Flowserve Corporation: FY2011 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2011. The filing also provides unaudited fourth-quarter data. Flowserve manufactures and services pumps, valves, mechanical seals, automation products and related flow-control systems for oil and gas, chemical, power generation, water management and general industrial customers. Operations are organized into EPD, IPD and FCD segments, with approximately 16,000 employees operating in more than 50 countries.
Key Financial Metrics
| Metric | FY2011 | FY2010 | Change |
|---|---|---|---|
| Sales | $4.510 billion | $4.032 billion | +11.9% |
| Gross profit | $1.514 billion | $1.410 billion | +7.4% |
| Gross margin | 33.6% | 35.0% | Down 140 bps |
| Operating income | $618.7 million | $581.4 million | +6.4% |
| Operating margin | 13.7% | 14.4% | Down 70 bps |
| Net earnings attributable to Flowserve | $428.6 million | $388.3 million | +10.4% |
| Diluted EPS | $7.64 | $6.88 | +11.0% |
| Operating cash flow | $218.2 million | $355.8 million | Down $137.6 million |
| Capital expenditures | $108.0 million | $102.0 million | +5.8% |
| Cash and equivalents | $337.4 million | $557.6 million | Down $220.2 million |
| Total debt | $505.2 million | $527.7 million | Down $22.5 million |
Working capital was $1.158 billion, compared with $1.067 billion in 2010. Accounts receivable increased to $1.060 billion and inventories to $1.008 billion, consuming substantial operating cash. Fourth-quarter 2011 sales were $1.265 billion, gross profit was $420.0 million, net earnings attributable to Flowserve were $125.1 million and diluted EPS was $2.25.
Bookings, Backlog and Segment Performance
- Bookings increased 10.2% to $4.662 billion, including approximately $149 million of favorable currency impact.
- Year-end backlog increased 3.7% to $2.690 billion; approximately 24% was aftermarket-related.
- EPD: Sales of $2.321 billion, operating income of $395.2 million and operating margin of 17.0%. Backlog was $1.442 billion. Operating income declined 4.2% despite higher sales, primarily because of lower project margins, execution issues, higher SG&A and a $3.9 million Spanish regulatory penalty.
- IPD: Sales of $878.2 million, operating income of $62.9 million and operating margin of 7.2%. Gross margin declined to 22.5% from 25.6%, reflecting unfavorable project pricing, material costs, operational-efficiency issues and the IPD recovery plan.
- FCD: Sales of $1.473 billion, operating income of $233.3 million and operating margin of 15.8%. Backlog increased 15.4% to $759.9 million, supported by oil and gas, chemical and general-industrial demand and the Valbart acquisition.
Material Changes Versus FY2010
- Revenue and earnings improved as original-equipment demand recovered and aftermarket sales increased to approximately 41% of sales from 39%.
- Profitability weakened at the gross-margin level because of low-margin large projects, material-cost inflation, currency effects, late shipments and IPD recovery-plan charges.
- SG&A increased 8.2% to $914.1 million, although SG&A as a percentage of sales improved to 20.3% from 21.0%.
- Operating cash flow declined sharply because accounts receivable and inventory increases used $243.1 million and $139.8 million of cash, respectively. Fourth-quarter DSO rose to 75 days from 66 days.
- Flowserve acquired Lawrence Pumps for $89.6 million in October 2011, adding engineered centrifugal slurry-pump capabilities to EPD.
- Realignment-program charges declined to $4.8 million from $18.3 million. Management estimated approximately $120 million of annual run-rate savings for 2012 and beyond.
- Flowserve repurchased $150.0 million of common stock in 2011 and ended the year with $300.0 million of remaining repurchase authorization. Dividends declared increased to $1.28 per share from $1.16.
Debt, Liquidity and Capital Allocation
Total debt consisted primarily of a $475.0 million term loan and $30.2 million of other debt and capital-lease obligations. Approximately $25.0 million of term debt was scheduled for repayment in 2012, with the principal maturity concentrated in 2015. The company had no revolver borrowings, $352.6 million of borrowing capacity after outstanding letters of credit, and net available capacity of €35.7 million under its European letter-of-credit facility.
Approximately 70% of debt was fixed-rate after interest-rate swaps. Flowserve complied with its maximum 3.25-times leverage and minimum 3.25-times interest-coverage covenants through December 31, 2011. Management stated that cash, operating cash flow and available credit were sufficient for expected needs over the next 12 months, while noting sensitivity to working capital, economic conditions, currency movements and customer payment timing.
Outlook, Risks and Unusual Items
- Management expected 2012 revenue to benefit from the higher backlog and increased shipments, excluding currency effects, but did not provide specific revenue or earnings guidance.
- Management expected 2012 performance to be weighted toward the second half because of efforts to reduce past-due backlog, shipments of large low-margin projects and lower aftermarket shipments early in the year.
- Expected 2012 investing cash flow was $120 million to $130 million before acquisitions; scheduled debt repayments were $25 million.
- Expected 2012 pension contributions were $20 million to $25 million for the U.S. plan and approximately $10 million for non-U.S. plans.
- Key risks include cyclical customer capital spending, order cancellations or delays, backlog execution and delivery penalties, raw-material inflation, international political and economic conditions, foreign-exchange volatility, competition and restrictive debt covenants.
- North African unrest caused shipment delays and an estimated $11.2 million of lost or delayed 2011 operating-income opportunities. The company reported no significant direct financial disruption from the Japan earthquake and tsunami or the European sovereign-debt crisis during 2011.
- Export-control settlements totaled $3.0 million, consisting of $2.5 million payable to BIS and $0.5 million to OFAC; the company stated that the matter was fully resolved.
- Flowserve remains exposed to asbestos litigation, environmental matters, product-liability and warranty claims, tax audits and uncertain tax positions. Management believes existing reserves are adequate, but outcomes are inherently uncertain.
Important Facts for Investors to Verify
- Whether receivable collections, DSO and inventory levels improved sufficiently to restore operating cash flow.
- Whether EPD and IPD can complete low-margin and past-due projects without further charges or delivery penalties.
- Realization of the estimated $120 million annual run-rate savings and completion of the IPD recovery plan.
- Backlog conversion, cancellation trends and the expected timing of shipments during 2012.
- Compliance with debt covenants and the availability of revolving and letter-of-credit capacity.
- Actual pension contributions, tax-audit resolutions and potential changes in asbestos, environmental or other litigation exposures.
- Impact of foreign-exchange movements, raw-material costs and international political conditions on margins and cash flow.