Flowserve Reports Sharply Improved Segment Performance In 2005
Flowserve announced financial results for 2005, including significantly improved operating segment results in bookings, sales, gross margin and operating income.
- 2005 Form 10-K Filed with the SEC
- Record bookings of $3.02 billion, up 13 percent, excluding currency
- Record sales of $2.70 billion, up 7 percent, excluding currency
- Consolidated gross profit increased to $862 million, up 14 percent
- Consolidated gross margin percentage improved to 32 percent, an increase of 190 basis points
- Operating income from continuing operations of $190.1 million, up 18 percent
- Earnings per diluted share from continuing operations of 82 cents, up 78 percent, despite being reduced by high professional fees and costs related to the successful $1 billion refinancing
- Earnings per diluted share of 21 cents, including the $34.4 million loss from discontinued operations, which were divested in December 2005
- Strong operating cash flow facilitated funding of $78 million repayment of debt and other financing obligations, a greater than required pension contribution and refinancing related costs
- Net debt-to-capital ratio improved to 40.6 percent
- Number of material weaknesses in internal controls fell significantly and is expected to be further reduced or eliminated in 2006
- Expects to be current with all of its SEC financial report filings by Sept. 30, 2006
2005 Form 10-K Filed
Flowserve filed the 2005 Form 10-K annual report with the SEC. "We are pleased to complete our 2005 financial statements, close the 2005 audit, and file our Form 10-K as we continue to make good progress toward becoming current with all of our SEC quarterly and annual financial report filings," said Flowserve President and Chief Executive officer Lewis M. Kling. "We continue to expect to file our 2005 Form 10-Qs this summer, and file our first and second quarter 2006 Form 10-Qs by the end of September to become current."
2005 Financial Results
Bookings, including discontinued operations, were a record $3.02 billion, a 13 percent increase, excluding currency benefits of approximately $10 million. Year-end backlog, which excludes discontinued operations, was a record $994.1 million, a 27 percent increase, excluding negative currency effects of approximately $67 million. Sales, excluding discontinued operations, were $2.70 billion, a 7 percent increase, excluding currency benefits of approximately $8 million.
Gross profit from continuing operations increased 14 percent to $861.8 million. Gross profit margin percentage improved 190 basis points to 32.0 percent. These increases primarily reflect cost savings resulting from the company's operational excellence and ongoing continuous improvement initiatives, improved operating leverage, improved pricing discipline, increased sales and a lower charge for obsolete and slow moving inventory (OSMI).
"We are extremely pleased by the marked year-over-year improvements in our continuing business operations as we gain traction with our operational excellence initiatives. These initiatives combined with strategic sourcing programs have helped us offset raw material price increases," said CEO Kling. "We are well positioned to continue to take advantage of the robust market environment."
Selling, general and administrative expenses (SG&A) were $671.7 million, an increase of 12 percent, excluding currency effects of approximately $3 million. The increase is mainly due to increases in professional fees related to the 2004 restatement, including increases in audit fees and fees related to tax consulting, accounting and internal audit assistance; an increase in employee-related expenses, primarily as a result of non-recurring costs associated with management transition and severance expenses, including non-cash costs arising from modifications of stock options. These increases were partially offset by decreases in legal expenses and costs related to Sarbanes-Oxley compliance.
"Our 2005 results contain a significant amount of costs associated with the 2004 restatement and management transition. Now that these are behind us, and as we bring in-house more of our compliance efforts, we expect to see a meaningful decline in the amount of these professional fees over future periods," said Chief Financial Officer Mark A. Blinn. "However, some related costs will be included in our financial results for 2006. We anticipate that 2007 will be more representative of our true run rate for such expenses."
Operating income from continuing operations was $190.1 million, an increase of 18 percent. This improvement is mainly due to the factors discussed above that increased gross profit, partially offset by the increases in SG&A. Currency had a nominal effect on 2005 results. Operating margin percentage improved to 7.1 percent, an increase of 70 basis points.
