin in 2006 was also positively impacted by pricing increases in FCD and FSD, as well as increased sales in all of our divisions, which positively impacts our absorption of fixed costs. These were partially offset by an increase in original equipment sales, primarily by FPD, which generally carries a lower margin.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
We are an established industry leader with a strong product portfolio of pumps, valves, seals, automation and aftermarket services in support of global infrastructure industries, including oil and gas, chemical, power generation and water management, as well as general industrial markets where our products add value. Our products are integral to the movement, control and protection of the flow of materials in our customersâ€™ critical processes. Our business model is influenced by the capital spending of these industries for the placement of new products into service and aftermarket services for existing operations. The worldwide installed base of our products is an important source of aftermarket revenue, where products are expected to ensure the maximum operating time of many key industrial processes. The aftermarket business includes parts, service solutions, product life cycle solutions and other value added services, and is generally a higher margin business and a key component to our profitable growth.
We experienced favorable conditions in 2007 in our key industries, which have continued through the first nine months of 2008. The demand growth from developing markets and the optimization and refurbishment needs from mature markets have increased investments in oil and gas, power and water infrastructure. Along with the growth in industrialization in developing markets, this has increased the demand for primary chemicals, which has driven investment growth in chemical manufacturing facilities, particularly in Asia and the Middle East. In the oil and gas industry, advancements in recovery and processing technologies have created opportunities in heavy oil processing, deep water production and natural gas liquefaction and regasification, where our products are well positioned. In the power industry, we provide products and services for all forms of power generation, and we are one of a limited number of manufacturers with existing N-stamp certifications required to support the nuclear power industry. The global demand growth over the past several years has provided us the opportunity to increase our installed base of new products and drive recurring aftermarket business. We continue to execute on our strategy to increase our presence in all regions of the global market to capture aftermarket business through our installed base, as well as to secure new capital projects and process plant expansions. Although we have experienced strong demand for our products and services in recent periods, we face challenges affecting many companies in our industry with a significant multinational presence, such as economic, political and other risks.
We currently employ approximately 16,000 employees in more than 55 countries who are focused on executing our key strategic objectives across the globe. We continue to build on our geographic breadth through the implementation of additional Quick Response Centers (â€śQRCsâ€ť) with the goal to be positioned as near to our customers as possible for service and support in order to capture this important aftermarket business. Along with ensuring that we have the local capability to sell, install and service our equipment in remote regions, it becomes equally imperative to continuously improve our global operations. Our global supply chain capability is being expanded to meet global customer demands and ensure the quality and timely delivery of our products. Significant efforts are underway to reduce the supply base and drive processes across our divisions to find areas of synergy and cost reduction. We continue to focus on improving on-time delivery and quality, while reducing warranty costs as a percentage of sales across our global operations through a focused Continuous Improvement Process (â€śCIPâ€ť) initiative. The goal of the CIP and lean manufacturing initiatives are to maximize service fulfillment to customers through on-time delivery, reduced cycle time and quality at the highest internal productivity. These programs are a key factor in our margin expansion plans.
Recent disruptions in global financial markets and banking systems are making credit and capital markets more difficult for companies to access, and are generally driving up the costs of newly raised debt. We have assessed the implications of these factors on our current business and determined that these financial market disruptions have not had a significant impact on our financial position, results of operations or liquidity as of September 30, 2008. However, continuing volatility in the credit and capital markets could potentially impair our and our customersâ€™ ability to access these markets and increase associated costs, and there can be no assurance that we will not be materially affected by these financial market disruptions as economic events and circumstances continue to evolve. We have no scheduled loans due to mature in 2008, and only 1% of our term loan is due to mature in each of 2009 and 2010, and after the effects of $385.0 million of notional interest rate swaps, approximately 70% of our term debt was at fixed rates at September 30, 2008. Our revolving line of credit and our European LOC Facility are committed and are held by a diversified group of financial institutions with high credit ratings, principally Bank of America. Further, during the three months ended September 30, 2008, we increased our cash by $16.7 million to $153.4 million, after taking into account $100.0 million of share repurchases, $34.8 million in capital expenditures and $14.4 million in quarterly dividend payments. We monitor the depository institutions that hold our cash and cash equivalents on a regular basis, and we believe that we have placed our deposits with creditworthy financial institutions.
RESULTS OF OPERATIONS â€” Three and nine months ended September 30, 2008 and 2007
Our operating income benefitted from strong international currencies in 2007 and through the first nine months of 2008. However, recent strength of the U.S. Dollar could reduce the benefit or result in losses in operating income related to currency in future periods.
