Flowserve Corporation Reports Fourth Quarter and Full Year 2018 Results; Issues 2019 Financial Guidance

  • Strong bookings growth for the fourth quarter and full year
  • Significant quarterly expansion in gross and operating margins
  • Continued progress on Flowserve 2.0 transformation

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 fourth quarter and full year
ended December 31, 2018.

Fourth Quarter 2018 Highlights (all
comparisons to the 2017 fourth quarter, unless otherwise noted)

  • Reported Earnings Per Share (EPS) of $0.48 and Adjusted EPS[1]
    of $0.58

    • Reported EPS includes pre-tax adjusted items of approximately $27
      million, including realignment and transformation expenses and
      below-the-line foreign exchange impacts
    • Adjusted EPS increased 16%, and 18% on a sequential basis
  • Total bookings were $1.05 billion, up 6.1%, or 8.8% on a constant
    currency basis, and included approximately 1% negative impact related
    to divested businesses. Book-to-bill was 1.06

    • Aftermarket bookings were $533 million, or 51% of total bookings,
      up 14.9%, or 18.2% on a constant currency basis
  • Sales were $987 million, down 4.6%, or 2.0% on a constant currency
    basis and included approximately 1% negative impact related to
    divested businesses

    • Aftermarket sales were $496 million, down 1.2%, or up 1.9% on a
      constant currency basis
  • Reported gross and operating margins were 32.6% and 9.4%, respectively

    • Adjusted gross and operating margins[2] increased 300
      and 170 basis points to 33.7% and 11.9%, respectively

Full Year 2018 Highlights (all
comparisons to full year 2017, unless otherwise noted)

  • Reported EPS of $0.91 and Adjusted EPS[1] of $1.75

    • Reported EPS includes pre-tax adjusted items of approximately $146
      million, primarily related to realignment and transformation
      expenses, a loss on divested assets and below-the-line foreign
      exchange impacts
  • Total bookings were $4.02 billion, up 5.7%, or 4.9% on a constant
    currency basis, and included approximately 1% negative impact related
    to divested businesses. Book-to-bill was 1.05.

    • Aftermarket bookings were $2.03 billion, or 50% of total bookings,
      up 10.6%, or 11.0% on a constant currency basis
  • Backlog at December 31, 2018 was $1.90 billion, up 5.3% versus 2018
    beginning backlog
  • Sales were $3.83 billion, up 4.7%, or 3.8% on a constant currency
    basis and included approximately 1% negative impact related to
    divested businesses.

    • Aftermarket sales were $1.90 billion, up 6.3%, or 5.2% on a
      constant currency basis
  • Reported gross and operating margins of 31.0% and 6.5%, respectively

    • Adjusted gross and operating margins[2] increased 90
      and 100 basis points to 32.3% and 9.8%, respectively

“The Flowserve 2.0 transformation continues to drive significant
improvement as seen by the 29% increase in our full year 2018 adjusted
EPS. Improved operational performance drove adjusted gross and operating
margin expansion for both the quarter and full year, including IPD’s
highest adjusted operating margin since 2015,” said Scott Rowe,
Flowserve’s president and chief executive officer. “Double-digit growth
in aftermarket bookings in the quarter, combined with an increased
backlog at year-end provides a solid foundation for growth in 2019.”

Lee Eckert, Flowserve’s senior vice president and chief financial
officer, added, “Flowserve delivered solid operating cash flow of $164
million in the 2018 fourth quarter, continuing the momentum of the
second and third quarters. Working capital efficiency remains a key
priority and we delivered improvement in 2018, including both inventory
and accounts receivables declines since the beginning of 2018, even with
growth in bookings and sales.”

Rowe concluded, “As we look to this year, we remain focused on advancing
our Flowserve 2.0 initiatives to capitalize on the momentum we achieved
in 2018. Our priorities include further operating improvements and
driving strategic and deliberate growth. Despite the current market
uncertainties from ongoing geopolitical headwinds, including tariffs,
sanctions and certain regional challenges, we believe in our ability to
deliver continued operational improvements together with top- and
bottom-line growth. We look forward to our continued progress in 2019 as
we remain committed to driving long-term value creation for our
customers, employees and shareholders.”

2019 Initial Guidance[3]

Flowserve is providing Reported and Adjusted EPS guidance for 2019, as
well as certain other financial metrics, as shown in the table below.

