Flowserve Corporation: Q2 2021 Form 10-Q Summary
Business context and reporting period
Flowserve manufactures engineered pumps, valves, seals, automation products and related aftermarket services for oil and gas, chemical, power generation, water and general industrial markets. Operations are reported through the Flowserve Pump Division (FPD) and Flow Control Division (FCD). The filing covers the unaudited quarter and six months ended June 30, 2021, compared with revised 2020 results.
Financial performance and key metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Sales | $898.2 million | $925.0 million | $1,755.5 million | $1,818.5 million |
| Gross profit / margin | $278.2 million / 31.0% | $269.7 million / 29.2% | $529.1 million / 30.1% | $536.2 million / 29.5% |
| Operating income / margin | $72.2 million / 8.0% | $43.5 million / 4.7% | $128.3 million / 7.3% | $67.7 million / 3.7% |
| Net earnings attributable to Flowserve | $45.4 million | $6.1 million | $59.4 million | $18.3 million |
| Diluted EPS | $0.35 | $0.05 | $0.45 | $0.14 |
| Operating cash flow | Not separately provided | Not separately provided | $61.3 million | $20.2 million |
- Q2 bookings rose 17.9% to $952.8 million; six-month bookings increased 6.3% to $1.897 billion.
- Backlog was $1.950 billion at June 30, 2021, up 5.1% from December 31, 2020; approximately 37% was aftermarket-related.
- Aftermarket sales represented approximately 52% of total sales in both the quarter and first six months, versus approximately 50% in the comparable 2020 periods.
- Q2 FPD sales declined 8.4%, while FCD sales increased 11.5%. Segment operating margins were 11.0% for FPD and 13.2% for FCD.
- Cash and cash equivalents were $630.4 million at June 30, 2021, compared with $1.095 billion at December 31, 2020.
- Total debt was $1.317 billion, down from $1.727 billion at year-end 2020. Long-term debt was $1.307 billion.
- Available capacity under the $800 million unsecured revolving credit facility was $738.9 million; outstanding letters of credit were $61.1 million. The company was in compliance with applicable covenants.
- Capital expenditures were $22.5 million in the first six months. Management estimated full-year 2021 capital expenditures of $70 million to $80 million.
- The company declared $0.20 per share in quarterly dividends and repurchased 440,000 shares for $17.5 million during the first six months.
Material changes versus the prior comparable period
- Sales decreased 2.9% in Q2 and 3.5% for the six-month period, primarily because original equipment sales remained weak, especially in North America, the Middle East and Africa.
- Profitability improved substantially. Q2 operating income increased 66.0%, and six-month operating income increased 89.5%, primarily due to lower SG&A, reduced realignment charges, improved aftermarket mix and the absence of 2020 COVID-related underutilized-capacity charges.
- SG&A declined 8.1% in Q2 and 13.8% year to date, with SG&A as a percentage of sales improving to 23.5% and 23.3%, respectively.
- The effective tax rate fell to 5.4% in Q2 and 9.1% year to date, compared with 35.2% and 64.8% in the revised 2020 periods. The 2021 rates benefited from foreign operations, favorable audit resolutions and certain deferred-tax effects.
- Operating cash flow improved by $41.1 million year to date, but financing cash outflows increased to $491.1 million, principally because the company redeemed $400.9 million of 2022 Euro Senior Notes and paid a $7.6 million extinguishment loss.
- The company revised previously reported 2020 financial information for foreign-currency accounting errors, asbestos-related claim accounting and other immaterial errors. Management concluded the errors were not material to the affected prior periods.
Guidance, outlook, risks and unusual items
- Management expected full-year 2021 bookings to increase more than 10% from 2020 levels, but did not provide clear full-year revenue or earnings guidance.
- Management reported approximately $1.4 billion of liquidity at June 30, 2021 and believed cash, operating cash flow and available credit capacity would meet cash needs for the next 12 months.
- Customer spending, particularly in oil and gas, had not returned to pre-pandemic levels. Management did not expect planned capital spending to approach pre-pandemic levels during 2021.
- All facilities were reported open and operating close to pre-COVID levels as of August 5, 2021, but supply-chain delays, higher freight costs, labor disruptions and COVID-19 variants remained risks.
- The 2020 Realignment Program incurred $19.3 million of charges in the first six months of 2021, with total investment expected to be approximately $95 million. Management estimated $49 million of savings in the first six months and approximately $125 million of full-year run-rate savings upon completion; actual savings may differ.
- Approximately $470 million of unsatisfied or partially unsatisfied performance obligations was outstanding at June 30, 2021, with approximately $294 million expected to be recognized as revenue during the remainder of 2021.
- Asbestos litigation remains a significant contingency. Active claims increased to 8,559 at June 30, 2021 from 8,366 at December 31, 2020. Net asbestos-related expense was approximately $4.5 million in the first six months, and ultimate exposure remains subject to substantial uncertainty regarding claims, settlements, courts and insurance recoveries.
- Foreign-currency exposure was material. A 10% change in exchange rates was estimated to affect six-month 2021 net earnings by approximately $11 million before considering foreign-exchange contracts.
- Tax audits in multiple jurisdictions could reduce tax expense by approximately $13 million within the next 12 months, although the timing and outcome are uncertain.
Important facts for investors to verify
- Whether bookings growth converts into revenue and acceptable margins while original equipment demand remains below pre-pandemic levels.
- The sustainability of margin expansion after COVID-related charges and substantial realignment benefits are fully reflected.
- Progress toward the projected $125 million run-rate cost savings and the remaining realignment charges through 2021.
- Cash conversion, working-capital requirements and the effect of dividends, repurchases and debt maturities on liquidity.
- The impact of COVID-19 variants, supply-chain inflation and delays, raw-material costs and customer capital-spending decisions.
- Developments in asbestos claims, insurance recoveries and related accounting reserves.
- Foreign-exchange volatility, tax-audit outcomes and the transition of credit facilities from LIBOR to a successor reference rate.
- The effect of the revised 2020 financial information on historical comparisons and future filings.