Flowserve Corporation Reports First Quarter 2020 Results and Updates COVID-19 Response

  • Taking action in response to COVID-19 while executing on Flowserve 2.0 transformation
  • Bookings of $976.9 million produced a book-to-bill over 1.09 and backlog growth of 1.2%
  • First Quarter GAAP EPS was break-even, and Adjusted EPS of $0.21, reflecting significant impact of COVID-19 and associated temporary site closures of approximately $0.19 per share
  • Delivered solid free cash flow of $30 million in seasonally weak first quarter with continued strong liquidity in excess of $1.3 billion
  • Initiating $100 million of aggressive cost actions, including both structural and temporary 2020 initiatives in response to current market environment

DALLAS–(BUSINESS WIRE)–Flowserve Corporation (NYSE: FLS), a leading provider of flow control products and services for the global infrastructure markets, today announced its financial results for the first quarter ended March 31, 2020.

First Quarter 2020 Highlights (all comparisons to the 2019 first quarter, unless otherwise noted)

  • Reported Earnings Per Share (EPS) of $0.00 and Adjusted EPS[1] of $0.21, down 48.8%

    • Reported EPS includes after-tax adjusted items of approximately $28 million, including realignment, transformation, below-the-line foreign exchange impacts and certain non-cash impairments
    • Both reported and Adjusted EPS include the impact of COVID-19 of approximately $74 million and $25 million of deferred revenue and profit, respectively, as well as $8.4 million of discrete costs in the quarter
  • Total bookings were $976.9 million, down 8.4%, or 6.6% on a constant currency basis

    • Original equipment bookings were $474.8 million, or 49% of total bookings, down 14.6%, or 12.9% on a constant currency basis
    • Aftermarket bookings were $502.0 million, or 51% of total bookings, down 1.7%, or up 0.3% on a constant currency basis
  • Sales were $894.5 million, up 0.5%, or 2.2% on a constant currency basis

    • Original equipment sales were $452.3 million, up 7.7%, or 9.5% on a constant currency basis
    • Aftermarket sales were $442.2 million, down 6.0%, or 4.3% on a constant currency basis
  • Reported gross and operating margins were 29.7% and 2.9%, respectively

    • Adjusted gross and operating margins[2] were 30.8% and 5.9%, respectively
  • Backlog at March 31, 2020 was $2.18 billion, up 1.2% compared to December 31, 2019

“Flowserve’s products and services are classified as essential in the majority of the locations in which we operate, and while most of our operating facilities have been impacted to varying degrees, we have taken extraordinary precautions to maintain business continuity and protect our associates,” said Scott Rowe, Flowserve’s president and chief executive officer. “Despite significant disruption in the first quarter and in early April, we have most of our facilities open and operational with the exception of our Indian manufacturing locations. As a company, we are rapidly adapting to this new environment across the globe and improving our ability to operate every day. Additionally, we are aggressively taking cost out of our business to ensure our cost structure aligns with the current environment. While we expect further disruption due to the ongoing market uncertainty, our core strategy remains in place, and we continue to build on the fundamental operational improvements that began with our Flowserve 2.0 transformation journey.”

Rowe added, “The health and safety of our associates, suppliers and customers has remained Flowserve’s highest priority as we take action to manage the unprecedented impact from this global pandemic. I am extremely proud of our global leadership teams who, in the face of significant uncertainty and disruption, remain focused on delivering critical support, products and services that our customers expect.”

Liquidity and Capital Priorities

Flowserve maintained a strong balance sheet, ending the first quarter with available liquidity of $1.3 billion, including $622 million of cash and cash equivalents and $721 million of available capacity under the company’s revolving credit facility. Flowserve also maintains an investment grade credit rating and has no material debt maturities until March 2022. We are confident in our ability to generate free cash flow and have already taken actions to preserve cash, including elimination of merit increases and non-essential travel, initiating a hiring freeze, and reducing other discretionary spending, as well as plans to keep our capital expenditures below $60 million in 2020. Additionally, we will continue to take further actions to right-size our operations to the current market environment as we work through the customer commitments in our backlog.

Outlook

Rowe concluded, “Despite the magnitude of this crisis, we are better positioned to navigate this environment thanks to the progress we have made on our Flowserve 2.0 transformation, and I am confident we will continue to build on our achievements in the new environment. While our markets have been significantly impacted, our underlying financial position remains strong and we expect to deliver our robust backlog, continue to support our customers, and provide service and support for our global installed base of equipment. We are committed to taking the necessary measures to best position Flowserve to drive long-term value creation for our customers, associates and shareholders.”

