Flowserve Corporation (NYSE: FLS), a leading provider of flow control products and services for the global infrastructure markets, today reported its financial results for the second quarter ended June 30, 2016.

Second Quarter 2016 Highlights [1] :
  • Reported Earnings Per Share of $0.48 includes $0.09 per share of adjusted items, as detailed herein, and approximately $0.01 per share of negative currency translation
    • Adjusted Earnings Per Share (EPS) [2] was $0.57, excluding the adjusted items but including the negative currency translation
  • Sales were $1.03 billion, down 11.7% or 9.7% on a constant currency basis, and up 6.7% sequentially on a constant currency basis
    • Original equipment sales were $574 million, down 13.5% on a constant currency basis
    • Aftermarket sales were $456 million, down 4.8% on a constant currency basis
  • Total Bookings were $975 million, down 10.1% on a constant currency basis, and up 4.0% sequentially on a constant currency basis
    • Aftermarket bookings were $480 million, up 2.3%, and 5.6% sequentially, on a constant currency basis
  • Adjusted gross margin decreased 130 basis points to 32.7%
  • Achieved approximately $27 million of realignment savings in the quarter, with progress to date on track to deliver expected incremental savings of approximately $100 million in 2016
  • Backlog at June 30, 2016 was $2.10 billion, down 3.2% versus year-end 2015

"We delivered solid results in the 2016 second quarter which were generally in-line with our expectations for the period," said Mark Blinn, Flowserve's president and chief executive officer. "Our aftermarket business remained resilient during the quarter, evidenced by modest constant currency bookings growth. For the larger project original equipment opportunities, however, we expect that our customers will remain cautious, and that capital investment decisions will remain deliberate and the process iterative until our customers' confidence improves. In spite of headwinds, we realized traction from our commercial strategies within in all areas, notably the IPD segment, driving constant currency bookings growth of 3.4%.

"We continue to make significant progress on our transformational realignment program. Since the commencement of our program, we have initiated actions on two-thirds of the manufacturing facilities expected to be closed, repurposed or sold and we remain on pace to deliver expected incremental savings of approximately $100 million for this year. We also continue to execute on our targeted growth strategies, which together with our efforts to optimize the manufacturing platform and reduce our cost structure, will better position Flowserve for profitable growth and increased shareholder value creation."

"Although our served markets currently remain challenged and volatile, Flowserve is committed to remaining disciplined in its project pursuit and taking the actions necessary to better position the Company for the future," Blinn concluded.

Second Quarter 2016

For the second quarter of 2016, Flowserve delivered Adjusted EPS of $0.57 on revenues of $1.03 billion. Adjusted operating margins were 11.7%, down 300 basis points year-over-year and up 230 basis points sequentially. Second quarter Adjusted EPS excludes the impact of realignment expenses of $0.11, $0.01 of SIHI purchase price accounting and integration costs and $0.03 of below-the-line foreign currency income, but includes $0.01 of negative currency translation. On a reported basis, earnings for the second quarter were $0.48 per share, compared to $0.56 per share in the 2015 second quarter.

Commenting on second quarter 2016 performance, Karyn Ovelmen, Flowserve's executive vice president and chief financial officer, said, "Flowserve continues to actively focus on our disciplined cost management and realignment actions to reduce the impact of volume declines and price competitiveness in this end-market environment. Our adjusted gross margin performance of nearly 33% reflects continued bidding discipline, a mix shift towards aftermarket and early realignment savings which partially mitigate current market headwinds. Importantly, the long-term outlook for our served end-markets remains promising, as we continue delivering on our realignment initiatives and growth strategies to better serve our customers and deliver value for our shareholders."

Realignment Program

In the 2016 second quarter, Flowserve realized cost savings of approximately $27 million through its realignment program, and continues to expect full year 2016 incremental savings of approximately $100 million. The Company expensed $20 million during the quarter related to realignment efforts, and for the full year 2016 continues to expect to incur realignment charges of approximately $160 million. This program is expected to repurpose, close or sell a number of manufacturing facilities and reduce total headcount approximately 15-20% by the end of next year.