    2019 Target Range
Revenues Up 4.0% to 6.0%
Reported Earnings Per Share $1.60 – $1.80
Adjusted Earnings Per Share $1.95 – $2.15
Net interest expense $55 – $57 million
Adjusted Tax rate 26% – 28%
 

Flowserve’s 2019 Adjusted EPS target range excludes expected realignment
and transformation charges of approximately $65 million, as well as the
potential impact of below-the-line foreign currency effects and certain
other discrete items. Both the Reported and the Adjusted EPS target
range includes the expected revenue increase of approximately 4.0 to 6.0
percent year-over-year, and is based on current foreign currency rates
and commodity prices, 2018 year-end backlog, expected bookings levels
and market conditions, the reset of annual incentive performance goals,
a broad-based merit increase, modest above-the-line negative foreign
currency impacts, net interest expense in the range of $55 to $57
million and an adjusted tax rate of 26 to 28 percent. The quarterly
phasing of expected 2019 earnings is anticipated to reflect Flowserve’s
traditional seasonality, although more pronounced in its second half
weighting as additional transformation benefits are expected to be
realized.

Fourth Quarter 2018 Results Conference Call

Flowserve will host its conference call with the financial community on
Thursday, February 21st 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.
[3] Adjusted 2019 EPS will exclude the Company’s realignment expenses,
the impact from other specific one-time events and below-the-line
foreign currency effects and utilizes year-end 2018 FX rates and
approximately 131 million fully diluted shares.
_ FX headwind is calculated by comparing the difference between the
actual average FX rates of 2018 and the year-end 2018 spot rates
both as applied to our 2019 expectations, divided by the number of
shares expected for 2019.
 

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: 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 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.

 
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
  Three Months Ended December 31,
(Amounts in thousands, except per share data)   2018       2017  
 
Sales $ 986,867 $ 1,034,069
Cost of sales   (665,022 )   (727,575 )
Gross profit 321,845 306,494
Selling, general and administrative expense (231,869 ) (221,422 )
Gain on sale of businesses 159
Net earnings from affiliates   3,235     3,564  
Operating income 93,211 88,795
Interest expense (14,516 ) (15,041 )
Interest income 2,228 1,056
Other expense, net   (2,362 )   (7,855 )
Earnings before income taxes 78,561 66,955
Provision for income taxes   (14,197 )   (172,843 )
Net earnings (loss), including noncontrolling interests 64,364 (105,888 )
Less: Net (earnings) loss attributable to noncontrolling interests   (1,261 )   6  
Net earnings (loss) attributable to Flowserve Corporation $ 63,103   $ (105,882 )
 
Net earnings per share attributable to Flowserve Corporation common
shareholders:
Basic $ 0.48 $ (0.81 )
Diluted 0.48 (0.81 )
       
RECONCILIATION OF NON-GAAP MEASURES
(Unaudited)
 
Three Months Ended December 31, 2018
(Amounts in thousands, except per share data) As Reported (a) Realignment (1) Other Items As Adjusted
 
Sales $ 986,867 $ $ $ 986,867
Gross profit 321,845 (11,104 ) 332,949

Gross margin

32.6 % 33.7 %
 
Selling, general and administrative expense (231,869 ) 513 (13,815 ) (3) (218,567 )
Loss on sale of business
 
Operating income 93,211 (10,591 ) (13,815 ) 117,617
Operating income as a percentage of sales 9.4 % 11.9 %
 
Interest and other expense, net (14,650 ) (2,337 ) (4) (12,313 )
 
Earnings before income taxes 78,561 (10,591 ) (16,152 ) 105,304
Provision for income taxes (14,197 ) 3,211 (2) 10,062 (5) (27,470 )
Tax Rate 18.1 % 30.3 % 62.3 % 26.1 %
 
Net earnings attributable to Flowserve Corporation $ 63,103 $ (7,380 ) $ (6,090 ) $ 76,573
 
Net earnings per share attributable to Flowserve Corporation common
shareholders:
Basic $ 0.48 $ (0.06 ) $ (0.05 ) $ 0.59
Diluted $ 0.48 $ (0.06 ) $ (0.05 ) $ 0.58
 
Basic number of shares used for calculation 130,845 130,845 130,845 130,845
Diluted number of shares used for calculation 131,413 131,413 131,413 131,413
 
(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) Represents Flowserve 2.0 transformation efforts
(4) Represents below-the-line foreign exchange impacts
(5) Includes tax impact of items above and a $5.7 million tax
benefit related to the U.S. Tax Cuts and Jobs Act of 2017
       
RECONCILIATION OF NON-GAAP MEASURES
(Unaudited)
 
Three Months Ended December 31, 2017
(Amounts in thousands, except per share data) As Reported (a) Realignment (1) Other Items As Adjusted
 
Sales $ 1,034,069 $ $ $ 1,034,069
Gross profit 306,494 (10,575 ) 317,069
Gross margin 29.6 % 30.7 %
 
