Flowserve Corporation Reports Second Quarter 2012 Results

Second Quarter EPS Rises 12.5% to $1.98 and Bookings Reach $1.21 Billion; Company Reaffirms 2012 Full Year EPS Target Range of $8.00 to $8.80

DALLAS, July 30, 2012 – Flowserve Corp. (NYSE:FLS), a leading provider of flow control products and services for the global infrastructure markets, announced today financial results for the second quarter of 2012 in its Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission. Highlights from the second quarter and first half of 2012 were as follows:

Second Quarter 2012 (all comparisons versus second quarter 2011 unless otherwise noted):

  • Fully diluted EPS of $1.98, up 12.5%, including $0.11 of below the line negative currency effects and a $0.05 net benefit from discrete corporate items
  • Fully diluted EPS up 24% excluding below the line currency effects year over year
  • Bookings of $1.21 billion, up 0.2%, or 7.1% excluding negative currency effects of $84 million
  • Highest quarterly aftermarket bookings of $508 million, up 7.4%, or 13.2% excluding negative currency effects
  • Sales of $1.18 billion, up 5.0%, or 12.6% excluding negative currency effects of $86 million
  • Gross margin decrease of 30 basis points to 32.5% reflecting shipments of low margin legacy backlog
  • SG&A as a percentage of sales down 180 basis points to 18.9%
  • Operating income of $164.8 million, up 17.6%, or 28.3% excluding negative currency effects
  • Operating margin increase of 150 basis points to 13.9%
  • Positive operating cash flow of $168 million, compared to a $10 million cash use in prior year period
  • Tax rate of 26.7% compared to 27.9% for second quarter 2011
  • Repurchased over 3.3 million shares as part of $1 billion share repurchase program
  • Backlog of $2.9 billion at June 30, 2012, including negative currency effects of approximately $30 million, compared to $2.7 billion in backlog at December 31, 2011

First Half of 2012 (all comparisons versus first half of 2011 unless otherwise noted):

  • Fully diluted EPS of $3.67, up 5.5%, or up 16.4% excluding below the line currency effects year over year
  • Bookings of $2.45 billion, up 3.4%, or 8.1% excluding negative currency effects of $111 million
  • Highest year to date aftermarket bookings of $970 million, up 7.2%, or 11.1% excluding negative currency effects
  • Sales of $2.26 billion, up 6.3%, or 11.5% excluding negative currency effects of $109 million
  • Gross margin decrease of 80 basis points to 33.0% reflecting shipments of low margin legacy backlog
  • SG&A as a percentage of sales down 170 basis points to 19.8%
  • Operating income of $307.3 million, up 13.6%, or 21.0% excluding negative currency effects
  • Operating margin increase of 90 basis points to 13.6%

Mark Blinn, Flowserve president and chief executive officer, said, “I am pleased with our performance in the second quarter and first half of the year.  Management focus and operational discipline drove solid execution as we continued to capitalize on investments in our end user strategy and pursue opportunities across our geographically diverse end markets.  Our highest level of quarterly and year to date aftermarket bookings highlighted our solid second quarter bookings.  Overall, our focus on discipline and selectivity in project pursuit continued to support our bookings performance and improve the quality of orders going into backlog.

“As our results reflect, internal operating improvements driven by our “One Flowserve” initiative are gaining momentum.  While keeping our longer-term operating margin target in mind, our leadership has remained focused on our customers and on increasing shareholder value by leveraging operational excellence and cost management across our global platform.  While we still have work to do, I am encouraged by the positive impact these initiatives have had on our results thus far, and on our prospects for continued improvements going forward.”

Blinn added, “Looking to the balance of 2012 and 2013, we remain optimistic about our business opportunities and the progress of the current cycle.  While short cycle growth has moderated, our project bidding levels remain active, providing us confidence in major project opportunities in 2013 and the overall state of our diverse global end markets.  Economic difficulties in Europe continue to add a measure of caution to our view, as we continue to closely monitor potential impacts of Europe’s debt crisis and increasing currency headwinds from a stronger U.S. dollar.  Long-term opportunities provided by our strategic initiatives remain in sharp focus as we work to achieve our revenue growth and margin expansion goals.”

Financial Performance and Guidance
Mike Taff, senior vice president and chief financial officer, said, “We are encouraged by our financial performance this second quarter.  Our results benefitted from improved execution on increased sales volumes, where our continued focus on cost leverage, including tight corporate cost controls, resulted in notable improvements in SG&A leverage and incremental margins.  However, as expected, our second quarter earnings and margins were somewhat impacted by shipments of low margin legacy backlog taken in more challenging markets to build our aftermarket base and by reduction of targeted past due backlog, where we continue to make progress.

