Flowserve Corporation: Q3 2023 Form 10-Q Summary
Business context and reporting period
Flowserve manufactures engineered flow-control equipment and provides aftermarket services through its Flowserve Pump Division (FPD) and Flow Control Division (FCD). Products support oil and gas, chemical, power generation, water management and general industrial markets. The filing covers the unaudited three and nine months ended September 30, 2023, compared with the corresponding 2022 periods.
- Aftermarket revenue represented approximately 52% of sales in both periods, compared with 53% in the prior-year periods.
- International customers, including U.S. export sales, represented approximately 63% of sales.
- Backlog was $2.77 billion at September 30, 2023, up 1.4% from December 31, 2022; approximately 36% related to aftermarket orders.
Financial performance and key metrics
| Metric | Q3 2023 | Q3 2022 | Change |
|---|
| Sales | $1,094.7 million | $872.9 million | +25.4% |
| Gross profit | $317.7 million | $239.6 million | +32.6% |
| Gross margin | 29.0% | 27.4% | +160 bps |
| Operating income | $70.3 million | $24.2 million | +190.5% |
| Operating margin | 6.4% | 2.8% | +360 bps |
| Net earnings attributable to Flowserve | $46.2 million | $38.4 million | +20.2% |
| Diluted EPS | $0.35 | $0.29 | +20.7% |
| Metric | Nine months 2023 | Nine months 2022 | Change |
|---|
| Sales | $3,155.4 million | $2,576.2 million | +22.5% |
| Gross profit | $937.3 million | $699.1 million | +34.1% |
| Gross margin | 29.7% | 27.1% | +260 bps |
| Operating income | $224.1 million | $91.9 million | +143.9% |
| Operating margin | 7.1% | 3.6% | +350 bps |
| Net earnings attributable to Flowserve | $124.1 million | $67.4 million | +84.3% |
| Diluted EPS | $0.94 | $0.51 | +84.3% |
- Q3 FPD sales were $766.2 million and segment operating income was $78.3 million, compared with $592.6 million and $38.9 million, respectively, in Q3 2022.
- Q3 FCD sales were $330.7 million and segment operating income was $43.5 million, compared with $282.6 million and $29.7 million, respectively.
- Q3 bookings declined 12.7% to $1.07 billion, primarily because a more than $210 million FPD Middle East original-equipment order booked in Q3 2022 did not recur. Nine-month bookings declined 3.3% to $3.23 billion.
- SG&A increased 14.0% in Q3 and 16.8% year to date, but SG&A as a percentage of sales improved to 23.0% from 25.3% in Q3 and 24.1% year to date in 2022.
- Interest expense increased to $17.3 million in Q3 and $50.0 million year to date, primarily due to higher interest rates and the termination of cross-currency swaps in late 2022.
- Other expense, net was $13.7 million in Q3 and $27.3 million year to date, compared with other income of $28.7 million and $28.2 million, respectively, in the prior-year periods, largely due to unfavorable foreign-currency transaction effects.
- The Q3 effective tax rate was a benefit of 27.0%, primarily reflecting release of a valuation allowance on Brazilian deferred tax assets. The nine-month effective tax rate was 9.6%, compared with 18.5% in 2022.
Cash flow, liquidity and debt
- Operating cash flow was $131.1 million in the first nine months of 2023, compared with cash used of $109.5 million in 2022.
- Capital expenditures were $47.5 million; management estimated full-year 2023 capital expenditures of $75 million to $85 million.
- Cash and cash equivalents were $480.5 million at September 30, 2023, up from $435.0 million at December 31, 2022.
- Total debt and finance lease obligations were $1.33 billion, including $1.27 billion due after one year. Debt increased from $1.27 billion at year-end 2022.
- The company had $85.0 million outstanding under its revolving credit facility at September 30, 2023 and $651.3 million of borrowing capacity after considering covenants, short-term borrowings and letters of credit. The October 25, 2023 revolving balance was $105 million.
- Flowserve was in compliance with applicable debt covenants at September 30, 2023. The Senior Credit Facility matures September 13, 2026.
- The company declared quarterly dividends of $0.20 per share and had $96.1 million remaining under its share-repurchase authorization. No open-market repurchases were reported during the quarter.
Material changes, outlook and unusual items
- Management attributed margin improvement primarily to prior pricing actions and lower supply-chain inflation, partially offset by higher incentive compensation and realignment charges.
- The 2023 Realignment Program generated $50.6 million of charges through September 30, including $22.2 million in Q3. Management expects approximately $62 million of total investment, including $13 million of estimated non-cash costs, and estimates approximately $13 million of savings in the first nine months. Upon completion of identified initiatives, annualized savings are expected to exceed $50 million.
- Flowserve terminated its proposed approximately $245 million acquisition of Velan after required French foreign-investment approval was not obtained. No termination fee is payable; cumulative 2023 acquisition-related expenses were $8.5 million.
- A $3.6 million adjustment to net earnings attributable to noncontrolling interests was recorded in Q3 to correct immaterial prior-period tax allocation errors.
- Russia operations were permanently ceased in 2022. Management concluded that existing reserves were sufficient at September 30, 2023 and does not currently expect material incremental effects.
- Management expects available cash, operating cash flow, credit capacity and cost-reduction measures to provide adequate liquidity for the next 12 months and beyond.
- Key risks include supply-chain and labor constraints, inflation, foreign-exchange volatility, customer order cancellations or delays, dependence on cyclical end markets, debt and interest-rate exposure, international geopolitical risks, cybersecurity, tax matters and asbestos litigation.
- Asbestos-related liabilities were $106.3 million at September 30, 2023, with $18.7 million of related expenses recognized in the first nine months. Management states that ultimate exposure remains subject to significant uncertainty.
Important facts for investors to verify
- Whether lower bookings, particularly in FPD and original equipment, persist after excluding the nonrecurring 2022 Middle East project.
- Conversion of the $2.77 billion backlog into revenue and profit, including the estimated $807 million of longer-term unsatisfied performance obligations.
- Execution of the 2023 Realignment Program, actual savings achieved and remaining cash expenditures.
- Working-capital trends, especially the $114.6 million inventory cash use year to date and the sustainability of improved operating cash flow.
- Impact of higher interest rates, revolving-credit borrowings and scheduled term-loan repayments on future earnings and liquidity.
- Volatility in foreign-currency gains and losses, including the company’s sensitivity estimate of approximately $9 million of net-earnings impact from a 10% currency movement.
- Developments in asbestos claims, insurance recoveries, tax audits and potential deferred-tax valuation-allowance releases.
