Flowserve Corporation — Q1 2023 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 organized into the Flowserve Pump Division and Flow Control Division. The filing covers the unaudited three months ended March 31, 2023, compared with the same period in 2022.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Sales | $980.3 million | $821.1 million |
| Gross profit | $296.8 million | $209.6 million |
| Gross margin | 30.3% | 25.5% |
| Operating income | $57.2 million | $7.4 million |
| Operating margin | 5.8% | 0.9% |
| Net earnings attributable to Flowserve | $26.8 million | $(15.8) million |
| Diluted earnings per share | $0.20 | $(0.12) |
| Cash flow from operations | $26.6 million | $(26.8) million |
Sales increased 19.4%, including approximately $24 million of unfavorable currency effects. Gross profit benefited from pricing, higher volume, favorable mix, lower supply-chain inflationary pressure and the absence of $4.6 million of Russia-related cost charges recorded in Q1 2022. SG&A increased 18.5% to $244.3 million, reflecting higher incentive compensation, realignment costs, legal costs, research and development, Velan acquisition expenses and an intangible-asset impairment.
Cash and cash equivalents were $404.7 million at March 31, 2023, down from $435.0 million at December 31, 2022. Total debt was $1.263 billion, including $53.4 million due within one year and $1.209 billion due thereafter. The company had $464.5 million of borrowing capacity under its revolving credit facility after consideration of covenants and letters of credit, and was in compliance with applicable covenants. In April 2023, it borrowed $115.0 million under the facility; $75.0 million was outstanding as of May 1, 2023.
Capital expenditures were $15.3 million in Q1. Management expects 2023 capital expenditures of approximately $75 million to $85 million, before acquisition activity. The company paid $26.2 million in dividends and declared a quarterly dividend of $0.20 per share.
Material changes versus the prior comparable period
- Bookings decreased 2.7% to $1.057 billion, largely because of unfavorable currency effects and lower original-equipment orders in oil and gas and power generation.
- Backlog increased 2.6% from December 31, 2022 to $2.806 billion; approximately 34% related to aftermarket orders.
- Aftermarket revenue was approximately 53% of sales in both periods.
- FPD sales increased 21.6% and segment operating income increased to $79.1 million from $21.0 million; margin improved to 11.3% from 3.6%.
- FCD sales increased 13.6% and segment operating income increased to $18.5 million from $15.2 million; margin improved to 6.6% from 6.1%.
- Operating results benefited from the absence of $20.2 million of pre-tax Russia-related charges recorded in Q1 2022.
- Operating cash flow improved by $53.4 million year over year, although inventory used $70.7 million of cash and accounts receivable used $26.2 million.
- The effective tax rate was 12.9%, compared with negative 30.5% in Q1 2022, primarily reflecting tax-planning benefits and differing effects from foreign operations and the Russia-related charges.
Guidance, outlook, commentary and unusual items
Management expects growth in 2023 as commodity prices, mobility levels and served end-markets improve. It expects to continue converting backlog despite somewhat longer cycle times and does not currently expect a significant increase in backlog cancellations. Management believes existing cash, operating cash flow, available credit and planned cost savings are sufficient for short- and long-term business needs.
The company initiated a 2023 Realignment Program involving consolidation of aftermarket and pump operations and other efficiency actions. It expects approximately $25 million of investment in currently evaluated activities, approximately $13 million of full-year run-rate savings upon completion and an additional broader cost-reduction effort of approximately $50 million beginning in 2023. Q1 realignment charges were $16.9 million.
Flowserve agreed to acquire Velan Inc. for approximately $245 million in cash. Closing is subject to customary conditions, regulatory approvals and target shareholder approval and was expected in the third quarter of 2023. Q1 included $3.1 million of related expenses.
COVID-19-related effects subsided from 2022 but supply-chain, logistics and labor-availability pressures are expected to continue. The company permanently ceased operations in Russia and recorded no comparable Russia-related charge in Q1 2023. Material risks include backlog conversion and margin execution, inflation and raw-material costs, foreign exchange, customer capital spending, international geopolitical conditions and sanctions, supplier and labor disruptions, litigation, acquisitions, pension obligations, taxes, cybersecurity and access to financing.
Asbestos-related claims totaled 8,071 at March 31, 2023, with an estimated asbestos liability of $93.3 million. Management believes most existing claims should continue to receive insurance or indemnity coverage, but notes significant uncertainty regarding ultimate claims, costs and recoveries.
Important facts for investors to verify
- Whether improved gross and operating margins are sustainable after pricing benefits, mix changes and the absence of Russia-related charges.
- Progress toward the 2023 Realignment Program’s approximately $25 million investment and approximately $13 million run-rate savings target.
- Backlog conversion, booking trends and the effect of longer cycle times, supply constraints and potential cancellations.
- Funding and integration of the proposed $245 million Velan acquisition, including closing timing and acquisition-related financing.
- Working-capital requirements, particularly inventory growth, receivable collections and days sales outstanding.
- Debt levels, interest-rate exposure, scheduled term-loan repayments and the effect of the April 2023 revolving-credit borrowing.
- Potential changes in tax expense from audits, unrecognized tax benefits or releases of foreign deferred-tax valuation allowances.
- Developments in asbestos litigation, insurance recoveries and other contingencies.