Flowserve (FLS) Q3 Earnings & Revenues Miss, Decline Y/Y
Flowserve Corp. FLS reported third-quarter 2016 adjusted earnings of 52 cents per share, missing the Zacks Consensus Estimate of 61 cents by 14.8%. Also, adjusted EPS declined 35.8% on a year-over-year basis from the year-ago tally of 81 cents.
This is Flowserve’s fourth consecutive quarter of earnings miss. Precipitous top-line decline owing to macroeconomic volatility as well as foreign currency headwinds are proving to be major drags for the bottom line. In addition, the bottom-line decline in the quarter was on account of weaker short-cycle industrial and aftermarket revenues.
Quarter in Detail
Revenues fell 14% year over year to $943.3 million and also lagged the Zacks Consensus Estimate of $977 million. Apart from lower sales across all three sub-segments, negative currency effects had a $20 million impact on revenues. Weak original equipment sales across all geographies were largely attributable to the top-line decline.
The company’s bookings totaled $960 million in the third quarter of 2016, down 9.2% year over year at constant currency (cc). Aftermarket bookings totaled $452 million, down 2.1% at cc. Bookings were affected by negative currency effects of approximately $21 million. Also, prolonged softness in the chemical, power generation and general industries affected customer original equipment bookings, aggravating the decline.
Operating loss increased by $170.6 million, as compared with an income of $167.8 million in the year-ago period. Foreign currency headwinds, lower gross profits and higher selling and administrative expenses resulted in the operating loss. Also, gross margins were down 740 bps to 28.1%. Increased charges related to realignment programs, poor sales, unfavorable impacts of short-term operational inefficiencies and lower margin projects were major dampeners.
Segmental Results
Engineered Product Division revenues in the quarter decreased 11.4% year over year to $455.8 million. Negative currency translation effects along with lower aftermarket and original equipment sales in Latin America, North America, Africa and the Middle East were the major factors behind the revenue decline. Also, bookings were down 7.4% year over year to $497.5 million, mainly due to currency headwinds and softness in chemical & power generation industries.
Sales at the Flow Control Division declined 18.7% year over year to $299.3 million, hit by currency headwinds and soft customer original equipment sales in Asia Pacific, North America, Latin America, Middle East and Europe. Bookings fell 6.2% year over year to $291.9 million, owing to lower orders from general industries in North America, Latin America, Africa and the Middle East.
Also, Industrial Product Division sales were down 15.9% year over year to $203.3 million. Foreign currency headwinds coupled with low original equipment sales resulted in the decline across all main geographies. Also, bookings were down 19.8% to $189.6 million, mainly because of dismal bookings in the chemical industry.
Restructuring Initiatives
Flowserve announced a $125 million realignment program, which was expanded in the fourth quarter of 2015 with the aim of reducing headcount and closing non-profit facilities. Through this program, the company intends to streamline its managerial structure, reduce manufacturing costs and implement cost-saving measures. 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 third-quarter 2016, it raked in $37 million of savings and expects to realize full-year incremental savings of $100 million. Since the beginning of the restructuring program, Flowserve has been working on closing, repurposing or selling two-thirds of its manufacturing facilities.
The company’s program expenses amounted to $37 million in third-quarter 2016. It expects to incur another $160 million as realignment charges in full-year 2016. Going forward, Flowserve is optimistic about the competency of this realignment program and believes it will help slash total headcount by 15–20% by the end of 2017.
Balance Sheet & Cash Flow
Flowserve ended the quarter with cash and cash equivalents of $260.9 million compared with $266 million as of Jun 30, 2016. On Sep 30, 2016, the company’s long-term debt totaled $1,535.7 million, down from $1,543.5 million at the end of Jun 30, 2016.
The company’s net cash flow provided by operating activities totaled $58.2 million for the nine months ended Sep 30, 2016, significantly below $131.0 million recorded in the prior-year period.
Outlook Slashed
On account of the current challenges, Flowserve slashed its 2016 adjusted earnings per share guidance to $2.05 to $2.25 from the previous $2.40 to $2.60. Also, the company revised the lower limit of its revenue guidance downward. It now expects 11–14% decline, as compared with the prior range of 7–14% year-over-year decline, including a 2% impact from foreign currency headwind.
Flowserve’s downcast outlook reflects the ongoing sluggishness in global macroeconomic conditions and lack of visibility in end-markets.
FLOWSERVE CORP Price, Consensus and EPS Surprise
FLOWSERVE CORP Price, Consensus and EPS Surprise | FLOWSERVE CORP Quote
To Conclude
Flowserve’s dismal performance over the trailing four quarters is largely attributable to the macroeconomic concerns plaguing most well managed companies. The company remains vulnerable to cyclicality primarily from the oil & gas, general industrial and chemical industries. Capital spending deferrals as well as reduced activity in its key markets are expected to play spoilsport in the upcoming quarters as well. Two consecutive quarters of an earnings guidance cut raises concern.
Also, persistent weakness in commodity prices and reduced visibility in many of its key markets are marring the company’s top-line performance. Also, operational uncertainties in several regions like Asia-Pacific, North America, Middle East and Latin America are adding to the woes of this Zacks Rank #5 (Strong Sell) company.
Despite these challenges, the company’s focus on cost control, strategic restructuring, high operational excellence and earnings improvement are expected to offset some of the negatives.
Stocks to Consider
Better-ranked stocks in the industry include Applied Industrial Technologies, Inc. AIT, Barnes Group Inc. B and Chart Industries Inc. GTLS. All the three stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Applied Industrial Technologies is one of North America's leading distributors of bearings, linear technologies, power transmission components, rubber products and specialty maintenance items to the MRO and OEM markets. The company managed to beat estimates thrice in the trailing four quarters and has a positive earnings surprise of 4.9%.
Barnes Group is an international manufacturer of precision metal parts and distributor of industrial supplies, serving a wide range of markets and customers. The company posted a healthy earnings beat of 6.8% in the last reported quarter.
Chart Industries is a leading independent global manufacturer of highly engineered equipment used in the production, storage and end use of hydrocarbon and industrial gases. The company posted a whopping earnings beat of 453.9% in the last reported quarter.
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