Flowserve Corporation Reports Third Quarter Results

Updates 2011 Full Year EPS Target Range to $7.45 to $7.85

DALLAS, October 27, 2011 – Flowserve Corp. (NYSE:FLS), a leading provider of flow control products and services for the global infrastructure markets, announced today financial results for the third quarter of 2011 in its Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission. Highlights were as follows: 

Highlights

Third Quarter of 2011 (all comparisons versus the third quarter of 2010 unless otherwise noted):

• Fully diluted EPS of $1.92, up 4.3%, including $0.08 of negative currency effects
• Fully diluted EPS up 19.8% excluding after tax currency effects in the current and prior periods
• Bookings of $1.16 billion, up 15.9%, or 10.2% excluding currency benefits of $57 million, reflecting solid chemical, oil & gas and general industry orders and strong aftermarket activity
• Sales of $1.12 billion, up 15.4%, or 9.9% excluding currency benefits of $54 million, driven by increased short cycle original equipment sales and strong aftermarket sales
• Gross margin decrease of 70 basis points to 33.6%
• SG&A as a percentage of sales down 130 basis points to 20.1%
• Operating income of $155.0 million, up 20.0%, including realignment charges of $1.2 million
• Operating margin increase of 50 basis points to 13.8%
• Tax rate of 22.9% for the quarter
• Cash balance of $227.9 million at September 30, 2011
• Backlog at September 30, 2011 of $2.81 billion, including negative currency effects of $43 million, compared to $2.59 billion in backlog at December 31, 2010

Year-to-Date 2011 (all comparisons versus year-to-date 2010 unless otherwise noted):

• Fully diluted EPS of $5.40, up 10.4%, including $0.20 of charges from realignment activity and a Spanish regulatory penalty, partially offset by $0.10 of net currency benefits
• Bookings of $3.53 billion, up 10.1%, or 5.2% excluding currency benefits of $157 million, reflecting solid short cycle original equipment activity and increased aftermarket activity
• Sales of $3.24 billion, up 12.2%, or 7.0% excluding currency benefits of $152 million, driven by increased short cycle original equipment sales and strong aftermarket sales
• Gross margin decrease of 180 basis points to 33.7%, or 34.0% excluding realignment charges
• SG&A as a percentage of sales down 50 basis points to 21.0%
• Operating income of $425.3 million, up 1.9%, including realignment charges of $10.4 million and a Spanish regulatory penalty of $3.9 million
• Operating margin decrease of 130 basis points to 13.1%, or 13.4% excluding realignment charges

Mark Blinn, Flowserve president and chief executive officer, said, “I am pleased with our performance this quarter, with top line growth and improved operating performance driving earnings up about 20%, excluding currency effects.  We posted double digit growth in bookings, led primarily by our short cycle business but overall by broad based increases in activity in the chemical, general industries and oil and gas industries and across most regions.  Our short cycle business remains strong, and our smaller project long cycle business is steady to improving, which balances continued competitiveness in large long-cycle project activity.

“We saw our strongest ever aftermarket performance in the quarter, as our focus on expanding our global QRC footprint and growing our service capabilities continues to deepen our customer relationships.  In addition, the continued dedication of our outstanding workforce on executing on our key strategies helped drive both year over year and sequential operating margin improvement.  This generated positive operating momentum across the organization that we plan to build on as we close out the year and move into 2012.”
Blinn added, “We remained focused on executing our strategic growth initiatives and serving our customers in spite of an uncertain macroeconomic and geopolitical environment, and we are proud of what we have accomplished in positioning our company to deliver sustainable earnings growth and long-term shareholder value. During the quarter, we announced a new $300 million share repurchase program, reflecting our ongoing commitment to returning cash to our shareholders and increasing our flexibility to pursue additional value-enhancing opportunities.  Our recently announced acquisition of Lawrence Pumps exemplifies our inorganic growth strategy, where we view incremental, disciplined leverage of our diverse global platform with ‘bolt on’ acquisitions as the best way to drive growth and create value for our shareholders.  Looking forward, I am confident that through our continued disciplined execution of our strategic plan, broad product capabilities, strong backlog, high-margin aftermarket business and global presence – particularly in high-growth markets, we are well positioned for 2012 and beyond.”