“Total shareholder return and optimal capital allocation remain top management priorities.  During the quarter, we repurchased over 3.3 million shares of common stock in support of our recently announced capital structure strategy, which targets a more efficient long-term gross leverage ratio of 1x to 2x EBITDA.  We expect to continue executing on our $1 billion share repurchase program through the remainder of the year, with completion targeted in 2013.  Following our recent upgrades to investment grade credit ratings from the three major ratings agencies, we expect to take advantage of the current attractive debt markets to further support our capital structure strategy."

Taff added, “Working capital improvement also remains a top management priority, and we were pleased with our year over year and sequential improvements in operating cash flow.  While we made progress in the quarter, resulting in sequential improvements in performance metrics, attractive opportunities for additional improvements remain.  Our goal is to drive days’ sales outstanding into the mid 60s over the next 12 to 18 months, and drive inventory turns to 4.0x to 4.5x over the next 18 to 24 months.  I am confident that our disciplined cash collection efforts, improvements in our front-end bidding process and implementation of other operational improvements provide the opportunity to reach our goals.

“The continued strengthening of the U.S. dollar against the Euro and other functional currencies has had a significant impact on our reported results.  As a result, we have increased our estimate of above and below the line negative currency effects for the full year.  We now estimate total negative currency effects of $1.00 per share at current exchange rates compared to $0.50 per share in prior guidance, with most of the expected increase impacting the second half of 2012.  Our planned share repurchase activity for 2012 is expected to add approximately $0.30 to our full year results, which should help potentially offset this impact.  We expect the third quarter of 2012 to be impacted by seasonality, ongoing shipments of low margin legacy backlog and currency.  But, our fourth quarter is shaping up to clearly be our strongest of the year.  After considering the net impact of all these factors, we are reaffirming our 2012 earnings guidance of $8.00 to $8.80 per share.”

Operational Performance
Tom Pajonas, senior vice president and chief operating officer, said, “Our commitment to our “One Flowserve” operational improvement initiatives supported our operating results this quarter. We advanced initiatives on low cost sourcing, on-time delivery and cost of quality across our platforms, where management focus and discipline remain key to execution.  Expected margin quality in backlog continued to improve with increased project visibility, improved markets and continued bid discipline and selectivity across all our platforms.

“The Engineered Product Division (EPD) capitalized on improving business conditions, driving bookings growth over 10% on a constant currency basis, with original equipment and aftermarket growth in the general, oil and gas and chemical industries.  Similar to the first quarter, gross margins were challenged due to the shipment of low margin legacy backlog.  However, we are working through the remaining legacy backlog, and increased discipline and selectivity in EPD’s recent order intake has improved the expected margins in its order book.  Despite the gross margin headwinds, operating margin was up, benefitting from our renewed operational focus and improved SG&A leverage.”

Pajonas added, “The Industrial Product Division (IPD) delivered solid performance this quarter, demonstrating that its recovery plan remains on track and is gaining momentum.  Bookings increased on the strength of original equipment orders in the general and chemical industries.  Sales increases were driven by original equipment and aftermarket shipments to North America, the Middle East and Africa, somewhat offset by a decrease in Latin America.  Gross margin and operating margin improved both sequentially and year over year, supported by operational improvements.

“The Flow Control Division (FCD) continued to deliver solid performance in the second quarter.  Bookings were relatively flat on a constant currency basis, even with a difficult comparison to the second quarter of 2011, which saw the highest bookings in FCD’s history.  Overall, bookings were impacted by reduced original equipment bookings in Europe and Latin America and increased selectivity in oil and gas orders, somewhat offset by select opportunities in the nuclear power business.  Sales increased 11% on a constant currency basis, with increased sales into Asia Pacific and the Americas offsetting softness in Europe, and the Middle East.  Margins decreased due to a sales mix shift to original equipment and a product mix shift, reflecting the shipment of certain lower margin oil and gas projects strategically bid in early 2011 to build our aftermarket base in this sector.”

Segment Overview (all comparisons versus second quarter 2011 unless otherwise noted)

Engineered Product Division (EPD)
EPD bookings for the second quarter of 2012 were $602.8 million, an increase of $14.7 million, up 2.5%, or 10.2% excluding negative currency effects of approximately $45 million. EPD sales for the second quarter of 2012 were $586.7 million, an increase of $29.4 million, up 5.3%, or 13.2% excluding negative currency effects of approximately $44 million.

