Flowserve Corporation 2015 Form 10-K Summary
Business context and reporting period
Flowserve manufactures and services pumps, valves, mechanical seals, automation equipment and related flow-control systems for oil and gas, chemical, power-generation, water-management and general industrial customers. Operations are managed through Engineered Product Division (EPD), Industrial Product Division (IPD) and Flow Control Division (FCD). This Form 10-K covers the fiscal year ended December 31, 2015; fourth-quarter information is included where disclosed.
- Approximately 19,000 employees, operations in more than 50 countries and customers in more than 90 countries.
- Aftermarket sales represented approximately 43% of 2015 sales versus 42% in 2014.
- 2015 bookings mix: oil and gas 36%, general industries 24%, chemical 22%, power generation 14% and water management 4%.
Financial performance and key metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Sales | $4.561 billion | $4.878 billion | Down 6.5% |
| Gross profit | $1.487 billion | $1.715 billion | Down 13.3% |
| Gross margin | 32.6% | 35.2% | Down 260 bps |
| Operating income | $525.6 million | $789.8 million | Down 33.5% |
| Operating margin | 11.5% | 16.2% | Down 470 bps |
| Net earnings attributable to Flowserve | $267.7 million | $518.8 million | Down 48.4% |
| Diluted EPS | $2.00 | $3.76 | Down 46.8% |
| Cash flow from operations | $417.1 million | $571.0 million | Down 27.0% |
- Fourth-quarter 2015 sales were $1.288 billion and net earnings attributable to Flowserve were $71.4 million, or $0.54 diluted EPS, compared with $1.381 billion, $159.0 million and $1.16, respectively, in fourth-quarter 2014.
- Bookings were $4.177 billion, down 19.1%; year-end backlog was $2.173 billion, down 19.6%. Approximately 26% of backlog was aftermarket-related.
- Segment operating income was $329.0 million for EPD, $30.2 million for IPD and $234.4 million for FCD. IPD results included SIHI acquisition and integration effects.
- Cash and cash equivalents were $366.4 million versus $450.4 million at year-end 2014. Working capital was $1.272 billion.
- Total debt was $1.631 billion, including $1.337 billion of fixed-rate senior notes and $285.0 million of variable-rate term debt. Net debt to net capital was 42.9%, versus 26.6% in 2014.
- The $1.0 billion revolving facility had $894.8 million of borrowing capacity, including the effect of outstanding letters of credit. The company reported compliance with all debt covenants.
- Capital expenditures were $181.9 million. The company paid $93.7 million of dividends and repurchased $303.7 million of common stock.
Material changes versus the prior comparable period
- Performance deteriorated because of lower customer capital spending, particularly in oil and gas, pricing pressure, unfavorable foreign exchange and delayed aftermarket maintenance spending.
- Sales declined despite $294.2 million of SIHI sales acquired in January 2015. Excluding SIHI, IPD sales declined 14.7% year over year.
- Gross margin was reduced by $66.9 million of realignment charges, $18.1 million of SIHI purchase-accounting effects, lower manufacturing absorption and lower-margin projects.
- SG&A increased 3.7% to $971.6 million, including $41.2 million of realignment charges, $11.6 million of SIHI acquisition costs and higher bad-debt expense.
- Other expense was $40.2 million versus other income of $2.0 million in 2014, mainly because of foreign-currency losses, including an $18.5 million Venezuelan remeasurement loss.
- The effective tax rate increased to 35.3% from 28.4%, reflecting realignment-related tax effects, the nondeductible Venezuelan loss and a $12.6 million Brazilian deferred-tax valuation allowance.
- Flowserve acquired SIHI for $341.5 million in cash. SIHI generated a $39.5 million net loss for the post-acquisition period, including acquisition, purchase-accounting and realignment costs.
Guidance, outlook, risks and unusual items
- Management expected the difficult market environment to persist into 2016, with continued uncertainty in customer capital spending and global economic conditions. Results were expected to be weighted toward the second half of 2016.
- Realignment programs were expected to require approximately $400 million of total investment, including projects under evaluation, and produce approximately $230 million of annualized run-rate savings. Management estimated an approximately 18% global workforce reduction; most remaining charges were expected in 2016.
- 2016 capital expenditures were estimated at $105 million to $115 million, before acquisitions. Scheduled term-loan principal repayments were $60.0 million, and expected pension contributions were approximately $32 million in total.
- Management expected 2016 interest expense to be relatively consistent with 2015 and believed operating cash flow, existing cash and revolver availability would meet near-term requirements.
- Key risks include oil and gas and industrial cyclicality, backlog cancellations or delivery penalties, pricing and raw-material pressure, foreign-exchange volatility, international political and regulatory risks, customer receivable concentration in Venezuela, debt covenants, pension obligations, asbestos and product-liability litigation, environmental matters, cybersecurity and potential goodwill impairment.
- No goodwill impairment was recorded, but the EPO reporting unit’s estimated fair-value cushion was approximately 70%; a 100-basis-point increase in its cost of capital would reduce estimated fair value by approximately 40% and could increase future impairment risk if the oil and gas downturn persists.
- At December 31, 2015, approximately 64% of the Venezuelan customer receivable was classified as long-term; the customer represented approximately 7% of gross accounts receivable.
- The company disclosed an ongoing DOJ and SEC matter involving a potential Foreign Corrupt Practices Act violation and continued cooperation with regulators. Management did not expect a material financial impact but could not assure that penalties or additional costs would not occur.
- Management represented that disclosure controls and internal control over financial reporting were effective. SIHI, representing approximately 10% of consolidated assets and 6% of sales, was excluded from the internal-control assessment because it was acquired during 2015.
Most important facts for investors to verify
- Whether the realignment programs achieve the projected $230 million annualized savings and whether total investment remains near $400 million.
- Whether oil and gas, chemical and other customers resume capital and maintenance spending, and how that affects bookings, backlog conversion and pricing.
- SIHI’s underlying profitability after purchase-accounting, acquisition and restructuring effects have lapsed.
- Cash conversion, working-capital trends and collectibility of the Venezuelan receivable.
- Debt leverage, covenant headroom, scheduled repayments and the continued availability of the revolving credit facility.
- Potential goodwill impairment in the EPO reporting unit if oil and gas markets or operating forecasts weaken further.
- Exposure and eventual resolution of asbestos, environmental, product-liability, FCPA and tax contingencies.
- Whether dividends and share repurchases remain consistent with cash generation, leverage requirements and credit-facility restrictions.