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Flowserve (FLS) Q1 Earnings Lag, Revenues Top, Down Y/Y
Zacks Equity Research
Updated
Flowserve Corp. FLS reported first-quarter 2016 adjusted earnings of 39 cents per share, missing the Zacks Consensus Estimate of 42 cents by 7.1%. Also, the adjusted EPS declined 32.8% on a year-over-year basis from the year-ago tally of 58 cents.
The bottom-line decline can be attributed to negative currency translation and higher SG&A expenses. Meanwhile, the decline in the top line was mainly the result of macroeconomic softness.
Quarter in Detail
Revenues fell 6.6% year over year to $947.2 million but surpassed the Zacks Consensus Estimate of $871 million. Apart from lower sales in all the three sub-segments, strengthening of the U.S. dollar and inherent seasonality affected revenues. Macro uncertainty has been a particular drag on capital investments of clients which in turn marred the top-line performance.
The company’s bookings totaled $922 million in the first quarter of 2016, down 7.8% year over year on a constant currency (cc) basis. Aftermarket bookings totaled $447 million, remaining relatively flat (up a meager 0.6%) at cc. Bookings were affected by a competitive pricing environment and softness in the Industrial Product division.
Flowserve’s adjusted operating income in the quarter was $89.2 million, down from $130.8 million recorded in the first quarter of 2015. Also, adjusted operating declined 440 basis points to 9.8% on a year-over-year basis.
Segmental Results
Engineered Product Division revenues in the quarter decreased 2.1% year over year to $473.8 million. Negative currency translation effects along with weak aftermarket sales in Latin America and European region were the factors behind the decline. Also, bookings were down 14.3% year over year to $424.5 million, mainly due to volatility in oil & gas markets and softness in general and chemical industries. Softness in geographies including Latin America, Middle East, North America and Europe aggravated the fall.
Sales at the Flow Control Division declined 8.6% year over year to $299.0 million, hit by currency headwinds and soft customer original equipment sales in Asia Pacific, North America, Latin America and Europe. Bookings fell 4% year over year to $310.1 million, owing to lower orders from chemical and oil and gas industries in North America, Europe and the Middle East.
Also, Industrial Product Division sales were down 11.6% year over year to $197.5 million. Foreign currency headwinds coupled with low original equipment sales resulted in the decline. Europe and Asia Pacific registered the maximum fall in sales. Also, bookings were down 16.1% to $207.7 million, on account of lower orders from chemical and oil & gas industries. Also, currency headwinds were a major drag.
Restructuring Initiatives
Flowserve had previously announced a $125 million realignment program aimed at reducing headcount and closing non-profit facilities. Through this program, the company aspires to streamline its managerial structure, reduce manufacturing costs and implement cost-saving measures. During fourth-quarter 2015, the company had expanded this realignment program to improve its operational structure. Overall, this combined $350 million program is projected to garner cost savings of $125 million in 2016 and another $185 million in 2017.
The company is well on track to achieve its goals, and during first-quarter 2016, it garnered $16 million of savings and expects to realize full-year savings of $125 million. Encouragingly, Flowserve garnered cumulative program savings of approximately $41 million as of Apr 28, 2016, and plans to focus on optimizing its manufacturing platform and cost structure to cater to customer needs.
The company’s program expenses amounted to $13.5 million in first-quarter 2016 while the company expects to incur another $160 million as realignment charges in full-year 2016. Since first-quarter 2015, Flowserve closed 13 facilities, reduced headcount and plans to bring down costs by approximately 15–20% by the end of 2017.
Balance Sheet & Cash Flow
Flowserve ended the quarter with cash and cash equivalents of $310.3 million compared with $366.4 million as of Dec 31, 2015. On Mar 31, 2016, Flowserve’s long-term debt was $1,573.4 million, up from $1,560.6 million at the end of Dec 31, 2015.
The company’s net cash flow used in operating activities totaled $8.0 million for the 3 months ended Mar 31, 2016, compared with the utilization of $93.2 million in the prior-year period.
Outlook Reiterated
Despite the current challenges, Flowserve has reaffirmed its 2016 adjusted earnings per share guidance within $2.40–$2.75. Also, the company expects a 7–14% year-over-year decline in revenues, including a 2% impact from foreign currency headwind.
Going forward
Undoubtedly, Flowserve’s first-quarter earnings have been quite a disappointment as it is the company’s second consecutive miss. Most of the realignment programs undertaken by the company look promising but tangible gains from the initiatives are expected from the second half of 2016. Meanwhile, stabilization of aftermarket spending is a positive despite the strong currency headwinds.
Going forward, we believe the company’s disciplined inorganic investments, initiatives to improve aftermarket and distribution activities and diligent “One Flowserve” culture to drive long-term growth. We believe the company’s strong market share, focus on cost control and strategic restructuring, high operational excellence and increased earnings leverage bode well for long-term growth.
Flowserve currently carries a Zacks Rank #3 (Hold). Better-ranked players in the same sector include EnPro Industries, Inc. NPO, Luxfer Holdings PLC LXFR and Sun Hydraulics Corp. SNHY. All the three stocks sport a Zacks Rank #1 (Strong Buy).
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