Flowserve Announces Strong Third Quarter Results

Flowserve Corporation, a leading provider of flow control products and services for the global infrastructure markets, announced today its financial results for the 2013 third quarter.

In addition, Flowserve also today filed its Form 10-Q with the Securities and Exchange Commission for the period ended September 30, 2013.

Highlights of 2013 Third Quarter (all comparisons versus prior year quarter, unless otherwise noted):

– Fully diluted EPS of $0.90, up 30.4% compared to $0.69 per share

– Fully diluted EPS up approximately 22% excluding below the line FX currency effects year over year

– Bookings of $1.23 billion, up 3.7%, or 3.4% on a constant currency basis

– Original equipment bookings of $750.3 million, up 5.6%, or 4.4% on a constant currency basis, and up sequentially 3.6%

– Aftermarket bookings of $479.5 million, up 0.9%, or 1.9% on a constant currency basis

– Sales of $1.23 billion, up 5.4%, or 6.4% on a constant currency basis

– Aftermarket sales of $464.7 million, up 1.4%, or 2.5% on a constant currency basis

– Gross profit increased $33.1 million to $422.7 million, up 8.5%

– Gross margin improved 100 basis points to 34.4%

– SG&A spend essentially flat, and as a percentage of sales decreased 70 basis points to 18.8%

– Operating income increased $27.7 million to $193.4 million, up 16.7%

– Operating margin of 15.7% increased 150 basis points

“We are pleased with the progress and momentum demonstrated thus far in 2013, evidenced by these strong third quarter results,” said Mark Blinn, Flowserve’s president and chief executive officer. “Our continued internal improvement initiatives have the company well-positioned for disciplined profitable growth, continued operational improvement and project opportunities. Key takeaways from the 2013 third quarter include:

Ongoing operational excellence initiatives, including ‘One Flowserve,’ buoyed our margin improvements and supported EPS growth for the quarter as well as year-to-date compared to 2012;

Solid year-over-year and sequential OE bookings growth, particularly in EPD, is a positive indicator despite a difficult 2012 compare quarter that included large IPD orders exceeding $90 million;

Continued bidding discipline remains paramount, as initial large project opportunities anticipated to be highly competitive;

Diversity in geographic exposure, business mix, customer base and end markets remains a major strength;

Aftermarket strategies and run-rate original equipment projects again contributed to increased sales and gross profits, and producing an improved level-loading of our business during the year;

Significant shipments of “legacy” projects suppressed EPD margins this quarter, but improved past-due metrics and enhanced the quality of quarter-end backlog;

Earnings leverage on volume in EPD and gross margin increases in FCD, again drove single-digit sales growth into double-digit profit improvement for the third consecutive quarter;

IPD gross margin increase of 120 basis points is encouraging progress, solidifying the operational platform to pursue growth;

Strong SG&A expense and fixed cost leverage realized and remains a key focus; and

While some uncertainty remains within the global economy, the strength of our business model and the energy markets we serve provide confidence to our outlook for long-term earnings growth.”

“In summary, our strong third quarter results again demonstrate that our internal initiatives, disciplined approach and end-user strategies are delivering value to our customers, and in turn to Flowserve shareholders.”

Financial Performance and Guidance

“For the third quarter of 2013, our single-digit revenue increase produced solid operating leverage and incremental margins. These improvements, when combined with the share count reduction, delivered EPS growth over 30%,” commented Mike Taff, Flowserve’s senior vice president and chief financial officer. “Focused cost control yielded impressive SG&A leverage during the 2013 third quarter, as compared to 2012, driving SG&A as a percent of sales to 18.8%, as each segment delivered a reduction in absolute dollar SG&A spend.”

“Even with our strong third quarter financial results, we continue to address opportunities to improve our performance. Initiatives to improve our working capital are an example and are gaining traction. In the 2013 third quarter, we realized solid operating cash flow improvement both year-over-year and sequentially. We also showed progress in a five day reduction in DSO compared to prior year, which builds on the three day improvement in the second quarter. With meaningful “legacy” shipments, we also saw significant improvement in our past due backlog, although our inventory turns were essentially flat. Overall, this progress validates that our focus is well-placed and that opportunities remain available.”

“As we pursue our long-term working capital and cash flow goals, we remain strategically focused on deploying cash to the most accretive long-term alternatives, including organic and acquisitive investments or by returning excess capital to our shareholders, all while maintaining a solid balance sheet. Through the first nine months of 2013, Flowserve returned approximately $427 million in share repurchases and dividends. Going forward, we will remain faithful to this disciplined approach to capital deployment.”

“We are encouraged by the year-to-date results we have delivered with a more level-loaded business, but we still anticipate the fourth quarter to be the pinnacle of the full year. As such, we have increased the lower-end of our prior guidance range, and now expect 2013 EPS between $3.33 and $3.53.”

Operational Commentary and Segment Performance (all comparisons versus third quarter 2012 unless otherwise noted)

“Our strong and improved operational performance was validated by these solid third quarter results,” said Tom Pajonas, senior vice president and chief operating officer. “In particular, the benefits from our ‘One Flowserve’ initiatives continue to enhance our operations, while our commitment to a disciplined and selective pursuit of project work is designed to generate sales with the desired outcomes. Together, this formula in the 2013 third quarter delivered significant flow through to the operating income line in EPD, with continued strong income and margin growth in FCD. As we look ahead, these ongoing essentials are positioning the business to maximize project opportunities as the cycle gains momentum.”

“In the third quarter 2013, Flowserve customers entrusted us with our highest level of original equipment bookings since the first quarter of 2012, representing continued strong run-rate activity plus a few medium size awards. With regard to larger orders, we remain encouraged by the size and number of projects that are progressing through the pre-FEED and FEED stages, including a few which have already been officially awarded to EPC firms. Our larger OE bookings typically follow this process, and therefore the vast majority of opportunities are still on the horizon. We anticipate that initial bidding opportunities for larger projects will prove very competitive. As such, we will maintain our discipline and selectivity to ensure the quality of our backlog.”

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Press Release, October 25, 2013