Flowserve Corporation 2021 Q3 Form 10-Q Summary
Business Context and Reporting Period
Flowserve Corporation is a global manufacturer and aftermarket service provider of pumps, valves, seals, automation products and related services for oil and gas, chemical, power generation, water and general industrial markets. Operations are reported through the Flowserve Pump Division (FPD) and Flow Control Division (FCD). The filing covers the unaudited three and nine months ended September 30, 2021, compared with the corresponding 2020 periods.
Flowserve employed approximately 15,000 people in more than 50 countries and operated 163 Quick Response Centers. Aftermarket revenue represented approximately 51% of third-quarter sales and 52% of nine-month sales, compared with 48% and 49%, respectively, in the prior-year periods.
Key Financial Metrics
| Metric | Q3 2021 | Q3 2020 | Nine Months 2021 | Nine Months 2020 |
|---|---|---|---|---|
| Sales | $866.1 million | $924.3 million | $2,621.6 million | $2,742.8 million |
| Gross profit | $253.5 million | $285.2 million | $782.6 million | $821.4 million |
| Gross margin | 29.3% | 30.9% | 29.9% | 29.9% |
| Operating income | $57.4 million | $87.3 million | $185.6 million | $155.0 million |
| Operating margin | 6.6% | 9.4% | 7.1% | 5.7% |
| Net earnings attributable to Flowserve | $49.8 million | $56.1 million | $109.2 million | $74.4 million |
| Diluted EPS | $0.38 | $0.43 | $0.83 | $0.57 |
| Operating cash flow | Not separately provided | Not separately provided | $151.1 million | $114.3 million |
At September 30, 2021, cash and cash equivalents were $1.457 billion, compared with $1.095 billion at December 31, 2020. Total debt was $2.109 billion, including $836.6 million classified as due within one year. Available borrowing capacity under the Senior Credit Facility was $708.6 million, producing reported liquidity of approximately $2.2 billion before subsequent debt redemptions.
Nine-month investing cash outflows were $38.7 million, including $34.0 million of capital expenditures. Financing cash inflows were $272.3 million, including proceeds from the 2032 Senior Notes and a new term loan, partly offset by debt repayments, dividends and share repurchases.
Material Changes Versus the Prior Comparable Period
- Third-quarter sales declined 6.3%, primarily because of lower original equipment revenue and reduced sales in Europe, North America, Asia Pacific, and the Middle East and Africa. Nine-month sales declined 4.4%.
- Third-quarter gross margin fell 160 basis points to 29.3%, reflecting lower-margin original equipment revenue and lower volumes, partially offset by a higher aftermarket mix and lower realignment charges.
- Third-quarter operating income declined 34.2%, while nine-month operating income increased 19.7% because of substantially lower SG&A and reduced COVID-19-related underutilized-capacity charges.
- Nine-month SG&A declined 9.7% to $610.0 million, and SG&A as a percentage of sales improved to 23.3% from 24.6%.
- Bookings increased 13.1% in the quarter and 8.4% for the nine months. Backlog was $1.970 billion at September 30, 2021, up 6.2% from December 31, 2020; approximately 39% was aftermarket-related.
- FPD nine-month sales declined 8.0% and operating income declined 3.2%. FCD nine-month sales increased 4.7% and operating income increased 20.9%.
- Net earnings benefited from an income tax benefit of $10.4 million in the quarter and $3.9 million for the nine months, compared with tax provisions of $19.2 million and $60.7 million, respectively, in 2020.
- Other income and expense deteriorated to expense of $1.5 million in the quarter and $20.7 million for the nine months, principally because of unfavorable foreign-currency transaction effects.
Guidance, Outlook, Risks and Unusual Items
Management expected 2021 bookings to increase approximately 10% from 2020, with fourth-quarter bookings expected to be the highest quarterly level of the year. Management expected bookings to recover to at least the first-half 2021 quarterly run rate and expected to continue converting backlog into revenue through the fourth quarter and into 2022, although with longer cycle times.
Management estimated that supply-chain, logistics and labor-availability headwinds shifted approximately $60 million of expected third-quarter revenue and reduced operating margin by approximately 150 basis points. The company did not expect a material increase in backlog cancellations.
COVID-19, labor shortages, supplier delays, freight costs, customer inspection delays and lower project-based capital spending remained significant operating risks. Project-based customer spending had not returned to pre-pandemic levels, while maintenance, repair and overhaul and aftermarket spending had recovered closer to pre-pandemic levels.
The company estimated approximately $78 million of cost savings from the 2020 Realignment Program through the first nine months of 2021 and expected approximately $125 million of full-year run-rate savings upon completion. Nine-month 2021 realignment charges were $22.3 million, compared with $88.3 million of realignment and transformation charges in 2020.
On September 23, 2021, Flowserve issued $500 million of 2.8% senior notes due 2032 and drew $300 million under a new term loan. On October 12, 2021, it redeemed the 2022 and 2023 senior notes. The company expects a fourth-quarter 2021 loss on debt extinguishment of approximately $38.0 million, including a $36.1 million make-whole premium. After the redemption, management reported approximately $1.3 billion of liquidity, consisting of $615.2 million of cash and $708.6 million of available credit capacity.
Flowserve disclosed approximately 8,621 active asbestos-related claims at September 30, 2021. It incurred approximately $10.1 million of asbestos-related defense and resolution expenses during the first nine months. Management believes most claims should remain covered in whole or in part by insurance or indemnities, but noted that adverse litigation outcomes or insurer viability could materially affect results.
The company corrected previously reported foreign-currency accounting errors and certain immaterial cash-flow classification errors. The filing states that the errors were not material to prior periods, but comparative balances were revised.
Important Facts for Investors to Verify
- Whether supply-chain, labor and logistics disruptions continue to defer revenue and pressure margins beyond the fourth quarter of 2021.
- Whether bookings convert into revenue at expected margins and whether the $1.970 billion backlog experiences cancellations or further delivery delays.
- The financial effect of the October 2021 debt redemptions, including the expected $38.0 million fourth-quarter extinguishment loss and resulting liquidity.
- Progress toward the estimated $125 million run-rate savings target and the remaining charges under the 2020 Realignment Program.
- The sustainability of the unusually favorable 2021 effective tax rates and the potential impact of tax audits; management estimated a possible tax benefit of approximately $12 million within the next 12 months.
- Exposure to foreign-currency movements, including the disclosed sensitivity of approximately $14 million of net earnings for a 10% currency-rate change, before considering foreign-exchange contracts.
- Future asbestos claim volumes, settlement costs, insurance recoveries and potential litigation developments.
- Management’s statement that disclosure controls were effective as of September 30, 2021 and that no material changes occurred in internal control over financial reporting.