Flowserve Reports Third Quarter 2014 Results

Summary of 2014 Third Quarter

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

• Fully diluted EPS of $0.93, up 3.3%, which included $0.01 per share net benefit from foreign currency, partially offset by a discrete, non-cash charge in IPD
• Bookings of almost $1.3 billion, up 3.7%, or 5.0% on a constant currency basis
• Original equipment bookings of $756.3 million increased 0.8%, or 2.1% on a constant currency basis
• Aftermarket bookings of $518.5 million increased 8.1%, or 9.4% on a constant currency basis
• Sales of $1.2 billion, decreased 2.0%, or 0.7% on a constant currency basis, and was essentially flat as adjusted for divestitures and currency
• Aftermarket sales of $499.6 million increased 7.5%, or 8.8% on a constant currency basis
• Gross profit decreased $1.2 million to $421.5 million, or 0.3%
• Gross margin of 35.0% increased 60 basis points, or was 35.3%, an increase of 90 basis points excluding a discrete non-cash charge in IPD
• SG&A expense decreased $0.7 million to $230.9 million
• Operating income decreased $1.0 million to $192.4 million, down 0.5%, or up 1.0% on a constant currency basis
• Operating margin of 16.0% increased 30 basis points, or was 16.3%, an increase of 60 basis points, excluding discrete non-cash charge in IPD
• Backlog increased $265.4 million year-to-date to $2.8 billion, up 10.4%, or 14.1% on a constant currency basis

"Flowserve’s third quarter results demonstrated strong operational execution and the value inherent in our end-user strategies, aftermarket franchise, geographic and market diversity, broad product portfolio and disciplined approach," commented Mark Blinn, Flowserve’s president and chief executive officer. "Although reported revenues were lower than expected due to a number of factors, we remain optimistic in our ability to grow the business based upon our solid bookings this year and expected execution of our growth strategies. We will continue to improve the efficiency of our global operating platform which will support, and better leverage, the expected long-term increase in activity for our key energy markets. Profitable growth remains a primary focus, including M&A opportunities and organic initiatives, as we position the company to deliver and drive increased shareholder value. Key takeaways from the 2014 third quarter include:

• Solid book-to-bill of 1.06 increased our year-to-date backlog by $265.4 million, up 10.4 percent or 14.1% constant currency, which provides confidence for solid performance in the 2014 fourth quarter and 2015;
• Focused end-user aftermarket strategies resulted in bookings over $518 million, up 8.1%;
• Ongoing success of operational excellence initiatives, including ‘One Flowserve’, supported the third consecutive quarter of gross margins in excess of 35 percent with improved year-over-year operating margins;
• Strong operational performance has increased bandwidth to enhance and accelerate our organic growth and acquisitive growth strategies, and further pursue asset optimization strategies;
• Disciplined cost focus demonstrated by SG&A reductions for both the quarter and year-to-date;
• Continued solid improvement at IPD demonstrated by 13.8% operating margin, up 250 basis points, excluding $3.5 million discrete, non-cash charge; and
• While the global demand environment is difficult to time, we remain confident that our diverse business model, growth strategies and investments supports long-term earnings growth."

Flowserve’s financial results for the first nine months of 2014 (as compared to the 2013 period) are highlighted by fully diluted EPS of $2.60 per share, up 7.9%, on relatively flat constant currency sales of $3.5 billion, adjusted for divestitures. Gross profit of $1.2 billion and operating income of $551.1 million represent margins of 35.1% and 15.8%, up 90 and 40 basis points, respectively. Bookings for the nine months ended September 30, 2014 totaled $3.9 billion, up 5.9% or 7.1% on a constant currency basis, representing a year-to-date book-to-bill of 1.1 times.

Operational Commentary and Segment Performance

Tom Pajonas, executive vice president and chief operating officer, said, "Flowserve s operations continued to perform well in the third quarter, demonstrating the significant improvements in recent years in both on-time delivery and past due backlog. The strong operating profile, coupled with our available capacity, positions us for the anticipated growth in our diverse end markets and geographies. During the third quarter, we continued to experience an increased level of finished product not yet required by our customers due to project delays, deferred product inspections and issued change orders, which impacted our ability to recognize additional revenues this quarter. Despite recent global market indicators of slowing activity and lower demand levels, we have seen a solid level of bids and proposal requests, even while additional uncertainty may enter our customers decision processes. Nevertheless, we remain confident in the long-term strength of our energy markets. Our strong margin performance over the last few years is evidence of the consistent progress we have made from an operational excellence standpoint. While we are never finished on that front, the improvements in our platform provide opportunities to focus on footprint optimization, drive higher absorption rates, pursue inorganic opportunities and increase returns on our assets as we capitalize on the expected growth in our key energy markets."

Financial Performance and Guidance

"Flowserve s strong operational execution and cost focus delivered its highest quarterly level of net income outside a fourth quarter," indicated Mike Taff, Flowserve’s senior vice president and chief financial officer. "Revenues, however, continued to be impacted by elevated customer directed delays, foreign currency headwinds, extended final-investment decision evaluations, challenges faced by certain emerging region customers and the impact of the 2014 first quarter sale of our Russian-focused Naval business. While Flowserve has finished product prepared to ship and manufacturing capacity for significant growth, predicting the timing of delivery dates and the recently volatile foreign currency movements has proven difficult and may persist. However, as is typical with our seasonality, we continue to expect the fourth quarter to generate the strongest earnings of the year, which provides confidence in our tightened 2014 EPS target range of $3.65 to $3.85, representing a 7 to 13 percent year-over-year increase, even as we now expect full-year revenues to be essentially flat on a constant currency basis.

Additionally, we will continue to efficiently allocate capital in our business and opportunistic growth investments, as well as returning capital to shareholders. Year-to-date through the 2014 third quarter, Flowserve returned over $250 million to shareholders in share repurchases and dividends, and our repurchase plan has been incrementally more active through the recent market fluctuations."

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