Overview
We are a leading designer, manufacturer and marketer of highly-engineered, application-critical equipment and systems for the energy, industrial, chemical and pharmaceutical markets worldwide. We attribute our success to our close and continuing interaction with customers, our manufacturing, sourcing and application engineering expertise and our ability to serve customers globally. We attempt to continually develop initiatives to improve our performance in these key areas. In fiscal 2009, demand for our products slowed due to lower oil and natural gas prices as well as the worldwide economic downturn which affected the operating results in each of our segments. We have responded to these business conditions by cutting costs and initiating restructuring programs which are intended to reduce manufacturing capacity, standardize product offerings to allow greater utilization of our lower cost manufacturing facilities, leverage functional resources, and further integrate our business activities. We expect to continue our restructuring efforts in fiscal 2010 to improve our competitiveness and long-term profitability. With approximately 62% of our sales outside the United States, we were also unfavorably impacted by foreign currency translation in fiscal 2009 due to the U.S. dollar strengthening relative to our other principal operating currencies. Additionally, the assets and liabilities of our foreign operations are translated at the exchange rates in effect at the balance sheet date, with related gains or losses reported as a separate component of our shareholders' equity. The devaluation of most foreign currencies against the U.S. dollar impacted our financial condition at the end of fiscal 2009 as compared with fiscal 2008.
Our business consists of three market-focused segments: Fluid Management, Process Solutions and Romaco.
Fluid Management. Energy and industrial markets served by our Fluid Management segment began slowing in January 2009. Our primary objectives for this segment are to expand our geographic reach, introduce new products, develop new customer relationships, and more tightly integrate our operations. Our Fluid Management business segment designs, manufactures and markets equipment and systems, including hydraulic drilling power sections, down-hole and industrial progressing cavity pumps, wellhead systems, grinders, rod guides, tubing rotators and pipeline closures, used in oil and gas exploration and recovery, specialty chemical, wastewater treatment and a variety of other industrial applications.
Process Solutions. Key end markets served by our Process Solutions segment, chemical and pharmaceutical, began slowing in October 2008. Our primary objectives are to improve productivity through integration of operations and process improvements, to leverage our lower cost locations and to increase our focus on aftermarket opportunities. Our Process Solutions business segment designs, manufactures and services glass-lined reactors and storage vessels, standard and customized fluid-agitation equipment and systems and customized fluoropolymer-lined fittings, vessels and accessories, primarily for the pharmaceutical and specialty chemical markets.
Romaco. Our customer base within the key markets, including pharmaceutical, cosmetics and healthcare, served by the Romaco segment, has been expanding in the developing areas of the world, although these markets also slowed in fiscal 2009. Our primary objectives are to maintain our simplified business model, further develop our global distribution capabilities, and increase our focus on aftermarket opportunities. Our Romaco business segment designs, manufactures and markets packaging and secondary processing equipment for the pharmaceutical, healthcare, nutriceutical and cosmetic industries. Packaging applications include dosing; filling and sealing of vials, capsules, tubes, bottles and blisters; tablet counting and packaging for bottles; blister and powder packaging for various products including tablets and powder; customized packaging; as well as secondary processing for sauces and semi solids.

Results of Operations
The following tables present components of our Consolidated Statement of Income and segment information.

                                        2009        2008        2007
                     Consolidated
                     Sales             100.0 %     100.0 %     100.0 %
                     Cost of sales      64.9        63.1        65.2

                     Gross profit       35.1        36.9        34.8
                     SG&A expenses      23.5        21.2        21.7
                     Other income        0.0        (0.9 )      (0.5 )

                     EBIT               11.6 %      16.6 %      13.6 %




                                          2009             2008        2007
                                        (In millions, except percents)
               By Segment
               Fluid Management:
               Sales                $    268.8       $    322.9     $ 292.3
               EBIT                       69.1             91.3        77.0
               EBIT %                     25.7 %           28.3 %      26.3 %

               Process Solutions:
               Sales                $    258.6       $    313.6     $ 273.9
               EBIT                       19.4             37.6        31.9
               EBIT %                      7.5 %           12.0 %      11.7 %

               Romaco:
               Sales                $    113.0       $    150.7     $ 129.2
               EBIT                        2.3             20.6         2.6
               EBIT %                      2.0 %           13.7 %       2.0 %

               Consolidated:
               Sales                $    640.4       $    787.2     $ 695.4
               EBIT                       74.4            130.7        94.3
               EBIT %                     11.6 %           16.6 %      13.6 %

