Flowserve Corporation Reports Fourth Quarter and Full Year 2014 Results

Highlights of 2014 Fourth Quarter

(all comparisons versus prior year quarter, unless otherwise noted):

• Fully diluted EPS of $1.16, up 14.9% compared to $1.01 per share
• Bookings of $1.32 billion, up 5.6%, or 11.2% on a constant currency basis
• Original equipment bookings of $768 million increased 6.4%, or 12.5% on a constant currency basis
• Aftermarket bookings of $554 million increased 4.4%, or 9.5% on a constant currency basis
• Sales of $1.4 billion, decreased 0.6%, or increased 5.6% on a constant currency basis
• Aftermarket sales of $577 million increased 0.9%, or 6.8% on a constant currency basis
• Gross profit increased $15.2 million to $485.7 million, or 3.2%
• Gross margin increased 130 basis points to 35.2%
• SG&A expense decreased $9.0 million to $251.6 million
• SG&A as a percent of sales decreased 60 basis points to 18.2%
• Operating income increased $25.8 million to $238.7 million, up 12.1%, or up 20.2% on a constant currency basis
• Operating margin increased 200 basis points to 17.3%
• Backlog increased $147.3 million year-to-date to $2.7 billion, up 5.8%, or 11.8% on a constant currency basis

Highlights of 2014 Full Year

(all comparisons versus prior year, unless otherwise noted):

• Fully diluted EPS of $3.76, up 10.3% compared to $3.41 per share
• Bookings of $5.16 billion, up 5.7%, or 8.0% on a constant currency basis
• Original equipment bookings of $3.04 billion, up 5.2%, or 7.5% on a constant currency basis
• Aftermarket bookings of $2.12 billion, up 6.4%, or 8.9% on a constant currency basis
• Sales of $4.88 billion, down 1.5%, or up 0.7% on a constant currency basis
• Full year 2013 revenues included approximately $37 million of revenues from Naval OY business that was divested in the first quarter of 2014
• Aftermarket sales of $2.04 billion, up 2.9%, or 5.5% on a constant currency basis
• Gross profit increased $26.5 million to $1.71 billion, up 1.6%
• Gross margin improved 110 basis points to 35.2%
• SG&A spend as a percentage of sales decreased 30 basis points to 19.2%
• Operating income increased $29.5 million to $789.8 million, up 3.9%, or 7.0% on a constant currency basis
• Operating margin increased 90 basis points to 16.2%
• Full year operating cash flow increased over $80 million, up 17 percent, to $571 million

"I am pleased with our solid fourth quarter and full year results, as we drove continued gross and operating margin improvement through our strong operating performance and sound bidding discipline. We executed at a high level throughout 2014 and we believe our operating platform is performing as well as ever. Although we are not immune to the recent decline in crude oil price or the strengthening U.S. dollar, I believe Flowserve is well positioned, and will pursue numerous growth opportunities, in this environment," commented Mark Blinn, Flowserve s president and chief executive officer. "With a strong financial foundation, combined with our improved backlog, resilient aftermarket franchise, diverse market and geographic exposures, and a proven ability to manage our cost structure, we are prepared to deliver on our recent 2015 financial targets and are confident reaffirming today." Key takeaways from the 2014 fourth quarter and full year results include:

• Full year book-to-bill of 1.06 increased year-to-date backlog by $147 million, up 5.8% or 11.8% on a constant currency basis, and provides a solid foundation as we enter 2015;
• Strong fourth quarter and full year bookings, up 11.2% and 8.0% on a constant currency basis;
• Focused end-user aftermarket strategies drove record full year bookings and sales of $2.12 billion and $2.04 billion, respectively;
• Fourth consecutive quarter of gross margins exceeding 35% with a full year operating margin of 16.2%, reaching the top end of our three year target range;
• Strong operational performance provides increased bandwidth to accelerate our organic and acquisitive growth strategies, as well as further pursue asset optimization opportunities;
• Disciplined cost management demonstrated by SG&A reductions for both the quarter and full year;
• Delivered a 17% increase in year-over-year operating cash flow, to $571 million
• Returned $332 million in capital to shareholders, representing over 60% of net income;
• While an uncertain macro environment has diminished market visibility, we remain confident that our diverse business model, growth strategies and investments support long-term earnings growth; and
• In short, we believe 2015 will provide the opportunity for Flowserve to differentiate itself, leverage the operational improvements made and build upon its leadership position in the flow control industry.

