Flowserve Corporation 2021 Form 10-K Summary
Business context and reporting period
Flowserve Corporation manufactures and services engineered flow-control equipment, including pumps, valves, mechanical seals, automation systems and aftermarket services. Its two reportable segments are the Flowserve Pump Division (FPD) and Flow Control Division (FCD), serving oil and gas, chemical, power generation, water management and general industrial markets. The filing covers the fiscal year ended December 31, 2021, with quarterly data provided for the fourth quarter.
Flowserve operated in more than 50 countries with approximately 16,000 employees. Aftermarket sales represented approximately 52% of 2021 revenue, compared with 49% in 2020.
Key financial metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Sales | $3.541 billion | $3.728 billion | Down 5.0% |
| Gross profit | $1.050 billion | $1.117 billion | Down 6.0% |
| Gross margin | 29.6% | 30.0% | Down 40 basis points |
| Operating income | $270.8 million | $250.3 million | Up 8.2% |
| Operating margin | 7.6% | 6.7% | Up 90 basis points |
| Net earnings attributable to Flowserve | $125.9 million | $130.4 million | Down 3.4% |
| Diluted EPS | $0.96 | $1.00 | Down 4.0% |
| Operating cash flow | $250.1 million | $310.5 million | Down 19.5% |
| Capital expenditures | $54.9 million | $57.4 million | Down 4.3% |
| Cash and equivalents at year-end | $658.5 million | $1.095 billion | Down $436.8 million |
Fourth-quarter 2021 sales were $919.5 million, gross profit was $267.1 million, net earnings attributable to Flowserve were $16.7 million and diluted EPS was $0.13.
Segments, bookings and backlog
- 2021 bookings were $3.774 billion, up 10.6% from 2020. Year-end backlog was $2.004 billion, up 8.0%.
- FPD sales were $2.471 billion, down 7.7%; segment operating income was $243.2 million, down 10.3%. FPD backlog was $1.369 billion, with approximately 88% expected to be recognized in 2022.
- FCD sales were $1.073 billion, up 1.7%; segment operating income was $119.7 million, down 4.7%. FCD backlog was $639.8 million, with approximately 95% expected to be recognized in 2022.
- Bookings by industry were approximately 35% oil and gas, 26% general industries, 24% chemical, 12% power generation and 3% water management.
Material changes versus the prior comparable period
- Revenue declined primarily because of lower original-equipment sales, customer project delays and supply-chain constraints. Aftermarket mix increased and helped support margins.
- Gross margin declined modestly because of lower-margin original-equipment revenue, inflation and supply-chain effects. The comparison benefited from the absence of $15.0 million of COVID-19-related underutilized-capacity charges recorded in 2020.
- SG&A declined 9.2% to $797.1 million, reflecting lower realignment charges, increased savings, lower travel and lower bad-debt expense.
- Operating income improved despite lower sales, mainly because of SG&A reductions and lower realignment-related charges.
- Net income was pressured by a $46.2 million loss on extinguishment of debt and a $36.1 million unfavorable change in other income and expense, primarily from foreign-currency effects.
- The effective tax rate was negative 1.9%, compared with 30.4% in 2020, due primarily to foreign operations, favorable audit resolutions and the reversal of certain deferred tax liabilities.
- Flowserve identified a foreign-currency accounting error affecting 2020 and revised prior-year information. The company concluded the error was not material to prior periods.
Debt, liquidity and capital allocation
- Total debt and finance lease obligations were $1.303 billion at December 31, 2021, including $988.1 million of fixed-rate senior notes, a $291.9 million term loan and other obligations.
- The company redeemed its 2022 Euro Senior Notes, 2022 Senior Notes and 2023 Senior Notes, funded partly with $500 million of 2032 Senior Notes, a $300 million term loan and cash. These transactions generated the $46.2 million debt-extinguishment loss.
- The amended senior credit facility includes an $800 million revolving facility and a term-loan facility of up to $300 million, with maturity extended to September 2026. Borrowing availability at year-end was $614.2 million after consideration of covenants and letters of credit.
- Total liquidity was approximately $1.273 billion, consisting of $658 million of cash and $614 million of available credit capacity. Flowserve was in compliance with debt covenants at year-end.
- The company paid $104.6 million of dividends, repurchased $17.5 million of stock and had $96.1 million of remaining repurchase authorization.
Guidance, outlook, risks and unusual items
- Management expected revenue growth and higher bookings in 2022, assuming continued pandemic progress. Supply-chain, logistics and labor constraints were expected to persist into at least the first half of 2022, with longer order cycle times.
- Planned 2022 capital expenditures were estimated at $70 million to $80 million. Expected pension contributions were approximately $20 million for the U.S. plan and $2 million for non-U.S. plans.
- Management expected lower 2022 interest expense and believed operating cash flow, cash balances and credit availability would fund working capital, capital expenditures, dividends, repurchases, debt payments and pension contributions.
- COVID-19 continued to affect labor availability, manufacturing utilization, customer capital spending, logistics, freight costs and delivery schedules. Raw-material inflation and supply disruption could pressure margins.
- Other significant risks include cyclical customer capital spending, oil and gas exposure, foreign-currency volatility, geopolitical and trade risks, cybersecurity, environmental and climate regulation, product liability, pension assumptions and debt covenant compliance.
- Asbestos-related claims remained a material contingency. The recorded asbestos liability was approximately $94.4 million, with estimated insurance receivables of approximately $57.4 million. The actuarial range of possible future liability was approximately $75.9 million to $124.6 million.
- Goodwill was $1.196 billion at year-end, including approximately $467 million associated with the pump reporting unit. No impairment was recorded, but management identified the pump reporting unit's valuation as sensitive to future operating performance and market conditions.
- 2021 realignment charges were $22.5 million. Management estimated approximately $106 million of run-rate savings at year-end and expected approximately $125 million of full-year run-rate savings upon completion.
Most important facts for an investor to verify
- Whether backlog converts to revenue as expected, particularly the approximately 90% of consolidated backlog targeted for recognition in 2022.
- Whether supply-chain, freight, inflation and labor pressures improve without further deterioration in gross margin or delivery performance.
- Whether bookings and customer capital spending recover toward pre-pandemic levels, especially in oil and gas and project-based original equipment.
- Whether operating cash flow improves from the 2021 level and supports debt service, dividends, pension contributions and planned capital expenditures.
- The sustainability of cost savings from the realignment program and the risk of additional restructuring charges.
- Debt maturities, interest-rate exposure, credit-facility availability and compliance with leverage and interest-coverage covenants.
- Potential changes in asbestos claims, insurance recoveries, environmental matters, tax positions and goodwill valuation.