As discussed in Note 2 to our condensed consolidated financial statements included in this Quarterly Report, FPD acquired the remaining 50% interest in Niigata, a Japanese manufacturer of pumps and other rotating equipment, effective March 1, 2008, for $2.4 million in cash. The incremental interest acquired was accounted for as a step acquisition, and Niigataâ€™s results of operations have been consolidated since the date of acquisition. Prior to this transaction, our 50% interest in Niigata was recorded using the equity method of accounting. No pro forma information has been provided due to immateriality.
We define a booking as the receipt of a customer order that contractually engages us to perform activities on behalf of our customer with regard to manufacture, service or support. Bookings for the three months ended September 30, 2008 increased by $312.5 million, or 29.5%, as compared with the same period in 2007. The increase includes currency benefits of approximately $53 million. The increase is attributable to strength in the oil and gas and general industries, especially in FPD, primarily in Europe, the Middle East and Africa (â€śEMAâ€ť), as well as continued strength in the power and chemical industries, especially in FCD, and $22.2 million in bookings provided by Niigata.
Bookings for the nine months ended September 30, 2008 increased by $910.3 million, or 28.4%, as compared with the same period in 2007. The increase includes currency benefits of approximately $257 million. The increase is attributable to strength in the chemical and power industries across all of our divisions and strength in the oil and gas and general industries in FPD and FCD, as well as $47.7 million in bookings provided by Niigata.
Sales for the three months ended September 30, 2008 increased by $234.4 million, or 25.5%, as compared with the same period in 2007. The increase includes currency benefits of approximately $47 million. The increase is attributable to strength in the oil and gas market, especially in FPD, primarily in EMA and Asia Pacific, including $18.0 million in sales provided by Niigata, and strength across the power and chemical markets in FCD.
Sales for the nine months ended September 30, 2008 increased by $651.2 million, or 24.5%, as compared with the same period in 2007. The increase includes currency benefits of approximately $202 million. The increase is attributable to strength in the oil and gas market in FPD, primarily in EMA and Asia Pacific, including $56.2 million in sales provided by Niigata, and growth in the power and chemical markets, especially in FCD.
Net sales to international customers, including export sales from the U.S., were approximately 72% and 69% of consolidated sales for the three and nine months ended September 30, 2008, respectively, compared with approximately 66% and 65% for the same periods in 2007, respectively.
Backlog represents the aggregate value of uncompleted customer orders. Backlog of $3,076.0 million at September 30, 2008 increased by $799.4 million, or 35.1%, as compared with December 31, 2007. Currency effects provided a decrease of approximately $95 million. The net increase reflects growth in orders for large engineered products, which naturally have longer lead times, and $92.5 million attributable to the acquisition of Niigata.
Gross Profit and Gross Profit Margin
Gross profit for the three months ended September 30, 2008 increased by $91.3 million, or 29.1%, as compared with the same period in 2007. Gross profit margin for the three months ended September 30, 2008 of 35.1% increased from 34.1% for the same period in 2007. The increase is primarily attributable to FCD, whose gross profit margin increased due primarily to improved pricing, as well as FPD, whose gross profit margin increased due to original equipment pricing implemented in 2007 and reduced warranty costs as a percentage of sales. The improvement is also attributable to CIP initiatives and increased sales, which favorably impacts our absorption of fixed manufacturing costs. These improvements were slightly offset by a sales shift toward original equipment during the period for each of our divisions. While both original equipment and aftermarket sales increased, original equipment growth exceeded that of aftermarket growth during the period. As a result, original equipment sales increased to approximately 67% of total sales as compared with approximately 63% of total sales for the same period in 2007. Original equipment generally carries a lower margin than aftermarket. The impact of metal price increases and transportation fuel surcharges have been minimized through supply chain initiatives.
Gross profit for the nine months ended September 30, 2008 increased by $287.2 million, or 32.6%, as compared with the same period in 2007. Gross profit margin for the nine months ended September 30, 2008 of 35.4% increased from 33.2% for the same period in 2007. The increase is primarily attributable to FPD, whose gross profit margin increased due primarily to improved original equipment pricing implemented in 2007, CIP initiatives and reduced warranty costs as a percentage of sales. Additionally, gross profit margin was favorably impacted by specialty pumps, which had a higher margin, produced during the second and third quarters of 2008. These improvements were slightly offset by a sales shift toward original equipment during the period for each of our divisions. While both original equipment and aftermarket sales increased, original equipment growth exceeded that of aftermarket growth during the period. As a result, original equipment sales increased to approximately 65% of total sales as compared with approximately 63% of total sales for the same period in 2007. Original equipment generally carries a lower margin than aftermarket.