Selling, general and administrative expense (221,422 ) (1,672 ) (4,115 ) (3) (215,635 )
Gain on sale of businesses 159 159 (4)
 
Operating income 88,796 (12,247 ) (3,956 ) 104,999
Operating income as a percentage of sales 8.6 % 10.2 %
 
Interest and other expense, net (21,841 ) (4,294 ) (5) (17,547 )
 
Earnings before income taxes 66,955 (12,247 ) (8,250 ) 87,452
Provision for income taxes (172,843 ) 4,361 (2) (155,538 ) (6) (21,666 )
Tax Rate 258.1 % 35.6 % -1885.3 % 24.8 %
 
Net (loss) earnings attributable to Flowserve Corporation $ (105,882 ) $ (7,886 ) $ (163,788 ) $ 65,792
 
Net (loss) earnings per share attributable to Flowserve Corporation
common shareholders:
Basic $ (0.81 ) $ (0.06 ) $ (1.25 ) $ 0.50
Diluted $ (0.81 ) $ (0.06 ) $ (1.25 ) $ 0.50
 
Basic number of shares used for calculation 130,681 130,758 130,758 130,758
Diluted number of shares used for calculation 130,681 131,417 131,417 131,417
 
(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) Represents $1.2 million of SIHI integration costs and purchase
price adjustments (“PPA”) and $2.9 million of Mexico asset
impairment charge
(4) Represents gain related to the sale of Vogt business
(5) Represents below-the-line foreign exchange impacts
(6) Includes tax impact of items above, a $115.3 million tax charge
related to the U.S. Tax Cuts and Jobs Act of 2017 and certain tax
valuation allowances totaling $43.1 million
   
SEGMENT INFORMATION
(Unaudited)
ENGINEERED PRODUCT DIVISION Three Months Ended December 31,
(Amounts in millions, except percentages)   2018     2017  
Bookings $ 545.0 $ 485.5
Sales 484.6 498.9
Gross profit 146.6 141.7
Gross profit margin 30.3 % 28.4 %
SG&A 90.6 93.9
Segment operating income 59.1 51.5
Segment operating income as a percentage of sales 12.2 % 10.3 %
 
INDUSTRIAL PRODUCT DIVISION Three Months Ended December 31,
(Amounts in millions, except percentages)   2018     2017  
Bookings $ 203.2 $ 205.8
Sales 196.4 215.3
Gross profit 59.2 45.9
Gross profit margin 30.1 % 21.3 %
SG&A 40.5 49.1
Segment operating income (loss) 18.9 (2.9 )
Segment operating income (loss) as a percentage of sales 9.6 % (1.4 %)
 
FLOW CONTROL DIVISION Three Months Ended December 31,
(Amounts in millions, except percentages)   2018     2017  
Bookings $ 318.0 $ 314.1
Sales 325.9 344.6
Gross profit 118.3 118.8
Gross profit margin 36.3 % 34.5 %
SG&A 53.8 49.7
Gain on sale of businesses 0.2
Segment operating income 64.5 68.8
Segment operating income as a percentage of sales 19.8 % 20.0 %
 
CONSOLIDATED STATEMENTS OF INCOME
     
Year Ended December 31,
(Amounts in thousands, except per share data)   2018     2017     2016  
 
Sales $ 3,832,666 $ 3,660,831 $ 3,990,487
Cost of sales   (2,644,830 )   (2,571,878 )   (2,753,689 )
Gross profit 1,187,836 1,088,953 1,236,798
Selling, general and administrative expense (943,714 ) (901,727 ) (965,376 )
(Loss) gain on sale of businesses (7,727 ) 141,317 (7,664 )
Net earnings from affiliates   11,143     12,592     12,926  
Operating income 247,538 341,135 276,684
Interest expense (58,160 ) (59,730 ) (60,137 )
Interest income 6,465 3,429 2,804
Other expense, net   (19,569 )   (21,827 )   (6,439 )
Earnings before income taxes 176,274 263,007 212,912
Provision for income taxes   (51,224 )   (258,679 )   (77,380 )
Net earnings, including noncontrolling interests 125,050 4,328 135,532
Less: Net earnings attributable to noncontrolling interests   (5,379 )   (1,676 )   (3,077 )
Net earnings attributable to Flowserve Corporation $ 119,671   $ 2,652   $ 132,455  
 
Net earnings per share attributable to Flowserve Corporation common
shareholders:
Basic $ 0.91 $ 0.02 $ 1.02
Diluted 0.91 0.02 1.01
       
RECONCILIATION OF NON-GAAP MEASURES
(Unaudited)
 
