Flowserve Corporation: Q1 2013 Form 10-Q Summary
Business context and reporting period
Flowserve designs, manufactures and services flow-control equipment, including pumps, valves, seals, automation products and related aftermarket services. Its customers primarily operate in oil and gas, chemical, power generation, water management and general industrial markets. The company operates through Engineered Product Division (EPD), Industrial Product Division (IPD) and Flow Control Division (FCD), with approximately 17,000 employees, more than 50 countries of operation and 177 Quick Response Centers.
This unaudited quarterly report covers the three months ended March 31, 2013, compared with the three months ended March 31, 2012. The company filed the report on April 24, 2013.
Financial performance and key metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Sales | $1,096.6 million | $1,075.0 million | +2.0% |
| Gross profit | $373.3 million | $359.2 million | +3.9% |
| Gross margin | 34.0% | 33.4% | +60 bps |
| Operating income | $170.5 million | $142.5 million | +19.6% |
| Operating margin | 15.5% | 13.3% | +220 bps |
| Net earnings attributable to Flowserve | $97.8 million | $93.1 million | +5.0% |
| Diluted EPS | $2.01 | $1.69 | +18.9% |
| Cash dividends per share | $0.42 | $0.36 | +16.7% |
Bookings were $1,190.0 million, down 4.4% from $1,245.0 million. Backlog was $2,703.6 million at March 31, 2013, up 2.1% from year-end 2012; approximately 24% was aftermarket orders. Aftermarket sales represented approximately 42% of total sales versus 41% in the prior-year quarter.
Net cash used in operating activities was $108.1 million, broadly comparable with $107.9 million in Q1 2012. Capital expenditures were $34.3 million, compared with $28.7 million. Cash and cash equivalents declined to $169.4 million from $304.3 million at December 31, 2012, primarily reflecting $155.6 million of share repurchases, $17.5 million of dividends and working-capital needs, partly offset by $150.0 million of revolving-credit borrowings.
Total debt and capital lease obligations were $1,069.7 million at March 31, 2013, including $210.4 million due within one year and $859.3 million due thereafter. Borrowing capacity under the revolving credit facility, after considering outstanding letters of credit, was $557.4 million. The company complied with its debt covenants.
Material changes versus the prior comparable period
- FCD bookings increased 13.3%, while EPD and IPD bookings declined 12.8% and 10.6%, respectively. Consolidated bookings fell because of weaker oil and gas and original-equipment activity.
- FCD sales increased 5.5%, EPD sales increased 0.9% and IPD sales declined 0.9%. North America and Africa strengthened, while Europe remained challenged.
- Operating income benefited from improved gross profit and a $28.3 million pretax gain related to the exit from the Audco India joint venture. The gain comprised a $15.3 million gain on remeasurement of acquired assets and a $13.0 million gain on sale of the equity interest.
- The 2013 results were adversely affected by the absence of a $10.4 million gain on the sale of a Brazilian manufacturing facility recognized in 2012, higher interest expense from the 2012 senior notes issuance, and higher foreign-exchange losses.
- The effective tax rate increased to 33.0% from 27.5%, while diluted EPS benefited from substantial share repurchases and lower weighted-average shares outstanding.
- Other comprehensive income changed from $34.8 million of income to a $30.7 million loss, principally because of unfavorable foreign-currency translation, particularly the euro.
Guidance, outlook, risks and unusual items
The filing does not provide formal revenue or earnings guidance. Management reported continued global macroeconomic uncertainty, limited large original-equipment capital projects and difficult power and European markets. It noted growth in aftermarket activity, strengthening in North America and Latin America, gradual improvement in water markets, and increased front-end engineering activity for projects potentially releasing in the second half of 2013.
Management expected 2013 capital expenditures of approximately $120 million to $130 million, excluding acquisitions, and anticipated approximately $20 million of U.S. pension-plan contributions, excluding direct benefits paid. Management believed operating cash flow, existing cash and revolving-credit availability would be sufficient for the next 12 months.
- Venezuela devalued its currency in February 2013; Flowserve recognized a $4.0 million loss and continues to monitor remittance, import and economic risks.
- Flowserve repurchased 992,368 shares for $155.6 million during the quarter. The remaining authorization was $687.2 million at March 31, 2013. The quarterly dividend was increased to $0.42 per share.
- Foreign-exchange forward contracts had $695.1 million of notional exposure, and interest-rate swaps had $245.0 million of notional exposure. A hypothetical 10% currency movement would have affected quarterly net earnings by approximately $7.5 million, before considering the impact of hedges.
- Material contingencies include asbestos-related claims, environmental sites, product liability matters, and the United Nations Oil-for-Food-related investigation and litigation. Management did not expect these matters to have a material adverse impact, although outcomes remain uncertain.
- The company disclosed a historical Iranian shipment and related payments received during 2012 and 2013; it stated that it had withdrawn from the Iranian market and did not expect ongoing activity other than required inspections.
Facts investors should verify
- Whether the decline in bookings, particularly in EPD and IPD, persists and affects backlog conversion and future margins.
- How much of the $28.3 million AIL-related gain and other unusual items affected reported operating income and EPS.
- Whether operating cash flow improves as inventory and accounts payable normalize, given the $108.1 million quarterly operating cash outflow.
- The sustainability of the 34.0% gross margin and 15.5% operating margin excluding one-time gains and prior-year facility-sale effects.
- Debt maturities, revolving-credit utilization, covenant compliance and the effect of future share repurchases on liquidity and leverage.
- Foreign-currency exposure, Venezuela developments, and the potential effect of euro movements on earnings and accumulated other comprehensive loss.
- The status and potential financial exposure of asbestos, environmental, Oil-for-Food and other legal or regulatory matters.