Flowserve Corporation 2009 Form 10-K Summary
Business Context and Reporting Period
Flowserve Corporation manufactures pumps, valves, mechanical seals, automation products and related aftermarket services for oil and gas, chemical, power generation, water management and general industrial customers. The filing covers the fiscal year ended December 31, 2009, with comparative information for 2008 and 2007. The company operated through Flowserve Pump Division, Flow Control Division and Flow Solutions Division during 2009 and employed approximately 15,000 people globally.
International customers represented approximately 73% of 2009 sales. Bookings were concentrated in oil and gas at 36%, power generation at 20%, general industries at 19%, chemical at 18% and water management at 7%.
Key Financial Metrics
| Metric | 2009 | 2008 | Change |
|---|---|---|---|
| Sales | $4,365.3 million | $4,473.5 million | Down 2.4% |
| Gross profit | $1,548.1 million | $1,580.3 million | Down 2.0% |
| Gross margin | 35.5% | 35.3% | Up 20 basis points |
| Operating income | $629.5 million | $615.7 million | Up 2.2% |
| Operating margin | 14.4% | 13.8% | Up 60 basis points |
| Net earnings attributable to Flowserve | $427.9 million | $442.4 million | Down 3.3% |
| Diluted EPS | $7.59 | $7.71 | Down 1.6% |
| Cash flow from operations | $431.3 million | $408.8 million | Up 5.5% |
| Cash and equivalents | $654.3 million | $472.1 million | Up $182.3 million |
| Total debt | $566.7 million | $573.3 million | Down $6.6 million |
| Working capital | $1,041.2 million | $724.4 million | Up $316.8 million |
Cash flow benefited from collections and inventory reductions. Capital expenditures were $108.4 million, acquisition spending was $30.8 million, dividends paid were $59.2 million and share repurchases were $40.9 million. The company contributed $83.1 million to its U.S. pension plan and $101.2 million to defined benefit plans globally.
Debt consisted primarily of a $544.0 million term loan and $22.7 million of capital lease obligations and other borrowings. No amounts were outstanding under the $400.0 million revolving credit facility; available borrowing capacity was $276.9 million after letters of credit. The company was in compliance with its debt covenants at year-end.
Material Changes Versus the Prior Comparable Period
- Bookings declined 23.9% to $3.885 billion, and year-end backlog declined 16.1% to $2.371 billion. The decline reflected the global recession, delayed oil and gas and chemical projects, distributor destocking and lower general-industry demand.
- Sales declined modestly because of approximately $208 million of unfavorable currency effects and lower chemical, general-industry and Flow Solutions sales. Flowserve Pump Division sales increased 5.4%, while Flow Control sales declined 12.9% and Flow Solutions sales declined 11.4%.
- Operating income increased despite lower sales, supported by lower SG&A, cost controls, pricing on previously booked projects, productivity initiatives and realignment savings. Results included $68.1 million of realignment charges, reducing after-tax earnings by approximately $49.8 million.
- Aftermarket sales were comparable with 2008 and remained a higher-margin and more stable component of the business. Original equipment sales declined approximately 4%.
- Flowserve acquired Calder AG, a Swiss desalination energy-recovery technology company, for up to $44.1 million, including contingent consideration. The acquisition added approximately $25.2 million of goodwill.
- Return on average net assets declined to 18.2% from 20.4%, while the net debt-to-net capital ratio improved to negative 5.1% from 6.9%, reflecting the company’s substantial cash balance.
Guidance, Outlook, Risks and Unusual Items
Management remained cautious about 2010. Lower bookings and backlog could result in lower revenue, excluding currency effects, although management noted that bookings do not necessarily convert to revenue on a comparable timing basis. The company expected increased pricing pressure and potential mix pressure from fewer specialty-pump sales, partly offset by aftermarket strength, selective bidding, operational improvements and realignment savings.
- Management expected up to $20 million of additional realignment charges in 2010, with identified initiatives expected to produce approximately $40 million of additional annual savings. The filing also notes approximately $12 million of potential initiatives not included in the estimate.
- 2010 investing cash flows were expected to range from $110 million to $125 million before acquisitions. Management expected sufficient operating cash flow and available credit to fund working capital, capital expenditures, dividends, debt service, pension contributions, share repurchases and realignment costs.
- Expected 2010 pension contributions were $30 million to $40 million for the U.S. plan and approximately $10 million for non-U.S. plans.
- Management preliminarily estimated an approximately $14 million after-tax charge in the first quarter of 2010 from Venezuela’s currency devaluation and hyperinflationary accounting designation. Venezuela represented approximately 1% or less of consolidated 2009 sales and assets.
- Flowserve planned to combine the Pump and Solutions divisions into a new Flow Solutions Group in 2010, with new Engineered and Industrial reporting segments. Prior periods were to be retrospectively adjusted.
- Material contingencies include asbestos-related claims, shareholder litigation subject to a conditional settlement, export-control investigations and potential penalties, the United Nations Oil-for-Food-related investigation and litigation, environmental remediation and product liability matters.
- The company had $130.2 million of gross liabilities for uncertain tax positions, excluding related interest and penalties, and estimated a possible $9.6 million to $22.4 million reduction in tax expense within the following 12 months from audit resolutions or statute expirations.
- Foreign exchange exposure remained significant. Management estimated that a 10% change in foreign currency exchange rates could affect annual net earnings by approximately $31.2 million, before considering certain forward contracts.
The filing reports effective disclosure controls and effective internal control over financial reporting as of December 31, 2009. PricewaterhouseCoopers issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting.
Most Important Facts for Investors to Verify
- Whether the sharp decline in bookings and backlog translates into lower 2010 revenue and operating utilization.
- Actual realignment charges, execution costs, employee reductions and realized savings compared with management’s estimates.
- Progress on the Flow Solutions Group reorganization and the effect of retrospective segment reporting on historical comparisons.
- Compliance with debt covenants, the August 2012 term-loan and revolver maturities, and available liquidity after letters of credit.
- Actual pension contributions and the sensitivity of obligations to discount rates and asset returns.
- Resolution and ultimate cost of shareholder litigation, export-control matters, asbestos claims, Oil-for-Food matters and environmental liabilities.
- The actual impact of Venezuela’s devaluation and hyperinflationary accounting on 2010 earnings and cash remittances.
- Whether aftermarket demand, pricing discipline and productivity initiatives offset weaker original-equipment markets and currency volatility.