12 Months Ended December 31, 2018
(Amounts in thousands, except per share data) As Reported (a) Realignment (1) Other Items As Adjusted
 
Sales $ 3,832,666 $ $ $ 3,832,666
Gross profit 1,187,836 (42,697 ) (7,713 ) (3) 1,238,246
Gross margin 31.0 % 32.3 %
 
Selling, general and administrative expense (943,714 ) (11,235 ) (58,180 ) (4) (874,299 )
Gain on sale of business (7,727 ) (7,727 ) (5)
 
Operating income 247,538 (53,932 ) (73,620 ) 375,090
Operating income as a percentage of sales 6.5 % 9.8 %
 
Interest and other expense, net (71,264 ) (18,686 ) (6) (52,578 )
 
Earnings before income taxes 176,274 (53,932 ) (92,306 ) 322,512
Provision for income taxes (51,225 ) 12,863 (2) 23,273 (7) (87,361 )
Tax Rate 29.1 % 23.9 % 25.2 % 27.1 %
 
Net earnings attributable to Flowserve Corporation $ 119,671 $ (41,069 ) $ (69,033 ) $ 229,773
 
Net earnings per share attributable to Flowserve Corporation common
shareholders:
Basic $ 0.91 $ (0.31 ) $ (0.53 ) $ 1.76
Diluted $ 0.91 $ (0.31 ) $ (0.53 ) $ 1.75
 
Basic number of shares used for calculation 130,823 130,823 130,823 130,823
Diluted number of shares used for calculation 131,271 131,271 131,271 131,271
 
(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) Represents $7.7 million related to IPD divestiture write-down of
assets
(4) Represents $9.7 million related to IPD divestiture write-down of
assets, $7.3 million related to implementation costs for the
adoption of ASC 606 and $41.2 million related to Flowserve 2.0
transformation efforts
(5) Represents IPD loss on sale of business
(6) Represents below-the-line foreign exchange impacts
(7) Includes tax impact of items above and a $5.7 million tax
benefit related to the U.S. Tax Cuts and Jobs Act of 2017
       
RECONCILIATION OF NON-GAAP MEASURES
(Unaudited)
 
Twelve Months Ended December 31, 2017
(Amounts in thousands, except per share data) As Reported (a) Realignment (1) Other Items As Adjusted
 
Sales $ 3,660,831 $ $ $ 3,660,831
Gross profit 1,088,953 (43,946 ) (16,928 ) (3) 1,149,827
Gross margin 29.7 % 31.4 %
 
Selling, general and administrative expense (901,727 ) (27,308 ) (33,798 ) (4) (840,621 )
Gain on sale of businesses 141,317 141,317 (5)
 
Operating income 341,135 (71,254 ) 90,591 321,798
Operating income as a percentage of sales 9.3 % 8.8 %
 
Interest and other expense, net (78,128 ) (13,965 ) (6) (64,163 )
 
Earnings before income taxes 263,007 (71,254 ) 76,626 257,635
Provision for income taxes (258,679 ) 17,003 (2) (198,264 ) (7) (77,418 )
Tax Rate 98.4 % 23.9 % 258.7 % 30.0 %
 
Net earnings attributable to Flowserve Corporation $ 2,652 $ (54,251 ) $ (121,638 ) $ 178,541
 
Net earnings per share attributable to Flowserve Corporation common
shareholders:
Basic $ 0.02 $ (0.42 ) $ (0.93 ) $ 1.37
Diluted $ 0.02 $ (0.41 ) $ (0.93 ) $ 1.36
 
Basic number of shares used for calculation 130,703 130,703 130,703 130,703
Diluted number of shares used for calculation 131,358 131,358 131,358 131,358
 
(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) Represents reserve for costs incurred related to a contract to
supply oil and gas platform equipment to an end user in Latin America
(4) Represents $4.4 million of SIHI integration costs and purchase
price adjustments (“PPA”), $29.0 million of asset impairment charges
and $0.4 million reserve for costs incurred related to a contract to
supply oil and gas platform equipment to an end user in Latin America
(5) Represents gain related to the sale of Gestra and Vogt businesses
(6) Represents below-the-line foreign exchange impacts
(7) Includes tax impact of items above, a $115.3 million tax charge
related to the U.S. Tax Cuts and Jobs Act of 2017 and certain tax
valuation allowances totaling $43.1 million

Contacts

Flowserve
Investor Contacts:
Jay Roueche, Vice President,
Investor Relations & Treasurer, (972) 443-6560
Mike Mullin,
Director, Investor Relations, (972) 443-6644

Media Contact:
Lars Rosene, Vice President, Corporate & Marketing
Communications, (972) 443-6636

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