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Flowserve (FLS) Surpasses Q2 Earnings Estimates, Raises View

Zacks Equity Research

Flowserve Corporation FLS reported better-than-expected results in the second quarter of 2019, with earnings beating estimates by 5.9%. This was the second consecutive quarter of impressive results. It reported a positive earnings surprise of 20.59% in the previous quarter.

The machinery company’s adjusted earnings in the reported quarter were 54 cents per share, surpassing the Zacks Consensus Estimate of 51 cents. Further, the bottom line grew 31.7% from the year-ago figure of 41 cents on sales growth, improved margins, and decline in net interest and other expenses.

Segmental Performance Drives Revenues

In the quarter under review, Flowserve’s sales were $990.1 million, reflecting year-over-year growth of 1.7%. Foreign currency movements had a negative 3% impact on sales and divested businesses adversely impacted sales by 1.5%.

The company’s revenues lagged the Zacks Consensus Estimate of $1,012 million by 2.2%.

Aftermarket sales in the reported quarter rose 2% year over year (or grew 5.4% on a constant-currency basis) to $498 million. Furthermore, original equipment sales totaled $493 million, reflecting year-over-year growth of 1.6% (or 3.9% on a constant-currency basis).

Bookings totaled $1.11 billion, reflecting growth of 6.5% or 9.9% on a constant currency basis over the year-ago quarter. Of the end markets, booking strengthened in oil & gas as well as in water and chemical end markets. Backlog at the end of the reported quarter was $2.2 billion.

During the first quarter of 2019, the company combined operations of Engineered Product Division and Industrial Product Division under one segment — Flowserve Pumps Division. The changes will enable Flowserve to better control operations and serve customers. The company currently has two reportable segments — Flowserve Pumps Division and Flow Control Division. A brief discussion on the segments is provided below:

Revenues from the Flowserve Pumps Division were $674.6 million, increasing 0.9% year over year or 3.9% on a constant-currency basis. Bookings grew 5.7% year over year to $761.9 million.

Revenues from the Flow Control Division were $316.9 million, increasing 3.4% year over year or 6.3% on a constant-currency basis. Bookings of $346.4 million grew 8.7% year over year.

Margins Improve Y/Y

In the quarter under review, Flowserve’s adjusted cost of sales rose 0.8% year over year to $668.2 million. It represented 67.5% of sales compared with 68.1% in the year-ago quarter. Adjusted gross margin grew 60 basis points (bps) year over year to 32.5%. Selling, general and administrative expenses declined 3.5% year over year to $213.7 million. It represented 21.6% of sales.

Adjusted operating income in the quarter under review rose 24.2% year over year to $111.9 million. Moreover, adjusted operating margin grew 200 bps to 11.3%. Net interest and other expenses in the quarter declined 15.8% year over year to $12.1 million.

Effective tax rate was 26% versus 26.1% in the year-ago quarter. Provision for income taxes in the quarter under review grew to $26 million from $19.8 million in the year-ago quarter.

Balance Sheet and Cash Flow

Exiting the second quarter of 2019, Flowserve had cash and cash equivalents of $596.5 million, down 6.5% from $637.7 million at the end of the last reported quarter. Long-term debt declined 0.4% sequentially to $1,386.5 million.

In the first half of 2019, the company generated net cash of $49.4 million from operating activities against cash outflow of $56.7 million in the year-ago period. Capital expenditure totaled $25.3 million, declining 20.4% from $31.7 million spent in the previous year’s comparable period.

During the first half of 2019, the company used $49.8 million for distributing dividends.

Outlook

Flowserve is progressing well with transformation initiatives. The multi-year Flowserve 2.0 strategy will help in simplifying the operating model and spur growth. The company impressed investors with the results in the first half. It is also confident about the second half and thus, has raised earnings projections for 2019.

The company anticipates adjusted earnings per share of $2.05-$2.20, up from $1.95-$2.15 mentioned earlier. Revenues are anticipated to increase 4-5% versus 4-6% stated earlier. Adjusted tax rate for the year is still maintained at 26-28%. Capital expenditure is predicted to be $90-$100 million.

Flowserve Corporation Price, Consensus and EPS Surprise

 

Flowserve Corporation Price, Consensus and EPS Surprise

Flowserve Corporation price-consensus-eps-surprise-chart | Flowserve Corporation Quote

Zacks Rank & Stocks to Consider

With a market capitalization of approximately $6.7 billion, Flowserve currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the industry are Roper Technologies, Inc. ROP, DXPE Enterprises, Inc. DXPE and Dover Corporation DOV. All these stocks currently carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

In the past 60 days, earnings estimates for these companies have improved for the current year. Further, average earnings surprise for the last four quarters was 6.92% for Roper, 48.47% for DXP Enterprises and 6.91% for Dover.

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