Flowserve Corporation 2023 Form 10-K Summary
Business context and reporting period
Flowserve is a global manufacturer and aftermarket service provider of pumps, valves, mechanical seals, automation systems and related services for oil and gas, chemical, power generation, water management and general industrial markets. The filing covers the fiscal year ended December 31, 2023; it is an annual report rather than a standalone fourth-quarter filing.
The company operates through the Flowserve Pumps Division (FPD) and Flow Control Division (FCD), with approximately 16,000 employees, operations in more than 50 countries and sales to more than 10,000 companies. Aftermarket revenue represented approximately 52% of 2023 sales.
Key financial metrics
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Sales | $4,320.6 million | $3,615.1 million | Up 19.5% |
| Gross profit | $1,276.8 million | $994.3 million | Up 28.4% |
| Gross margin | 29.6% | 27.5% | Up 210 basis points |
| Operating income | $333.6 million | $197.2 million | Up 69.2% |
| Operating margin | 7.7% | 5.5% | Up 220 basis points |
| Net earnings attributable to Flowserve | $186.7 million | $188.7 million | Down 1.0% |
| Diluted EPS | $1.42 | $1.44 | Down 1.4% |
| Cash flow from operations | $325.8 million | $(40.0) million | Improved by $365.8 million |
| Capital expenditures | $67.4 million | $76.3 million | Down $8.9 million |
Sales growth reflected higher original-equipment and aftermarket sales across most regions. The margin improvement was attributed primarily to prior price increases, moderating supply-chain inflation and the absence of 2022 Russia-related charges, partly offset by realignment costs, incentive compensation and other expenses.
At December 31, 2023, cash and cash equivalents were $545.7 million, compared with $435.0 million in 2022. Total assets were $5.1 billion and total equity was $2.0 billion. Accounts receivable were $881.9 million and inventories were $879.9 million. Fourth-quarter days sales outstanding improved to 68 days from 75 days.
Bookings, backlog and segment performance
- Total bookings were $4.27 billion, down 4.0% from 2022. Backlog was $2.70 billion, down 1.5%; approximately 87% was expected to convert to revenue during 2024.
- FPD sales increased 21.5% to $3.06 billion, while segment operating income increased 67.7% to $348.9 million. FPD backlog declined 5.8% to $1.89 billion.
- FCD sales increased 15.0% to $1.26 billion, while segment operating income increased 30.5% to $148.0 million. FCD backlog increased 10.9% to $826.8 million.
- Bookings were concentrated in oil and gas at 38%, general industries at 26%, chemical at 21%, power generation at 11% and water management at 4%.
Debt, liquidity and capital allocation
Total debt and finance lease obligations were $1.23 billion at year-end, including $990.4 million of fixed-rate senior notes, a $219.7 million term loan and $23.5 million of finance lease and other borrowings. Interest expense increased to $66.9 million from $46.2 million, primarily because of higher borrowing rates and increased revolving-facility borrowings during the year.
Flowserve had approximately $672.9 million available under its senior credit facility after outstanding letters of credit. Including cash, reported liquidity was approximately $1.22 billion. The credit facility matures in September 2026, and the company was in compliance with its debt covenants at year-end.
Financing cash outflows included $40.0 million of term-loan repayments and $105.0 million of dividend payments. The annual dividend declared was $0.80 per share. No shares were repurchased during 2023; remaining repurchase authorization was $96.1 million at year-end and was increased to $300.0 million in February 2024.
Material changes versus the prior comparable period
- Revenue, gross profit and operating income increased substantially, with operating margin expanding to 7.7% from 5.5%.
- Net earnings and diluted EPS declined modestly despite improved operating performance because of higher taxes, interest expense, foreign-currency losses and higher noncontrolling interests.
- Other expense increased to $49.9 million from $0.6 million, primarily due to foreign-currency transaction losses, higher losses on foreign-exchange contracts and a $2.0 million equity-investment impairment.
- Cash from operations recovered strongly from a $40.0 million use of cash in 2022, driven by improved working-capital performance, particularly accounts receivable and inventory.
- The company initiated a 2023 Realignment Program, recording $66.0 million of charges during 2023. Total anticipated investment for identified and initiated activities is approximately $87 million, including an estimated $17 million of non-cash costs.
- Flowserve terminated its proposed approximately $245 million acquisition of Velan after required French foreign-investment approval was not obtained; 2023 acquisition-related expenses were $7.3 million.
Guidance, outlook and management commentary
- Management expects continued growth in 2024, supported by backlog, served end markets and the 3D strategy of diversification, decarbonization and digitization.
- Assuming a positive macroeconomic environment, 2024 bookings are expected to be comparable with 2023 levels.
- 2024 capital expenditures are estimated at $75 million to $85 million, excluding acquisitions.
- Management expects 2024 interest expense to be relatively consistent with 2023 and believes operating cash flow, existing cash and credit availability will fund working capital, capital expenditures, dividends, share repurchases, debt payments and pension contributions.
- Expected 2024 non-U.S. pension contributions are approximately $2 million; no U.S. pension contribution is required, although the company is authorized to contribute up to $20 million.
- Management expects to exceed the established annualized cost-savings target of approximately $50 million once identified realignment activities are completed, but actual savings may differ.
Risks, contingencies and unusual items
- Demand depends on customer capital investment and maintenance spending, particularly in cyclical oil and gas, chemical, power-generation and industrial markets. Backlog may be delayed, modified or canceled.
- Key operating risks include inflation, raw-material costs, supply-chain disruption, labor availability, pricing pressure, foreign-exchange movements, tariffs, geopolitical conflicts and customer credit risk.
- Flowserve permanently ceased operations in Russia in 2022. No additional material Russia-related reserve was recorded in 2023, and management currently does not expect material incremental impacts.
- Asbestos-related claims remain material contingencies. The recorded liability was approximately $102.9 million, with estimated insurance receivables of $42.9 million. The actuarial range of possible future liability was approximately $83.0 million to $132.6 million.
- The company is a potentially responsible party at four former public waste-disposal sites; projected fair-share costs are expected to be immaterial. Routine product-liability, warranty, environmental and other litigation remains subject to uncertainty.
- Goodwill totaled $1.18 billion, including approximately $780 million associated with FPD. No goodwill impairment was recorded, but the FPD impairment test is sensitive to projected sales, margins, growth rates and discount rates.
- Defined-benefit pension obligations increased to $715.2 million from $651.3 million, while plan assets were $540.6 million. Changes in discount rates, asset returns and other assumptions could affect earnings and future funding requirements.
- The company reported no material cybersecurity incidents and concluded that internal control over financial reporting was effective. PricewaterhouseCoopers issued unqualified opinions on the financial statements and internal controls.
Most important facts for investors to verify
- Whether 2024 bookings remain comparable with 2023 and whether the $2.70 billion backlog converts to revenue at the expected rate.
- Whether pricing, supply-chain normalization and the realignment program sustain the 2023 margin improvement.
- Progress toward the approximately $50 million annualized cost-savings target and the remaining approximately $87 million realignment investment.
- Debt repayment requirements, floating-rate exposure, covenant headroom and the September 2026 credit-facility maturity.
- The ultimate cost and insurance recovery associated with asbestos claims and other legal contingencies.
- The sensitivity of FPD goodwill and pension obligations to operating performance, discount rates, currency movements and market conditions.
- Whether the company maintains sufficient cash generation to fund capital expenditures, dividends, potential repurchases and pension contributions while reducing leverage.