As announced on April 6, 2020, Flowserve withdrew its full year 2020 guidance in light of the significant market uncertainty as a result of the COVID-19 pandemic, and its related affects.

First Quarter 2020 Results Conference Call

Flowserve will host its conference call with the financial community on Friday, May 8th at 11:00 AM Eastern. Scott Rowe, president and chief executive officer, as well as other members of the management team will be presenting. The call can be accessed by shareholders and other interested parties at www.flowserve.com under the “Investor Relations” section.

[1] See Reconciliation of Non-GAAP Measures table for detailed reconciliation of reported results to adjusted measures.

[2] Adjusted gross and operating margins are calculated by dividing adjusted gross profit and adjusted operating income, respectively, by revenues. Adjusted gross profit and adjusted operating income are derived by excluding the adjusted items. See reconciliation of Non-GAAP Measures table for detailed reconciliation.

About Flowserve

Flowserve Corp. is one of the world’s leading providers of fluid motion and control products and services. Operating in more than 50 countries, the company produces engineered and industrial pumps, seals and valves as well as a range of related flow management services. More information about Flowserve can be obtained by visiting the company’s Web site at www.flowserve.com.

Safe Harbor Statement: This news release includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended. Words or phrases such as, “may,” “should,” “expects,” “could,” “intends,” “plans,” “anticipates,” “estimates,” “believes,” “forecasts,” “predicts” or other similar expressions are intended to identify forward-looking statements, which include, without limitation, earnings forecasts, statements relating to our business strategy and statements of expectations, beliefs, future plans and strategies and anticipated developments concerning our industry, business, operations and financial performance and condition.

The forward-looking statements included in this news release are based on our current expectations, projections, estimates and assumptions. These statements are only predictions, not guarantees. Such forward-looking statements are subject to numerous risks and uncertainties that are difficult to predict. These risks and uncertainties may cause actual results to differ materially from what is forecast in such forward-looking statements, and include, without limitation, the following: the impact of the global outbreak of COVID-19 on our business and operations; a portion of our bookings may not lead to completed sales, and our ability to convert bookings into revenues at acceptable profit margins; changes in global economic conditions and the potential for unexpected cancellations or delays of customer orders in our reported backlog; our dependence on our customers’ ability to make required capital investment and maintenance expenditures; if we are not able to successfully execute and realize the expected financial benefits from our strategic transformation and realignment initiatives, our business could be adversely affected; risks associated with cost overruns on fixed-fee projects and in taking customer orders for large complex custom engineered products; the substantial dependence of our sales on the success of the oil and gas, chemical, power generation and water management industries; the adverse impact of volatile raw materials prices on our products and operating margins; economic, political and other risks associated with our international operations, including military actions, trade embargoes, epidemics or pandemics or changes to tariffs or trade agreements that could affect customer markets, particularly North African, Russian and Middle Eastern markets and global oil and gas producers, and non-compliance with U.S. export/re-export control, foreign corrupt practice laws, economic sanctions and import laws and regulations; increased aging and slower collection of receivables, particularly in Latin America and other emerging markets; our exposure to fluctuations in foreign currency exchange rates, including in hyperinflationary countries such as Venezuela and Argentina; our furnishing of products and services to nuclear power plant facilities and other critical processes; potential adverse consequences resulting from litigation to which we are a party, such as litigation involving asbestos-containing material claims; expectations regarding acquisitions and the integration of acquired businesses; our relative geographical profitability and its impact on our utilization of deferred tax assets, including foreign tax credits; the potential adverse impact of an impairment in the carrying value of goodwill or other intangible assets; our dependence upon third-party suppliers whose failure to perform timely could adversely affect our business operations; the highly competitive nature of the markets in which we operate; environmental compliance costs and liabilities; potential work stoppages and other labor matters; access to public and private sources of debt financing; our inability to protect our intellectual property in the U.S., as well as in foreign countries; obligations under our defined benefit pension plans; our internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud; the recording of increased deferred tax asset valuation allowances in the future or the impact of tax law changes on such deferred tax assets could affect our operating results; our information technology infrastructure could be subject to service interruptions, data corruption, cyber-based attacks or network security breaches, which could disrupt our business operations and result in the loss of critical and confidential information; ineffective internal controls could impact the accuracy and timely reporting of our business and financial results; and other factors described from time to time in our filings with the Securities and Exchange Commission.

All forward-looking statements included in this news release are based on information available to us on the date hereof, and we assume no obligation to update any forward-looking statement.

