Flowserve Corporation Reports First Quarter 2019 Results

  • Bookings of $1.07 billion is the highest quarterly level in over
    three years
  • First quarter 2019 free cash flow improved significantly
    year-over-year
  • Strong margin expansion driven by ongoing Flowserve 2.0
    transformation

DALLAS–(BUSINESS WIRE)–Flowserve Corporation (NYSE: FLS), a leading provider of flow control
products and services for the global infrastructure markets, today
announced its financial results for the first quarter ended March 31,
2019.

First Quarter 2019 Highlights (all
comparisons to the 2018 first quarter, unless otherwise noted)

  • Reported Earnings Per Share (EPS) were $0.44, and Adjusted[1] EPS
    of $0.41

    • Pre-tax adjusted items include an approximate $3.5 million net
      gain on realignment and transformation activities and
      approximately $2.7 million of negative below-the-line FX impact
    • Adjusted EPS increased approximately 52% year-over-year
  • Total bookings were $1.07 billion, up 14.9%, or 19.3% on a constant
    currency basis, and included approximately 1.5% negative impact
    related to divested businesses

    • Aftermarket bookings were $511 million, or 48% of total bookings,
      up 5.8%, or 10.4% on a constant currency basis
    • Original equipment bookings were up 24.5%, or 28.5% on a constant
      currency basis
  • Backlog as of March 31, 2019 was $2.1 billion, up 9.2% versus 2018
    year-end, on 1.2 book-to-bill
  • Sales were $890 million, down 3.3%, or up 0.4% on a constant currency
    basis and included approximately 1.0% negative impact related to
    divested businesses

    • Aftermarket sales were $470 million, up 3.4%, or 7.9% on a
      constant currency basis
  • Reported gross and operating margins were 33.0% and 10.2%, up 350
    basis points and 530 basis points, respectively

    • Adjusted gross and operating margins[2] were 33.7% and
      9.9%, up 340 basis points and 310 basis points, respectively

“Flowserve’s 2019 first quarter results represent a good start to the
year. Execution on our ongoing Flowserve 2.0 transformation, including
the commercial intensity initiatives, has allowed us to capture an
increased rate of customer aftermarket spending and project investment,
driving a 19.3% increase in constant currency bookings for the quarter,”
said Scott Rowe, Flowserve’s president and chief executive officer.
“Additionally, we have improved the quality of our backlog and lowered
product cost through our operations workstream, resulting in strong
year-over-year improvement in our reported and adjusted gross and
operating margins.”

Lee Eckert, Flowserve’s senior vice president and chief financial
officer, added, “Our first quarter 2019 results support our full-year
outlook, including our expectations for strong growth in full-year 2019
Adjusted EPS[1]. We were especially pleased that our
Flowserve 2.0 transformation efforts and continued focus on cash flow
generation resulted in solid working capital performance and free cash
flow improvement of $160 million compared to the 2018 first quarter.”

Rowe concluded, “We are building momentum with our Flowserve 2.0 program
to drive additional operational and productivity improvements across all
levels of the organization. We expect to further leverage our recently
combined pump segments to better serve our customers and capitalize on
improving markets. I am confident that our ongoing transformation
initiatives will position the Company to deliver on our 2019 full-year
expectations and create significant long-term value for our customers,
employees and shareholders.”

Full Year 2019 Guidance[3]

Flowserve reaffirmed its 2019 guidance, including its Reported and
Adjusted EPS target range of $1.60 to $1.80 and $1.95 to $2.15,
respectively. Both the Reported and the Adjusted EPS target range
includes the expected revenue increase of approximately 4.0% to 6.0%
year-over-year, and are based on previously announced assumptions,
including net interest expense in the range of $55 to $57 million and an
adjusted tax rate of 26% to 28%. While Flowserve expects 2019 earnings
to reflect our traditional seasonality, the Company expects the greater
weighting in the second half of the year, as additional transformation
benefits are realized.

First Quarter 2019 Results Conference Call

Flowserve will host its conference call with the financial community on
Friday, May 3rd at 11:00 AM Eastern. Scott Rowe, president
and chief executive officer, as well as other members of the management
team will be presenting. The call can be accessed by shareholders and
other interested parties at www.flowserve.com
under the “Investor Relations” section.

