Flowserve Reports Improved Bookings and Backlog
Flowserve Corp. reported net income of $13.2 million, or 24 cents a share, in the second quarter of 2003, compared with $14.3 million, or 27 cents a share, in the year-ago quarter.
Before special items, net income was 32 cents a share in the second quarter of 2003, in line with the company's guidance. Special items in the quarter relate to integration and restructuring expenses associated with the acquisition of the flow control division of Invensys plc (IFC).
Second Quarter Highlights (Comparisons are versus second quarter 2002, unless noted. Pro forma results give effect as if the May 2, 2002 acquisition of IFC had been completed on Jan. 1, 2002.)
-- Bookings - Up 9 percent, up 4 percent pro forma.
-- Backlog - Up 2 percent.
-- Sales - Up 4 percent, down 1 percent pro forma.
-- Cash flow from operations - Up $33 million, to $84 million.
-- Debt - Optional prepayments of $65 million.
-- Net debt-to-capital ratio - Improves to 54 percent, from 57 percent at end of first quarter of 2003 and 61 percent year-ago.
-- DSO - Improves by 12 days.
-- Inventory turns - Improve to 4.0, from 3.4.
-- Operating income, excluding special items - Down 21 percent, down 17 percent pro forma.
-- EPS - 32 cents compared with 46 cents in year-ago quarter, excluding special items in both periods; 24 cents reported compared with 27 cents reported in year-ago quarter.
Second Quarter Results
Bookings increased 9 percent to $622.4 million in the second quarter of 2003 compared with $572.3 million reported, and increased 4 percent compared with $601.0 million pro forma, in last year's second quarter. "The level of bookings increased during the quarter despite weaker book-and-ship business, reflecting in particular strong petroleum-related project business, much of which will ship in 2004," said Flowserve Chairman, President and Chief Executive Officer C. Scott Greer.
Second quarter 2003 sales increased 4 percent to $614.0 million compared with $592.7 million in the prior year period. This increase reflects the acquisition of IFC, partially offset by the continued weakness in the quick-turnaround business. On a pro forma basis, second quarter 2002 sales were $621.4 million.
Currency translation had an 8 percent favorable impact on bookings and sales compared with 2002.
Operating income, excluding special items, was $49.5 million in the second quarter of 2003, compared with $62.6 million reported and $59.5 million pro forma in the year-ago quarter. The unfavorable comparisons are primarily due to a higher mix of lower margin project business and some cost overruns, despite a favorable contribution from currency translation.
Net income, before special items, was $17.4 million in the second quarter of 2003 compared with $24.0 million, and $22.1 million pro forma, in last year's second quarter. Special items for integration and restructuring expenses related to the IFC acquisition were $6.5 million in the second quarter of 2003. In the year-ago period, these expenses were $2.6 million plus an additional $2.6 million included in cost of sales related to a required purchase accounting revaluation of inventory. Further, special items in the year-ago period included $9.7 million of deferred financing costs related to the extinguishment of debt in connection with the financing of the IFC acquisition. Those expenses were accounted for as extraordinary in 2002 and are now considered as a component of interest in accordance new accounting requirements.
"While our petroleum-related project business was strong, the already weak chemical sector weakened further in the latter half of the second quarter of 2003 due to escalating natural gas costs," Greer said. "The net impact on Flowserve has been to further depress our book-and-ship business to that sector."
Cash Flow and Working Capital Improve
In the second quarter of 2003, the company generated $83.7 million of cash flow from operations after funding $8.3 million of integration and restructuring costs during the quarter. This compares with $50.7 million of cash flow from operations after funding $1.6 million of integration and restructuring costs in the year-ago quarter. The $33 million improvement reflects improvements in receivables and inventories.
Working capital as a percentage of sales improved to 22.4 percent at the end of the second quarter of 2003, compared with 28.7 percent at the end of the prior year period. Days' sales outstanding improved to 69 days at the end of the second quarter of 2003, compared with 81 days at the end of last year's second quarter. Inventory turns improved to 4.0 times for the second quarter of 2003, compared with 3.4 times for the year-ago period.
"A year ago at this time, after the completion of the IFC acquisition, I said that our number one priority - particularly considering our weak end-user markets - was our balance sheet and repayment of debt. This quarter, with our $84 million of cash flow, and $65 million of prepayments, we are continuing to demonstrate we are doing just that." Greer went on to say, "I am particularly pleased with the momentum we are gaining in improving inventory turns."
Continued Debt Reduction
The company continued optional debt repayments, raising the total of debt prepayments made in 2003 to $85 million. The net debt-to-capital ratio improved to 54 percent at the end of the second quarter of 2003, compared with 61 percent at the end of the year-ago period and 57 percent at the end of this year's first quarter. "We remain committed to our goal of reducing debt by $150 million in 2003," Greer said. "Through the first six months of this year, we are more than halfway to this target."
