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

Zacks

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

Flowserve Corporation Price, Consensus and EPS Surprise | Flowserve Corporation Quote

Zacks Rank & Stocks to Consider

With a market capitalization of approximately $6 billion, Flowserve currently carries a Zacks Rank #4 (Sell).

Some better-ranked stocks in the industry are Altra Industrial Motion Corp. AIMC, Chart Industries, Inc. GTLS and Barnes Group Inc. B. While both Altra Industrial Motion and Chart Industries sport a Zacks Rank #1 (Strong Buy), Barnes Group carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

In the past 60 days, earnings estimates for each of these stocks improved for the current year and the next year. The average positive earnings surprise for the last four quarters was 4.01% for Altra Industrial Motion, 29.36% for Chart Industries and 6.88% for Barnes Group.

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