perational Commentary and Segment Performance

Tom Pajonas, executive vice president and chief operating officer, said, "Flowserve s impressive operating performance includes gross and operating margin improvement across all segments for the full year 2014, culminating in a consolidated operating margin of 16.2 percent, at the top end of our target range established three years ago. While I m pleased with the consistent progress over the last three years, opportunity remains and we will continue to focus on the customer, invest in our people, increase productivity and optimize our operating platform to deliver long-term profitable growth.

The recent decline in crude oil price has challenged certain oil and gas projects, but Flowserve s approximate 40 percent oil and gas exposure predominantly services existing infrastructure in the mid- and downstream. With roughly 80 percent of our total revenues focused on existing facilities and their respective maintenance budgets, we believe Flowserve will be less impacted than others might perceive due to the recently announced upstream-focused capital spending reductions and project delays. As we demonstrated in prior commodity downturns, we expect our aftermarket franchise and our original equipment run-rate business to remain resilient throughout the cycle.

With our strong operational performance as a foundation, we believe the current environment provides Flowserve significant opportunities to enhance its long-term strategic position. Even in our areas of strength, we see solid prospects to accelerate our aftermarket and chemical positions, and believe market share growth is achievable in emerging market power, upstream oil & gas and mining, to name a few. We will pursue these and other growth strategies on both an organic and acquisitive approach, and we will continue to invest in R&D and technologies. Additionally, with the completion of our 2015 SIHI acquisition, we expect to further improve that business and drive growth through scale and operational efficiencies."

Financial Performance and Guidance

"Flowserve s strong operational execution, cost focus and share count reduction combined to deliver solid full year 2014 EPS growth of over 10 percent," commented Mike Taff, Flowserve s senior vice president and chief financial officer. "We delivered solid cash flow from operations of $571 million for the full year of 2014 and ended the year with $450 million of cash and cash equivalents. Our gross leverage ratio was 1.3 times EBITDA at year end, well within our stated 1-2 times range, and our net leverage ratio was 0.8 times. Flowserve remains well-positioned from a capital structure standpoint, possessing the financial flexibility to pursue growth and efficiency initiatives to drive long-term value for our shareholders.

While we expect 2015 to continue to demonstrate our normal seasonality, we also expect the first half of 2015 to experience the largest year-over-year comparable challenges, due to the FX differentials, gains from the 2014 Naval sale and the market view on commodity prices that exist between the two years. For 2015, we are reaffirming our Adjusted EPS target range of $3.60 to $4.00 on a revenue range between down 1 to up 3 percent, as detailed in our January 29, 2015 press release.

We also returned over 60 percent of our 2014 net income to our shareholders in the form of share repurchases and dividends, as our strong cash flow provided additional capital to be allocated for repurchases at attractive valuations, continuing our disciplined approach. Our Board of Directors further emphasized their commitment to this policy through the recent approval of a 12.5 percent increase to our quarterly dividend, the fifth consecutive annual double digit increase," Taff concluded.

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

Increase in Quarterly Dividend

Flowserve announced that its Board of Directors has authorized the payment of a quarterly cash dividend of $0.18 per share on the company s outstanding shares of common stock. This dividend represents a 12.5% increase compared to the $0.16 per share amount paid in January 2015.

The dividend is payable on April 10, 2015, to shareholders of record as of the close of business on March 27, 2015.

While Flowserve currently intends to pay regular quarterly cash dividends for the foreseeable future, any future dividends, whether at this $0.18 per share quarterly rate or otherwise, will be reviewed individually and declared by the Board at its discretion, dependent upon the Board s assessment of the company s financial condition and business outlook at the applicable time.