Flowserve (FLS) Q4 Earnings Meet Estimates, Improve Y/Y

Flowserve Corporation (NYSE:FLS) reported in-line results for the fourth quarter of 2018. Notably, the company pulled off a positive earnings surprise of 16.67% in the previous quarter.

This machinery company’s adjusted earnings in the reported quarter were 58 cents per share, meeting the Zacks Consensus Estimate. Further, the bottom line increased 16% from the year-ago tally of 50 cents on the back of improved margins, decline in net interest and other expenses, and lower provision for income taxes.

For 2018, the company’s adjusted earnings were $1.75 per share, in line with the Zacks Consensus Estimate. It increased 28.7% from the year-ago figure of $1.36.

Weak Segmental Performance Lowers Revenues

In the quarter under review, Flowserve’s sales were $986.9 million, reflecting a year-over-year decline of 4.6%. Foreign currency movements had a negative 2.6% impact on sales and divested businesses adversely impacted sales by 1%.

The top line lagged the Zacks Consensus Estimate of $1,069 million by 7.68%.

Aftermarket sales in the reported quarter decreased 1.2% year over year (or grew 1.9% on a constant-currency basis) to $496 million. Furthermore, original equipment sales totaled $495 million, reflecting a year-over-year decline of 7.8% (or 5.7% on a constant-currency basis).

Bookings totaled $1.05 billion, reflecting growth of 6.1% or 8.8% on a constant currency basis over the year-ago quarter. Of the end markets, booking strengthened in oil & gas as well as general industries while were weak in chemical, power and water end markets. Backlog at the end of the reported quarter was $1.9 billion.

The company reports net sales under three segments. A brief discussion on those is provided below:

Revenues from the Engineered Product Division were $484.6 million, decreasing 2.9% year over year. Bookings increased 12.3% year over year to $545 million.

Revenues from the Industrial Product Division totaled $196.4 million, decreasing 8.8% year over year or 6.8% on a constant-currency basis. Bookings decreased 1.3% to $203.2 million in the quarter under review.

Revenues from the Flow Control Division were $325.9 million, decreasing 5.4% year over year or 3.2% on a constant-currency basis. Bookings of $318 million grew 1.2% year over year.

For 2018, the company’s sales totaled $3,832.7 million, increasing 4.7% year over year. However, the top line lagged the Zacks Consensus Estimate of $3.91 billion.

Margins Improve

In the quarter under review, Flowserve’s adjusted cost of sales decreased 8.8% year over year to $653.9 million. It represented 66.3% of sales compared with 69.3% in the year-ago quarter. Adjusted gross margin increased 300 basis points (bps) year over year to 33.7%. Selling, general and administrative expenses increased 1.4% year over year to $218.6 million. It represented 22.1% of sales.

Adjusted operating income in the quarter under review increased 12% year over year to $117.6 million. Moreover, adjusted operating margin grew 170 bps to 11.9%. Net interest and other expenses in the quarter declined 29.8% year over year to $12.3 million.

Effective tax rate was 26.1% versus 24.8% in the year-ago quarter. Provision for income taxes in the quarter under review decreased to $14.2 million from $172.8 million in the year-ago quarter.

Balance Sheet and Cash Flow

Exiting the fourth quarter, Flowserve had cash and cash equivalents of $619.7 million, up 16.9% from $529.9 million at the end of the last reported quarter. Long-term debt balance decreased 1.5% sequentially to $1,414.8 million.

In 2018, the company generated net cash of $190.8 million from operating activities, down roughly 38.7% from $311.1 million generated in 2017. Capital expenditure totaled $84 million, increasing 36.3% from $61.6 million spent in the previous year.

During the year, the company used $99.4 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 anticipates adjusted earnings per share of $1.95-$2.15, up from $1.75 recorded in 2018. Revenues are anticipated to increase 4-6%. Adjusted tax rate for the year is predicted to be 26-28%. Net interest expenses are predicted to be $55-$57 million and capital expenditure is predicted to be $90-$100 million.

Flowserve Corporation Price, Consensus and EPS Surprise