Segment Performance

Flowserve reports its operations through three segments: Engineered Product Division (EPD), Industrial Product Division (IPD) and Flow Control Division (FCD). Key financial highlights of segment performance for the second quarter and year-to-date include:
           
 
Second Quarter and Year-to-Date 2016 - Segment Results
(dollars in millions, comparison vs. 2015 second quarter and full year, unaudited)
 
EPD IPD FCD
2nd Qtr YTD 2nd Qtr YTD 2nd Qtr YTD
Bookings $ 465.5 $ 889.9 $ 212.3 $ 420.0 $ 312.9 $ 622.6
- vs. prior year -19.1 % -16.9 % 3.4 % -7.2 % -12.0 % -8.2 %
- on constant currency -15.0 % -12.5 % 3.4 % -5.9 % -11.0 % -6.1 %
 
Sales $ 511.8 $ 985.6 $ 215.0 $ 412.5 $ 317.2 $ 616.2
- vs. prior year -10.3 % -6.6 % -17.6 % -14.8 % -11.0 % -9.8 %
- on constant currency -6.9 % -1.6 % -16.8 % -13.2 % -10.6 % -8.5 %
 
Gross Profit $ 164.9 $ 323.0 $ 50.6 $ 100.8 $ 108.3 $ 207.3
- vs. prior year -13.2 % -9.1 % -13.9 % -0.9 % -12.4 % -14.6 %
 
Gross Margin (% of sales) 32.2 % 32.8 % 23.5 % 24.4 % 34.1 % 33.6 %
- vs. prior year (in basis points) -110 -90 100 340 -60 -190
 
Operating Income $ 65.3 $ 123.6 $ 5.5 $ 9.5 $ 48.5 $ 87.3
- vs. prior year -24.2 % -20.3 % -22.5 % NM -11.0 % -20.1 %
- on constant currency -21.8 % -16.4 % -22.5 % NM -10.3 % -18.8 %
 
Operating Margin (% of sales) 12.8 % 12.5 % 2.6 % 2.3 % 15.3 % 14.2 %
- vs. prior year (in basis points) -230 -220 -10 360 - -180
 
Adjusted Operating Income * $ 77.3 $ 139.4 $ 12.3 $ 21.5 $ 50.8 $ 95.2
- vs. prior year -19.6 % -15.9 % -55.3 % -56.2 % -24.0 % -21.6 %
- on constant currency -17.5 % -12.3 % -55.3 % -54.2 % -23.4 %

-20.5

%
 
Adj. Oper. Margin (% of sales)* 15.1 % 14.1 % 5.7 % 5.2 % 16.0 % 15.4 %
- vs. prior year (in basis points) -180 -160 -480 -490 -270 -240
 
Backlog $ 1,074.8 $ 433.9 $ 627.7
 
*   Adjusted Operating Income and Adjusted Operating Margin exclude realignment charges, purchase price accounting charges and acquisition related costs
 

Full Year 2016 Guidance

Flowserve tightened its 2016 Adjusted [3] EPS target range of $2.40 to $2.60 per share, while reaffirming expected revenues declining 7 to 14 percent year-over-year, including a forecasted 2 percent currency headwind. The Company expects its full year 2016 Adjusted EPS to be weighted toward the second half of the year, reflecting greater than normal seasonality and the timing of realignment savings and backlog shipments.

Second Quarter 2016 Results Conference Call

Flowserve will host its conference call with the financial community on Friday, July 29th 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 by shareholders and other interested parties at www.flowserve.com under the "Investor Relations" section.
 

[1] Comparisons versus prior year quarter, unless otherwise noted

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

[3] Adjusted 2016 EPS will include SIHI's operational results and will exclude the Company's realignment expenses, SIHI purchase price accounting/integration costs, the potential impact from certain other discrete items and below-the-line foreign currency effects
 

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 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; 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 manufacturing optimization and 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; 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; 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; 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 ability to anticipate and manage cybersecurity risk, including the risk of potential business disruptions or financial losses; 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; 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.

CONDENSED CONSOLIDATED BALANCE SHEETS    
(Unaudited)
June 30, December 31,
(Amounts in thousands, except par value)   2016     2015  
 
ASSETS
Current assets:
Cash and cash equivalents $ 266,013 $ 366,444
Accounts receivable, net of allowance for doubtful accounts of $46,768 and $43,936, respectively 945,966 988,391
Inventories, net 1,057,967 995,565
Prepaid expenses and other   153,416     125,410  

Total current assets
2,423,362 2,475,810
Property, plant and equipment, net of accumulated depreciation of $881,655 and $855,214, respectively 755,105 758,427
Goodwill 1,227,218 1,223,986
Deferred taxes 71,439 69,327
Other intangible assets, net 222,412 228,777
Other assets, net   232,136     224,330  
Total assets $ 4,931,672   $ 4,980,657  
 