SG&A for the three months ended September 30, 2008 increased by $34.6 million, or 16.5%, as compared with the same period in 2007. Currency effects yielded an increase of approximately $8 million. The increase in SG&A is primarily attributable to an $18.4 million increase in other employees related costs due to annual and long-term incentive compensation plans, including equity compensation, arising from improved performance and a higher stock price as of the date of grant and annual merit increases. The increase is also attributable to an $18.3 million increase in selling and marketing-related expenses in support of increased bookings and sales and overall business growth, partially offset by an $11.2 million decrease in legal fees and expenses due to expenses incurred in 2007 that did not recur. SG&A as a percentage of sales for the three months ended September 30, 2008 of 21.2% improved 170 basis points as compared with the same period in 2007. The improvement is primarily attributable to leverage from higher sales, as well as ongoing efforts to contain costs.
Zac Nagle - Vice President of Investor Relations
Thank you, operator. Good morning everyone and thank you for joining us. Welcome to Flowserve's third quarter 2008 investor conference call. Today's call is also being webcast along with our earnings presentation on our website at flowserve.com. Just click on the Investor Relations tab to access the webcast and the accompanying presentation.
Before we get started with the presentation, I'd like to highlight a couple of important items. First, we schedule the duration of the call for a full 90 minutes or we typically not need that much time, we're happy to go beyond our typical hour to cover prepared commentary and any subsequent Q&A.
Second, for those of you who have accessed today's call through our dial-in phone number and also wish to follow along with our earnings presentation slides on our website, please select the Click Here to Listen via Phone icon on the Event Details page. I'd also like to note that our webcast we posted on our website for replay approximately two hours following the end of the call. The replay will stay on the site on-demand for the next few months.
Joining today are Lew Kling, President and CEO of Flowserve; Senior Vice President, Chief Financial Officer and Latin America Operations, Mark Blinn; and Vice President and Chief Accounting Officer, Dick Guiltinan. Following our commentary, we'll begin the Q&A session.
Regarding the forward-looking statements, I'll refer you to yesterday's earnings release and 10-Q filing and today's earnings presentation slides deck for Flowserve's Safe Harbor statement on this topic. All of this information could 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 the initial statements by management plus their answers to questions related to projections or other forward-looking statements are subject to Flowserve's Safe Harbor.
Now I would like to turn things over to Lew to begin the formal presentation.
Lewis M. Kling - President and Chief Executive Officer
Thanks Zac and good morning. It's a pleasure to welcome you to our 2008 third quarter conference call. I am pleased to report that the third quarter was another terrific quarter for Flowserve with continued strong execution and outstanding financial results. These record results again demonstrated the improving operational excellence, continued strength in our end markets, strong leverage in our income statement and the successful execution of our key strategies. This resulted in strong organic growth in bookings and sales for both our original equipment and aftermarket portions of our business, as well as solid year-over-year gross margin and operating margin improvement.
When looking at the year-to-date our strong financial results for the third quarter have increased our confidence and our ability to continue to deliver strong earnings and cash flow in the fourth quarter. As a result, even with the adverse impact from the strengthening dollar, we expect our full year earnings per share to be at or around the high end of our previously announced range of 720 to 750 per share. It is also worth noting, that a long term benefit of a stronger dollar also improves the competitiveness of our non-U.S. operations which represent approximately 70% of our global business.
During next two slides, I will touch on some of the significant company highlights for both the third quarter and the year-to-date, as well as the primary performance metrics achieved during this quarter. Equally important to the reported financial results of what we are seeing in the major markets we participate in, oil and gas, power, chemical, and water.
I will spend a considerable amount of time on these topics, since I know it's on the minds of many of our investors. We'll also look at some commentary about our target global markets from numerous external sources including some of our major customers, to demonstrate that our positive outlook doesn't just represent an isolated Flowserve point of view, but rather a host of views that point to what appears to be continuing opportunities for our products and services, despite the general uncertainty about the overall macro economic outlook.
In light of the unprecedented shifts in the credit and financial markets, I will share some history with you, with respect to our markets during the past 13 years as I went through similar cycles from an economic point of view. And then I will review with you what we've been doing during the past few years to improve the company's performance and prepare for any business cycle. Since history tells us even in week cycles our markets may temporarily decrease but they don't go away.
This discussion will provide you a better understanding of our external market outlook, and help you gain a stronger sense of the opportunities we see ahead. I also wanted to note that to-date we haven't seen any meaningful reduction of opportunities and in fact the proposal pipeline in all divisions is still extremely strong.
In addition, we have also not seen any unusual cancellations of projects around the globe, but we will continue to monitor this very carefully and respond quickly to any changes in marketing conditions as neared.
Slide three covers some notable highlights of the third quarter of 2008. We delivered record fully diluted quarterly earnings per share of $2.04 up over 85% versus the same period last year. Earnings per share during the quarter also benefited from tax items detailed in our 10-Q and press release of approximately $0.22, which were partially offset by foreign currency hedging activities of $0.12 in the quarter. This significant increase in earnings reflects continued success in driving improved consolidated operating margins increasing 240 basis points to 14.2%. This also reflects both continued gross margin improvement year-over-year of a 100 basis points to 35.1% and a further reduction of a 170 basis points in SG&A expense as percentage of sales to 21.2%.