The Company reports its financial results in accordance with U.S. generally accepted accounting principles (GAAP). However, management believes that non-GAAP financial measures which exclude certain non-recurring items present additional useful comparisons between current results and results in prior operating periods, providing investors with a clearer view of the underlying trends of the business. Management also uses these non-GAAP financial measures in making financial, operating, planning and compensation decisions and in evaluating the Company’s performance. Throughout our materials we refer to non-GAAP measures as “Adjusted.” Non-GAAP financial measures, which may be inconsistent with similarly captioned measures presented by other companies, should be viewed in addition to, and not as a substitute for, the Company’s reported results prepared in accordance with GAAP.

 

 
 
 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

Three Months Ended March 31, 

(Amounts in thousands, except per share data)

2020

 

2019

 
Sales

 $

             894,457

 

 $

       890,051

 

Cost of sales

 

               (628,480

)

 

         (595,975

)

Gross profit

 

                265,977

 

 

          294,076

 

Selling, general and administrative expense

 

               (243,621

)

 

         (205,154

)

Net earnings from affiliates

 

                    3,196

 

 

              2,309

 

Operating income

 

                  25,552

 

 

            91,231

 

Interest expense

 

                 (12,963

)

 

           (14,031

)

Interest income

 

                    1,749

 

 

              2,023

 

Other income (expense), net

 

                  23,462

 

 

            (3,140

)

Earnings before income taxes

 

                  37,800

 

 

            76,083

 

Provision for income taxes

 

                 (36,310

)

 

           (16,587

)

Net earnings, including noncontrolling interests

 

                    1,490

 

 

            59,496

 

Less: Net earnings attributable to noncontrolling interests

 

                   (2,100

)

 

            (2,235

)

Net earnings (loss) attributable to Flowserve Corporation

 $

                   (610

)

 $

         57,261

 

   
Net earnings (loss) per share attributable to Flowserve Corporation common shareholders:    
Basic

 $

                      –  

 

 $

             0.44

 

Diluted

 

                         –  

 

 

                0.44

 

 
 
 
RECONCILIATION OF NON-GAAP MEASURES
(Unaudited)
 

Three Months Ended March 31, 2020

(Amounts in thousands, except per share data)

As Reported (a)

 

Realignment (1)

 

Other Items

 

As Adjusted

 
Sales

 $

          894,457

 

 $

                 –  

 

 $

              –  

 

 $

    894,457

 

Gross profit 

 

             265,977

 

 

             (9,460

)

 

                 –  

 

 

       275,437

 

Gross margin

 

29.7

%

 

                   –  

 

 

                 –  

 

 

30.8

%

 
Selling, general and administrative expense

 

            (243,621

)

 

             (1,278

)

 

         (16,083

)

(3)

 

     (226,260

)

 
Operating income

 

               25,552

 

 

           (10,738

)

 

         (16,083

)

 

        52,373

 

Operating income as a percentage of sales

 

2.9

%

 

                   –  

 

 

                 –  

 

 

5.9

%

 
Interest and other expense, net

 

               12,248

 

 

                    –  

 

 

          25,653

 

(4)

 

       (13,405

)

 
Earnings before income taxes

 

               37,800

 

 

           (10,738

)

 

            9,570

 

 

        38,968

 

Provision for income taxes

 

             (36,310

)

 

                 962

 

(2)

 

         (27,720

)

(5)

 

         (9,552

)

Tax Rate

 

96.1

%

 

9.0

%

 

289.7

%

 

24.5

%

 
Net earnings (loss) attributable to Flowserve Corporation

 $

               (610

)

 $

          (9,776

)

 $

      (18,150

)

 $

      27,316

 

 
Net earnings (loss) per share attributable to Flowserve Corporation common shareholders:
Basic

 $

                   –  

 

 $

            (0.07

)

 $

          (0.14

)

 $

         0.21

 

Diluted

 

                      –  

 

 

               (0.07

)

 

             (0.14

)

 

            0.21

 

 
Basic number of shares used for calculation

 

             130,731

 

 

           130,731

 

 

        130,731

 

 

       130,731

 

Diluted number of shares used for calculation

 

             130,731

 

 

           131,573

 

 

        131,573

 

 

       131,573

 

 
(a) Reported in conformity with U.S. GAAP
 
Notes:
(1)  Represents realignment expense incurred as a result of realignment programs. 
(2)  Includes tax impact of items above.
(3)  Includes $5.6 million related to Flowserve 2.0 transformation efforts and $10.4 million related to discrete asset write-downs.
(4)  Represents below-the-line foreign exchange impacts.
(5)  Includes tax impact of items above, $25.4 million related to Italian tax valuation allowance and $2.0 million benefit related to tax reform.
 
