Flowserve Corporation 2022 Q1 Form 10-Q Summary
Business context and reporting period
Flowserve manufactures engineered flow-control equipment and provides aftermarket services through its Flowserve Pump Division (FPD) and Flow Control Division (FCD). Its end markets include oil and gas, chemical, power generation, water management and general industry. The report covers the three months ended March 31, 2022, compared with the three months ended March 31, 2021.
Key financial metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Sales | $821.1 million | $857.3 million | Down 4.2% |
| Gross profit | $209.6 million | $250.9 million | Down 16.5% |
| Gross margin | 25.5% | 29.3% | Down 380 bps |
| Operating income | $7.4 million | $56.1 million | Down 86.8% |
| Operating margin | 0.9% | 6.5% | Down 560 bps |
| Net earnings attributable to Flowserve | $(15.8) million | $14.1 million | Declined to a loss |
| Diluted EPS | $(0.12) | $0.11 | Declined $0.23 |
| Operating cash flow | $(26.8) million | $36.4 million | Down $63.2 million |
| Bookings | $1,086.1 million | $945.0 million | Up 14.9% |
Aftermarket sales represented approximately 53% of sales in both periods. FPD generated $574.0 million of external sales and $21.0 million of segment operating income; FCD generated $247.1 million of external sales and $15.2 million of segment operating income.
Cash and cash equivalents were $575.8 million at March 31, 2022, compared with $658.5 million at December 31, 2021. Total debt was $1.296 billion, including $44.6 million due within one year. The company had $383.5 million of borrowing capacity under its revolving credit facility after covenant and letter-of-credit considerations and was in compliance with applicable covenants.
Capital expenditures were $14.1 million. Inventory increased to $722.4 million from $678.3 million at year-end 2021, and accounts receivable days sales outstanding increased to 80 days from 77 days in the prior-year comparable period. The company paid $26.1 million in dividends and declared a quarterly dividend of $0.20 per share.
Material changes versus the prior comparable period
- Profitability deteriorated substantially as gross profit fell $41.3 million and SG&A increased $7.8 million.
- Margins were pressured by lower-margin original-equipment revenue, slower backlog conversion, higher freight and logistics costs, manufacturing under-absorption and Russia-related charges.
- Operating cash flow shifted from $36.4 million provided to $26.8 million used, primarily reflecting increased inventory investment and other working-capital demands.
- Interest expense declined to $10.7 million from $16.8 million, while the prior-year period included a $7.6 million loss on extinguishment of debt.
- Bookings increased 14.9% and backlog rose 11.3% from December 31, 2021 to $2.230 billion, despite approximately $25.2 million of Russia-related cancellations and approximately $15 million of negative currency effects.
- International sales declined to approximately 62% of total sales from 68% in the prior-year period, partly reflecting currency effects and weaker sales in Europe, Asia Pacific, and the Middle East and Africa.
Guidance, outlook, risks and unusual items
Management expects a return to growth in 2022 supported by improved commodity prices, market conditions, bookings and backlog. However, supply-chain, logistics and labor-availability constraints are expected to continue through the first half of 2022, resulting in longer cycle times. Management expects planned capital spending to increase but remain below pre-pandemic levels and estimates 2022 capital expenditures of $60 million to $70 million before acquisitions.
Flowserve permanently ceased operations in Russia after stopping new orders in February 2022. It recorded a $20.2 million pretax charge, or $21.0 million after tax, including reserves for Russian assets, contract cancellations, exit costs and related financial exposure. Management currently does not expect additional Russia-related impacts to be material, although the exit process is expected to continue throughout 2022.
COVID-19 disruptions, Omicron-related shutdowns, labor shortages, supplier delays, freight inflation and customer inspection delays continued to affect operations. Management expects cost-saving measures and available liquidity to support operations for the next 12 months. It anticipates approximately $20 million of U.S. pension contributions in 2022.
Other risks include backlog conversion and margin execution, customer capital-spending levels, oil and gas exposure, raw-material inflation, foreign-exchange volatility, international sanctions, credit losses, asbestos litigation, pension obligations, cyber risks and potential goodwill or intangible-asset impairment. The asbestos liability was $92.3 million at March 31, 2022, with 8,800 active claims; management believes most claims should remain covered in whole or in part by insurance or indemnities, but notes significant uncertainty.
Important facts for investors to verify
- Whether bookings and the $2.230 billion backlog convert into revenue at acceptable margins despite supply-chain and labor constraints.
- The sustainability of the 25.5% gross margin and the timing of recovery in operating margin.
- Inventory growth, working-capital needs and the company’s ability to restore positive operating cash flow.
- The ultimate cost of exiting Russia and any additional contract cancellations, sanctions exposure or related reserves.
- Liquidity after scheduled term-loan repayments, expected pension contributions, dividends and planned capital expenditures.
- Potential changes in asbestos claims, insurance recoveries and other litigation exposures.
- Foreign-exchange effects, including the impact of approximately $422.2 million of foreign-exchange contracts and related hedge activity.
- Tax developments, including a potentially favorable reduction in tax expense of approximately $15 million within the next 12 months, which is not assured.