Flowserve Corporation Reports Fourth Quarter and Full Year 2012 Results

04.03.2013

Flowserve Corp. announced financial results for the fourth quarter and full year of 2012. In a separate release, the company also announced a 16.7% increase in its quarterly dividend to 42 cents per share, a replenished stock repurchase authorization to $750 million and an approved 3-for-1 stock split, subject to shareholder action.

In addition, Flowserve filed its 2012 Annual Report on Form 10-K with the Securities and Exchange Commission. Highlights from the fourth quarter and full year 2012 results include:

Fourth Quarter 2012 (all comparisons versus fourth quarter 2011 unless otherwise noted):

  • Fully diluted EPS of $2.83, up 25.8%
  • Bookings of $1.08 billion, down 5.6%, or 4.3% excluding negative currency effects of approximately $15 million
    • Aftermarket bookings of $489 million, up 4.7%
  • Sales of $1.33 billion, up 5.0%, or 6.5% excluding negative currency effects of approximately $20 million
    • Aftermarket sales of $575 million, up 10.6%, or 11.0% on a constant currency basis
  • Gross margin increase of 50 basis points to 33.7%
  • SG&A as a percentage of sales up 30 basis points to 18.7%
  • Operating income of $202.8 million, up 4.9%, or 6.4% excluding negative currency effects of approximately $3 million
  • Operating margin constant at 15.3%

Full Year 2012 (all comparisons versus full year 2011 unless otherwise noted):

  • Fully diluted EPS of $8.51, up 11.4%, including $0.85 of net negative currency effects
  • Bookings of $4.71 billion, up 1.1%, or 5.5% excluding negative currency effects of approximately $204 million
    • Aftermarket bookings of $1.93 billion, up 4.0%, or 7.1% on a constant currency basis
  • Sales of $4.75 billion, up 5.3%, or 9.9% excluding negative currency effects of approximately $204 million
    • Aftermarket sales of $1.95 billion, up 5.6%, or 9.0% on a constant currency basis
  • Gross margin decrease of 30 basis points to 33.3%
  • SG&A as a percentage of sales down 90 basis points to 19.4
  • Operating income of $675.8 million, up 9.2%, or 15.0% excluding negative currency effects of approximately $36 million
  • Operating margin increase of 50 basis points to 14.2%
  • Backlog at December 31, 2012 of $2.65 billion, including positive currency effects of $22 million, compared to $2.69 billion in backlog at December 31, 2011

Mark Blinn, Flowserve president and chief executive officer, said, "I am pleased with our fourth quarter performance, which was a good finish to the year and culminated in our solid full year 2012 results as we managed through a challenging macroeconomic environment. During the year, we focused internally on operational efficiency and leveraging our One Flowserve initiative. As a result of these operational improvements and our increased focus on cost, we delivered on our long-term goal of leveraging mid-single digit organic revenue growth into double-digit earnings per share growth.

As the year progressed, we also improved upon our order execution process and heightened our discipline and selectivity, resulting in both bookings growth and a higher quality of projects in backlog. Our aftermarket business continued to show strength, with our end-user focus and strategic localization initiatives supporting our highest annual aftermarket bookings level over $1.9 billion.

Looking forward to fiscal 2013, we expect to build upon last year s progress and capitalize on anticipated improving economic growth rates in latter 2013 to drive long-term value for our shareholders. While global macroeconomic uncertainty remains, we anticipate modest improvement in the U.S., stability in our European exposures and solid opportunities in the developing regions that we targeted with additional capacity in 2012. When value-creating opportunities arise, we are also well positioned to execute on our inorganic growth strategy, targeting bolt-on opportunities where we can leverage our global sales force and aftermarket platform to grow the business at a faster pace."

Financial Performance and Guidance

Mike Taff, senior vice president and chief financial officer, said, "Our strong execution and operational excellence efforts throughout the year resulted in over 11% earnings per share growth and operating margin expansion of 50 basis points, keeping us on track for our previously announced 2014 margin improvement target of 150 to 250 basis points above 2011 margins. While opportunities remain, our recent working capital initiatives contributed to the strong operating cash flow of $517 million generated during the year.