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable $ 417,218 $ 491,378
Accrued liabilities 750,728 796,764
Debt due within one year   70,656     60,434  
Total current liabilities 1,238,602 1,348,576
Long-term debt due after one year 1,543,557 1,560,562
Retirement obligations and other liabilities 387,226 387,786
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 487,775 494,961
Retained earnings 3,637,837 3,587,120
Treasury shares, at cost - 47,065 and 47,703 shares, respectively (2,082,308 ) (2,106,785 )
Deferred compensation obligation 8,231 10,233
Accumulated other comprehensive loss   (528,550 )   (540,043 )
Total Flowserve Corporation shareholders' equity 1,743,976 1,666,477
Noncontrolling interests   18,311     17,256  
Total equity   1,762,287     1,683,733  
Total liabilities and equity $ 4,931,672   $ 4,980,657  
 
   
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended June 30,
(Amounts in thousands, except per share data)   2016     2015  
 
Sales $ 1,026,232 $ 1,162,247
Cost of sales   (701,508 )   (793,155 )
Gross profit 324,724 369,092
Selling, general and administrative expense (228,529 ) (243,594 )
Net earnings from affiliates   1,809     2,079  
Operating income 98,004 127,577
Interest expense (15,274 ) (15,392 )
Interest income 645 249
Other income (expense), net   4,735     (4,882 )
Earnings before income taxes 88,110 107,552
Provision for income taxes   (25,122 )   (30,920 )
Net earnings, including noncontrolling interests 62,988 76,632
Less: Net loss (earnings) attributable to noncontrolling interests   9     (1,624 )
Net earnings attributable to Flowserve Corporation $ 62,997   $ 75,008  
 
Net earnings per share attributable to Flowserve Corporation common shareholders:
Basic $ 0.48 $ 0.56
Diluted 0.48 0.56
 
Cash dividends declared per share $ 0.19 $ 0.18
   
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Six Months Ended June 30,
(Amounts in thousands, except per share data)   2016     2015  
 
Sales $ 1,973,480 $ 2,176,867
Cost of sales   (1,340,755 )   (1,476,045 )
Gross profit 632,725 700,822
Selling, general and administrative expense (465,439 ) (483,521 )
Net earnings from affiliates   5,128     3,652  
Operating income 172,414 220,953
Interest expense (29,842 ) (31,429 )
Interest income 1,318 1,006
Other income (expense), net   193     (24,828 )
Earnings before income taxes 144,083 165,702
Provision for income taxes   (42,812 )   (59,426 )
Net earnings, including noncontrolling interests 101,271 106,276
Less: Net earnings attributable to noncontrolling interests   (415 )   (3,602 )
Net earnings attributable to Flowserve Corporation $ 100,856   $ 102,674  
 
Net earnings per share attributable to Flowserve Corporation common shareholders:
Basic $ 0.77 $ 0.76
Diluted 0.77 0.76
 
 
Cash dividends declared per share $ 0.38 $ 0.36
           
RECONCILIATION OF NON-GAAP MEASURES
(Unaudited)
 
Three Months Ended June 30, 2016
(Amounts in thousands, except per share data) As Reported (a) Realignment (1) Other Items As Adjusted
 
Sales $ 1,026,232 $ - $ - $ 1,026,232
Gross profit (loss) 324,724 (11,196 ) - 335,920
Gross margin (loss) 31.6 % - - 32.7 %
 
Selling, general and administrative expense (228,529 ) (8,942 ) (2,093 ) (3) (217,494 )
 
Operating income (loss) 98,004 (20,138 ) (2,093 ) 120,235
Operating income (loss) as a percentage of sales 9.5 % - - 11.7 %
 
Interest and other (expense) income, net (9,894 ) - 5,709 (4) (15,603 )
 
Earnings (loss) before income taxes 88,110 (20,138 ) 3,616 104,632
Provision for income taxes (25,122 ) 6,142 (2) (1,103 ) (5) (30,161 )
Tax Rate 28.5 % 30.5 % 30.5 % 28.8 %
 
Net earnings (loss) attributable to Flowserve Corporation $ 62,997 $ (13,996 ) $ 2,513 $ 74,480
 
Net earnings per share attributable to Flowserve Corporation common shareholders:
Basic $ 0.48 $ (0.11 ) $ 0.02 $ 0.57
Diluted $ 0.48 $ (0.11 ) $ 0.02 $ 0.57
 
Basic number of shares used for calculation 130,454 130,454 130,454 130,454
Diluted number of shares used for calculation 130,910 130,910 130,910 130,910
 
(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 SIHI integration costs and purchase price adjustments ("PPA")
(4) Represents below-the-line foreign exchange impacts
(5) Includes tax impact of items above
   
