Flowserve Corporation Reports Third Quarter Results

Third Quarter EPS Rises 7.8% to $2.07; Company Narrows 2012 Full Year EPS Target Range to $8.20 to $8.70

DALLAS, October 29, 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 third quarter of 2012 in its Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission. Highlights from the third quarter and 2012 year-to-date were as follows:

Highlights
Third Quarter 2012 (all comparisons versus third quarter 2011 unless otherwise noted):

  • Fully diluted EPS of $2.07, up 7.8%, including $0.12 of below the line negative currency effects
    • Fully diluted EPS up 9.5% excluding below the line currency effects year over year
  • Bookings of $1.19 billion, up 2.3%, or 9.0% excluding negative currency effects of $78 million
    • Aftermarket bookings of $475 million, up 2.3% excluding negative currency effects
  • Sales of $1.17 billion, up 3.9%, or 10.6% excluding negative currency effects of $75 million
  • Gross margin decrease of 20 basis points to 33.4%
  • SG&A as a percentage of sales down 60 basis points to 19.5%
  • Operating income of $165.7 million, up 6.9%, or 14.6% excluding negative currency effects
  • Operating margin increase of 40 basis points to 14.2%
  • Tax rate of 26.1% compared to 22.9% for third quarter 2011
  • Repurchased $101 million in shares as part of $1 billion share repurchase program, $524 million of authorized repurchase capacity remaining
  • Backlog of $2.9 billion at September 30, 2012, including negative currency effects of approximately $2 million, compared to $2.7 billion in backlog at December 31, 2011
  • Highest aftermarket backlog of $713 million at September 30, 2012 compared to $633 million at December 31, 2011
  • 2012 full year EPS target range narrowed to $8.20 to $8.70

Year-to-Date 2012 (all comparisons versus year-to-date 2011 unless otherwise noted):

  • Fully diluted EPS of $5.73, up 6.1%, or 13.8% excluding below the line currency effects year over year
  • Bookings of $3.6 billion, up 3.1%, or 8.4% excluding negative currency effects of $189 million
    • Aftermarket bookings of $1.4 billion, up 10.1% excluding negative currency effects
  • Sales of $3.4 billion, up 5.5%, or 11.2% excluding negative currency effects of $185 million
  • Gross margin decrease of 60 basis points to 33.1%
  • SG&A as a percentage of sales down 130 basis points to 19.7%
  • Operating income of $473.0 million, up 11.2%, or 19.0% excluding negative currency effects
  • Operating margin increase of 70 basis points to 13.8%
  • $534 million in share repurchase activity year to date

Mark Blinn, Flowserve president and chief executive officer, said, "I am pleased with our performance in the third quarter, where solid top line growth, operational progress and improved SG&A leverage drove earnings growth.  Our bookings growth was varied across our product lines, served industries and geographic regions, underscoring how our diverse global platform works to manage risk.  Solid aftermarket bookings reflected normal seasonal activity and drove our highest level of quarter-end aftermarket backlog, which continues to support a near $2 billion annual run rate for this business.

"While remaining committed to serving our customers and increasing shareholder value, we have built positive operating momentum during the year through 'One Flowserve', which focuses on growing our business while driving operational excellence.  Our operational improvement and cost management initiatives have gained traction, resulting in improved SG&A leverage and a second consecutive quarter of both year over year and sequential operating margin improvement.  Our Industrial Product Division's performance highlighted this progress, delivering notable improvements in financial and operating metrics.  I am encouraged by the progress we have made, and we remain focused on leveraging additional operating improvement opportunities."

Blinn added, "We are somewhat cautious in our outlook, as softer conditions in certain regions and general macroeconomic uncertainty may impact the shorter cycle business and push out the timing of expected later cycle project investments.  That being said, demand drivers for infrastructure needs remain intact, and we are optimistic in medium- to long-term infrastructure investment opportunities, particularly in our energy end markets.  I am confident that our heightened focus and discipline on the front-end bidding process, growing improvements in our operations, and our diverse end markets and geographic presence will provide support as the cycle progresses and the later cycle projects move forward.  All of this combines to position us well to continue capturing profitable growth and creating long-term value for our shareholders."

