Flowserve (FLS) Tops Earnings Estimates in Q2, Bookings Solid

Flowserve Corporation FLS reported better-than-expected bottom-line results for the second quarter of 2018, delivering a positive earnings surprise of 20.6%.

This machinery company’s adjusted earnings in the reported quarter were 41 cents per share, surpassing the Zacks Consensus Estimate of 34 cents. Moreover, the bottom line increased 86.4% from the year-ago tally of 22 cents, primarily on the back of sales growth and a lower tax rate.

Segmental Performance Drives Revenues

In the quarter under review, Flowserve’s sales were $973.1 million, reflecting growth of 11% from the year-ago quarter. Foreign currency movements had a positive 1.9% impact on sales growth while divested businesses negatively impacted top-line growth by 1%.

Moreover, the top line surpassed the Zacks Consensus Estimate of $921.6 million by 5.6%.

Aftermarket sales in the reported quarter grew 12.4% year over year (or 10.2% on a constant-currency basis) to $$488 million. Furthermore, original equipment sales totaled $485 million, reflecting year-over-year growth of 9.5% (or 7.9% on a constant-currency basis).

Bookings totaled $1 billion, reflecting growth of 6.8% over the year-ago quarter. Of the end markets, booking strengthened in oil & gas, chemical, and general industries end markets while remained stable for water and declined for power. Backlog at the end of the reported quarter was $1.8 billion, flat sequentially.

The company reports its net sales in three segments, a brief discussion of those are provided below:

Revenues from the Engineered Product Division were $480.7 million, increasing 12.4% year over year or 11.4% on a constant-currency basis. Bookings increased 8.7% year over year to $505.7 million.

Revenues from the Industrial Product Division totaled $205.7 million, increasing 7.2% year over year or 4.2% on a constant-currency basis. Bookings were solid in the quarter under review, increasing 10.2% to $235 million.

Revenues from the Flow Control Division were $306.5 million, increasing 11.3% year over year or 8.9% on a constant-currency basis. Bookings of $318.6 million inched up 0.8% year over year while organically recorded a 1.4% decline.

Mixed Margin Profile

In the quarter under review, Flowserve’s adjusted cost of sales increased 10.4% year over year to $663.1 million. It represented 68.1% of sales compared with 68.5% in the year-ago quarter. Adjusted gross margin increased 40 basis points (bps) year over year to 31.9%. Selling, general and administrative expenses increased 6.9% year over year to $221.4 million. It represented 22.7% of sales.

Adjusted operating income in the quarter under review increased 25% year over year to $90.1 million. Moreover, adjusted operating margin grew 110 bps to 9.3%. Effective tax rate was 26.1% versus 46.3% in the year-ago quarter.

Balance Sheet and Cash Flow

Exiting the second quarter, Flowserve had cash and cash equivalents of $517.4 million, down 3.4% from $535.7 million at the end of the last-reported quarter. Long-term debt balance decreased 3.1%, sequentially, to $1,455 million.

In the first half of 2018, the company used net cash of $56.7 million for its operating activities against $46.6 million net cash generated in the year-ago comparable period. Capital expenditure amounted to $31.7 million, slightly below $29.4 million in the first half of 2017.

During the first half of 2018, the company used $49.7 million for distributing dividends.

Outlook

Flowserve is progressing well with its transformation initiatives. The multi-year Flowserve 2.0 strategy will help in simplifying the operating model and spur growth.

The company has maintained adjusted earnings per share projection of $1.50-$1.70. Revenues are anticipated to increase 3-6%. Adjusted tax rate for the year is predicted to be 27-28%. Capital expenditure is predicted to be $80-$90 million.

Flowserve Corporation Price, Consensus and EPS Surprise

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