The comparability of the operating results has been impacted by product line/facility sale gains in fiscal 2008 and 2007, as well as restructuring costs in fiscal 2007. See Note 4, "Statement of Income Information", in Notes to Consolidated Financial Statements for further discussion. In addition, the comparability of the segment data is impacted by changes in foreign currency exchange rates, due to the translation of non-U.S. Dollar denominated subsidiary results into U.S. dollars.
The Company's operating performance is evaluated using several measures. One of those measures, EBIT, is income before interest, income taxes and minority interest and is reconciled to net income on our Consolidated Statement of Income. We evaluate performance of our business segments and allocate resources based on EBIT. EBIT is not, however, a measure of performance calculated in accordance with U.S. generally accepted accounting principles and should not be considered as an alternative to net income as a measure of our operating results. EBIT is not a measure of cash available for use by management. Fiscal Year Ended August 31, 2009 Compared with Fiscal Year Ended August 31, 2008
Net Sales
Sales for fiscal 2009 were $640.4 million compared with $787.2 million in fiscal 2008, a decrease of $146.8 million or 18.7%. Excluding the impact of currency translation and an acquisition early in the second quarter of fiscal 2008, sales decreased by $97.5 million or 12.5%, primarily in the second half of fiscal 2009.
The Fluid Management segment had sales of $268.8 million in fiscal 2009 compared with $322.9 million in fiscal 2008, a decrease of $54.1 million, or 16.8%. Currency translation accounted for $12.7 million of the decrease, and the remaining $41.4 million decrease, or 12.8%, resulted from lower demand for energy equipment products and lower demand in general industrial markets. Orders for this segment were impacted by the same factors and were $232.4 million in fiscal 2009 compared with $343.1 million in fiscal 2008. Ending backlog of $22.6 million is 64.3% lower than at the end of the prior year.

The Process Solutions segment had sales of $258.6 million in fiscal 2009 compared with $313.6 million in fiscal 2008, a decrease $55.0 million, or 17.5%. Excluding the impact of currency translation and an acquisition in fiscal 2008, sales decreased by $30.7 million, or 10.1% from the prior year. We believe this decrease is largely attributable to the worldwide economic downturn. Excluding currency and acquisition impacts, orders decreased by $85.8 million, or 27.1% over prior year, primarily driven by lower demand in our chemical markets. Ending backlog of $72.3 million is 41.5% lower than prior year levels. The Romaco segment had sales of $113.0 million in fiscal 2009 compared with $150.7 million in fiscal 2008, a decrease of $37.7 million, or 25.0%. After adjusting for currency translation, sales decreased $27.9 million, or 18.5% from the prior year. Orders decreased $30.9 million, or 20.6%, from the prior year after adjusting for currency exchange rates. We believe the decrease in demand is primarily due to the current worldwide economic slowdown. Ending backlog of $40.1 million is 21.7% lower than prior year levels.
Earnings Before Interest, Income Taxes and Minority Interest (EBIT) Consolidated EBIT for fiscal 2009 was $74.4 million compared with $130.7 million in fiscal 2008, a decrease of $56.3 million. Results for fiscal 2008 included other income of $7.6 million from gains on product line/facility sales. Excluding the impact of other income, and a currency impact of $2.9 million, consolidated EBIT decreased $45.8 million mainly due to decreased sales volume described above, pricing pressures in certain product lines, and higher general operating expenses related to severance, employee benefit plans and legal costs, partly offset by cost reduction initiatives completed during the year. The Fluid Management segment EBIT for fiscal 2009 was $69.1 million, compared with $91.3 million in fiscal 2008. The decrease of $22.2 million resulted primarily from the sales decrease in the second half of fiscal 2009 as described above and pricing pressures in certain product lines.
The Process Solutions segment EBIT was $19.4 million for fiscal 2009, compared with $37.6 million for fiscal 2008, a decrease of $18.2 million. Process Solutions had a gain on the sale of a facility in fiscal 2008 of $0.8 million. Excluding the impact of the facility sale gain, and a currency effect of $1.6 million, fiscal 2009 EBIT decreased by $15.8 million principally due to the lower sales volume described above, coupled with pricing pressures in certain product lines and severance costs.
The Romaco segment EBIT was $2.3 million for fiscal 2009, a decrease of $18.3 million compared with fiscal 2008. In fiscal 2008, other income included a $5.7 million gain related to Romaco product lines sold in fiscal 2006 and a $1.1 million gain on a facility sale related to a previously disposed product line. The remaining $11.5 million decrease in profitability was due to decreased sales volume described above.
Interest Expense
Net interest expense was $0.4 million in fiscal 2009 and $2.0 million in fiscal 2008. The reduction in net interest expense resulted from lower debt levels in fiscal 2009 due to the repayment of $70.0 million of our Senior Notes on May 1, 2008.
Income Taxes
Our effective tax rate was 23.5% in fiscal 2009 and 30.4% in fiscal 2008. The lower tax rate resulted from the implementation of certain one-time tax strategies and finalizing earlier tax estimates. This one-time benefit is not expected to repeat in fiscal 2010. The effective tax rate in fiscal 2008 was lower than the statutory tax rate primarily due to profitable operations in Italy and Germany, which resulted in the release of deferred tax asset valuation allowances of $4.9 million as well as increased taxable income in countries outside the United States, where statutory rates are lower.
The Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 48 (FIN 48) on September 1, 2007. The total amount of unrecognized tax benefits as of the date of adoption was $6.3 million all of which would affect the effective tax rate if recognized in future periods. As a result of the implementation of FIN 48, the Company recognized a $5.5 million increase in the liability for unrecognized tax benefits accounted for as a decrease to retained earnings (cumulative effect) as of September 1, 2007. The balance of unrecognized tax benefits including interest and penalties, as of August 31, 2009 and August 31, 2008 was $6.2 million and $6.3 million, respectively.