Financial Performance and Guidance
Mike Taff, senior vice president and chief financial officer, said, "Consistent with the first half of the year, our financial performance benefitted from improved execution on increased sales volumes, with our continued focus on disciplined cost management driving improvements in SG&A leverage and incremental margins.  We are encouraged by the build of our aftermarket base, and we made solid progress in shipping low margin legacy backlog.  While these legacy shipments continued to impact earnings and margins in the third quarter, the impact should diminish in the remainder of the year with the increased volume and fixed cost absorption planned in the fourth quarter.

"During the third quarter, we took significant steps to optimize our capital structure, all with the goal of increasing total shareholder return.  Taking advantage of attractive debt markets and our investment grade credit ratings, we put in place a new $1.25 billion senior credit facility and publicly issued $500 million of 10-year senior notes at a 3.5% coupon.  We also continued executing on our $1 billion share repurchase program during the quarter by repurchasing $101 million of common stock, and we expect to conclude the program in 2013.  We are pleased with these actions taken in support of our capital structure strategy, which will enable us to more efficiently deploy capital and execute our growth initiatives to increase shareholder value."

Taff added, "The year-over-year strengthening of the U.S. dollar against our other functional currencies, including the Euro, continued to have a significant impact on our reported results.  For the full year, we now estimate total negative currency effects of $1.00 to $1.10 per share at current exchange rates, compared to $1.00 per share in prior guidance.  We continue to expect share repurchase activity for 2012 to add approximately $0.30 to our full year results, although somewhat offset by higher borrowing costs related to increased leverage.  With the expectation of strong fourth quarter performance and despite the increased currency headwinds, we are narrowing our 2012 earnings guidance to $8.20 to $8.70 per share."

Operational Performance
Tom Pajonas, senior vice president and chief operating officer, said, "Our operating structure and 'One Flowserve' initiative continued to drive disciplined, profitable growth this quarter.  Across all of our operations, the results this quarter demonstrate how our diversified product lines, end markets and geographic presence work to mitigate risk in our business.  Also, our leadership team's focus and discipline on the front end of our bidding process continued the trend of increasing expected margin quality in backlog.

"The Engineered Product Division (EPD) took advantage of original equipment activity in the oil and gas industry and in the Middle East to increase bookings over 4% on a constant currency basis.  Offsetting this activity were decreases in Europe and Asia Pacific.  A sales mix shift to aftermarket sales and execution improvements drove gross margin improvement over last year, even with the impact of progress made in shipping low margin legacy backlog.  Operating margin decreased slightly on increased SG&A driven by selling-related expenses."

Pajonas added, "The Industrial Product Division (IPD) delivered solid performance this quarter as its focus on operational excellence produced significant improvements in operating income and operating margin.  IPD's bookings increase reflected strength of original equipment orders in the oil and gas industry and reflected orders in excess of $90 million to supply offshore oil and gas platform equipment over the next five years. Sales improved on increased original equipment shipments to Asia Pacific and North America, somewhat offset by a decrease in Europe.  Gross margin and operating margin again improved both sequentially and year over year.  This reflected continued traction on the IPD recovery plan as we focused on operational excellence, on-time delivery, supply chain and disciplined cost management.

"The Flow Control Division (FCD) continued to deliver steady performance in the third quarter.  Bookings were down only slightly on a constant currency basis, even with a difficult comparison to the third quarter of 2011.  Overall, bookings were impacted by reduced original equipment bookings in the Middle East/Africa and Latin America, largely offset by an increase in Europe, primarily Russia.  Sales increased over 14% on a constant currency basis, with increased sales into Asia Pacific, North America, the Middle East and Latin America more than offsetting softness in Europe and Africa.  Gross margin decreased due to a sales mix shift to original equipment and product line mix, though operating margin was steady with the support of improved SG&A leverage."