We returned nearly $850 million of capital to shareholders during 2012, as we also executed on our capital structure strategies to increase the efficiency of our balance sheet while remaining positioned for profitable growth investments. Throughout, we maintained a disciplined approach to capital deployment and continued investing to optimize our operational platform and further grow our business. I am pleased that our Board of Directors has recently approved a 16.7% dividend increase, replenished our share repurchase authorization to $750 million and approved a 3-for-1 stock split, subject to shareholder action, all of which we believe will prove beneficial to our owners.

Similar to 2012, our 2013 earnings guidance of $9.60 to $10.60 per share will reflect traditional seasonality, as well as the impact on our backlog of a slowing economy in latter 2012, and thus will have earnings weighted towards the second half of the year. We further expect the 2013 first quarter to be the trough of the year, with a somewhat challenging year-over-year compare primarily due to Venezuela s recent devaluation of the bolivar, with a forecasted first quarter 2013 impact of approximately $3 million, as well as a higher effective tax rate, and with the one-time $10.4 million benefit recognized in the first quarter of 2012 resulting from the sale of our prior Rio de Janeiro facility. Although our 2013 earnings will be weighted toward the second half of the year, we remain confident in our ability to achieve our full-year goals."

Operational Commentary and Segment Performance(all comparisons versus fourth quarter 2011 or full year 2011 unless otherwise noted)

Tom Pajonas, senior vice president and chief operating officer, said, "I am pleased with the operational improvements we made throughout 2012, as certain key initiatives such as on-time delivery, working capital management, reduced cost of quality and low-cost sourcing allowed the company to achieve disciplined, profitable growth and further positioned the business to capture expected improvements in our end markets. We saw solid activity across our served industries in 2012, with the exception of power, which remains soft and competitive. While most of our original equipment activity consisted of small to mid-sized projects, as we look at 2013 we are encouraged that pre-FEED and FEED work remains at high levels, and we continue to expect the final approval of certain larger projects in the second half of 2013."

Engineered Product Division (EPD)

EPD bookings for the fourth quarter of 2012 decreased to $558.4 million, down $31.6 million or 5.4%, or 4.0% excluding negative currency effects of approximately $8 million. Bookings for the full year 2012 increased to $2.37 billion, up $39.6 million or 1.7%, or 6.2% excluding negative currency effects of approximately $105 million. EPD sales for the fourth quarter of 2012 increased to $714.2 million, up $48.1 million or 7.2%, or 9.0% excluding negative currency effects of approximately $12 million. Sales for the full year 2012 increased to $2.40 billion, up $81.7 million or 3.5%, or 8.1% excluding negative currency effects of approximately $106 million.

EPD gross profit for the fourth quarter of 2012 increased to $239.8 million, up $9.7 million or 4.2%. Gross margin for the fourth quarter of 2012 decreased 90 basis points to 33.6%. Gross profit for the full year 2012 increased to $811.2 million, up $7.8 million or 1.0%. Gross margin for the full year 2012 decreased 80 basis points to 33.8%, which was primarily attributable to a larger effect on revenue of certain large projects at low margins, partially offset by the effects of operational execution improvements and a sales mix shift towards higher margin aftermarket sales.

EPD operating income for the fourth quarter of 2012 decreased to $121.8 million, down $3.0 million or 2.4%, or 0.8% excluding negative currency effects of approximately $2 million. Operating income for the full year 2012 increased to $396.1 million, up $0.9 million or 0.2%, or 5.3% excluding negative currency effects of approximately $20 million. The full year increase was primarily attributable to the increase in gross profit, partially offset by increased SG&A. Fourth quarter operating margin decreased 160 basis points to 17.1%. Full year 2012 operating margin decreased 50 basis points to 16.5%.

"Full year constant currency bookings growth for EPD was driven by the chemical, oil and gas and general industries. Full year sales growth was led by the North America, Middle East and Asia Pacific regions. Operating margin of 16.5% for 2012 was solid in a mixed market environment, considering the negative impact from currency and the shipment of certain large projects with low margins. Our focus throughout the year on project selectivity, operational improvements and a sales mix shift towards aftermarket helped offset some of this impact, as evidenced by improvements in the second half of 2012," commented Pajonas.