We also delivered our seventh quarter of bookings in excess of $1 billion, recording bookings of nearly $1.4 billion up almost 30% over the previous year including organic bookings growth of 22%. This was lead by the pump division delivering an impressive 44.3% growth in bookings in the quarter, including over 35% organic growth. We continue to drive strong manufacturing throughput in the third quarter, delivering record third quarter sales of almost $1.2 billion up nearly 26% over the previous year including over 18% organic sales growth.
Based on our strong global footprint and portfolio of industry leading products to buying with our strong sales force we achieve significant growth in both our original equipment and aftermarket businesses. Even during the growing financial crisis since September, we're able to renew and increase our unsecured European letter of credit facility from â‚¬80 million to â‚¬100 million reflecting our banks strong confidence in financial position.
Reflecting our continued commitment to return value to our shareholders and confidence in cash flows we repurchased approximately $100 million worth of Flowserve share during the quarter. Additionally, on September 26th based on the strength of our balance sheet we had our corporate credit rating increased by Standard & Poor's to BB with a positive outlook from BB- with a positive outlook. And just a few hours later, we were added to the S&P 500 Index.
Slide five covers the key year-to-date highlights for 2008. The team delivered record earnings per share of $5.71 in the first three quarters up over 104% versus the same period last year. Bookings for the first three quarters raised [ph] a record $4.1 billion up over 28% versus a year ago including almost 19% organic growth year-over-year.
Sales for the third quarter were also up sharply versus 2007 reaching a record $3.3 billion up nearly 25% including almost 15% organic growth this year. In addition, at the close of third quarter our backlog stood at healthy $3.1 billion showing solid support for 2009 revenue and earnings. And in fact we've also been taken for orders for 2010 delivery such as the Abu Dhabi Crude Oil Pipeline order received last month.
Gross margins have steadily improved through the first three quarters up 220 basis points to 35.4% based on strong operational improvement, a solid pricing environment and improved fixed cost absorption on higher sales. Well SG&A cost control has also continued to show solid progress decreasing an additional 140 basis points to 22.1% as a percent of sales.
Consolidated operating margin has continue to benefit from the teams success in driving effective initiatives to improve both gross margin and SG&A as a percentage of sales increasing sharply by 340 basis points to 13.7% versus the first three quarters of 2007. So as you can see, our financial performance for the first three quarters of this year posted past our previous year on all significant financial metrics.
The third quarter also demonstrated that good business opportunities remain in the market and we continue to use our strong global footprint and aftermarket strategy to win this new business. And by continuing to solidly execute in these contracts, we will be well positions to keep delivering strong operational and financial results to our shareholders.
Slide six outlines a traditional P&L format, the third quarter highlights I discussed on the previous slides. Since I fit most of these key financial highlights previously, I won't go to any further detail here. Moving on to slide seven, which I am sure is familiar to many of you, you can see that quarterly progression of bookings since 2004 and a tremendous growth we've driven since the back half of 2005.
Slide eight highlights our sales, since the beginning of 2004 and the average conversion cycle we've talked about many times between a booking and a sale, which is averaged about 12 months. I would like to remind everyone again that this is an average conversion cycle with valves and seals normally being showed in 12 months and pumps on the average being longer.
Now let's take a look at what drives infrastructure opportunities. Over the past decades, infrastructure spending was primarily driven by profit. Much of the work around the world was managed by western multinational corporations with a need to create shareholder value. Today, several additional factors increasingly drive the need to invest capital for infrastructure requirements. These drivers include demographics, ageing infrastructure, independence and economic growth. Within each of these areas are a number of motivating factors such as population movement from rural to urban cities, refurbishment needs, energy security and potential and political stability to name a few.
In many cases these investments are supported by more than one of these factors and in the developing markets many are supported by government funding or guarantees not directly related to today's U.S. or European capital markets.
Slide 11 begins to look at our core infrastructure markets oil and gas, power, chemical, and water from the point of view of numerous external sources including some of our major customers. In the oil and gas market which represents about 37% of our market to-date, we continue to see our global customers making investment decisions based on projected demand growth; upgrade and optimization projects, refurbishment of ageing infrastructure and economic growth in developing regions. It is important to understand that these major investment decisions by our customers are not made based on the spot price of oil but rather on longer-term product demand considerations.
We have all heard the news likely that projections for demand growth in this market had softened from beginning of the year. And as of three weeks ago, the Energy Information Administration and the International Energy Agency, the two energy watchdogs for the United States and Europe did forecast a reduction in demand for oil. But that global demand was still up approximately 400,000 barrels per day for 2008 and a projected 700,000 barrels per day for 2009.