EPD gross profit for the second quarter of 2012 was $195.7 million, up $3.7 million or 1.9%.  Gross margin for the second quarter of 2012 decreased 110 basis points to 33.4%, which was primarily attributable to certain large projects that shipped from backlog at low margins, partially offset by a sales mix shift to higher margin aftermarket and the effects of lower costs associated with operational execution improvements.

EPD operating income for the second quarter of 2012 increased to $95.1 million, up $8.4 million or 9.7%, including negative currency effects of approximately $8 million. The increase was primarily attributable to reduced SG&A and increased gross profit.  Operating margin increased 60 basis points to 16.2%.  

Industrial Product Division (IPD)
IPD bookings for the second quarter of 2012 were $242.9 million, an increase of $14.1 million, up 6.2%, or 11.8% excluding negative currency effects of approximately $13 million.  IPD sales for the second quarter of 2012 were $231.7 million, an increase of $7.2 million, up 3.2%, or 9.4% excluding negative currency effects of approximately $14 million.

IPD gross profit for the second quarter of 2012 increased to $55.8 million, up $11.6 million or 26.2%.  Gross margin for the second quarter of 2012 increased 440 basis points to 24.1%, which was primarily attributable to IPD recovery plan realignment costs incurred in the second quarter of 2011 that did not recur in 2012.

IPD operating income for the second quarter of 2012 increased to $23.8 million, up $14.2 million or 147.9%, which includes negative currency effects of $2 million.  The increase was primarily attributable to increased gross margin and reduced SG&A.  Operating margin increased 600 basis points to 10.3%.

Flow Control Division (FCD)
FCD bookings for the second quarter of 2012 were $411.6 million, a decrease of $28.4 million, down 6.5%, or 0.5% excluding negative currency effects of approximately $26 million.  FCD sales for the second quarter of 2012 were $401.5 million, an increase of $14.4 million, up 3.7%, or 11.0% excluding negative currency effects of approximately $28 million.

FCD gross profit for the second quarter of 2012 increased to $132.3 million, up $0.4 million or 0.3%.  Gross margin for the second quarter of 2012 decreased 110 basis points to 33.0%, which was primarily attributable to product line mix and a sales mix shift to original equipment.

FCD operating income for the second quarter of 2012 increased to $60.4 million, up $0.5 million or 0.8%, including negative currency effects of approximately $4 million.  The increase was primarily attributable to slightly improved gross profit and reduced SG&A.  Operating margin decreased 50 basis points to 15.0%.

Conference Call
The conference call will take place on Tuesday, July 31 at 11:00 AM Eastern.

Mark Blinn, president and chief executive officer, as well as other members of the management team will be presenting.

The call can be accessed at the Flowserve Web site at www.flowserve.com under the “Investor Relations” section.  

CONDENSED CONSOLIDATED STATEMENTS OF INCOME      
(Unaudited)      
       
(Amounts in thousands, except per share data)

Three Months Ended June 30,

 

2012

 

2011

       
Sales

 $1,182,225

 

 $  1,125,752

Cost of sales

     (797,623)

 

       (756,414)

Gross profit

      384,602

 

        369,338

Selling, general and administrative expense

     (223,892)

 

       (232,983)

Net earnings from affiliates

         4,086

 

           3,751

Operating income

      164,796

 

        140,106

Interest expense

        (8,922)

 

          (9,534)

Interest income

            237

 

              394

Other (expense) income, net

        (8,046)

 

           5,985

Earnings before income taxes

      148,065

 

        136,951

Provision for income taxes

      (39,580)

 

         (38,227)

Net earnings, including noncontrolling interests

      108,485

 

          98,724

Less: Net (earnings) loss attributable to noncontrolling interests

        (1,169)

 

                  8

Net earnings attributable to Flowserve Corporation

 $   107,316

 

 $       98,732

       
Net earnings per share attributable to Flowserve Corporation common shareholders:      
Basic

 $        1.99

 

 $          1.77

Diluted

           1.98

 

             1.76

       
Cash dividends declared per share

 $        0.36

 

 $          0.32

       
 

 

 

 

       
CONDENSED CONSOLIDATED STATEMENTS OF INCOME      
(Unaudited)      
       
(Amounts in thousands, except per share data)

Six Months Ended June 30,

 

2012

 

2011

       
Sales

 $2,257,205

 

 $  2,122,959

Cost of sales

  (1,513,420)

 

    (1,405,926)

Gross profit

      743,785

 