Industrial Product Division (IPD)

IPD bookings for the fourth quarter of 2012 decreased to $206.7 million, down $24.2 million or 10.5%, or 9.6% excluding negative currency effects of $2 million. Bookings for the full year 2012 increased to $964.3 million, up $58.9 million or 6.5%, or 10.4% excluding negative currency effects of approximately $35 million. IPD sales for the fourth quarter of 2012 increased to $265.5 million, up $3.8 million or 1.5%, or 2.2% excluding negative currency effects of approximately $2 million. Sales for the full year 2012 increased to $953.9 million, up $75.7 million or 8.6%, or 12.1% excluding negative currency effects of approximately $31 million.

IPD gross profit for the fourth quarter of 2012 increased to $65.8 million, up $8.6 million or 15.0%. Gross margin for the fourth quarter of 2012 increased 290 basis points to 24.8%. Gross profit for the full year 2012 increased to $230.3 million, up $32.8 million or 16.6%. Gross margin for the full year 2012 increased 160 basis points to 24.1%, which was primarily attributable to charges related to the IPD recovery plan incurred in 2011 that did not recur, lower costs resulting from operational improvements and continued realization of realignment savings, partially offset by a sales mix shift to lower margin original equipment sales.

IPD operating income for the fourth quarter of 2012 increased to $31.7 million, up $8.0 million or 33.8%. Operating income for the full year 2012 increased to $99.5 million, up $36.6 million or 58.2%, or 64.5% excluding negative currency effects of approximately $4 million. The full year increase was primarily attributable to the increase in gross profit and a decrease in SG&A. Fourth quarter 2012 operating margin increased 280 basis points to 11.9%. Full year 2012 operating margin increased 320 basis points to 10.4%.

"I am pleased with the progress IPD made in 2012, which has demonstrated that its recovery plan remains on track," Pajonas added. "IPD delivered double-digit constant currency improvements in bookings and sales for the full year, which were driven by activity in the oil and gas and chemical industries. Both gross margin and operating margin improved for the full year and fourth quarter, resulting from the operational improvements, continued realization of realignment savings and SG&A cost controls that are part of the recovery plan."

Flow Control Division (FCD)

FCD bookings for the fourth quarter of 2012 decreased to $354.2 million, down $23.4 million or 6.2%, or 4.9% excluding negative currency effects of approximately $5 million. Bookings for the full year 2012 decreased to $1.53 billion, down $76.2 million or 4.8%, or 0.8% excluding negative currency effects of approximately $63 million. FCD sales for the fourth quarter of 2012 increased to $396.9 million, up $16.6 million or 4.4%, or 5.7% excluding negative currency effects of approximately $5 million. Sales for the full year 2012 increased to $1.56 billion, up $83.8 million or 5.7%, or 10.2% excluding negative currency effects of approximately $67 million.

FCD gross profit for the fourth quarter of 2012 increased to $142.3 million, up $9.6 million or 7.2%. Gross margin for the fourth quarter of 2012 increased 100 basis points to 35.9%. Gross profit for the full year 2012 increased to $541.4 million, up $29.9 million or 5.8%. Gross margin for the full year 2012 was 34.8%, which was comparable to 2011.

FCD operating income for the fourth quarter of 2012 increased to $69.0 million, up $6.9 million or 11.1%, or 12.7% excluding negative currency effects of approximately $1 million. Operating income for the full year 2012 increased to $253.4 million, up $20.1 million or 8.6%, or 13.8% excluding negative currency effects of approximately $12 million. The full year increase was primarily attributable to the increase in gross profit, partially offset by an increase in SG&A, which was attributable to increased selling and research and development costs. Fourth quarter 2012 operating margin increased 110 basis points to 17.4%. Full year 2012 operating margin increased 50 basis points to 16.3%.

"FCD delivered solid performance, even against a strong 2011 compare. Full year bookings decreased slightly on a constant currency basis, as increased activity in the Middle East was offset by decreases in Europe and Latin America. However, full year sales increased a double-digit percentage on a constant currency basis, led by strong original equipment sales into Asia Pacific and North America, which offset decreases in Europe. The 50 basis point improvement in operating margin, supported by a 60 basis point improvement in SG&A leverage, demonstrated FCD s ability to deliver continued strong operational performance," concluded Pajonas.

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