Flowserve Corporation: Q1 2024 Form 10-Q Summary
Business context and reporting period
Flowserve Corporation is a global manufacturer and aftermarket service provider of flow-control systems, including pumps, valves, seals, automation products and related services. Operations are conducted through the Flowserve Pumps Division (FPD) and Flow Control Division (FCD), serving infrastructure and industrial markets such as oil and gas, chemical, power generation, water management and general industry. The filing covers the three months ended March 31, 2024, compared with the three months ended March 31, 2023.
Key financial metrics
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Sales | $1,087.5 million | $980.3 million | Up 10.9% |
| Gross profit | $339.0 million | $296.8 million | Up 14.2% |
| Gross margin | 31.2% | 30.3% | Up 90 basis points |
| Operating income | $113.1 million | $57.2 million | Up 97.7% |
| Operating margin | 10.4% | 5.8% | Up 460 basis points |
| Net earnings attributable to Flowserve | $74.2 million | $26.8 million | Up 177.3% |
| Diluted earnings per share | $0.56 | $0.20 | Up $0.36 |
| Cash flow from operations | $62.3 million | $26.6 million | Up $35.7 million |
Aftermarket sales were approximately 51% of total sales, compared with approximately 53% in the prior-year quarter. International sales, including U.S. exports, were approximately 64% of sales, compared with 63% in Q1 2023.
- FPD sales were $769.4 million, up 9.9%; segment operating income was $110.9 million, up 40.2%, and operating margin improved to 14.4% from 11.3%.
- FCD sales were $320.5 million, up 13.8%; segment operating income was $34.7 million, up 87.6%, and operating margin improved to 10.8% from 6.6%.
- Bookings were $1,038.3 million, down 1.8% from $1,057.2 million. Backlog was $2,612.5 million at March 31, 2024, down 3.1% from December 31, 2023, including an approximately $26 million unfavorable currency effect.
- Cash and cash equivalents were $532.0 million at March 31, 2024, compared with $545.7 million at December 31, 2023.
- Total debt was $1,218.8 million, including $66.4 million due within one year. Long-term debt due after one year was $1,152.3 million.
- Capital expenditures were $13.6 million. Management estimates 2024 capital expenditures of $75 million to $85 million, before acquisition activity.
Material changes versus the prior comparable period
- Revenue growth reflected higher aftermarket and original-equipment sales across most regions, with approximately $3 million of favorable currency impact.
- Gross margin benefited from prior pricing actions and higher volume, partly offset by higher annual incentive compensation and $5.5 million of incremental realignment charges.
- SG&A decreased 6.5% to $228.4 million. The reduction reflected lower realignment charges, the absence of $3.1 million of Velan acquisition expenses and the absence of a $2.9 million licensing-intangible write-down recorded in Q1 2023.
- Other expense declined to $0.9 million from $8.0 million, primarily because of improved foreign-exchange forward-contract results and lower foreign-currency transaction losses.
- The effective tax rate increased to 20.5% from 12.9%, primarily reflecting the absence of the prior-year tax-planning benefit and the effects of foreign operations and state taxes.
- Operating cash flow improved despite cash uses from accounts receivable and contract assets. Inventory-related cash use declined substantially from the prior-year quarter.
- The company recognized $7.2 million of realignment charges in Q1 2024, versus $16.9 million in Q1 2023. Cumulative charges under the 2023 Realignment Programs were $73.2 million at March 31, 2024.
Guidance, outlook, risks and unusual items
Management expects continued revenue growth in 2024, supported by a strong backlog, supportive served end-markets, the new operating model and cost savings. The company’s strategic priorities are diversification, decarbonization and digitization. Management expects the evaluated and initiated realignment activities to require approximately $100 million of total investment, including approximately $18 million of non-cash costs, and expects annualized cost savings in excess of $100 million upon completion. Approximately $45 million of savings had been realized through March 31, 2024.
Liquidity is considered adequate for the short and long term. At March 31, 2024, the company reported $672.2 million of available borrowing capacity under its revolving credit facility, after letters of credit. In April 2024, it borrowed $100 million for general corporate purposes; the filing states that $100 million was outstanding as of April 29, 2024. The company was in compliance with applicable debt covenants at March 31, 2024.
- Key risks include global economic conditions, customer capital-spending levels, order cancellations or delays, backlog conversion and margin execution.
- Additional risks include foreign-exchange volatility, raw-material costs, supply-chain and labor disruptions, international political and sanctions risks, customer credit deterioration, interest rates, competition and cybersecurity.
- The company remains subject to asbestos-related litigation. The recorded asbestos liability was $99.4 million at March 31, 2024, with 8,225 active claims. Management believes the reserve and related insurance recoveries are reasonable, but notes that ultimate exposure is subject to significant uncertainty.
- Russia operations were permanently ceased in 2022. The company recorded a $2 million reduction to existing Russia-related reserves in Q1 2024 and does not currently expect material incremental effects.
- Foreign-currency translation produced a $28.2 million loss in other comprehensive income. Management estimates that a 10% change in exchange rates could affect net earnings by approximately $13 million, excluding the impact of foreign-exchange forward contracts.
- Tax audits and valuation allowances could affect future tax expense. Management estimates a possible tax benefit of approximately $5 million within the next 12 months from audit resolutions or statute expirations.
- The company increased its share-repurchase authorization to $300 million and repurchased $2.5 million of shares during the quarter. The quarterly dividend increased to $0.21 per share from $0.20.
Important facts for investors to verify
- Whether bookings stabilize and convert into sales while backlog declines and original-equipment bookings weaken in certain markets.
- Whether gross-margin and operating-margin improvements persist after pricing benefits, incentive compensation and remaining realignment costs.
- Progress toward the projected $100 million-plus annualized realignment savings and the remaining approximately $100 million investment.
- Cash conversion, working-capital trends, capital expenditures and the effect of the $100 million April revolver borrowing.
- Debt repayment requirements, interest-rate exposure and continued compliance with financial covenants.
- Developments in asbestos litigation, insurance recoveries, tax audits and foreign-currency exposure.
- The effect of lower aftermarket mix, customer spending in oil and gas, chemical and water markets, and geopolitical or supply-chain disruptions.