Net Income
Our net income in fiscal 2009 was $55.4 million compared with $87.4 million in fiscal 2008. The decrease in net income is a result of lower sales, pricing pressures in certain product lines, severance costs related to our restructuring efforts across all our business platforms, benefit from product line/ asset sales in fiscal 2008, higher medical and legal costs, partly offset by cost reduction initiatives, lower interest expense and a lower normalized effective tax rate in fiscal 2009, as discussed above.
Fiscal Year Ended August 31, 2008 Compared with Fiscal Year Ended August 31, 2007
Net Sales
Sales for fiscal 2008 were $787.2 million compared with $695.4 million in fiscal 2007, an increase of $91.8 million or 13.2%. Excluding the impact of currency translation and acquisitions and dispositions, sales increased by $43.9 million, or 6.4%.
The Fluid Management segment had sales of $322.9 million in fiscal 2008 compared with $292.3 million in fiscal 2007, an increase of $30.6 million, or 10.5%. Currency translation accounted for $9.0 million of the increase, and the remaining $21.6 million increase, or 7.4%, was from increased demand for oilfield equipment products due to higher levels of oil and gas exploration and recovery activity, as well as improved demand in chemical processing and general industrial markets. Orders for this segment were $343.1 million in fiscal 2008 compared with $301.9 million in fiscal 2007. Ending backlog of $63.2 million is 47.0% higher than at the end of the prior year.
The Process Solutions segment had sales of $313.6 million in fiscal 2008 compared with $273.9 million in fiscal 2007, an increase $39.7 million, or 14.5%. Excluding the impact of currency translation and an acquisition, sales increased by $15.1 million, or 5.5% over the prior year. This increase is largely attributable to a stronger global chemical market and increased Asia region sales. Excluding currency and acquisition impacts, orders increased by $18.1 million, or 6.4% over prior year, primarily driven by projects in the chemical market and activity in the Asian region. Ending backlog of $123.5 million is 24.9% higher than prior year levels. The organic increase in sales, orders and backlog reflects the strong demand in the chemical market and an increased expansion in the developing areas of the world. Our primary end markets, chemical processing and pharmaceutical, continued to improve. The Romaco segment had sales of $150.7 million in fiscal 2008 compared with $129.2 million in fiscal 2007, an increase of $21.5 million, or 16.6%. Excluding the impact of currency translation and a product line sold in fiscal 2007, sales increased $7.3 million, or 5.8% over the prior year. The increase was primarily in the pharmaceutical market. Orders increased $1.1 million, or 0.9%, over prior year after adjusting for currency and the disposed product line. Ending backlog of $51.3 million is comparable to prior year level of $52.0 million. Earnings Before Interest, Income Taxes and Minority Interest (EBIT) Consolidated EBIT for fiscal 2008 was $130.7 million compared with $94.3 million in fiscal 2007, an increase of $36.4 million. Results for fiscal 2008 included other income of $7.6 million from gains on product line/facility sales while fiscal 2007 results included other income of $3.5 million, which consisted of gains on product line and facility sales of $5.3 million, reduced by restructuring costs in the Romaco segment of $1.8 million. The remaining increase in consolidated EBIT of $32.3 million resulted from increased sales volume, benefits realized from completed restructuring activities in the Romaco segment and improved pricing.
The Fluid Management segment EBIT for fiscal 2008 was $91.3 million, compared with $77.0 million in fiscal 2007. The increase of $14.3 million resulted primarily from the sales increase described above, coupled with a favorable product mix.
The Process Solutions segment EBIT was $37.6 million for fiscal 2008, compared with $31.9 million for fiscal 2007, an increase of $5.7 million. Process Solutions had a gain on the sale of a facility in fiscal 2008 of $0.8 million while fiscal 2007 had a facility sale gain of $5.0 million. Excluding the impact of facility sale gains, fiscal 2008 EBIT increased by $9.9 million principally due to the sales volume increase described above, coupled with better pricing. The Romaco segment EBIT was $20.6 million for fiscal 2008, an increase of $18.0 million compared with fiscal 2007. The change in other (income) expense accounted for $8.4 million of the increase in EBIT. In fiscal 2008, other income included a gain of $5.7 million related to Romaco product lines sold in fiscal 2006 and a $1.1 million