Segment Overview (all comparisons versus third quarter 2011 unless otherwise noted)
Engineered Product Division (EPD)
EPD bookings for the third quarter of 2012 were $553.7 million, a decrease of $13.9 million, down 2.4%, or up 4.1% excluding negative currency effects of approximately $37 million.  EPD sales for the third quarter of 2012 were $567.5 million, a decrease of $6.8 million, down 1.2%, or up 5.3% excluding negative currency effects of approximately $37 million.

EPD gross profit for the third quarter of 2012 was $192.3 million, down $0.8 million or 0.4%.  Gross margin increased 30 basis points to 33.9%.  The gross margin increase was primarily due to a sales mix shift to higher margin aftermarket sales and the effects of lower costs associated with operational execution improvements, partially offset by shipments of lower margin legacy backlog.

EPD operating income for the third quarter of 2012 was $87.0 million, a decrease of $4.9 million or 5.3%, including negative currency effects of approximately $6 million. The decrease was primarily due to increased SG&A, driven by increased selling-related expenses, and decreased gross profit.  Operating margin decreased 70 basis points to 15.3%.

Industrial Product Division (IPD)
IPD bookings for the third quarter of 2012 were $283.5 million, an increase of $60.3 million, up 27.0%, or up 34.6% excluding negative currency effects of approximately $17 million.  IPD sales for the third quarter of 2012 were $243.6 million, an increase of $28.0 million, up 13.0%, or 18.6% excluding negative currency effects of approximately $12 million.

IPD gross profit for the third quarter of 2012 was $59.1 million, up $8.2 million or 16.1%.  Gross margin increased 70 basis points to 24.3%.  The gross margin increase was primarily due to lower costs resulting from operational improvements and continued realization of realignment savings, partially offset by a mix shift to lower margin original equipment sales.

IPD operating income for the third quarter of 2012 was $26.6 million, up $10.1 million or 61.2%, including negative currency effects of approximately $2 million. The increase was primarily attributable to the increase in gross profit and a decrease in SG&A.  Operating margin increased 320 basis points to 10.9%.

Flow Control Division (FCD)
FCD bookings for the third quarter of 2012 were $381.4 million, a decrease of $28.5 million, down 7.0%, or 1.1% excluding negative currency effects of approximately $24 million.  FCD sales for the third quarter of 2012 were $394.7 million, an increase of $26.4 million, up 7.2%, or 14.2% excluding negative currency effects of approximately $26 million.

FCD gross profit for the third quarter of 2012 was $139.6 million, up $8.3 million or 6.3%.  Gross margin decreased 30 basis points to 35.4%. The gross margin decrease was primarily due to a shift in product line mix and a less favorable sales mix between original equipment and aftermarket.

FCD operating income for the third quarter of 2012 was $68.3 million, up $4.5 million or 7.1%, including negative currency effects of approximately $5 million. The increase was primarily attributable to higher gross profit, partially offset by an increase in SG&A.  Operating margin remained constant at 17.3%.

Conference Call
The conference call will take place on Tuesday, October 30 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 September 30,
  2012   2011
       
Sales  $      1,165,923    $     1,121,813
Cost of sales            (776,319)             (745,227)
Gross profit             389,604              376,586
Selling, general and administrative expense            (227,797)             (225,996)
Net earnings from affiliates                3,899                 4,367
Operating income             165,706              154,957
Interest expense              (12,144)                (8,544)
Interest income                   208                    216
Other expense, net               (9,167)                (6,621)
Earnings before income taxes             144,603              140,008
Provision for income taxes              (37,769)              (32,052)
Net earnings, including noncontrolling interests             106,834              107,956
Less: Net earnings attributable to noncontrolling interests                  (538)                   (185)
Net earnings attributable to Flowserve Corporation  $         106,296    $        107,771
       
Net earnings per share attributable to Flowserve Corporation common shareholders:      
Basic  $              2.09    $             1.94
Diluted                  2.07                   1.92
       
Cash dividends declared per share  $              0.36    $             0.32
       
       
       
