Business Context and Reporting Period
Company: Flowserve Corporation
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three months ended March 31, 2009
Business Overview: Flowserve is a global leader in the design, manufacture, and service of industrial flow management equipment (pumps, valves, mechanical seals) for oil and gas, chemical, power generation, and water management industries. The company operates through three segments: Flowserve Pump Division (FPD), Flow Control Division (FCD), and Flow Solutions Division (FSD).
Key Financial Metrics
| Metric (in thousands, except per share) | Q1 2009 | Q1 2008 |
|---|---|---|
| Sales | $1,024,726 | $993,319 |
| Gross Profit | $367,773 | $345,846 |
| Gross Margin | 35.9% | 34.8% |
| Operating Income | $147,137 | $119,317 |
| Operating Margin | 14.4% | 12.0% |
| Net Earnings (Flowserve Corp) | $92,305 | $88,065 |
| Diluted EPS | $1.64 | $1.52 |
| Cash and Equivalents (End of Period) | $201,539 | $199,394 |
| Total Debt (Current + Long-term) | $569,279 | $573,348 |
| Net Cash Used in Operating Activities | $(180,107) | $(172,431) |
Material Changes vs. Prior Period
- Revenue Growth: Sales increased 3.2% year-over-year despite negative currency effects of approximately $101 million. Growth was driven by the Flowserve Pump Division (FPD) executing against a strong backlog.
- Profitability Expansion: Operating income rose 23.3% to $147.1 million. Operating margin improved 240 basis points to 14.4%, aided by higher gross profit and a 140 basis point improvement in SG&A as a percentage of sales.
- Bookings Decline: New bookings dropped 32.3% to $968.2 million, reflecting customer caution due to global economic conditions, credit market disruptions, and lower oil prices. This included a non-recurring $74 million thruster order from Q1 2008.
- Cash Flow: Operating cash flow was negative $180.1 million, primarily due to a $59.5 million decrease in working capital cash flows (higher inventory and lower payables/accruals). Cash balances decreased by $270.5 million from the prior quarter due to planned incentive payments, capital expenditures, and dividends.
- Foreign Exchange: Significant negative currency impacts were recorded, including a $40.0 million loss in other comprehensive income due to the strengthening U.S. dollar against the Euro.
Guidance, Outlook, and Risks
- Realignment Program: In February 2009, management announced a program to incur up to $40 million in costs to optimize facilities and reduce redundancies. Approximately $9.9 million was incurred in Q1 2009, with the majority of remaining charges expected in Q2 2009.
- Capital Allocation: The Board increased the quarterly dividend to $0.27 per share. The company repurchased 150,000 shares for $7.1 million. Capital expenditures for 2009 are expected to be approximately $100 million.
- Acquisitions: On April 21, 2009, Flowserve acquired Calder AG (Swiss energy recovery technology) for up to $45 million to expand its desalination market presence.
- Liquidity: Despite a significant cash draw, management believes existing cash, operating cash flows, and a $302.4 million available revolving credit facility are sufficient for the next 12 months.
- Risks: Key risks include ongoing global financial market volatility, potential customer order cancellations, foreign currency fluctuations, and legal contingencies related to asbestos claims, the UN Oil-for-Food Program, and export compliance investigations.
Investor Verification Checklist
- Backlog Sustainability: Verify the stability of the $2.67 billion backlog given the 32% drop in new bookings and potential for customer cancellations in a recessionary environment.
- Realignment Execution: Monitor the timing and magnitude of the remaining ~$30 million in realignment charges expected in 2009 and their impact on future margins.
- Working Capital Trends: Assess the sustainability of the $75.7 million inventory build-up and the ability to convert this inventory into sales without further cash strain.
- Legal Contingencies: Review updates on the UN Oil-for-Food Program investigation (including the French inquiry) and the Republic of Iraq civil suit for potential material penalties.
- Segment Performance: Analyze the divergence between FPD (strong sales growth) and FSD (declining sales and operating income) to understand exposure to specific industrial sectors.