In addition, as you can see we received positive announcement on the chart, news in the market continues to show planned investments over the long-term as demonstrated by companies such as Exxon Mobile, ConocoPhillips, and the major oil companies of India, China and Saudi Arabia. This news aligns with the overall general feedback we're receiving directly from our customers which includes the recent concerns raised about the Canadian Tar Sands projects. From what we are hearing from our customers, this does not appear to have any effect on the current projects but may have an effect on projects in the planning phase. Since these Tar Sand projects represent less than 2.5% of our bookings year-to-date, it should have little effect on our future results.
Slide 12 illustrates a view of the global business opportunities for Flowserve based on the long-term view of oil demand. Fundamentally there is some level of opportunity for Flowserve across the full spectrum of prices for barrel of oil. However, there is also an optimal range or investments are made across all aspects of the industry.
As we have discussed in the past, many of our heritage brands have earned strong customer preference over the years within the downstream portion of the oil business. When oil prices float in the optimal range, the crack spreads remain healthy which allow the downstream owners, particularly the refiners to invest in the optimization in their facilities, which include capacity increases, refurbishment and modernization, it fits well within our product offerings.
Recently with the declining availability of light sweet crude oil is becoming imperative that refineries convert their current operations in order to handle the heavy oil coming to the market, where we have the right product technology to support them.
Midstream or pipeline investments are made with oil prices within or above the optimal range as shown by our recent announcement of our Abu Dhabi Crude Oil Pipeline contract of approximately 85 to $90 million. As oil prices move outside the optimal range, additional investments may become feasible. For example, when the oil prices are in or above the optimal range, we benefit from the increased investment in both the development of alternative fuels in complex oil recovery systems. When oil prices are in or below the optimal range, the consuming industries such as chemical, power and what we classify as general industries enjoy lower operating cost and higher margins. Which drive investments in optimization and expansion which ultimately creates excellent business opportunities for our products and services in those target markets. The challenge occurs, when oil gets too low or too high.
When it's to low, consumers expect prices to fall which leads to lower margins and lower profits for refiners thereby restricting investment in new facilities. When oil gets too high, the market reacts by reducing demand. The problem for all us is there is no absolute numbers defining the boundaries of optimum oil pricing. Each type of oil produced has different cost structures which on the basis for their optimal high and low spread. For example, typical production cost for light sweet crude relatively close to the surface run under $10 per barrels. This production cost increase significantly, as you'll move through the different grades of oil and production methodologies, such as heavy crude, Canadian Tar Sands crude and sub sea crude.
As we discussed earlier, it is important to remember that major infrastructure investments are not made on the spot price of oil. These are long lead projects that are based on the projected requirements for oil usage usually years away where independent research data still shows an increased demand for oil.
In addition, national oil companies which own over 90% of the worlds oil reserves, invest in oil development for many reasons other than profit, such as social programs, demographics, ageing infrastructures, security, independence and economic growth.
In the power industry which represent about 15% of our business to date, the need for basic electrode it continues drive at industry forecast of significant global growth for the next several years. This need is created by growth in urban areas, aging infrastructure, new environmental standards, expansion of industrialization of developing regions and the modernization of urban areas such as the more than $300 billion plan for development in Mid East for city development.
Over the past couple of months China has announced plans to add 60 gig watts of power to the nuclear grid by 2020. This is in fact incremental for their plans for coal fired and natural gas fire generating units. Announcements of also recently come out relative to the critical needs for additional power in India. It was recently reported the Indian government has allocated $95 billion to meet the increasing demand for power across the country; and as you bias their target for incremental power generation over the next five years from 79 gig watts to 90 gig watts.
The world energy output report for 2007 projected that energy demand would double by 2013 from a baseline in 2005. And to our best knowledge, this projection has not been modified to date.
In the chemical industry which represents about 19% of business year-to-date they continues to be a focus on investment into lower cost regions of the world as well as in developing alternatives for petroleum base products. The move into low cost developing region has continued to drive growth in new plan construction in both Asia and the Middle East.
As you can see in the recent announcements, regions in China are planning major capital spends for chemical facilities such as the investment plan of $15.8 billion by China Guodian. Many of the major petroleum companies in China are continuing with their plans to build refinery and petrochemical complexes over the next several years. As for alternatives petroleum based products, there continues to be investments in development of biotechnology alternatives as well as fuel alternatives.
A significant amount of attention is also being given to coal gasification investments supported by recent announcements stating that in 2009, their construction plans of $8.9 billion in North America alone.
In Nevada market, which represents about 6% of our business year-to-date, the available market tends to stay steady in an upward direction. This is supported by the persistent need for water worldwide, the continuing need to refurbish ageing infrastructure and the requirement to bring older operations up to current standards.