 
 
RECONCILIATION OF NON-GAAP MEASURES
(Unaudited)
 

Three Months Ended March 31, 2019

(Amounts in thousands, except per share data)

As Reported (a)

 

Realignment (1)

 

Other Items

 

As Adjusted

 
Sales

 $

          890,051

 

 $

                 –  

 

 $

              –  

 

 $

    890,051

 

Gross profit 

 

             294,076

 

 

             (5,500

)

 

                 –  

 

 

       299,576

 

Gross margin

 

33.0

%

 

                   –  

 

 

                 –  

 

 

33.7

%

 
Selling, general and administrative expense

 

            (205,154

)

 

             17,430

 

 

           (8,413

)

(3)

 

     (214,171

)

Loss on sale of business

 

                      –  

 

 

                    –  

 

 

                 –  

 

 

               –  

 

 
Operating income

 

               91,231

 

 

             11,930

 

 

           (8,413

)

 

        87,714

 

Operating income as a percentage of sales

 

10.3

%

 

                   –  

 

 

                 –  

 

 

9.9

%

 
Interest and other expense, net

 

             (15,148

)

 

                    –  

 

 

           (2,707

)

(4)

 

       (12,441

)

 
Earnings before income taxes

 

               76,083

 

 

             11,930

 

 

         (11,120

)

 

        75,273

 

Provision for income taxes

 

             (16,587

)

 

                  (19

)

(2)

 

            2,711

 

(5)

 

       (19,279

)

Tax Rate

 

21.8

%

 

0.2

%

 

24.4

%

 

25.6

%

 
Net earnings attributable to Flowserve Corporation

 $

            57,261

 

 $

          11,911

 

 $

        (8,409

)

 $

      53,759

 

 
Net earnings per share attributable to Flowserve Corporation common shareholders:
Basic

 $

                0.44

 

 $

             0.09

 

 $

          (0.06

)

 $

         0.41

 

Diluted

 

                  0.44

 

 

                0.09

 

 

             (0.06

)

 

            0.41

 

 
Basic number of shares used for calculation

 

             130,982

 

 

           130,982

 

 

        130,982

 

 

       130,982

 

Diluted number of shares used for calculation

 

             131,532

 

 

           131,532

 

 

        131,532

 

 

       131,532

 

 
(a) Reported in conformity with U.S. GAAP
 
Notes:
(1) Represents realignment (expense) income incurred as a result of realignment programs. Income in selling, general and administrative due to gains from the sales of non-strategic manufacturing facilities that are included in our Realignment Programs.
(2)  Includes tax impact of items above.
(3)  Represents Flowserve 2.0 transformation efforts.
(4)  Represents below-the-line foreign exchange impacts.
(5)  Includes tax impact of items above.
 
 
 
SEGMENT INFORMATION
(Unaudited)
 
FLOWSERVE PUMP DIVISION

Three Months Ended March 31,

(Amounts in millions, except percentages)

2020

 

2019

Bookings

 $

           685.1

 

 $

             750.2

 

Sales

 

              635.7

 

 

                609.4

 

Gross profit

 

              195.8

 

 

                200.6

 

Gross profit margin

 

30.8

%

 

32.9

%

SG&A

 

              159.2

 

 

                122.4

 

Segment operating income

 

                39.7

 

 

                 80.5

 

Segment operating income as a percentage of sales

 

6.2

%

 

13.2

%

 
FLOW CONTROL DIVISION

Three Months Ended March 31,

(Amounts in millions, except percentages)

2020

2019

Bookings

 $

           296.3

 

 $

             319.8

 

Sales

 

              260.3

 

 

                282.1

 

Gross profit

 

                74.4

 

 

                 97.7

 

Gross profit margin

 

28.6

%

 

34.6

%

SG&A

 

                57.7

 

 

                 53.3

 

Segment operating income

 

                16.7

 

 

                 44.4

 

Segment operating income as a percentage of sales

 

6.4

%

 

15.7

%

 

 
 

First Quarter 2020 – Segment Results

(dollars in millions, comparison vs. 2019 first quarter, unaudited)

 

 

 

 

 

 FPD 

 

FCD

Bookings

 $

    685.1

 

$

    296.3

 

– vs. prior year

 

-8.7

%

 

-7.3

%

– on constant currency

 

-6.7

%

 

-5.8

%

Sales

 $

    635.7

 

$

    260.3

 

