Flowserve Corporation: FY2014 Form 10-K Summary
Business context and reporting period
Flowserve Corporation designs, manufactures and services pumps, valves, mechanical seals, automation products and related flow-control systems for oil and gas, chemical, power generation, water management and general industrial customers. Operations are organized into Engineered Product Division (EPD), Industrial Product Division (IPD) and Flow Control Division (FCD). The filing covers the fiscal year ended December 31, 2014; fourth-quarter data are included where relevant.
- Approximately 18,000 employees, operations in more than 50 countries and customers in more than 90 countries.
- Aftermarket sales represented approximately 42% of 2014 sales versus 40% in 2013.
- International customers accounted for approximately 68% of sales versus 71% in 2013.
Key financial metrics
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Sales | $4,877.9 million | $4,954.6 million | Down 1.5% |
| Gross profit | $1,714.6 million | $1,688.1 million | Up 1.6% |
| Gross margin | 35.2% | 34.1% | Up 110 bps |
| Operating income | $789.8 million | $760.3 million | Up 3.9% |
| Operating margin | 16.2% | 15.3% | Up 90 bps |
| Net earnings attributable to Flowserve | $518.8 million | $485.5 million | Up 6.9% |
| Diluted EPS | $3.76 | $3.41 | Up 10.3% |
| Operating cash flow | $571.0 million | $487.8 million | Up 17.0% |
- Fourth-quarter 2014 sales were $1,381.4 million, net earnings attributable to Flowserve were $159.0 million and diluted EPS was $1.16, compared with $1,389.4 million, $141.1 million and $1.01, respectively, in fourth-quarter 2013.
- Bookings increased 5.7% to $5,161.0 million, including approximately $113 million of unfavorable currency effects. Year-end backlog increased 5.8% to $2,704.2 million, despite approximately $154 million of unfavorable currency effects.
- Segment operating margins were 17.3% for EPD, 13.4% for IPD and 20.0% for FCD.
- Cash and cash equivalents were $450.4 million at year-end, compared with $363.8 million in 2013. Working capital was $1,322.3 million.
- Capital expenditures were $132.6 million. Cash used in financing activities was $367.7 million, including $246.5 million of share repurchases, $85.1 million of dividends and $40.0 million of debt repayments.
- Total debt was $1,154.9 million, including $797.2 million of senior notes and $330.0 million under the term loan facility. Approximately 72% of debt was fixed-rate after interest-rate swaps.
Material changes versus the prior comparable period
- Sales declined because of unfavorable currency translation, lower original-equipment sales and the disposition of the Naval business; aftermarket sales increased and supported profitability.
- Gross and operating margins improved primarily from aftermarket mix, operational improvements, cost controls and selective bidding.
- SG&A declined 3.1%, partly reflecting a $13.4 million gain on the Naval sale and a gain related to certain legal matters.
- Net earnings from affiliates fell to $12.1 million from $39.0 million because 2013 included $28.3 million of pre-tax gains from the Audco India transactions.
- Operating cash flow improved, although accounts receivable used $79.7 million of cash. Collection delays involving the Venezuelan national oil company contributed to higher receivable aging; the customer represented approximately 9% of gross accounts receivable at year-end.
- Other comprehensive loss was $158.8 million, primarily from foreign-currency translation, compared with other comprehensive income of $2.8 million in 2013.
- Flowserve repurchased 3.42 million shares for $246.5 million during 2014 and had $464.4 million of remaining authorization at year-end.
Guidance, outlook, risks and unusual items
- Management expected a competitive and uncertain 2015 environment, with results weighted toward the second half of the year. It cited aftermarket strength, disciplined cost management, customer diversity and portfolio breadth as offsets to market pressure.
- Management expected lower oil prices to reduce oil-and-gas upstream investment most significantly, with lesser effects on midstream and downstream activity.
- 2015 capital expenditures were expected to be $150 million to $160 million before acquisitions. Expected pension contributions were approximately $20 million for the U.S. plan and $12 million for non-U.S. plans.
- On January 7, 2015, Flowserve acquired SIHI Group B.V. for $365.0 million, funded with approximately $110 million of cash and $255 million of revolving-credit borrowings. Management expected higher 2015 interest expense as a result.
- Liquidity included $923.2 million of borrowing capacity under the $1.0 billion revolving facility, after outstanding letters of credit. The company stated that operating cash flow, cash balances and available borrowing capacity were sufficient for its expected needs and that it was in compliance with debt covenants at year-end.
- Principal risks include customer capital-spending cycles, oil-price volatility, order cancellations or delays, backlog execution, pricing and raw-material pressure, foreign exchange, international political and regulatory risks, customer collection risk in Venezuela, leverage and covenant restrictions, pension assumptions, asbestos and product-liability claims, environmental matters and tax-asset realization.
- The company disclosed a potential overseas employee violation of its Code of Business Conduct and possible FCPA violation. The employee was terminated, an internal investigation was ongoing and the matter was self-reported to the DOJ and SEC; management did not expect a material impact but could not rule out penalties or additional costs.
- The 2013 realignment program generated $1.6 million of charges in 2014 and $10.7 million in 2013; total approved charges were expected to be $15.8 million.
- PricewaterhouseCoopers issued an unqualified audit opinion. Management and the auditor concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2014.
Investor verification priorities
- Assess whether the SIHI acquisition delivers the expected chemical-market growth, synergies and aftermarket benefits while maintaining leverage and covenant compliance.
- Monitor oil-and-gas capital spending, booking conversion, backlog cancellations and the timing of the $2.7 billion backlog.
- Review Venezuelan receivable collections and the potential impact of currency mechanisms, customer payment delays and further devaluation.
- Separate recurring margin improvement from one-time benefits, including the Naval-sale gain, legal gain and the absence of 2013 Audco India gains.
- Track foreign-exchange effects, particularly the euro, and the resulting impact on sales, earnings, equity and cash flow.
- Evaluate asbestos, FCPA, environmental, tax and product-liability contingencies, including amounts recoverable from insurers or indemnitors.
- Verify 2015 capital allocation among acquisitions, debt repayment, dividends, share repurchases, capital expenditures and pension funding.