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Flowserve Q3 Earnings Beat, Down Y/Y on Lower Revenues

Flowserve Corp. FLS reported third-quarter 2015 adjusted earnings of 81 cents per share, beating the Zacks Consensus Estimate of 78 cents.

 

However, reported earnings for the quarter came in at 70 cents, down 24.7% year over year. The decline was mainly triggered by negative effect of foreign currency translations and the company’s realignment measures. Moreover, weak top-line performance led by macroeconomic softness compounded the fall.

 

Quarter in Detail

Revenues fell 8.3% year over year to $1.096 billion and also lagged the Zacks Consensus Estimate of $1.100 billion. Dismal year-over-year performance was mainly caused by a drastic decline in global capital spending, volatility in oil & gas markets and softness in many of Flowserve’s emerging markets. This apart, strengthening of the U.S. dollar added to the company’s woes.

The company’s total bookings were $1.06 billion for the third quarter of 2015, reflecting a 14.6% sequential decline on a constant currency basis. Excluding SIHI’s contribution, bookings declined 6.3% sequentially. As of Sep 30, 2015, Flowserve’s backlog totaled $2.56 billion, down 5.2% excluding SIHI’s contribution on a constant currency basis.

Flowserve’s operating income in the quarter was $167.8 million, down 12.8% year over year.

Segmental Results

Engineered Product Division revenues for the quarter decreased 19.8% year over year to $514.5 million. Negative currency translation effects, along with poor sales of original equipment in key markets including Asia Pacific, Latin America, the Middle East and Europe, were largely responsible for this fall. Also, bookings were down 26.1% year over year to $537.5 million, mainly due to volatility in oil & gas markets and softness in general and power generation industries.

Also, Flow Control Division sales declined 4.9% year over year to $367.9 million. The lackluster performance was largely brought about by currency headwinds and soft original equipment sales. Bookings fell 20.6% year over year to $311.1 million, owing to lower orders from general & chemical industries and oil & gas market woes.

Nevertheless, Industrial Product Division sales were up 18.9% year over year to $241.6 million. The improvement was largely attributable to benefits reaped from the SIHI acquisition that drove sales of original equipment. Also, bookings in this segment rose 33.1% to $236.5 million, mainly on the back of higher orders from chemical & general and power generation industries.

Restructuring Initiatives

Flowserve remains on track to execute its $100-million realignment initiative that includes reduction in headcount as well as closure of non-profitable facilities. Moreover, the company has undertaken an additional investment of $25 million to streamline management structure, reduce manufacturing costs and implement other cost-saving measures, aiming at overall optimization of the cost structure.

Helped by such initiatives, management expects to generate $125 million in structural run-rate savings annually, up from the previously estimated $70 million.

Balance Sheet and Cash Flow

Flowserve ended the quarter with cash and cash equivalents of $237.8 million compared with $315.3 million as of Jun 20, 2015. On Sep 30, 2015, Flowserve’s long-term debt was $1.61 billion, declining marginally from the $1.63 billion as of Jun 30, 2015.

The company’s net cash flow from operating activities was $131.4 million for the nine months ended Sep 30, 2015 compared with net cash utilized for operating activities of $129.8 million for the prior-year period.

The company returned $320 million to its shareholders through repurchases and dividends year to date.

Outlook Reiterated

Given the present market scenario, Flowserve has reiterated its earnings and revenue guidance for 2015. The company projects earnings within $3.10–$3.40 per share and revenues to decline 10–15% on a year-over-year basis. Both these estimates exclude contribution from SIHI that was acquired by Flowserve in January 2015. However, as a result of increased uncertainty and reduced visibility in many of its key markets, Flowserve anticipates both earnings and revenues to scale the lower end of the guidance.

To Conclude

There is no denying the fact that Flowserve’s near-term prospects remain challenged on account of pressing macroeconomic concerns. Having said that, we believe the company is making excellent progress regarding the integration of SIHI, and will reap greater benefits, going forward.

This apart, the company’s “One Flowserve Culture” and cost-saving initiatives show promise and will likely add to its internal strength as well as ability to cope with broader market challenges. Also, secular trends in Flowserve’s end markets are expected to rebound in the long run, thereby driving growth.

Nevertheless, despite its long-term growth potential, Flowserve is currently faced with headwinds like uncertainties in oil & gas markets, adverse currency movements and cyclical nature of markets.

Hence, the stock has a Zacks Rank #4 (Sell).

Better-ranked players in the same sector include Dycom Industries Inc. DY, Middleby Corp. MIDD and EnPro Industries, Inc. NPO. While Dycom sports a Zacks Rank #1 (Strong Buy), both Middleby and EnPro carry a Zacks Rank #2 (Buy).

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FLOWSERVE CORP (FLS): Free Stock Analysis Report
 
ENPRO INDUS INC (NPO): Free Stock Analysis Report
 
MIDDLEBY CORP (MIDD): Free Stock Analysis Report
 
DYCOM INDS (DY): Free Stock Analysis Report
 
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