– vs. prior year

 

4.3

%

 

-7.7

%

– on constant currency

 

6.2

%

 

-6.4

%

Gross Profit

 $

    195.8

 

$

     74.4

 

– vs. prior year

 

-2.4

%

 

-23.8

%

Gross Margin (% of sales)

 

30.8

%

 

28.6

%

– vs. prior year (in basis points)

 (210) bps 

(600) bps

Operating Income

 $

     39.7

 

$

     16.7

 

– vs. prior year

 

-50.7

%

 

-62.4

%

– on constant currency

 

-49.3

%

 

-62.6

%

Operating Margin (% of sales)

 

6.2

%

 

6.4

%

– vs. prior year (in basis points)

 (700) bps 

(930) bps

Adjusted Operating Income *

 $

     50.6

 

$

     26.4

 

– vs. prior year

 

-24.7

%

 

-41.6

%

– on constant currency

 

-23.2

%

 

-41.8

%

Adj. Oper. Margin (% of sales)*

 

8.0

%

 

10.1

%

– vs. prior year (in basis points)

(300) bps

(590) bps

Backlog

 $

1,560.6

 

$

    626.0

 

 
* Adjusted Operating Income and Adjusted Operating Margin exclude realignment charges and other specific discrete items

 

 
 
 
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

March 31,

 

December 31, 

(Amounts in thousands, except par value)

2020

2019

 
ASSETS  
Current assets:  
Cash and cash equivalents

 $

            622,299

 

 $

        670,980

 

Accounts receivable, net of allowance for expected credit losses of $66,252 and $53,412, respectively 

 

              732,879

 

 

           795,538

 

Contract assets, net of allowance for expected credit losses of $2,681 at March 31, 2020 

 

              275,927

 

 

           272,914

 

Inventories, net

 

              684,113

 

 

           660,837

 

Prepaid expenses and other

 

              110,296

 

 

           105,101

 

Total current assets

 

            2,425,514

 

 

        2,505,370

 

Property, plant and equipment, net of accumulated depreciation of $1,007,261 and $1,013,207, respectively

 

              550,853

 

 

           572,175

 

Operating lease right-of-use assets, net

 

              182,464

 

 

           186,218

 

Goodwill

 

            1,180,264

 

 

        1,193,010

 

Deferred taxes

 

                31,517

 

 

            54,879

 

Other intangible assets, net

 

              174,538

 

 

           180,805

 

Other assets, net of allowance for expected credit losses of $100,887 and $101,439, respectively

 

              216,924

 

 

           227,185

 

Total assets

 $

         4,762,074

 

 $

     4,919,642

 

 
LIABILITIES AND EQUITY  
Current liabilities:  
Accounts payable

 $

            425,795

 

 $

        447,582

 

Accrued liabilities

 

              410,783

 

 

           401,385

 

Contract liabilities

 

              223,632

 

 

           216,541

 

Debt due within one year

 

                  8,980

 

 

            11,272

 

Operating lease liabilities

 

                36,841

 

 

            36,108

 

Total current liabilities

 

            1,106,031

 

 

        1,112,888

 

Long-term debt due after one year

 

            1,357,108

 

 

        1,365,977

 

Operating lease liabilities

 

              147,031

 

 

           151,523

 

Retirement obligations and other liabilities

 

              466,479

 

 

           473,295

 

Shareholders’ equity:  
Common shares, $1.25 par value

 

              220,991

 

 

           220,991

 

Shares authorized – 305,000  
Shares issued – 176,793  
Capital in excess of par value

 

              497,721

 

 

           501,045

 

Retained earnings

 

            3,661,579

 

 

        3,695,862

 

Treasury shares, at cost – 47,002 and 46,262 shares, respectively

 

          (2,069,063

)

 

      (2,051,583

)

Deferred compensation obligation

 

                  8,324

 

 

              8,334

 

Accumulated other comprehensive loss

 

             (660,122

)

 

         (584,292

)

Total Flowserve Corporation shareholders’ equity

 

            1,659,430

 

 

        1,790,357

 

Noncontrolling interests

 

                25,995

 

 

            25,602

 

Total equity

 

            1,685,425

 

 

        1,815,959

 

Total liabilities and equity

 $

         4,762,074

 

 $

     4,919,642

 

Contacts

Investor Contacts:

Jay Roueche, Vice President, Investor Relations & Treasurer (972) 443-6560

Mike Mullin, Director, Investor Relations (972) 443-6636

Media Contact:

Lars Rosene, Vice President, Corporate & Marketing Communications (972) 443-6644

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