Flowserve Corporation — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020, with fourth-quarter information included. Flowserve manufactures pumps, valves, seals, automation systems and aftermarket services through its Flowserve Pump Division (FPD) and Flow Control Division (FCD). The company serves oil and gas, chemical, power generation, water management and general industrial markets globally.
Key financial metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Sales | $3,728.1 million | $3,939.7 million | Down 5.4% |
| Gross profit | $1,116.8 million | $1,289.3 million | Down 13.4% |
| Gross margin | 30.0% | 32.7% | Down 270 bps |
| Operating income | $250.3 million | $386.6 million | Down 35.3% |
| Operating margin | 6.7% | 9.8% | Down 310 bps |
| Net earnings attributable to Flowserve | $116.3 million | $238.8 million | Down 51.3% |
| Diluted EPS | $0.89 | $1.81 | Down 50.8% |
| Operating cash flow | $310.5 million | $324.1 million | Down 4.2% |
| Capital expenditures | $57.4 million | $75.7 million | Down 24.2% |
| Cash and equivalents | $1,095.3 million | $671.0 million | Up $424.3 million |
| Total debt | $1,726.9 million | $1,377.2 million | Up $349.7 million |
Fourth-quarter 2020 sales were $985.3 million, gross profit was $295.4 million, net earnings attributable to Flowserve were $56.9 million and diluted EPS was $0.43, compared with fourth-quarter 2019 sales of $1,068.2 million, gross profit of $349.5 million, net earnings of $72.6 million and diluted EPS of $0.55.
Business and segment performance
- 2020 bookings were $3.41 billion, down 19.5% from 2019; year-end backlog was $1.85 billion, down 14.0%. Approximately 90% of year-end backlog was expected to convert to revenue in 2021.
- FPD sales were $2.67 billion, down 1.1%, while segment operating income declined 21.1% to $271.0 million. FPD backlog declined 20.8% to $1.24 billion.
- FCD sales were $1.05 billion, down 14.6%, while segment operating income declined 34.5% to $125.6 million. FCD backlog increased 3.9% to $623.1 million, aided partly by currency effects.
- Aftermarket sales represented approximately 49% of consolidated sales versus 50% in 2019. Original equipment mix increased, pressuring margins because original equipment generally carries lower margins.
- Oil and gas accounted for 34% of bookings versus 41% in 2019. General industries increased to 26% of bookings from 22%, chemical to 24% from 22%, power generation to 13% from 11%, and water management declined to 3% from 4%.
Material changes and unusual items
- COVID-19, lower oil demand and distressed oil prices reduced customer capital spending, aftermarket activity and facility utilization. Management reported approximately $15.0 million of manufacturing costs expensed due to underutilized capacity.
- Realignment and transformation charges totaled $104.8 million in 2020, reducing after-tax earnings by approximately $86.9 million. Management estimated approximately $41 million of savings had been achieved by year-end and expected a full-year run-rate savings benefit of approximately $100 million after completion of the 2020 program.
- SG&A declined 3.8% to $878.2 million, reflecting lower travel and selling expenses and cost savings, partially offset by realignment charges and an $8.5 million write-down of receivables and contract assets tied to an oil and gas customer in Latin America.
- The effective tax rate rose to 32.1% from 23.4%, primarily because of additional valuation allowances against deferred tax assets associated with COVID-19 and distressed oil prices.
- The company revised previously reported 2019 and 2018 financial statements for errors involving unasserted asbestos claims, related insurance receivables, legal costs and other items. Revised 2019 net earnings attributable to Flowserve were reduced by $14.8 million.
- No goodwill impairment was recorded, but the Pump reporting unit’s estimated fair-value cushion declined to approximately 46% from 131% in 2019.
Liquidity, debt and capital allocation
- Operating cash flow was $310.5 million, supporting dividends, capital expenditures, pension contributions and debt obligations.
- The company issued $500 million of 3.50% senior notes due 2030, generating $498.3 million of net proceeds, and used proceeds partly to repurchase $191.4 million principal amount of 2022 Euro Senior Notes.
- At December 31, 2020, the company had approximately $1.84 billion of liquidity, consisting of $1.10 billion of cash and $741.9 million available under its $800 million senior credit facility. No revolving loans were outstanding.
- Debt covenants were satisfied at year-end. The amended credit agreement provides temporary covenant relief through December 31, 2021 and limits dividends and share repurchases during the relief period.
- Management announced in February 2021 that the remaining 2022 Euro Senior Notes would be redeemed on March 19, 2021 using remaining proceeds from the 2030 notes offering.
- Dividends declared increased to $0.80 per share from $0.76. The company repurchased $32.1 million of stock during 2020 and had $113.6 million remaining under its authorization.
Outlook, risks and contingencies
- Management projected 2021 revenue to decline approximately 4% to 7% year over year because of lower 2020 bookings and backlog. The filing does not provide a specific 2021 earnings or margin target.
- COVID-19 effects were expected to continue at least through the second quarter of 2021, including customer delays, supply-chain disruptions, logistics costs, temporary closures, restricted site access and under-absorbed manufacturing costs.
- Management expected 2021 capital expenditures of $70 million to $80 million, U.S. pension contributions of approximately $20 million and non-U.S. contributions of approximately $2 million.
- Principal risks include cyclical customer capital spending, oil and gas exposure, backlog cancellations or delays, pricing pressure, raw-material costs, foreign exchange, supply-chain and labor disruptions, cybersecurity, international regulation and tariffs, Brexit, environmental liabilities, product liability and asbestos litigation.
- Asbestos liabilities were estimated at $99.5 million, with estimated insurance receivables of $69.5 million. The actuarial range of possible future liability was approximately $80.1 million to $131.7 million, and outcomes remain uncertain.
- The company was a potentially responsible party at four Superfund sites; management expected its allocated environmental exposure to be immaterial. Routine litigation was not expected to be material, although litigation outcomes remain unpredictable.
Important facts for investors to verify
- Whether the projected 4% to 7% 2021 revenue decline and backlog conversion assumptions remain achievable.
- The pace and durability of the $100 million expected run-rate savings from the 2020 Realignment Program, including remaining implementation costs.
- Cash generation, leverage and covenant compliance after the planned redemption of the 2022 Euro Senior Notes.
- Recovery in oil and gas, chemical and other end-market capital spending and aftermarket activity.
- Potential goodwill impairment at the Pump reporting unit if operating results or market conditions deteriorate.
- Future asbestos claims, insurance recoveries and revisions to the recorded liability.
- Changes in deferred-tax-asset valuation allowances and the resulting effective tax rate.
- The impact of currency movements, supply-chain costs, customer credit quality and unfulfilled backlog on margins and cash flow.