[1] See Reconciliation of Non-GAAP Measures table for
detailed reconciliation of reported results to adjusted measures.

[2] Adjusted gross and operating margins are calculated by
dividing adjusted gross profit and operating income, respectively, by
revenues. Adjusted gross profit and adjusted operating income are
derived by excluding the adjusted items. See reconciliation of Non-GAAP
Measures table for detailed reconciliation.

[3] Adjusted 2019 EPS will exclude the Company’s realignment
expenses, the impact from other specific one-time events and
below-the-line foreign currency effects and utilizes year-end 2018 FX
rates and approximately 132 million fully diluted shares.

– FX headwind is calculated by comparing the difference between the
actual average FX rates of 2018 and the year-end 2018 spot rates both as
applied to our 2019 expectations, divided by the number of shares
expected for 2019.

About Flowserve

Flowserve Corp. is one of the world’s leading providers of fluid motion
and control products and services. Operating in more than 50 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 Web site at www.flowserve.com.

Safe Harbor Statement: This news release includes forward-looking
statements within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934, which are
made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, as amended. Words or phrases such as,
“may,” “should,” “expects,” “could,” “intends,” “plans,” “anticipates,”
“estimates,” “believes,” “forecasts,” “predicts” or other similar
expressions are intended to identify forward-looking statements, which
include, without limitation, earnings forecasts, statements relating to
our business strategy and statements of expectations, beliefs, future
plans and strategies and anticipated developments concerning our
industry, business, operations and financial performance and condition.

The forward-looking statements included in this news release are based
on our current expectations, projections, estimates and assumptions.
These statements are only predictions, not guarantees. Such
forward-looking statements are subject to numerous risks and
uncertainties that are difficult to predict. These risks and
uncertainties may cause actual results to differ materially from what is
forecast in such forward-looking statements, and include, without
limitation, the following: a portion of our bookings may not lead to
completed sales, and our ability to convert bookings into revenues at
acceptable profit margins; changes in global economic conditions and the
potential for unexpected cancellations or delays of customer orders in
our reported backlog; our dependence on our customers’ ability to make
required capital investment and maintenance expenditures; if we are not
able to successfully execute and realize the expected financial benefits
from our strategic transformation and realignment initiatives, our
business could be adversely affected; risks associated with cost
overruns on fixed-fee projects and in taking customer orders for large
complex custom engineered products; the substantial dependence of our
sales on the success of the oil and gas, chemical, power generation and
water management industries; the adverse impact of volatile raw
materials prices on our products and operating margins; economic,
political and other risks associated with our international operations,
including military actions, trade embargoes or changes to tariffs or
trade agreements that could affect customer markets, particularly North
African, Russian and Middle Eastern markets and global oil and gas
producers, and non-compliance with U.S. export/re-export control,
foreign corrupt practice laws, economic sanctions and import laws and
regulations; increased aging and slower collection of receivables,
particularly in Latin America and other emerging markets; our exposure
to fluctuations in foreign currency exchange rates, including in
hyperinflationary countries such as Venezuela and Argentina; our
furnishing of products and services to nuclear power plant facilities
and other critical processes; potential adverse consequences resulting
from litigation to which we are a party, such as litigation involving
asbestos-containing material claims; expectations regarding acquisitions
and the integration of acquired businesses; our relative geographical
profitability and its impact on our utilization of deferred tax assets,
including foreign tax credits; the potential adverse impact of an
impairment in the carrying value of goodwill or other intangible assets;
our dependence upon third-party suppliers whose failure to perform
timely could adversely affect our business operations; the highly
competitive nature of the markets in which we operate; environmental
compliance costs and liabilities; potential work stoppages and other
labor matters; access to public and private sources of debt financing;
our inability to protect our intellectual property in the U.S., as well
as in foreign countries; obligations under our defined benefit pension
plans; our internal control over financial reporting may not prevent or
detect misstatements because of its inherent limitations, including the
possibility of human error, the circumvention or overriding of controls,
or fraud; the recording of increased deferred tax asset valuation
allowances in the future or the impact of tax law changes on such
deferred tax assets could affect our operating results; our information
technology infrastructure could be subject to service interruptions,
data corruption, cyber-based attacks or network security breaches, which
could disrupt our business operations and result in the loss of critical
and confidential information; ineffective internal controls could impact
the accuracy and timely reporting of our business and financial results;
and other factors described from time to time in our filings with the
Securities and Exchange Commission.