Financial Performance and Guidance

Dick Guiltinan, senior vice president, finance and chief accounting officer, said, “Our earnings and margins this quarter were positively influenced by increased sales volumes, driven primarily by the continued strength of our short cycle and aftermarket business, operational improvements and benefits from a lower tax rate, which offset headwinds from currency.  We also benefitted from our disciplined cost-control initiatives in achieving sequential and year over year improvement in SG&A as a percentage of sales.

“Solid growth across our company, and in particular in our short cycle original equipment business, has continued to drive increased working capital levels.  This continued growth in our business remains a significant driver of our raw materials and work in process inventory balances over year end.  While we began to see our past due backlog trend down towards the end of the third quarter, our inventory levels also continue to be influenced by isolated project delays and customer-driven delays on certain large projects, most of which we plan to ship by year end.  Receivables balances continued to be impacted by shipment delays and longer negotiated payment terms.  General market conditions, in which companies are increasingly mindful of cash flow, led to slower than anticipated payments from certain customers, although we have not seen any real deterioration in credit quality or collectability.  As we move into the fourth quarter, which historically has been our best operating cash flow quarter of the year, we remain focused on optimizing working capital levels.

“In considering our full year guidance, we expect the lost opportunity related to ongoing disruptions in the Middle East and North Africa will extend through year end. We also expect a small dilutive effect in 2011 relating to the Lawrence Pumps acquisition.  As such, we have narrowed our full year EPS target range to between $7.45 and $7.85, which anticipates a continuation of the recent currency rate environment.”

Flow Solutions Group

Tom Ferguson, president, Flow Solutions Group, said, “The Engineered Product Division (EPD) continued to deliver solid aftermarket performance this quarter, as we used our Integrated Services Group, our global QRC network and end user focus to drive growth.  Our smaller project original equipment volumes are steady to improving, although large project activity remains highly competitive, where we have been more selective in the projects we choose to pursue.  We believe these factors should help support our margins going forward, as we simultaneously work to ship and clear out some delayed projects that have weighed down EPD margins this year.

“I am excited that we will very soon close our acquisition of Lawrence Pumps, an industry leader in highly engineered critical slurry pumps in our core markets.  This acquisition is an excellent example of our ‘bolt on’ acquisition strategy, which is focused on highly engineered products with close strategic fit, meaningful potential synergies and attractive aftermarket opportunities that can be significantly grown through our global sales and distribution network.

“I am pleased with the Industrial Product Division’s (IPD) performance this quarter, as we capitalized on continued end market strength and gained traction on operational improvements as part of IPD’s recovery plan.  IPD’s bookings growth was broadly based, primarily driven by the chemical, power generation and oil and gas industries.  Our stronger backlog and improved short cycle market conditions provide the opportunity to drive further performance improvements.”

Flow Control Division

Tom Pajonas, president, Flow Control Division, said, “I am proud that the FCD team delivered another solid quarter of overall performance, demonstrating our ability to execute in the current macroeconomic environment and our continued efforts to drive growth and value-added solutions for our customers.  Bookings activity increased substantially in the third quarter, driven by broad based growth in the chemical and general industries, as well as growth in the oil and gas industry with the support of our 2010 Valbart acquisition.  Sales increased notably over the same period last year, with strong growth in most regions.  I am pleased by the strong performance of the division across a number of key financial performance metrics, including operating margins and overall aftermarket growth.”

