Flowserve Corporation: Q1 2015 Form 10-Q Summary
Business Context and Reporting Period
Flowserve designs, manufactures and services pumps, valves, seals, automation products and related flow-control systems for oil and gas, chemical, power generation, water management and industrial customers. The company operates through Engineered Product Division (EPD), Industrial Product Division (IPD) and Flow Control Division (FCD), with approximately 20,000 employees in more than 50 countries.
This unaudited filing covers the three months ended March 31, 2015, compared with the three months ended March 31, 2014, and the balance sheet as of March 31, 2015, compared with December 31, 2014.
Financial Performance and Liquidity
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Sales | $1,014.6 million | $1,068.1 million | Down 5.0% |
| Gross profit | $331.7 million | $377.1 million | Down 12.0% |
| Gross margin | 32.7% | 35.3% | Down 260 basis points |
| Operating income | $93.4 million | $164.3 million | Down 43.2% |
| Operating margin | 9.2% | 15.4% | Down 620 basis points |
| Net earnings attributable to Flowserve | $27.7 million | $107.7 million | Down 74.3% |
| Diluted EPS | $0.20 | $0.78 | Down $0.58 |
| Operating cash flow | $(93.2) million | $(84.7) million | Higher use of $8.5 million |
| Capital expenditures | $84.0 million | $31.7 million | Up $52.3 million |
Bookings were $1,042.6 million, down 12.7%, including approximately $81 million of unfavorable currency impact. Backlog was $2,689.4 million at March 31, 2015, down 0.5% from year-end after approximately $129 million of currency impact; approximately 25% was aftermarket-related. Aftermarket sales increased to approximately 44% of sales from 43% in the prior-year quarter.
Cash and cash equivalents were $333.8 million, down from $450.4 million at December 31, 2014. Working capital consumed cash, principally through a $117.8 million increase in inventories and a $131.2 million decrease in accounts payable, partially offset by a $59.4 million reduction in accounts receivable. Days sales outstanding increased to 94 days from 90 days a year earlier.
Total debt and capital lease obligations were $1.680 billion, including $58.7 million due within one year and $1.621 billion due thereafter. Approximately 82% of debt was fixed-rate after hedging. The company had $921.1 million of available revolving-credit capacity, complied with all financial covenants, and had no revolving-facility borrowings at quarter-end.
Material Changes Versus the Prior Comparable Period
- Sales declined $53.5 million, primarily because of negative currency effects, weaker oil and gas activity, lower original-equipment demand and softer activity in Asia Pacific, Latin America and the Middle East.
- Gross margin contracted because of purchase-accounting adjustments on SIHI backlog and inventory, $13.2 million of realignment charges and lower-margin projects shipped from backlog.
- SG&A increased 11.0% to $239.9 million and reached 23.6% of sales, reflecting SIHI costs, acquisition-related expenses, realignment charges and the absence of a $13.4 million gain from the 2014 sale of the Naval business.
- The company acquired SIHI Group B.V. on January 7, 2015, for $341.5 million in cash. SIHI contributed approximately $66.8 million of sales and reduced earnings by approximately $24 million, including $5.0 million of acquisition-related costs.
- IPD reported a $13.3 million operating loss versus $18.8 million of operating income in Q1 2014, largely due to SIHI purchase-accounting adjustments, realignment costs and acquisition-related expenses.
- FCD sales declined 14.5% and operating income declined 34.2%; the comparison also benefited from the nonrecurring 2014 Naval disposal gain.
- Other comprehensive loss was $103.7 million versus $5.9 million of income, primarily because of the stronger U.S. dollar and foreign-currency translation losses.
Guidance, Outlook, Risks and Unusual Items
- Management expects approximately 5% workforce reduction and approximately $100 million of additional near-term investment to support manufacturing optimization and SG&A efficiency initiatives. These actions are expected to produce approximately $70 million of annualized run-rate savings beyond SIHI synergies.
- The realignment program is expected to total $39.0 million; $26.3 million had been incurred through March 31, 2015, with most remaining charges expected through the remainder of 2015 and early 2016. Expected annual savings from the program are approximately $11 million, with some savings beginning in 2016.
- 2015 capital expenditures are expected to be $170 million to $180 million, excluding acquisition activity. Management expects existing cash, operating cash flow and revolving-credit availability to satisfy cash needs for the next 12 months.
- Venezuela produced a $20.6 million remeasurement loss, including $18.5 million in other expense and $2.1 million in cost of sales. Approximately 9% of gross accounts receivable was owed by Venezuela’s national oil company, and collection delays remain a concern.
- The effective tax rate rose to 49.0% from 25.9%, principally because of tax effects associated with the realignment program and Venezuelan currency remeasurement. Management estimated a possible tax benefit of approximately $11 million within the next 12 months from audit resolutions or statute expirations.
- Key risks include reduced oil and gas and infrastructure spending, backlog cancellations or margin erosion, foreign-exchange volatility, slower collections in Latin America, SIHI integration, acquisition and restructuring execution, litigation and asbestos claims, the United Nations Oil-for-Food investigation, environmental liabilities and pension obligations.
- The company designated €255.7 million of its €500.0 million Euro senior notes as a net investment hedge. Foreign-exchange contracts had aggregate third-party notional value of approximately $579.9 million at quarter-end.
Important Facts for Investors to Verify
- Whether SIHI integration and the realignment program achieve the projected cost savings without further margin deterioration.
- Conversion of the $2.689 billion backlog into sales and cash flow, including cancellation risk and project-level margins.
- Inventory levels, accounts payable normalization, collections in Latin America and the sustainability of negative operating cash flow.
- Debt reduction, interest costs, upcoming term-loan repayments and continued covenant compliance.
- Further Venezuelan currency losses, receivable recoverability and potential restrictions on cash repatriation.
- Whether weaker oil and gas, chemical, power and general-industrial spending persists and how aftermarket demand develops.
- The outcome of the French Oil-for-Food proceedings, asbestos-related claims and other contingent liabilities.