Flowserve Corporation: Q1 2021 Form 10-Q Summary
Business Context and Reporting Period
Flowserve manufactures engineered flow-control equipment and provides aftermarket services for oil and gas, chemical, power generation, water management and general industrial customers. Operations are conducted through the Flowserve Pump Division (FPD) and Flow Control Division (FCD). The filing covers the unaudited three months ended March 31, 2021, compared with the revised three months ended March 31, 2020.
Key Financial Metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Sales | $857.3 million | $893.5 million | Down 4.1% |
| Gross profit | $250.9 million | $266.5 million | Down 5.9% |
| Gross margin | 29.3% | 29.8% | Down 50 bps |
| SG&A | $198.3 million | $245.5 million | Down 19.2% |
| Operating income | $56.1 million | $24.2 million | Up 131.8% |
| Operating margin | 6.5% | 2.7% | Up 380 bps |
| Net earnings attributable to Flowserve | $14.1 million | $12.1 million | Up 16.1% |
| Diluted EPS | $0.11 | $0.09 | Up $0.02 |
| Operating cash flow | $36.4 million | $47.5 million | Down 23.4% |
Interest expense was $16.8 million versus $13.0 million. The company recorded a $7.6 million loss on extinguishment of debt related to redeeming its remaining 2022 Euro Senior Notes. Other expense was $11.4 million versus $38.2 million of other income in the prior-year period, primarily reflecting unfavorable foreign-currency effects.
Cash and cash equivalents were $659.3 million at March 31, 2021, down from $1.095 billion at December 31, 2020. Total debt was $1.316 billion, including $1.308 billion due after one year. The company had $742.0 million available under its $800.0 million unsecured revolving credit facility, with $58.0 million of letters of credit outstanding. Management reported approximately $1.4 billion of total liquidity and compliance with applicable debt covenants.
Capital expenditures were $11.4 million. The company paid $26.5 million of dividends and repurchased $5.1 million of common stock. The quarterly dividend was $0.20 per share.
Material Changes Versus the Prior Comparable Period
- Bookings declined 3.3% to $945.0 million, driven mainly by lower oil and gas and power-generation demand and weaker aftermarket bookings.
- Sales declined 4.1%, primarily due to lower original-equipment revenue. Aftermarket sales increased to approximately 53% of sales from 49%.
- Gross margin declined modestly because of lower-margin original-equipment revenue, partially offset by a favorable aftermarket mix, realignment savings and the absence of $8.4 million of COVID-related underutilized-capacity costs recorded in Q1 2020.
- SG&A fell by $47.2 million, reflecting lower realignment and transformation charges, lower travel and administrative costs, and lower bad-debt expense. Q1 2021 included $13.7 million of realignment charges versus $14.9 million of realignment and transformation charges in Q1 2020.
- Operating income improved substantially despite lower sales, primarily because of SG&A reductions.
- FPD sales declined 5.2%, while segment operating margin improved to 8.9% from 6.2%. FCD sales declined 1.4%, while segment operating margin improved to 9.7% from 6.6%.
- Backlog was $1.884 billion at March 31, 2021, up 1.6% from December 31, 2020; approximately 34% related to aftermarket orders.
- Cash declined primarily because of the $407.5 million redemption of the 2022 Euro Senior Notes.
- The 2020 comparative financial information was revised for identified foreign-currency and asbestos-related accounting errors. Management concluded the errors were not material to prior periods, but the filing states that additional 2020 periods will be revised as applicable in future filings.
Guidance, Outlook, Risks and Unusual Items
Management expects 2021 revenue to decline approximately 3% to 5% versus 2020, while full-year bookings are expected to increase in the mid-single-digit percentage range. Management expects COVID-19 effects to lessen as vaccinations increase, but continues to anticipate economic uncertainty, supply-chain disruption, elevated logistics costs and customer capital-spending constraints. Planned 2021 capital expenditures are $70 million to $80 million.
The 2020 Realignment Program is expected to require approximately $90 million of total investment, with remaining charges expected through the second quarter of 2021. Management estimated $21 million of savings achieved through March 31, 2021 and expects approximately $125 million of full-year run-rate savings after completion, although actual savings may vary.
Major risks include prolonged COVID-19 effects, oil and gas and power-generation spending weakness, backlog cancellations or delays, fixed-price project overruns, raw-material and supply-chain costs, foreign-exchange volatility, customer credit risk, international and geopolitical exposure, pension obligations, goodwill impairment, cybersecurity, tax matters and litigation.
Asbestos-related claims totaled 8,445 at March 31, 2021. Q1 asbestos-related expense was approximately $2.7 million net of insurance. Management believes reserves and expected insurance recoveries are reasonable, but notes that unfavorable legal developments, claim trends or insurer viability could materially affect results. The company also disclosed a potential reduction in tax expense of approximately $15 million within the next 12 months from audit resolutions or statute expirations.
Foreign-currency losses included in other expense were approximately $9.5 million in Q1 2021 versus gains of $40.4 million in Q1 2020. A 10% change in foreign-exchange rates would have affected net earnings by approximately $9 million, excluding the effect of foreign-exchange contracts.
Important Facts for Investors to Verify
- Whether the projected 3% to 5% revenue decline and mid-single-digit bookings growth are achieved.
- Conversion of the $1.884 billion backlog into revenue and acceptable margins, including the $573 million of longer-term unsatisfied performance obligations.
- Realization of the targeted $125 million run-rate savings and the remaining realignment costs.
- Cash generation, working-capital trends and liquidity following the Euro debt redemption.
- Compliance with debt covenants, dividend and repurchase limitations, and the availability of the revolving credit facility.
- Foreign-exchange volatility and its effect on earnings, accumulated other comprehensive loss and debt hedges.
- Developments in asbestos claims, insurance recoveries and related reserves.
- Updates to previously reported 2020 financial information and the company’s accounting controls.