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
(Amounts in thousands)   2016     2015  
 
Cash flows - Operating activities:
Net earnings, including noncontrolling interests $ 101,271 $ 106,276
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation 50,071 49,270
Amortization of intangible and other assets 8,341 17,833
Loss on divestiture of business 7,664 -
Excess tax benefits from stock-based payment arrangements (1,843 ) (5,858 )
Stock-based compensation 23,965 17,396
Foreign currency and other non-cash adjustments 5,622 49,794
Change in assets and liabilities, net of acquisitions:
Accounts receivable, net 41,348 45,376
Inventories, net (51,864 ) (113,005 )
Prepaid expenses and other (27,057 ) (21,015 )
Other assets, net (7,308 ) (22,435 )
Accounts payable (76,421 ) (124,001 )
Accrued liabilities and income taxes payable (77,210 ) (5,473 )
Retirement obligations and other 3,324 7,003
Net deferred taxes   3,377     16,903  
Net cash flows provided by operating activities   3,280     18,064  
Cash flows - Investing activities:
Capital expenditures (36,912 ) (113,794 )
Payments for acquisition, net of cash acquired - (341,545 )
Proceeds from disposal of assets 1,427 1,872
Payment for divestiture of business   (5,064 )   -  
Net cash flows used by investing activities   (40,549 )   (453,467 )
Cash flows - Financing activities:
Excess tax benefits from stock-based payment arrangements 1,843 5,858
Payments on long-term debt (30,000 ) (20,000 )
Proceeds from issuance of senior notes - 526,332
Payments of deferred loan costs - (5,108 )
Proceeds under other financing arrangements 19,494 2,902
Payments under other financing arrangements (11,441 ) (7,631 )
Repurchases of common shares - (139,644 )
Payments of dividends (48,181 ) (45,928 )
Other   (142 )   160  
Net cash flows (used) provided by financing activities (68,427 ) 316,941
Effect of exchange rate changes on cash   5,265     (16,584 )
Net change in cash and cash equivalents (100,431 ) (135,046 )
Cash and cash equivalents at beginning of period   366,444     450,350  
Cash and cash equivalents at end of period $ 266,013   $ 315,304  
   
SEGMENT INFORMATION
 
ENGINEERED PRODUCT DIVISION Three Months Ended June 30,
(Amounts in millions, except percentages)   2016     2015  
Bookings $ 465.5 $ 575.3
Sales 511.8 570.8
Gross profit 164.9 189.9
Gross profit margin 32.2 % 33.3 %
Operating income 65.3 86.2
Operating margin 12.8 % 15.1 %
 
INDUSTRIAL PRODUCT DIVISION Three Months Ended June 30,
(Amounts in millions, except percentages)   2016     2015  
Bookings $ 212.3 $ 205.3
Sales 215.0 260.8
Gross profit 50.6 58.8
Gross profit margin 23.5 % 22.5 %
Operating income 5.5 7.1
Operating margin 2.6 % 2.7 %
 
FLOW CONTROL DIVISION Three Months Ended June 30,
(Amounts in millions, except percentages)   2016     2015  
Bookings $ 312.9 $ 355.5
Sales 317.2 356.4
Gross profit 108.3 123.7
Gross profit margin 34.1 % 34.7 %
Operating income 48.5 54.5
Operating margin 15.3 % 15.3 %
   
SEGMENT INFORMATION
 
ENGINEERED PRODUCT DIVISION Six Months Ended June 30,
(Amounts in millions, except percentages)   2016     2015  
Bookings $ 889.9 $ 1,070.6
Sales 985.6 1,054.9
Gross profit 323.0 355.5
Gross profit margin 32.8 % 33.7 %
Operating income 123.6 155.1
Operating margin 12.5 % 14.7 %
 
INDUSTRIAL PRODUCT DIVISION Six Months Ended June 30,
(Amounts in millions, except percentages)   2016     2015  
Bookings $ 420.0 $ 452.8
Sales 412.5 484.2
Gross profit 100.8 101.7
Gross profit margin 24.4 % 21.0 %
Operating income (loss) 9.5 (6.3 )
Operating margin 2.3 % (1.3 %)
 
FLOW CONTROL DIVISION Six Months Ended June 30,
(Amounts in millions, except percentages)   2016     2015  
Bookings $ 622.6 $ 678.0
Sales 616.2 683.5
Gross profit 207.3 242.7
Gross profit margin 33.6 % 35.5 %
Operating income 87.3 109.2
Operating margin 14.2 % 16.0 %

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