Segment Overview (all comparisons versus the third quarter of 2010 unless otherwise noted)
FSG Engineered Product Division (EPD)

EPD bookings for the third quarter of 2011 were $567.6 million, an increase of $69.7 million, up 14.0%, or up 9.2% excluding currency benefits of approximately $24 million.  EPD sales for the third quarter of 2011 were $574.3 million, an increase of $63.0 million, up 12.3%, or up 7.4% excluding currency benefits of approximately $25 million.  EPD gross profit was $193.1 million, up $8.3 million or 4.5%.  Gross margin for the third quarter of 2011 decreased 250 basis points to 33.6%.  The gross margin decrease was primarily due to the negative impact of currency on U.S. dollar denominated sales produced in non-U.S. facilities and the effect on revenue of certain large projects at very low margins, partially offset by a sales mix shift towards higher margin aftermarket sales.

EPD operating income for the third quarter of 2011 was $91.9 million, a decrease of $0.9 million or 1.0%, including currency benefits of approximately $4 million. The decrease was primarily due to increased SG&A, driven by currency effects and increased selling and marketing related expenses, substantially offset by increased gross profit.  Operating margin decreased 210 basis points to 16.0%.
FSG Industrial Product Division (IPD)

IPD bookings for the third quarter of 2011 were $223.2 million, an increase of $20.3 million, up 10.0%, or up 4.6% excluding currency benefits of approximately $11 million.  IPD sales for the third quarter of 2011 were $215.6 million, an increase of $39.1 million, up 22.2%, or 15.9% excluding currency benefits of approximately $11 million.  IPD gross profit was $50.9 million, up $8.9 million or 21.2%.  Gross margin for the third quarter of 2011 decreased 20 basis points to 23.6%, or decreased 40 basis points to 24.1% when realignment charges in the current and comparison periods are excluded.  The gross margin decrease was primarily due to increased material costs, substantially offset by the impact of increased sales on the absorption of fixed manufacturing costs and a mix shift to higher margin aftermarket sales.

IPD operating income for the third quarter of 2011 was $16.5 million, up $7.0 million or 73.7%, including currency benefits of approximately $1 million and realignment charges of $1.0 million. The increase was primarily attributable to the increase in gross profit, partially offset by an increase in SG&A, which was driven by currency effects.  Operating margin increased 230 basis points to 7.7%, or increased 210 basis points to 8.1% excluding realignment charges in the current and comparison periods.

Flow Control Division (FCD)

FCD Bookings for the third quarter of 2011 were $409.9 million, an increase of $74.9 million, up 22.4%, or 16.1% excluding currency benefits of approximately $21 million.  FCD sales for the third quarter of 2011 were $368.3 million, an increase of $55.7 million, up 17.8%, or 12.1% excluding currency benefits of approximately $18 million.  FCD gross profit was $131.3 million, up $23.9 million or 22.3%.  Gross margin for the third quarter of 2011 increased 130 basis points to 35.7%. The gross margin increase was primarily due to the impact of increased sales on the absorption of fixed manufacturing costs and a favorable product line and maintenance, repair and overhaul mix.

FCD operating income for the third quarter of 2011 was $63.8 million, up $18.1 million or 39.6%, including currency benefits of approximately $2 million. The increase was primarily attributable to the increase in gross profit, partially offset by an increase in SG&A, which was driven by increased selling and marketing-related expenses and increased research and development costs.  Operating margin increased 270 basis points to 17.3%.