All forward-looking statements included in this news release are based
on information available to us on the date hereof, and we assume no
obligation to update any forward-looking statement.

The Company reports its financial results in accordance with U.S.
generally accepted accounting principles (GAAP). However, management
believes that non-GAAP financial measures which exclude certain
non-recurring items present additional useful comparisons between
current results and results in prior operating periods, providing
investors with a clearer view of the underlying trends of the business.
Management also uses these non-GAAP financial measures in making
financial, operating, planning and compensation decisions and in
evaluating the Company’s performance. Throughout our materials we refer
to non-GAAP measures as “Adjusted.” Non-GAAP financial measures, which
may be inconsistent with similarly captioned measures presented by other
companies, should be viewed in addition to, and not as a substitute for,
the Company’s reported results prepared in accordance with GAAP.

 
 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)        
Three Months Ended March 31,
(Amounts in thousands, except per share data) 2019 2018
 
Sales $ 890,051 $ 919,954
Cost of sales   (595,975 )   (648,521 )
Gross profit 294,076 271,433
Selling, general and administrative expense (205,154 ) (229,176 )
Net earnings from affiliates   2,309     3,168  
Operating income 91,231 45,425
Interest expense (14,031 ) (14,879 )
Interest income 2,023 1,639
Other income (expense), net   (3,140 )   (7,155 )
Earnings before income taxes 76,083 25,030
Provision for income taxes   (16,587 )   (8,571 )
Net earnings, including noncontrolling interests 59,496 16,459
Less: Net earnings attributable to noncontrolling interests   (2,235 )   (1,316 )
Net earnings attributable to Flowserve Corporation $ 57,261   $ 15,143  
 
Net earnings per share attributable to Flowserve Corporation common
shareholders:
Basic $ 0.44 $ 0.12
Diluted 0.44 0.12
 
 
RECONCILIATION OF NON-GAAP MEASURES
(Unaudited)                    
 
Three Months Ended March 31, 2019
(Amounts in thousands, except per share data) As Reported (a) Realignment (1) Other Items As Adjusted
 
Sales $ 890,051 $ $ $ 890,051
Gross profit 294,076 (5,500 ) 299,576
Gross margin 33.0 % 33.7 %
 
Selling, general and administrative expense (205,154 ) 17,430 (8,413 ) (3) (214,171 )
Loss on sale of business
 
Operating income 91,231 11,930 (8,413 ) 87,714
Operating income as a percentage of sales 10.3 % 9.9 %
 
Interest and other expense, net (15,148 ) (2,707 ) (4) (12,441 )
 
Earnings before income taxes 76,083 11,930 (11,120 ) 75,273
Provision for income taxes (16,587 ) (19 ) (2) 2,711 (5) (19,279 )
Tax Rate 21.8 % 0.2 % 24.4 % 25.6 %
 
Net earnings attributable to Flowserve Corporation $ 57,261 $ 11,911 $ (8,409 ) $ 53,759
 
Net earnings per share attributable to Flowserve Corporation common
shareholders:
Basic $ 0.44 $ 0.09 $ (0.06 ) $ 0.41
Diluted 0.44 0.09 (0.06 ) 0.41
 
Basic number of shares used for calculation 130,982 130,982 130,982 130,982
Diluted number of shares used for calculation 131,532 131,532 131,532 131,532
 
(a) Reported in conformity with U.S. GAAP

Notes:

(1) Represents realignment (expense) income incurred as a result of
realignment programs. Income in selling, general and administrative
due to gains from the sales of non-strategic manufacturing
facilities that are included in our Realignment Programs.
(2) Includes tax impact of items above
(3) Represents Flowserve 2.0 transformation efforts
(4) Represents below-the-line foreign exchange impacts
(5) Includes tax impact of items above
 
 
RECONCILIATION OF NON-GAAP MEASURES
(Unaudited)                    
 