        717,033

Selling, general and administrative expense

     (445,781)

 

       (455,622)

Net earnings from affiliates

         9,315

 

           8,948

Operating income

      307,319

 

        270,359

Interest expense

      (17,731)

 

         (18,139)

Interest income

            519

 

              883

Other (expense) income, net

      (12,985)

 

          14,474

Earnings before income taxes

      277,122

 

        267,577

Provision for income taxes

      (75,095)

 

         (71,857)

Net earnings, including noncontrolling interests

      202,027

 

        195,720

Less: Net earnings attributable to noncontrolling interests

        (1,586)

 

                 (5)

Net earnings attributable to Flowserve Corporation

 $   200,441

 

 $     195,715

       
Net earnings per share attributable to Flowserve Corporation common shareholders:      
Basic

 $        3.70

 

 $          3.51

Diluted

           3.67

 

             3.48

       
Cash dividends declared per share

 $        0.72

 

 $          0.64

       
 

 

 

 

       
CONDENSED CONSOLIDATED BALANCE SHEETS       
(Unaudited)      
       
(Amounts in thousands, except per share data)

June 30,

 

December 31,

 

2012

2011

       
ASSETS      
Current assets:      
Cash and cash equivalents

 $   175,213

 

 $     337,356

Accounts receivable, net of allowance for doubtful accounts of $19,174 and $20,351, respectively

   1,057,642

 

     1,060,249

Inventories, net

   1,149,178

 

     1,008,379

Deferred taxes

      126,605

 

        121,905

Prepaid expenses and other

      109,009

 

        100,465

Total current assets

   2,617,647

 

     2,628,354

Property, plant and equipment, net of accumulated depreciation of $749,973 and $719,992, respectively

      591,805

 

        598,746

Goodwill

   1,042,410

 

     1,045,077

Deferred taxes

       19,291

 

          17,843

Other intangible assets, net

      154,839

 

        163,482

Other assets, net

      179,891

 

        169,112

Total assets

 $4,605,883

 

 $  4,622,614

 

 

   
LIABILITIES AND EQUITY      
Current liabilities:      
Accounts payable

 $   541,925

 

 $     597,342

Accrued liabilities

      831,182

 

        808,601

Debt due within one year

      370,635

 

          53,623

Deferred taxes

         8,848

 

          10,755

Total current liabilities

   1,752,590

 

     1,470,321

Long-term debt due after one year

      426,140

 

        451,593

Retirement obligations and other liabilities

      429,549

 

        422,470

Shareholders’ equity:      
Common shares, $1.25 par value

       73,664

 

          73,664

Shares authorized – 120,000      
Shares issued – 58,931 and 58,931, respectively      
Capital in excess of par value

      538,944

 

        621,083

Retained earnings

   2,367,469

 

     2,205,524

 

   2,980,077

 

     2,900,271

Treasury shares, at cost – 8,080 and 5,025 shares, respectively

     (765,729)

 

       (424,052)

Deferred compensation obligation

       10,554

 

           9,691

Accumulated other comprehensive loss

     (237,302)

 

       (216,097)

Total Flowserve Corporation shareholders' equity

   1,987,600

 

     2,269,813

Noncontrolling interest

       10,004

 

           8,417

Total equity

   1,997,604

 

     2,278,230

Total liabilities and equity

 $4,605,883

 

 $  4,622,614

       
 

 

 

 

       
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS      
(Unaudited)      
       
(Amounts in thousands)

Six Months Ended June 30,

 

2012

 

2011

       
Cash flows – Operating activities:      
Net earnings, including noncontrolling interests

 $   202,027

 

 $     195,720

Adjustments to reconcile net earnings to net cash provided (used) by operating
  activities:
     
Depreciation

       44,340

 

          44,373

Amortization of intangible and other assets

       10,172

 

           8,299

Net gain on disposition of assets

      (10,549)

 

             (595)

Excess tax benefits from stock-based compensation arrangements

      (10,946)

 

          (5,021)

Stock-based compensation

       15,425

 

          16,271

Net earnings from affiliates, net of dividends received

        (4,723)

 

           1,623

Change in assets and liabilities:      
Accounts receivable, net

      (13,317)

 

       (121,537)

Inventories, net

     (155,739)

 

       (161,296)

Prepaid expenses and other

      (16,617)

 

         (32,670)

Other assets, net

        (7,219)

 

          (6,091)

Accounts payable

      (46,763)

 

       (114,811)

Accrued liabilities and income taxes payable

       49,908

 

         (75,279)