gain on a facility sale related to a previously disposed product line, while fiscal 2007 other expense of $1.6 million consisted of restructuring costs of $1.8 million, reduced by net gains on product line and facility sales of $0.2 million. The remaining $9.6 million increase in EBIT was attributable to higher sales described above and benefits from restructuring activities completed in the prior year.
Interest Expense
Net interest expense was $2.0 million in fiscal 2008 and $5.2 million in fiscal 2007. The reduction in net interest expense resulted from higher levels of interest income due to increased cash equivalent balances in fiscal 2008, as well as lower average debt levels in fiscal 2008 due to the repayment of $70 million of our Senior Notes on May 1, 2008. The higher levels of cash equivalent balances were attributable to cash generated from operations and asset/product line sales.
Income Taxes
Our effective tax rate for fiscal 2008 was 30.4%. The effective tax rate was lower than the statutory rate primarily due to continued profitable operations in Italy and Germany, which resulted in the release of deferred tax asset valuation allowances of $4.9 million (3.8% point reduction in the effective tax rate), as well as increased taxable income in countries outside the United States, where statutory rates are lower. Our effective tax rate for fiscal 2007 was 41.4%. The effective tax rate in fiscal 2007 was higher than the statutory rate due to certain foreign losses for which no benefit was recognized. Net Income
Our net income in fiscal 2008 was $87.4 million compared with $50.7 million in fiscal 2007. The increase in net income is a result of higher sales, improved cost structure due to completed restructuring activities in the Romaco segment, greater benefit from product line/ asset sales, improved pricing, lower interest expense and a lower normalized effective tax rate, as discussed above.

Liquidity and Capital Resources
Operating Activities
In fiscal 2009, our cash flow from operating activities was $51.9 million compared with $89.6 million in fiscal 2008, a decrease of $37.7 million. This decrease resulted primarily from lower net income, customer deposits and reductions in amounts owed to suppliers, partly offset by lower customer accounts receivable.
We expect our available cash, fiscal 2010 operating cash flow and amounts available under our credit agreement to be adequate to fund fiscal year 2010 operating needs, shareholder dividends, capital expenditures, repayment of our $30.0 million Senior Notes and additional share repurchases, if any. Investing Activities
In 2009, the Company continued to generate substantial cash from operating activities and remains in a strong financial position, with resources available for reinvestment in existing businesses and strategic acquisitions. Our capital expenditures were $17.7 million in fiscal 2009, a decrease from $22.1 million in fiscal 2008. Our 2009 capital expenditures were primarily for capacity expansion projects in the Fluid Management segment which were initiated in fiscal 2008, support for cost reduction initiatives and replacement items. Capital expenditures in fiscal 2010 are not expected to be materially higher than fiscal 2009.
In the fourth quarter of fiscal 2009, we purchased the remaining 24 percent minority interest in one of our Process Solutions Group Asian subsidiaries for $2.3 million, which we paid from available cash resources. We made an acquisition in our Process Solutions segment in 2008 for a total consideration of $5.1 million. In fiscal 2008 we received proceeds of $8.5 million related to the sale of two of our Romaco product lines sold in fiscal 2006 and the sale of two facilities. There were no product line/facility sales in fiscal 2009. Financing Activities
Proceeds from the sale of common stock of $2.4 million in fiscal 2009 and $8.6 million in fiscal 2008 were mostly related to the exercise of stock options and other stock compensation. Dividends paid during fiscal 2009 were $5.2 million, compared with $5.0 million in fiscal 2008. The quarterly dividend rate per common share was increased in January 2009 from $0.0375 to $0.0400. On October 27, 2008, we announced that our Board of Directors authorized the repurchase of up to 3.0 million of our currently outstanding common shares. We acquired approximately 2.0 million of our outstanding common shares for $39.1 million under the repurchase program in the first quarter of fiscal 2009. Credit Agreement
We have $30.0 million of Senior Notes that are due May 1, 2010 and therefore are classified as a current liability at August 31, 2009. We have available cash to repay these Senior Notes, as well as the ability to refinance these Senior Notes on a long-term basis under our Bank Credit Agreement ("Agreement"). Our Agreement provides that we may borrow on a revolving credit basis up to a maximum of $150.0 million and includes a $100.0 million expansion feature. All outstanding amounts under the Agreement are due and payable on December 19, 2011. Interest is variable based upon formulas tied to LIBOR or an alternative base rate defined in the Agreement, at our option, and is payable quarterly. Indebtedness under the Agreement is unsecured except for the pledge of the stock of our U.S. subsidiaries and two-thirds of the stock of certain non-U.S. subsidiaries. At August 31, 2009 we had no borrowings under the Agreement. We had $28.1 million of standby letters of credit outstanding at August 31, 2009. These standby letters of credit are primarily used as security for advance payments received from customers and for our performance under customer contracts. Under the Agreement, we have $121.9 million of unused borrowing capacity.
Six banks participate in our revolving credit agreement. We are not dependent on any single bank for our financing needs.
From available cash balances, we repaid $70.0 million of our Senior Notes on the May 1, 2008 due date.