Conference Call

The conference call will take place on Friday, October 28 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
(Amounts in thousands, except per share data)	Three Months Ended September 30,
	2011		2010
Sales	$     1,121,813		$        971,681
Cost of sales	(745,227)		(638,183)
Gross profit	376,586		333,498
Selling, general and administrative expense	(225,996)		(207,741)
Net earnings from affiliates	4,367		3,439
Operating income	154,957		129,196
Interest expense	(8,544)		(8,266)
Interest income	216		430
Other (expense) income, net	(6,621)		18,578
Earnings before income taxes	140,008		139,938
Provision for income taxes	(32,052)		(35,713)
Net earnings, including noncontrolling interests	107,956		104,225
Less: Net earnings attributable to noncontrolling interests	(185)		(306)
Net earnings attributable to Flowserve Corporation	$        107,771		$        103,919
Net earnings per share attributable to Flowserve Corporation common shareholders:
Basic	$             1.94		$             1.86
Diluted	1.92		1.84
Cash dividends declared per share	$             0.32		$             0.29
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)	Nine Months Ended September 30,
	2011		2010
Sales	$     3,244,772		$     2,891,683
Cost of sales	(2,151,153)		(1,866,510)
Gross profit	1,093,619		1,025,173
Selling, general and administrative expense	(681,618)		(620,311)
Net earnings from affiliates	13,314		12,537
Operating income	425,315		417,399
Interest expense	(26,684)		(25,942)
Interest income	1,100		1,170
Other income (expense), net	7,852		(15,259)
Earnings before income taxes	407,583		377,368
Provision for income taxes	(103,908)		(101,133)
Net earnings, including noncontrolling interests	303,675		276,235
Less: Net earnings attributable to noncontrolling interests	(191)		(448)
Net earnings attributable to Flowserve Corporation	$        303,484		$        275,787
Net earnings per share attributable to Flowserve Corporation common shareholders:
Basic	$             5.45		$             4.94
Diluted	5.40		4.89
Cash dividends declared per share	$             0.96		$             0.87
CONDENSED CONSOLIDATED BALANCE SHEETS
	September 30,		December 31,
(Amounts in thousands, except per share data)	2011		2010
ASSETS
Current assets:
Cash and cash equivalents	$        227,885		$        557,579
Accounts receivable, net of allowance for doubtful accounts of $21,146   and $18,632, respectively	1,022,897		839,566
Inventories, net	1,076,704		886,731
Deferred taxes	128,909		131,996
Prepaid expenses and other	121,071		107,872
Total current assets	2,577,466		2,523,744
Property, plant and equipment, net of accumulated depreciation of $719,720   and $682,715, respectively	564,759		581,245
Goodwill	1,013,526		1,012,530
Deferred taxes	21,383		24,343
Other intangible assets, net	139,811		147,112
Other assets, net	163,560		170,936
Total assets	$     4,480,505		$     4,459,910
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$        459,900		$        571,021
Accrued liabilities	769,620		817,837
Debt due within one year	50,033		51,481
Deferred taxes	18,513		16,036
Total current liabilities	1,298,066		1,456,375
Long-term debt due after one year	457,855		476,230
Retirement obligations and other liabilities	417,715		414,272
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	612,744		613,861
Retained earnings	2,098,054		1,848,680
	2,784,462		2,536,205
Treasury shares, at cost - 3,927 and 3,872 shares, respectively	(315,389)		(292,210)
Deferred compensation obligation	9,582		9,533
Accumulated other comprehensive loss	(179,951)		(150,506)
Total Flowserve Corporation Shareholders' Equity	2,298,704		2,103,022
Noncontrolling interest	8,165		10,011
Total equity	2,306,869		2,113,033
Total liabilities and equity	$     4,480,505		$     4,459,910
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)	Nine Months Ended September 30,
	2011		2010
Cash flows - Operating activities:
Net earnings, including noncontrolling interests	$        303,675		$        276,235
Adjustments to reconcile net earnings to net cash used by operating   activities:
Depreciation	67,166		64,727
Amortization of intangible and other assets	10,206		7,192
Amortization of deferred loan costs	2,179		2,699
Net gain on disposition of assets	(484)		(97)
Gain on sale of investment	-		(2,618)
Excess tax benefits from stock-based compensation arrangements	(5,201)		(9,971)
Stock-based compensation	23,655		24,295
Net earnings from affiliates, net of dividends received	472		(5,869)
Stock-based compensation
Change in assets and liabilities:
Accounts receivable, net	(201,636)		(47,883)
Inventories, net	(206,079)		(112,528)
Prepaid expenses and other	(21,606)		(17,034)
Other assets, net	(2,019)		5,812
Accounts payable	(101,671)		(61,960)
Accrued liabilities and income taxes payable	(43,648)		(138,420)
Retirement obligations and other liabilities	13,635		(31,632)
Net deferred taxes	11,271		30,433
Net cash flows used by operating activities	(150,085)		(16,619)
Cash flows - Investing activities:
Capital expenditures	(71,164)		(46,429)
Proceeds from disposal of assets	3,530		6,748
Payments for acquisitions, net of cash acquired	(890)		(199,396)
Affiliate investing activity, net	-		4,326
Net cash flows used by investing activities	(68,524)		(234,751)
Cash flows - Financing activities:
Excess tax benefits from stock-based compensation arrangements	5,201		9,971
Payments on long-term debt	(18,750)		(4,261)
Net (payments) borrowings under other financing arrangements	(1,747)		438
Repurchase of common shares	(41,088)		(34,074)
Payments of dividends	(51,794)		(47,419)
Proceeds from stock option activity	310		5,576
Dividends paid to noncontrolling interests	(2,168)		(259)
Sale of shares to noncontrolling interests	-		1,654
Net cash flows used by financing activities	(110,036)		(68,374)
Effect of exchange rate changes on cash	(1,049)		(23,963)
Net change in cash and cash equivalents	(329,694)		(343,707)
Cash and cash equivalents at beginning of period	557,579		654,320
Cash and cash equivalents at end of period	$        227,885		$        310,613
SEGMENT INFORMATION
FSG ENGINEERED PRODUCT DIVISION	Three Months Ended September 30,
(Amounts in millions)	2011		2010
Bookings	$            567.6		$            497.9
Sales	574.3		511.3
Gross profit	193.1		184.8
Gross profit margin	33.6%		36.1%
Segment operating income	91.9		92.8
Segment operating income as a percentage of sales	16.0%		18.1%
FSG INDUSTRIAL PRODUCT DIVISION	Three Months Ended September 30,
(Amounts in millions)	2011		2010
Bookings	$            223.2		$            202.9
Sales	215.6		176.5
Gross profit	50.9		42.0
Gross profit margin	23.6%		23.8%
Segment operating income	16.5		9.5
Segment operating income as a percentage of sales	7.7%		5.4%
FLOW CONTROL DIVISION	Three Months Ended September 30,
(Amounts in millions)	2011		2010
Bookings	$            409.9		$            335.0
Sales	368.3		312.6
Gross profit	131.3		107.4
Gross profit margin	35.7%		34.4%
Segment operating income	63.8		45.7
Segment operating income as a percentage of sales	17.3%		14.6%
FSG ENGINEERED PRODUCT DIVISION	Nine Months Ended September 30,
(Amounts in millions)	2011		2010
Bookings	$         1,753.7		$         1,719.5
Sales	1,655.3		1,567.6
Gross profit	573.3		575.1
Gross profit margin	34.6%		36.7%
Segment operating income	270.4		301.4
Segment operating income as a percentage of sales	16.3%		19.2%
FSG INDUSTRIAL PRODUCT DIVISION	Nine Months Ended September 30,
(Amounts in millions)	2011		2010
Bookings	$            674.5		$            609.5
Sales	616.5		571.2
Gross profit	140.4		146.6
Gross profit margin	22.8%		25.7%
Segment operating income	39.2		46.4
Segment operating income as a percentage of sales	6.4%		8.1%
FLOW CONTROL DIVISION	Nine Months Ended September 30,
(Amounts in millions)	2011		2010
Bookings	$         1,227.1		$            978.7
Sales	1,093.0		837.4
Gross profit	378.8		303.2
Gross profit margin	34.7%		36.2%
Segment operating income	171.2		127.9
Segment operating income as a percentage of sales	15.7%		15.3%

 

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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