Retirement obligations and other liabilities

         5,140

 

          11,000

Net deferred taxes

           (764)

 

           2,219

Net cash flows provided (used) by operating activities

       60,375

 

       (237,795)

       
Cash flows – Investing activities:      
Capital expenditures

      (56,885)

 

         (48,498)

Proceeds from disposal of assets

         7,902

 

           3,735

Payments for acquisition, net of cash acquired

        (3,996)

 

             (890)

Affiliate investing activity

        (1,620)

 

                -  

Net cash flows used by investing activities

      (54,599)

 

         (45,653)

       
Cash flows – Financing activities:      
Excess tax benefits from stock-based compensation arrangements

       10,946

 

           5,021

Payments on long-term debt

      (12,500)

 

         (12,500)

Proceeds from short-term financing, net

      300,000

 

                -  

Borrowings under other financing arrangements, net

         4,826

 

           4,348

Repurchase of common shares

     (432,898)

 

         (26,025)

Payments of dividends

      (37,082)

 

         (33,977)

Other

           (460)

 

              224

Net cash flows used by financing activities

     (167,168)

 

         (62,909)

Effect of exchange rate changes on cash

           (751)

 

          10,090

Net change in cash and cash equivalents

     (162,143)

 

       (336,267)

Cash and cash equivalents at beginning of year

      337,356

 

        557,579

Cash and cash equivalents at end of period

 $   175,213

 

 $     221,312

       
 

 

 

 

       
SEGMENT INFORMATION      
       
ENGINEERED PRODUCT DIVISION

Three Months Ended June 30,

(Amounts in millions, except percentages)

2012

 

2011

Bookings

 $      602.8

 

 $         588.1

Sales

         586.7

 

           557.3

Gross profit

         195.7

 

           192.0

Gross profit margin

33.4%

 

34.5%

Operating income

           95.1

 

             86.7

Operating margin

16.2%

 

15.6%

       
INDUSTRIAL PRODUCT DIVISION

Three Months Ended June 30,

(Amounts in millions, except percentages)

2012

 

2011

Bookings

 $      242.9

 

 $         228.8

Sales

         231.7

 

           224.5

Gross profit

           55.8

 

             44.2

Gross profit margin

24.1%

 

19.7%

Operating income 

           23.8

 

               9.6

Operating margin

10.3%

 

4.3%

       
FLOW CONTROL DIVISION

Three Months Ended June 30,

(Amounts in millions, except percentages)

2012

 

2011

Bookings

 $      411.6

 

 $         440.0

Sales

         401.5

 

           387.1

Gross profit

         132.3

 

           131.9

Gross profit margin

33.0%

 

34.1%

Operating income

           60.4

 

             59.9

Operating margin

15.0%

 

15.5%

       
 

 

 

 

       
SEGMENT INFORMATION      
       
ENGINEERED PRODUCT DIVISION

Six Months Ended June 30,

(Amounts in millions, except percentages)

2012

 

2011

Bookings

 $    1,265.7

 

 $      1,187.6

Sales

      1,121.5

 

         1,081.1

Gross profit

         379.1

 

           380.2

Gross profit margin

33.8%

 

35.2%

Operating income

         187.2

 

           178.4

Operating margin

16.7%

 

16.5%

       
INDUSTRIAL PRODUCT DIVISION

Six Months Ended June 30,

(Amounts in millions, except percentages)

2012

 

2011

Bookings

 $      474.8

 

 $         453.7

Sales

         444.9

 

           400.8

Gross profit

         105.4

 

             89.5

Gross profit margin

23.7%

 

22.3%

Operating income 

           41.2

 

             22.7

Operating margin

9.3%

 

5.7%

       
FLOW CONTROL DIVISION

Six Months Ended June 30,

(Amounts in millions, except percentages)

2012

 

2011

Bookings

 $      791.6

 

 $         817.3

Sales

         765.4

 

           724.7

Gross profit

         259.5

 

           247.5

Gross profit margin

33.9%

 

34.2%

Operating income

         116.0

 

           107.5

Operating margin

15.2%

 

14.8%

       
       

 

About Flowserve
Flowserve Corp. is one of the world’s leading providers of fluid motion and control products and services. Operating in more than 55 countries, the company produces engineered and industrial pumps, seals and valves as well as a range of related flow management services. More information about Flowserve can be obtained by visiting the company’s Website at www.flowserve.com.

 

Technical Contact: Mike Mullin, director, investor relations, (972) 443-6636

Media Contact: Steve Boone, director, global communications and public affairs, (972) 443-6644

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