Flowserve Corporation (FLS) reported first-quarter 2014 earnings per share of 78 cents, which easily beat the Zacks Consensus Estimate of 75 cents. Quarterly earnings also grew 16.4% year over year. The company’s net income increased to $107.7 million, up 10.1% from $97.8 million in the prior-year quarter.
Earnings were primarily driven by the continued growth in bookings, especially in aftermarket services, improvement in margin figures, and reduced share counts. The company’s initiatives to strengthen its core business are also positives. In addition, the company’s key initiatives such as ‘One Flowserve’ have also helped in margin expansion, thereby driving earnings per share (EPS) growth.
Revenues
Total revenue in the quarter was $1.07 billion, a decrease of 2.6% compared with the past-year figure. Excluding the currency impact, revenues have declined 1.3% year over year. The decline was due to adverse shipment timings and seasonal variations. Revenues also fell short of the Zacks Consensus Estimate of $1.14 billion.
Segment Results
Engineered Product Division (EPD) revenues for the quarter decreased to $505.2 million, from $539.7 million in the prior-year quarter. However, bookings for the segment increased 1.6% to $594.3 million.
Industrial Product Division (IPD) sales for the second quarter increased marginally 0.2% year over year to $211.8 million. Bookings for the segment were down 10.4% year over year.
Flow Control Division (FCD) revenues were $382.9 million, a marginal decline of 0.3% year over year. Bookings for the segment also slipped 3.9% to $413.7 million.
Margins
Gross margin for the quarter increased 130 basis points (bps) to 35.3% in first-quarter 2013. The EPD segment’s gross margin was 35.3% (up 40 bps) and the IPD segment’s gross margin was 26.1% (up 100 bps). The FCD segment’s gross margin moved north 280 bps to 37.7%. The rise in segmental gross margin was primarily due to significant growth in aftermarket and OE (Original Equipments) bookings, improvement in execution of operational plans and cost control initiatives. However, the operating margin declined from 15.5% to15.3% year over year.
Balance Sheet and Cash Flow
The company ended the quarter with cash and cash equivalents of $164.4 million compared with $363.8 million as of Dec 31, 2013. The company had a long-term debt of $1.12 billion compared with $1.13 billion as of Dec 31, 2013.
The company’s net cash flow from operating activities was a negative of $84.7 million at the end of the quarter, narrowed from the negative of $108.1 million in the prior-year period.
Business Update
In the quarter, the company divested its Naval OY business unit including the all-welded ball valve product line to Finnish valve manufacturer, Vexve OY. These valves catered to a niche market that were highly cyclical in nature and failed to generate the required results for Flowserve. Post the sell-off, Flowserve intends to concentrate and build up on its core portfolio comprising flow control equipment, such as pumps, valves and seals for critical service applications.
Outlook
Flowserve reaffirmed its full-year 2014 earnings per share to lie between $3.65 and $4.00 driven by 3% to 6% revenue growth, an improved backlog, continued operating improvements, cost leverage and its capital allocation policy.
Despite the sluggishness in some of its businesses, Flowserve is showing a positive trend with an increasing number of contracts in its OE business. Moreover, the uptrend in aftermarket business is also likely to continue. We commend the company’s key strategies such as focus on driving organic growth, operational efficiencies, capital deployment and improving working capital metrics.
Flowserve currently has a Zacks Rank #3 (Hold). Better-ranked players in the same industry include Kadant Inc. (KAI), Middleby Corp. (MIDD) and IDEX Corp. (IEX). Both Kadant and Middleby Corp. have a Zacks Rank #1 (Strong Buy), whereas IDEX Corp. carries a Zacks Rank #2 (Buy).
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