The need for water globally is challenging the available fresh water supplies and as drive your increased need for the expansion of desalination and the resource to potable water. With the advancements in technology, for sea water reverse osmosis the cost of desalination has dropped significantly, making it much more as a viable alternative.
Desalination market for our segments is projected to grow more then $56 billion in the next seven years. A report from Morgan Stanley earlier this year looked into the projected water needs of the emerging economies and determined that the new infrastructure requirements to meet these needs could drive an increased amount of spending from its current estimate of $80 billion annually to a $180 billion annually over the next 15 to 20 years.
From al of the emerging market requirements, the June 2008 report estimated the infrastructure upgrades, the United States alone would require $700 billion in capital investments. As urban city centers grow industrialization and modernization projects are commissioned and as population increases the need for potable water and water for industrial purposes will also grow. This growth will continue to challenge the industry to find ways to produce and deliver this water to its point of consumption.
As we have discussed over the past several slides, the market in our core industries still present significant opportunities to growth. When you look at the available market for pumps, valves and seals over the past 13 years, in all our markets you can see the impact of proper economic times.
What is most interesting is that the infrastructure markets both mature and developing continue to provide business opportunities throughout the various parts of the cycle. So we will continue to plan for this market fluctuation and their potential cycles while pursuing activities to increase market share and strengthen customer relationships.
I believe the title this chart, we prepared is indicative of how we run our business. As a company we are continuing to focus on key strategic initiatives to enhance our ability to take advantage of market opportunities, I mean in what part of the economic cycle we are in.
As I have said many times, operational excellence is a key strategic area focus for our management team. We are continuing looking for areas which strengthen our current performance as well as position us to manage through any cycle. Some of the areas we have made great strides in include moving manufacturing engineering and material sourcing to low cost regions of the world. Utilizing multiple shifts instead of any adding booking order, utilizing flexile staffing with practical, adding advance computerized machining capabilities to reduce manufacturing time, reduce labor burden and improve quality and many other cost containment initiatives.
We've also continued to strengthen our ability to share and leverage knowledge to the integration of our global ERP systems, development and implication of a global engineering platform and the establishment of global engineering centers. Combining these initiatives with our key growth strategies, help position the company well for all phases of the business cycle.
Slide 18, gives a high level view of the investments we have made over the past few years to strengthen our global diversification and competitiveness around the world. As you can see we have significantly expanded our capabilities in four key regions; China, India, the Middle East, and Latin America. Our approach has been to establish indigenous operations to effectively serve the local market or taking advantage of low cost manufacturing, component engineering and strategic sourcing where practical. These position us well to support our global customers from project and section through commissioning and over the life of their operations.
As you look at slide 19, you can see the range and diversity of our recent global project wins. We have been successful across all our markets and regions around the globe, as our customers continue to demonstrate long-term trust in Flowserve as a dependable business partner.
Slide 20 gives an overview of Flowserve's aftermarket growth strategy. The chart on the left represents our aftermarket revenues through the third quarter of 2008 and as you can see highlights significant growth in revenues since 2006. We believe that this growth is a direct result of our end-user strategy which focuses on creating greater value for our customers to expand in aftermarket services.
While maintaining proximity to our customers to the use of over a 150 quick response centers worldwide, working with our customers to optimize their equipment operation of Flowserve and competitive projects... our products as well as training their people and minimizing their down turn time, we can develop long term relationships that provide continued business opportunities. This aftermarket growth strategy is truly one of the aspects of Flowserve that makes us different. And along with our global diversification positions us to continue to win business through all phases of a business cycle.
Slide 21 shows a selection of strategic technologies where we've made significant investments to meet the current and future needs of our customers. And because many of these projects have been conducted in conjunction with our customers many are actually funded or co-funded by these customers.
Our investments in nuclear capability and desalination are providing current business opportunities as well as helping to support future growth. Teaming with a major oil producer, we have made significant developments in pumping systems for deepwater or sub sea production operations. We believe this experience is placing us on the leading edge of technology development in this crucial future market.
In the area of advanced electronic diagnostics, we've developed both intelligent pumping systems and intelligent valve systems. These two new projects are provide advanced sensing capabilities which help our customers become aware of operational performance issues and potential problem areas before they cause inefficiency or unplanned downturn.
Slide 22, takes a look at many of our developments around the pursuit of alternate energy sources. There are several active projects in this area, either underway or in the advance stages of development, these include clean coal, solar power, bio-fuel and our recently announced commercialized systems for natural gas and biogas refueling stations for automobiles, trucks and buses through our Flowserve compression systems joint venture with Linde in Austria.
There are also other areas in early development where we're partnering with customers on either pilot or research projects. These include geothermal power, wind power, compressed hydrogen gas fuel and ocean energy conversion.