CONDENSED CONSOLIDATED STATEMENTS OF INCOME      
(Unaudited)      
       
(Amounts in thousands, except per share data) Nine Months Ended September 30,
  2012   2011
       
Sales  $      3,423,128    $     3,244,772
Cost of sales         (2,289,739)          (2,151,153)
Gross profit          1,133,389           1,093,619
Selling, general and administrative expense            (673,578)             (681,618)
Net earnings from affiliates               13,214               13,314
Operating income             473,025              425,315
Interest expense              (29,876)              (26,684)
Interest income                   727                 1,100
Other (expense) income, net              (22,151)                 7,852
Earnings before income taxes             421,725              407,583
Provision for income taxes            (112,864)             (103,908)
Net earnings, including noncontrolling interests             308,861              303,675
Less: Net earnings attributable to noncontrolling interests               (2,124)                   (191)
Net earnings attributable to Flowserve Corporation  $         306,737    $        303,484
       
Net earnings per share attributable to Flowserve Corporation common shareholders:      
Basic  $              5.77    $             5.45
Diluted                  5.73                   5.40
       
Cash dividends declared per share  $              1.08    $             0.96
       
       
CONDENSED CONSOLIDATED BALANCE SHEETS       
(Unaudited)      
       
(Amounts in thousands, except per share data) September 30,   December 31,
  2012 2011
       
ASSETS      
Current assets:      
Cash and cash equivalents  $         217,420    $        337,356
Accounts receivable, net of allowance for doubtful accounts of $21,546
  and $20,351, respectively
         1,105,641           1,060,249
Inventories, net          1,155,725           1,008,379
Deferred taxes             128,611              121,905
Prepaid expenses and other             113,673              100,465
Total current assets          2,721,070           2,628,354
Property, plant and equipment, net of accumulated depreciation of $767,392
  and $719,992, respectively
            605,360              598,746
Goodwill          1,047,729           1,045,077
Deferred taxes               19,659               17,843
Other intangible assets, net             151,891              163,482
Other assets, net             198,039              169,112
Total assets  $      4,743,748    $     4,622,614
       
LIABILITIES AND EQUITY      
Current liabilities:      
Accounts payable  $         516,500    $        597,342
Accrued liabilities             836,330              808,601
Debt due within one year               48,861               53,623
Deferred taxes                8,748               10,755
Total current liabilities          1,410,439           1,470,321
Long-term debt due after one year             879,135              451,593
Retirement obligations and other liabilities             426,949              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             548,748              621,083
Retained earnings          2,455,401           2,205,524
           3,077,813           2,900,271
Treasury shares, at cost – 8,901 and 5,025 shares, respectively            (866,289)             (424,052)
Deferred compensation obligation               10,711                 9,691
Accumulated other comprehensive loss            (205,427)             (216,097)
Total Flowserve Corporation shareholders' equity          2,016,808           2,269,813
Noncontrolling interest               10,417                 8,417
Total equity          2,027,225           2,278,230
Total liabilities and equity  $      4,743,748    $     4,622,614
       
       
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS      
(Unaudited)      
       
(Amounts in thousands) Nine Months Ended September 30,
  2012   2011
       
Cash flows – Operating activities:      
Net earnings, including noncontrolling interests  $         308,861    $        303,675
Adjustments to reconcile net earnings to net cash provided (used) by operating
  activities:
         
Depreciation               66,027               67,166
Amortization of intangible and other assets               14,751               12,385
Loss on early extinguishment of debt                1,293                      -  
Net gain on disposition of assets              (10,461)                   (484)
Excess tax benefits from stock-based compensation arrangements              (11,056)                (5,201)
Stock-based compensation               25,942               23,655
Net earnings from affiliates, net of dividends received               (5,798)                    472
Change in assets and liabilities:          
Accounts receivable, net              (45,566)             (201,636)
Inventories, net            (149,254)             (206,079)
Prepaid expenses and other               (8,968)              (21,606)
Other assets, net              (11,609)                (2,019)
Accounts payable              (75,169)             (101,671)
Accrued liabilities and income taxes payable               26,057              (43,648)
Retirement obligations and other liabilities               (6,737)               13,635
Net deferred taxes                4,251               11,271
Net cash flows provided (used) by operating activities             122,564             (150,085)
       