Effective June 30, 2003, the company and its banks amended certain financial covenants in its senior credit facility to, among other things, delay the step-downs in the maximum leverage ratio and step-ups in the minimum interest coverage ratio.
"At the end of the second quarter of 2003, with our leverage ratio at 3.68 and interest coverage ratio at 3.01, Flowserve was in compliance with the terms of the original covenants," Greer said. "However, due to the current favorable financing climate, we felt it was prudent to amend the covenants to provide some additional flexibility."
FPD Bookings Improve, But Current Sales Lower
In the Flowserve Pump Division (FPD), second quarter 2003 sales were $294.1 million compared with $318.6 million in the prior year period. Operating income was $18.2 million in the second quarter of 2003, compared with $42.4 million in the year-ago period. Bookings increased year-over-year and sequentially for the second consecutive quarter. Second quarter 2003 bookings increased 15 percent to $317.0 million compared with the prior year period, and increased 4 percent compared with this year's first quarter. Second quarter 2003 operating margin was 6.2 percent compared with 13.3 percent in last year's second quarter.
"Though FPD's bookings are up, their operating income compared with the second quarter of 2002 reflects lower sales, unfavorable mix and some cost overruns," Greer said. "The mix is unfavorable due to reduced levels of sales to the chemical markets and of parts and services, particularly to the Middle East and Venezuela. The cost overruns relate to some applications that proved more challenging than originally anticipated. As I discussed last quarter, these were already embedded in our earlier earnings guidance."
FCD Posts Stronger Results
In the Flow Control Division (FCD), despite relatively flat year-over-year pro forma sales, operating income, before special items, improved to $22.5 million in the second quarter of 2003, compared with $11.6 million reported and $8.4 million pro forma in the year-ago quarter. Second quarter 2003 sales were $235.2 million compared with $194.2 million reported and $222.9 million pro forma in the prior year period. Second quarter 2003 bookings increased 11 percent to $229.0 million compared with the prior year period, declined 2 percent compared with the prior year pro forma, and increased 6 percent compared with this year's first quarter. Operating margin, before special items, was 9.6 percent compared with 6.0 percent reported and 3.8 percent pro forma in last year's second quarter.
"FCD's results reflect the accretion of the 2002 IFC acquisition and improved operational efficiencies despite the challenging market conditions," Greer said. "For the most part, the integration of IFC is complete, with synergy savings currently at an annual run rate of about $20 million."
FSD Reports Increases in Operating Income, Sales and Bookings
The Flow Solutions Division's (FSD) second quarter 2003 operating income increased 5 percent to $17.5 million, compared with $16.6 million in the year-ago quarter. Second quarter 2003 sales increased 3 percent to $90.9 million, compared with $88.1 million in the second quarter of the prior year. Second quarter 2003 bookings increased 2 percent to $90.0 million compared with the year-ago period. Operating margin improved 40 basis points to 19.2 percent.
"FSD's performance demonstrates that its business strategy and customer-centric focus can generate good operating results across a range of business environments," Greer said.
Greer re-emphasized his positive longer-term outlook for Flowserve and its end-markets. "The good level of project business booked year to date now gives us increasing confidence that at this point, we have seen the trough. I am confident that our end-user strategy, recent organizational changes and our operating initiatives will help us improve our results in 2004. However, for the near term we remain cautious.
"For the third quarter of 2003, we estimate earnings per share, before special items, will be in the range of 22 to 27 cents; and 18 to 23 cents including special items," Greer said. "While we expect our valve business to be up year-over-year due to synergy savings, our current, more conservative outlook for the book-and-ship business and the push out of some third quarter shipments into the fourth quarter result in our lower projected range versus last year. Keep in mind, while we have had two consecutive quarters of good bookings in our pump division, most of that will not ship until 2004.
"Though we can see our way to achieve our earlier full year estimates, given our current, more conservative outlook for the book-and-ship business in the third quarter, we feel a more appropriate projected range for full year earnings per share is $1.23 to $1.37, excluding special items, and $1.00 to $1.14 including special items," Greer said.
Greer emphasized that cash flow and de-leveraging continue to be the company's top priorities. "We are generating strong cash flow, paying down debt early and improving our operations. I am encouraged by the strength of second quarter bookings, which bodes well for 2004."
Flowserve Corp. (NYSE:FLS) is one of the world's leading providers of industrial flow management services. Operating in 56 countries, the company produces engineered and industrial pumps for the process industries, precision mechanical seals, automated and manual quarter-turn valves, control valves and valve actuators, and provides a range of related flow management services.
Source: Flowserve Corporation