In closing, it's important to remember that history tells us that businesses made pass through several cycles overtime, however history also tells us that there continues to be investments in infrastructure development and aftermarket support during all phases of these cycles. This is driven by the need to keep oil and gas flowing, water and critical chemicals available and electricity on.
As I discussed in the past, we have found that customers will continue to select companies who deliver on time, deliver an effective product and can provide a global support network even during the more challenging times. I believe that our leadership and strength come from our ability to deliver on these core customers requirements which in turn positions us could be successful during all phases of our business cycle.
I would now like to turn the presentation over to Mark, to further discuss our financial statements. Mark?
Mark A. Blinn - Senior Vice President, Chief Financial Officer, and Latin America Operations
Thank you Lew and good morning everyone. As Lew mentioned we are very pleased with our third quarter and year-to-date results. As we've seen strong orders in sales growth and strong margin improvements. This morning, before I review the financials, I'll cover a few topics and highlights relative to our business today. I'm going to spend a little more time on these current issues and more importantly how we're positioned.
The first topic is the credit market. The world is seeing unprecedented times, in the global financial markets and it's important to note that Flowserve has a durable capital structure. And I'll review that in a moment.
We're also continuing the monitor customers, financial relationships, counter parties and suppliers and we have not seen any problems. A consistent team, we have discussed for many quarters is the strength in our aftermarket business. We've seen strong execution on our aftermarket strategies reflected by 17% year-to-date growth in Flowserve aftermarket business including 20% growth in the Pump Division.
As we look at cycles, aftermarket provides a sustainable high margin earnings strength. We've also seen strong operating margin expansion of 340 basis points, driven by operational excellence, a mix to higher end products, improved pricing and volume leverage, resulting in gross margin improvement of 220 basis points.
We've done this, while remaining focused on cost containment, resulting in a reduction in SG&A as a percent of sales of a 140 basis points year-to-date. With respect to tax, we have seen that benefits of tax items of $0.22 in the quarter and $0.38 year-to-date and we now estimate our full year tax rate of approximately 25%.
Another business indicator which has remained strong over the last four quarters is cash flow generation and the third quarter was no exception with the generation of $173 million of operating cash flow.
Now let me take a moment to talk about currency and how it impacts our business. As we've often discussed about two thirds of our business is international, this means revenues, operations, people, QRCs two thirds is international. We do use foreign currency contracts, to hedge future cash flows. What I mean by this is where we secure contract in dollars that's going to be manufactured in Europe, we hedge those cash flows at time we receive the order, out to the period when we expect to receive cash and we use forward currency contracts.
The impact of economics of the order, are reflected above the line and the impact of the hedging activities are below the line. If you look at the first half currency, we had a benefit above and below the line based on the strengthening of many foreign currencies, most notably the Euro from 146 to 157.
Recently we've seen a dramatic strengthening of the U.S. dollar against all Flowserve [ph] significant currencies and this has created an impact. The reason I highlight all currencies, as some currencies in the first half didn't strengthen against the dollar, but we pretty much consistently seen a lot of those currencies weaken in the last couple of weeks.
So if you look at our July guidance, we based it on $1.57 Euro for the second half of the year, when you consider that actual rates, for Q3 of 2008 and spot rates recently for Q4 of 2008, you can see that it's driven an adverse impact of $0.60 for the second half of the year, including an estimate of approximately $0.40 in the fourth quarter and this is above and below the line.
Or if you look at our guidance, the bottom line as we've been able to counter the impact of this currency with strong operational performance and a lower tax rate. And as we mentioned one important factor is of the weakening of foreign currencies does provide a benefit to our international operations.
So looking at the third quarter and year-to-date results you can see that we had strong sales and even stronger orders as Lew mentioned which provides a solid backlog for Q4 in 2009. If you look at gross margin, gross margin improved a 100 basis points in the quarter and 220 basis points year-to-date despite shifts to more original equipment in our pump and seal division.
In fact, we have increased gross margin to 35.4% year-to-date. If you look at SG&A we've seen tremendous leverage in SG&A, with and improvement of 170 basis points in the quarter and a 140 basis points year-to-date. As we talked about before, over half of the increase in SG&A is selling related. We've also seen corporate expense drop down below 300 basis points as a percent of sales.
When you look at the year-over-year comparison for the quarter and the year, it is important to note that we had $9 million and reduce legal cost for the quarter and approximately 18 year-to-date. We're continuing to drive SG&A as a percent of sales to 20% or below which is our target.
If you look at operating margins as a result of the leverage in gross margin in SG&A, operating margins improved 240 basis points to 14.2% in the quarter and 340 basis points to 13.7% year-to-date. And contribution margin for the quarter was approximately 23% and it's almost 28% year-to-date. When you add the benefit of tax rate leverage, we're getting tremendous earnings leverage in our P&L.