Cash flows – Investing activities:      
Capital expenditures              (84,180)              (71,164)
Proceeds from disposal of assets               11,473                 3,530
Payments for acquisition, net of cash acquired               (3,996)                   (890)
Affiliate investing activity               (3,825)                      -  
Net cash flows used by investing activities              (80,528)              (68,524)
       
Cash flows – Financing activities:      
Excess tax benefits from stock-based compensation arrangements               11,056                 5,201
Payments on long-term debt            (475,000)              (18,750)
Proceeds from issuance of senior notes             498,075                      -  
Proceeds from issuance of long-term debt             400,000                      -  
Proceeds from short-term financing             475,000                      -  
Payments on short-term financing            (475,000)                      -  
Borrowings (payments) under other financing arrangements, net                   294                (1,747)
Repurchases of common shares            (533,864)              (41,088)
Payments of dividends              (55,569)              (51,794)
Payments of deferred loan costs               (9,657)                      -  
Other                  (248)                (1,858)
Net cash flows used by financing activities            (164,913)             (110,036)
Effect of exchange rate changes on cash                2,941                (1,049)
Net change in cash and cash equivalents            (119,936)             (329,694)
Cash and cash equivalents at beginning of year             337,356              557,579
Cash and cash equivalents at end of period  $         217,420    $        227,885
       
       
SEGMENT INFORMATION      
       
ENGINEERED PRODUCT DIVISION Three Months Ended September 30,
(Amounts in millions, except percentages) 2012   2011
Bookings  $             553.7    $           567.6
Sales                567.5                 574.3
Gross profit                192.3                 193.1
Gross profit margin 33.9%   33.6%
Operating income                  87.0                   91.9
Operating margin 15.3%   16.0%
       
INDUSTRIAL PRODUCT DIVISION Three Months Ended September 30,
(Amounts in millions, except percentages) 2012   2011
Bookings  $             283.5    $           223.2
Sales                243.6                 215.6
Gross profit                  59.1                   50.9
Gross profit margin 24.3%   23.6%
Operating income                    26.6                   16.5
Operating margin 10.9%   7.7%
       
FLOW CONTROL DIVISION Three Months Ended September 30,
(Amounts in millions, except percentages) 2012   2011
Bookings  $             381.4    $           409.9
Sales                394.7                 368.3
Gross profit                139.6                 131.3
Gross profit margin 35.4%   35.7%
Operating income                  68.3                   63.8
Operating margin 17.3%   17.3%
       
       
SEGMENT INFORMATION      
       
ENGINEERED PRODUCT DIVISION Nine Months Ended September 30,
(Amounts in millions, except percentages) 2012   2011
Bookings  $          1,818.2    $         1,753.7
Sales              1,689.0              1,655.3
Gross profit                571.4                 573.3
Gross profit margin 33.8%   34.6%
Operating income                274.2                 270.4
Operating margin 16.2%   16.3%
       
INDUSTRIAL PRODUCT DIVISION Nine Months Ended September 30,
(Amounts in millions, except percentages) 2012   2011
Bookings  $             758.1    $           674.5
Sales                688.4                 616.5
Gross profit                164.6                 140.4
Gross profit margin 23.9%   22.8%
Operating income                    67.8                   39.2
Operating margin 9.8%   6.4%
       
FLOW CONTROL DIVISION Nine Months Ended September 30,
(Amounts in millions, except percentages) 2012   2011
Bookings  $          1,173.0    $         1,227.1
Sales              1,160.1              1,093.0
Gross profit                399.1                 378.8
Gross profit margin 34.4%   34.7%
Operating income                184.4                 171.2
Operating margin 15.9%   15.7%
       
       

 

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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