Three Months Ended March 31, 2018
(Amounts in thousands, except per share data) As Reported (a) Realignment (1) Other Items As Adjusted
 
Sales $ 919,954 $ – $ – $ 919,954
Gross profit 271,433 (7,156) 278,589
Gross margin 29.5% 30.3%
 
Selling, general and administrative expense (229,176) (4,318) (5,467) (3) (219,391)
 
Operating income 45,425 (11,474) (5,467) 62,366
Operating income as a percentage of sales 4.9% 6.8%
 
Interest and other expense, net (20,395) (7,952) (4) (12,443)
 
Earnings before income taxes 25,030 (11,474) (13,419) 49,923
Provision for income taxes (8,571) 2,295 (2) 2,838 (5) (13,704)
Tax Rate 34.2% 20.0% 21.1% 27.5%
 
Net earnings attributable to Flowserve Corporation $ 15,143 $ (9,179) $ (10,581) $ 34,903
 
Net earnings per share attributable to Flowserve Corporation common
shareholders:
Basic $ 0.12 $ (0.07) $ (0.08) $ 0.27
Diluted 0.12 (0.07) (0.08) 0.27
 
Basic number of shares used for calculation 130,761 130,761 130,761 130,761
Diluted number of shares used for calculation 131,095 131,095 131,095 131,095
 
(a) Reported in conformity with U.S. GAAP

Notes:

(1) Represents realignment expense incurred as a result of
realignment programs
(2) Includes tax impact of items above
(3) Represents $5.0 million related to implementation costs for the
adoption of ASC 606 and $0.5 million related to Flowserve 2.0
transformation efforts
(4) Represents below-the-line foreign exchange impacts
(5) Includes tax impact of items above
 
 
SEGMENT INFORMATION
(Unaudited)          
FLOWSERVE PUMP DIVISION Three Months Ended March 31,
(Amounts in millions, except percentages) 2019 2018
Bookings $ 750.2 $ 604.2
Sales 609.4 644.4
Gross profit 200.6 183.3
Gross profit margin 32.9 % 28.4 %
SG&A 122.4 151.8
Segment operating income 80.5 34.7
Segment operating income as a percentage of sales 13.2 % 5.4 %
 
 
FLOW CONTROL DIVISION Three Months Ended March 31,
(Amounts in millions, except percentages) 2019 2018
Bookings $ 319.8 $ 327.3
Sales 282.1 277.2
Gross profit 97.7 88.2
Gross profit margin 34.6 % 31.8 %
SG&A 53.3 54.3
Segment operating income 44.4 33.9
Segment operating income as a percentage of sales 15.7 % 12.2 %
 
       
First Quarter 2019 – Segment Results
(dollars in millions, comparison vs. 2018 first quarter, unaudited)
 
FPD FCD
1st Qtr 1st Qtr
Bookings $ 750.2 $ 319.8
– vs. prior year 24.2 % -2.3 %
– on constant currency 29.0 % 1.0 %
 
Sales $ 609.4 $ 282.1
– vs. prior year -5.4 % 1.8 %
– on constant currency -1.8 % 5.3 %
 
Gross Profit $ 200.6 $ 97.7
– vs. prior year 9.4 % 10.8 %
 
Gross Margin (% of sales) 32.9 % 34.6 %
– vs. prior year (in basis points) 450 bps 280 bps
 
Operating Income $ 80.5 $ 44.4
– vs. prior year 131.9 % 31.1 %
– on constant currency 145.9 % 35.0 %
 
Operating Margin (% of sales) 13.2 % 15.7 %
– vs. prior year (in basis points) 780 bps 350 bps
 
Adjusted Operating Income * $ 67.2 $ 45.2
– vs. prior year 57.0 % 24.9 %
– on constant currency 68.5 % 28.5 %
 
Adj. Oper. Margin (% of sales)* 11.0 % 16.0 %
– vs. prior year (in basis points) 440 bps 290 bps
 
Backlog $ 1,423.5 $ 645.8
 
* Adjusted Operating Income and Adjusted Operating Margin exclude
realignment charges
 
 
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)        
March 31, December 31,
(Amounts in thousands, except par value) 2019 2018
 
