Flowserve Reports Second Quarter 2013 Earnings

Highlights of 2013 Second Quarter (all comparisons versus prior year quarter, unless otherwise noted):

• Fully diluted EPS of $0.84, up 27.3% compared to split-adjusted $0.66 per share
• Bookings of $1.23 billion, up 1.3%, or 1.8% on a constant currency basis. Sequentially, second quarter 2013 bookings increased 3.3%
• Aftermarket bookings of $505.0 million, essentially flat, and up sequentially 5.7%
• Sales of $1.24 billion, up 4.8%, or 5.1% on a constant currency basis, and up sequentially 13.0%
• Aftermarket sales of $492.5 million, up 3.7%, or 4.1% on a constant currency basis
• Gross profit increased $37.0 million to $421.6 million, up 9.6%
• Gross margin improved 150 basis points to 34.0%
• SG&A as a percentage of sales increased 50 basis points to 19.4%, including approximately 70 basis points net negative impact of certain discrete items in the second quarter of 2012 and 2013
• Operating income increased $18.7 million to $183.5 million, up 11.3%
• Operating margin of 14.8% increased 90 basis points, or up approximately 150 basis points excluding the net negative impact of certain discrete items year-over-year

"Our solid results in the 2013 second quarter further validate our strategies and initiatives we have implemented," indicated Mark Blinn, Flowserve s president and chief executive officer. "Disciplined bookings, increasing sales, improving margins and enhanced capital structure efficiency are the formula for our strong EPS improvement. Flowserve s 17,000 associates are customer focused and producing results for our shareholders, driving robust first half 2013 performance that continues to support our full year EPS target range. We appreciate their ongoing efforts and commitment, as well as the foundation they have provided as we proceed into the second half of the year. Key takeaways from the 2013 second quarter include:

• Recent initiatives, including One Flowserve , have added to higher gross margins, overall operating margin and EPS growth for the quarter as well as year-to-date compared to 2012;
• Bookings remained solid and disciplined, with larger project opportunities on the horizon;
• Diversity in geographic exposure, business mix, customer base and end markets is a major strength;
• Aftermarket strategies and run-rate original equipment projects again delivered increased sales and gross profits;
• Earnings leverage realized on volume and gross margin increases, as single-digit sales growth delivered double-digit profit improvement;
• SG&A expense and fixed cost leverage through ongoing cost control remains a key focus;
• Additional internal initiatives and operational improvements represent continued earnings opportunity; and
• While global economic conditions remain uncertain, we are confident that the strength of our business model and served energy markets provide the characteristics for continued long-term earnings growth."

"In the near term, we will remain focused on the customer and internal operational opportunities within our control to further improve the operational platform and end-user strategies. We are prepared for the large project opportunities as they begin to reach award stage, expected later this year, but will maintain our selectivity and discipline as we anticipate a competitive environment for the early work."

Flowserve s financial results for the first six months of 2013 are highlighted by fully diluted EPS of $1.51 per split-adjusted share, up 23.8%, on a 3.5% increase in total sales to $2.3 billion. Gross profit of $794.9 million and operating income of $354.0 million, during the first half of 2013, represented margins of 34.0%, up 100 basis points, and 15.2%, up 160 basis points, respectively. Bookings for the six months ended June 30, 2013 totaled over $2.4 billion.

Financial Performance and Guidance

"During the second quarter and first half of 2013, we have leveraged single-digit revenue increases into mid-20% EPS growth through improving operations, including a combination of solid revenue flow-through, margin improvement and cost leverage, as well as share count," said Mike Taff, Flowserve s senior vice president and chief financial officer. "With these attributes and our normal earnings seasonality, we remain confident in reaffirming our 2013 split-adjusted EPS guidance of $3.20 to $3.53."

"SG&A expense ticked up during the 2013 second quarter, as compared to 2012, due primarily to certain discrete expenses this year and some one-time benefits a year ago. These items represented a net impact of approximately $8 million year-over-year, representing approximately 50% of the increase."

"While we are pleased with our income statement performance, we do recognize additional internal opportunities remain available to us, primarily through organic growth, further operational efficiencies, capital deployment and working capital metrics. The 2013 second quarter realized an improvement in operating cash flow sequentially with a 3-day reduction in DSO compared to prior year. However year-to-date operating cash flow remains below 2012 levels. We have identified a number of opportunities for working capital improvement that are moving towards implementation, and we continue to believe significant cash flow can be released and employed in our business or returned to shareholders, as we continue to improve the operations and methodically pursue our long-term working capital and cash flow goals."

"We remain strategically focused on deploying cash to the most accretive long-term alternatives, and therefore, we remain committed to returning excess capital to our shareholders while maintaining a solid balance sheet. In the first half of 2013, Flowserve returned approximately $344 million in share repurchases and dividends, and effectively completed last year s $1 billion share repurchase program. Going forward, we will remain faithful to this disciplined approach to capital deployment."

Operational Commentary and Segment Performance (all comparisons versus second quarter 2012 unless otherwise noted)

Tom Pajonas, senior vice president and chief operating officer, said, "The strength of our operating model, particularly the benefits of our diversification, was evident this quarter. In a mixed market and while awaiting the release of larger projects, our operational performance was solid. We recognized significant improvement in gross margin, primarily at the IPD and FCD segments, as we continue to leverage the One Flowserve initiative across the supply chain, contract management and research and development processes. EPD gross margins improved on a solid sales increase and preliminary benefits from ongoing operational improvements, though discrete SG&A items minimized the full flow through to operating income. Disciplined and selective pursuit of new bookings has resulted in a solid level of new work, as we continue to expect the beginnings of larger orders to reach our markets in the second half of 2013. We remain encouraged by the progress these larger original equipment projects are making through the pre-FEED and FEED stages, while our core aftermarket and run-rate business continues to provide the solid foundation for earnings stability."

Flowserve reports its operations through three segments: Engineered Product Division (EPD), Industrial Product Division (IPD) and Flow Control Division (FCD).