Now I'll turn to the divisions. The Pump Division has had a great year, highlighted by strong third quarter order growth of 44% including 35% organic growth. And strong year-to-date order growth of 33% including 22% organic growth. I highlight this year-to-date because as we look back at the second quarter, we notice that orders were... organic orders were 7.5%. This reminds us, that this is not a quarter-to-quarter business; the bottom-line is that the trends are strong.
If you look at our gross margin, we've had gross margin improvement of 70 basis points in the third quarter to 30.5% despite a 600 basis point mix shift. And for the year, we've seen 300 basis point improvement in gross margin despite a 100 basis point mix shift. This has been driven by operational excellence, a mixed to more high end products, pricing and fixed cost leverage.
When you combine the gross margin improvement with good expense control and SG&A you'll get a result it's a 160 basis points of margin improvement to 15.5% for the quarter and 310 basis point improvement in margin to 15.3% for the year. With a solid order book and improving margins, the Pump Division is well positioned.
The next slide just shows a breakout of mix between aftermarket and original equipment and what I'll point out is that we've had strong aftermarket growth for the year of 20% in bookings and 24% in sales. This is important to note, because this is well above the market growth rate.
Looking at the Valve Division; the Valve Division has demonstrated consistent improved performance for last three years and the third quarter was no exception, based on strong order and sales growth notably in the chemical and power markets and if you look at their gross margin improvement of 200 basis points in the quarter and a 110 basis points year-to-date, you can see that they are converting their opportunities in an improving operating environment. Their gross margins are running at 35.9% year-to-date.
They are doing this through a good product management, R&D initiatives, lean, CIP and low cost sourcing just to name a few. They've also done a great job on cost management as they've driven SG&A to 20% as a percent of sales, while still investing in selling and R&D.
Similar to the Pump Division the result is tremendous operating margin expansion, 280 basis points in the quarter to 16.7% and 210 basis points year-to-date to 16.1%. This team has really transformed this business over the last few years and there are plenty of opportunities ahead of them.
The Seal Division has had had another strong quarter highlighted by continued strong orders and sales growth. They have accomplished this growth by continuing to sustain high gross margins in excess of 45% despite a shift to more original equipment. This shift results from their strategy to increase their install base where they have or more importantly plan to have an aftermarket presence.
Looking at SG&A, we've often discussed that they've been investing in their business, they have invested in selling, expanding their QRC network, expanding the capabilities of their auxiliary manufacturing facility to support the global market and they have invested in engineers, systems and machineries to drive a global standardized platform. They've done all this investment while maintaining operating margins year-to-date of 19.5%. This investment will enable them to continue to take share and sustain solid operating margins.
Looking at our primary working capital, the growth in receivables of 245 million include the impact of the $70 million of factored receivables that are no longer factored and also we've see an increase of approximately $100 million year-to-date in progress billings. In inventory, inventory grew a $179 million primarily driven by working process in the Pump Division.
Also in these working capital numbers is the impact of the Niigata acquisition approximately $30 million. If you look at advance payments, advance payments increased year-to-date $134 million, which secures our backlog and also helps offset the working capital impact.
Looking at third quarter cash flows, as I mentioned earlier, we had a very strong cash flow from operations in the third quarter of a $173 million. We continue to invest in our business with $36 million of capital spend and we returned a 114 million back to our shareholders in the form of dividends and share repurchases.
The next slide is what I referred to earlier, demonstrating the strength of our balance sheet. If you look at term debt and revolver, these facilities were committed till August of 2012. We added that the cash on the balance sheet at the end of the quarter of $154 million and also as Lew mentioned we're able to upsize our European letter of credit facility.
Bottom-line, is at the end of the quarter we had approximately $500 million of capacity and we're well positioned going into what is historically been our strongest cash flow quarter.
Taking the chart on our drivers of EPS growth, we're well on track on our key initiatives to drive gross margin and SG&A improvement. We've also seen our tax rate and we estimate it to go to approximately 25% for the year, through planning in certain tax items.
We talked about the impact of foreign currency and looking forward we now expect 2008 EPS target at around the upper end of our previously announced range. We will continue to stay focused on driving strong end... our strong end user strategy and taking aftermarket share, as this will drive sustainable high margin earnings. We'll be focused on continued cost containment to drive SG&A as a percentage of sales down. And we will maintain a strong balance sheet, available capacity and financial flexibility.
As I mentioned we do expect our tax rate to be approximately 25% for 2008 and as I've always mentioned, execution is still the focus in our business. We are going to take advantage of opportunities and continue to improve the platform.
We believe we are well positioned. With that I'll conclude my comment and turn it over to question and answers.