ASSETS
Current assets:
Cash and cash equivalents $ 637,710 $ 619,683
Accounts receivable, net of allowance for doubtful accounts of
$51,525 and $51,501, respectively
781,382 792,434
Contract assets, net 224,850 228,579
Inventories, net 680,191 633,871
Prepaid expenses and other   112,490     108,578  
Total current assets 2,436,623 2,383,145
Property, plant and equipment, net of accumulated depreciation of
$968,279 and $956,634, respectively
587,915 610,096
Operating lease right-of-use assets, net 198,656
Goodwill 1,191,706 1,197,640
Deferred taxes 47,745 44,682
Other intangible assets, net 186,290 190,550
Other assets, net   197,562     190,164  
Total assets $ 4,846,497   $ 4,616,277  
 
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable $ 398,052 $ 418,893
Accrued liabilities 405,633 391,406
Contract liabilities 207,742 202,458
Debt due within one year 72,197 68,218
Operating lease liabilities   37,807      
Total current liabilities 1,121,431 1,080,975
Long-term debt due after one year 1,392,238 1,414,829
Operating lease liabilities 160,315
Retirement obligations and other liabilities 464,527 459,693
Shareholders’ equity:
Common shares, $1.25 par value 220,991 220,991
Shares authorized – 305,000
Shares issued – 176,793
Capital in excess of par value 487,673 494,551
Retained earnings 3,575,014 3,543,007
Treasury shares, at cost – 45,969 and 46,237 shares, respectively (2,037,586 ) (2,049,404 )
Deferred compensation obligation 7,107 7,117
Accumulated other comprehensive loss   (566,400 )   (573,947 )
Total Flowserve Corporation shareholders’ equity 1,686,799 1,642,315
Noncontrolling interests   21,187     18,465  
Total equity   1,707,986     1,660,780  
Total liabilities and equity $ 4,846,497   $ 4,616,277  
 
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)        
Three Months Ended March 31
(Amounts in thousands) 2019 2018
 
Cash flows – Operating activities:
Net earnings, including noncontrolling interests $ 59,496 $ 16,459
Adjustments to reconcile net earnings to net cash provided (used) by
operating activities:
Depreciation 23,361 24,693
Amortization of intangible and other assets 4,105 4,220
Stock-based compensation 7,609 3,962
Foreign currency and other non-cash adjustments (15,454 ) (7,227 )
Change in assets and liabilities:
Accounts receivable, net 8,174 41,850
Inventories, net (49,478 ) (48,599 )
Contract assets, net 1,631 (64,402 )
Prepaid expenses and other assets, net (5,128 ) 203
Accounts payable (15,399 ) (59,645 )
Contract liabilities 5,567 (3,870 )
Accrued liabilities and income taxes payable 11,462 (32,583 )
Retirement obligations and other (652 ) (2,024 )
Net deferred taxes   3,225     6,236  
Net cash flows provided (used) by operating activities   38,519     (120,727 )
Cash flows – Investing activities:
Capital expenditures (10,638 ) (13,490 )
Proceeds from disposal of assets and other   39,211     600  
Net cash flows provided (used) by investing activities   28,573     (12,890 )
Cash flows – Financing activities:
Payments on long-term debt (15,000 ) (15,000 )
Proceeds under other financing arrangements 1,660 76
Payments under other financing arrangements (2,484 ) (4,198 )
Payments related to tax withholding for stock-based compensation (2,861 ) (2,288 )
Payments of dividends (24,909 ) (24,826 )
Other   (192 )   (619 )
Net cash flows provided (used) by financing activities (43,786 ) (46,855 )
Effect of exchange rate changes on cash   (5,279 )   12,684  
Net change in cash and cash equivalents 18,027 (167,788 )
Cash and cash equivalents at beginning of period   619,683     703,445  
Cash and cash equivalents at end of period $ 637,710   $ 535,657  
 

Contacts

Flowserve Contacts
Investor Contacts:
Jay Roueche, Vice
President, Investor Relations & Treasurer (972) 443-6560
Mike
Mullin, Director, Investor Relations (972) 443-6636

Media Contact:
Lars Rosene, Vice President, Corporate & Marketing
Communications (972) 443-6644

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