Results for 2005 were impacted by a $37.1 million provision for income taxes, resulting in an effective tax rate of 45 percent compared to a 2004 effective tax rate of 61 percent. In 2005, the consolidated effective tax rate was adversely impacted by high taxes on certain foreign earnings. The company expects its 2006 effective tax rate will be lower.
Net income from continuing operations increased 78 percent to $46.2 million, or 82 cents a diluted share. Including losses of $34.4 million related to discontinued operations, net income was $11.8 million or 21 cents a diluted share. Diluted earnings per share were negatively impacted by a higher average share count of approximately 2 percent.
Discontinued operations were the General Services Group, which was sold in 2005, and the government and marine business unit, which was sold in 2004.
In addition to strategic uses of cash, including a greater than required pension contribution of $45 million and $26 million of costs related to the $1 billion refinancing, the company repaid outstanding debt and effectively reduced other financing obligations by about $78 million, excluding currency effects, as previously disclosed. As a result, the company's net debt-to-capital ratio improved to 40.6 percent at year-end. "Our 2005 refinancing gives us considerable flexibility for employing our cash flow," said CFO Blinn. "We will continue to review a variety of options for using that cash flow in future periods."
2005 SEGMENT RESULTS
Flowserve Pump Division
Flowserve Pump Division (FPD) bookings were $1.58 billion, an increase of 17 percent, excluding currency benefits of approximately $3 million. Sales were $1.40 billion, an increase of 5 percent, excluding currency benefits of approximately $4 million. FPD's gross profit was $390.6 million, an increase of 14 percent. Gross profit benefited from higher sales, price increases, improved pricing discipline, improved operating leverage and the impact of the company's operational excellence initiatives. Gross profit margin percentage increased 220 basis points to 27.9 percent. Operating income was $144.6 million, an increase of $35.7 million, or 32 percent, excluding unfavorable currency effects of approximately $1 million. Operating margin percentage increased 200 basis points to 10.3 percent.
Flow Control Division
Flow Control Division (FCD) bookings were $936.0 million, an increase of $81.5 million, or 10 percent, excluding currency benefits of approximately $3 million. Sales from continuing operations were $894.3 million, an increase of 6 percent, excluding currency benefits of approximately $2 million. FCD's gross profit was $284.9 million, a 13 percent increase. Gross profit benefited from higher sales volume, price increases, improved pricing discipline, improved operating leverage and reduced expense related to OSMI. Gross profit margin percentage increased 180 basis points to 31.9 percent. Operating income from continuing operations was $89.2 million, an increase of 36 percent, excluding currency benefits of less than $1 million. Operating margin increased 220 basis points to 10.0 percent.
Flow Solutions Division
Flow Solutions Division (FSD) bookings were $463.4 million, an increase of 16 percent, excluding currency benefits of approximately $4 million. Sales were $443.6 million, an increase of 12 percent, excluding currency benefits of approximately $3 million. FSD's gross profit was $193.4 million, an increase of 14 percent. Gross profit benefited from higher sales, price increases, improved pricing discipline, improved operating leverage and the impact of the company's operational excellence initiatives. Gross profit margin percentage increased 40 basis points to 43.6 percent. Operating income was $86.0 million, an increase of 18 percent, excluding currency benefits of less than $1 million. Operating margin increased 100 basis points to 19.4 percent.
Internal Controls Update
While the company reported a significant decrease in the number of material weaknesses in its internal controls, the company expects to continue to make significant improvements in reducing or eliminating these weaknesses in 2006.
"We have continued to make significant progress in becoming current with our SEC financial report filings and improving our internal controls and operations, while our operating businesses have continued to successfully implement key operational excellence and process improvement initiatives," Kling said. "These successes are reflected in our improved segment results and position the company very well for the future."
Source: Flowserve Corporation