Flowserve Corporation 2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019, with unaudited quarterly data for fourth-quarter 2019. Flowserve manufactures and services pumps, valves, seals, automation and other flow-control systems for oil and gas, chemical, power generation, water management and general industrial customers. Operations are reported in two segments: Flowserve Pump Division (FPD) and Flow Control Division (FCD).
Financial Performance and Position
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Sales | $3,944.9 million | $3,832.7 million | +2.9% |
| Gross profit / margin | $1,295.4 million / 32.8% | $1,187.8 million / 31.0% | Margin +180 bps |
| Operating income / margin | $406.0 million / 10.3% | $247.5 million / 6.5% | +64.0%; margin +380 bps |
| Net earnings attributable to Flowserve | $253.7 million | $119.7 million | +112.0% |
| Diluted EPS | $1.93 | $0.91 | +112.1% |
| Operating cash flow | $312.7 million | $190.8 million | +63.9% |
| Cash and equivalents | $671.0 million | $619.7 million | +$51.3 million |
| Total debt | $1,377.2 million | $1,483.0 million | -$105.8 million |
- Bookings increased 5.4% to $4.24 billion, and year-end backlog increased 14.0% to $2.16 billion. Management expects to recognize approximately 88% of year-end backlog in 2020.
- Aftermarket sales were approximately 50% of consolidated sales and generally carry higher margins than original-equipment sales.
- Working capital was $1.39 billion at year-end. Fourth-quarter days sales outstanding improved to 67 days from 72 days in 2018.
- Capital expenditures were $66.2 million. Financing cash outflows included $105.0 million of debt payments, $99.6 million of dividends and $15.0 million of share repurchases.
- The company had an $800.0 million unsecured senior credit facility, with $711.5 million available for borrowing at year-end and no revolving loans outstanding. The company was in compliance with debt covenants.
- Senior notes totaled $1,354.1 million, primarily maturing in 2022 and 2023. Net debt to net capital was 28.0%, compared with 34.2% in 2018.
Fourth-Quarter 2019
Fourth-quarter sales were $1,068.2 million, compared with $986.9 million in the fourth quarter of 2018. Gross profit increased to $349.6 million from $321.8 million. Net earnings attributable to Flowserve increased to $69.8 million from $63.1 million, and diluted EPS increased to $0.53 from $0.48. The filing does not provide fourth-quarter operating cash flow or debt balances separately.
Material Changes Versus the Prior Comparable Period
- FPD was the primary driver of improvement: sales increased 3.2%, segment operating income increased 70.9% to $343.5 million, and operating margin rose to 12.7% from 7.7%. FPD backlog increased 21.4% to $1.56 billion.
- FCD sales increased 2.3%, but segment operating income decreased 1.6% to $198.0 million and margin declined to 15.9% from 16.5%, primarily due to a less favorable original-equipment mix.
- Gross-margin expansion reflected higher-margin project revenue, operational efficiency, lower realignment charges and the absence of a $7.7 million 2018 inventory write-down.
- SG&A declined 4.7% to $899.8 million, partly because of lower transformation and realignment costs and the absence of certain 2018 impairment and divestiture-related charges.
- 2019 included $32.0 million of realignment and transformation costs, compared with $95.1 million in 2018. The Realignment Programs were substantially complete at year-end, with $351.7 million of cumulative charges since inception.
- The company adopted the new lease standard in 2019, recording approximately $225 million of additional lease assets and liabilities at adoption without a material impact on reported earnings or cash flow.
Outlook, Commentary and Risks
- Management expects a competitive economic environment in 2020 and remains cautious because of uncertain customer capital spending and international economic and political conditions. Results are expected to be weighted toward the second half of the year.
- Management expects continued benefits from the Flowserve 2.0 Transformation, aftermarket strength, disciplined cost management, working-capital initiatives and a diversified customer base, but did not provide quantified revenue or earnings guidance.
- Estimated 2020 capital expenditures are $90 million to $100 million, before acquisitions. Expected pension contributions are approximately $20 million for the U.S. plan and $2 million for non-U.S. plans.
- Management expects sufficient operating cash flow, cash balances and credit-facility capacity to fund working capital, capital expenditures, dividends, repurchases, debt payments and pension contributions.
- Key risks include cyclical and potentially delayed customer capital spending, oil-price and commodity volatility, backlog cancellations or delivery penalties, pricing pressure, raw-material costs, foreign-exchange exposure, tariffs and international political conditions.
- Material contingencies include asbestos-related litigation, environmental remediation at five Superfund sites, product liability and warranty claims, uncertain tax positions and pension obligations. Management believes reserves are adequate and routine litigation is not currently expected to be material, but outcomes remain uncertain.
- Goodwill was $1.19 billion at year-end. No goodwill impairment was recorded, although the Pump reporting unit remains sensitive to market conditions, operating performance and valuation assumptions.
- PricewaterhouseCoopers issued an unqualified audit opinion and concluded that internal control over financial reporting was effective as of December 31, 2019.
Investor Verification Points
- Verify whether the $2.16 billion backlog converts to revenue and cash flow at the expected pace, particularly the approximately 88% expected in 2020.
- Assess whether FPD margin gains and transformation savings are sustainable after realignment programs substantially conclude.
- Monitor FCD margin recovery and the mix between original-equipment and aftermarket sales.
- Review 2022 and 2023 debt maturities, refinancing plans and compliance with leverage and interest-coverage covenants.
- Track working-capital investment, especially inventories and contract assets, against management’s cash-conversion objectives.
- Evaluate sensitivity to foreign-exchange movements; management estimated that a 10% currency-rate change would affect annual net earnings by approximately $17 million before considering forward-contract effects.
- Review developments in asbestos, environmental, tax, warranty and product-liability matters, as well as the assumptions supporting goodwill and deferred-tax-asset valuations.