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Flowserve is a leading manufacturer and aftermarket service provider of flow control products and services for the world's most critical applications.
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|Flowserve Corporation Reports Second Quarter 2012 Results|
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|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):
First Half of 2012 (all comparisons versus first half of 2011 unless otherwise noted):
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 partially 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."
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%.
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.
Investor Contact: Mike Mullin, Director, Investor Relations (972) 443-6636
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 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 the global financial markets and the availability of capital 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; 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; our ability to execute and realize the expected financial benefits from our strategic realignment initiatives; economic, political and other risks associated with our international operations, including military actions or trade embargoes that could affect customer markets, particularly 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; our exposure to fluctuations in foreign currency exchange rates, including in hyperinflationary countries such as Venezuela; our furnishing of products and services to nuclear power plant facilities; potential adverse consequences resulting from litigation to which we are a party, such as litigation involving asbestos-containing material claims; a foreign government investigation regarding our participation in the United Nations Oil-for-Food Program; 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; 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.
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