Critical Accounting Policies and Estimates This "Management's Discussion and Analysis" is based on our Consolidated Financial Statements and the related notes. The more critical accounting policies used in the preparation of our Consolidated Financial Statements are discussed below.
Revenue Recognition
We recognize revenue at the time of title passage to our customer. In instances where we have equipment installation obligations, the revenue related to the installation service is deferred until installation is complete. We recognize revenue for certain longer-term contracts based on the percentage of completion method. The percentage of completion method requires estimates of total expected contract revenue and costs. We follow this method because we can make reasonably dependable estimates of the revenue and cost applicable to various stages of the contract. Revisions in profit estimates are reflected in the period in which the facts that gave rise to the revision become known. Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the related notes. Significant estimates made by us include the allowance for doubtful accounts, inventory valuation, deferred tax asset valuation allowance, warranty, litigation, product liability, tax contingencies, stock option valuation, goodwill valuation and retirement benefit obligations.
Our estimate for uncollectible accounts receivable is based upon an analysis of our prior collection experience, specific customer creditworthiness and current economic trends within the industries we serve. In circumstances where we are aware of a specific customer's inability to meet its financial obligation to us (e.g., bankruptcy filings or substantial downgrading of credit ratings), we record a specific reserve to reduce the receivable to the amount we reasonably believe will be collected. For all other customers, we recognize reserves for bad debts based on the length of time that the receivables are past due. Inventory valuation reserves are determined based on our assessment of the market conditions for our products and the on-hand quantities of inventory in relation to historical usage. The inventory to which this reserve relates is still on-hand and will be sold or disposed of in the future. The expected selling price of this inventory approximates its net book value; therefore, there is no significant impact on gross margin when it is sold. We have recorded valuation allowances to reflect the estimated amount of deferred tax assets that may not be realized based upon our analysis of estimated future taxable income, reversals of temporary differences, available carryback periods, the results of tax strategies and changes in tax laws could impact these estimates.
Warranty obligations are contingent upon product failure rates, material required for the repairs and service and delivery costs. We estimate the warranty accrual based on specific product failures that are known to us plus an additional amount based on the historical relationship of warranty claims to sales. We record litigation and product liability reserves based upon a case-by-case analysis of the facts, circumstances and estimated costs. These estimates form the basis for making judgments about the carrying value of our assets and liabilities and are based on the best available information at the time we prepare our consolidated financial statements. These estimates are subject to change as conditions within and beyond our control change, including but not limited to economic conditions, the availability of additional information and actual experience rates different from those used in our estimates. Accordingly, actual results may differ from these estimates. Goodwill and Other Intangible Assets
Goodwill is tested on an annual basis, or more frequently as impairment indicators arise. Impairment tests, which involve the use of estimates related to the fair market values of the business operations with which goodwill is associated at our reporting unit level, were performed at year-end for fiscal . . .