Leading manufacturer and aftermarket service provider of comprehensive flow control systems, Flowserve Corporation (FLS) reported third-quarter 2014 earnings per share of 93 cents, lagging the Zacks Consensus Estimate of $1.00 by 7%. However, earnings increased 3.3% from 90 cents per share in the prior-year quarter.
Earnings included a 1 cent gain from currency translation. However, a discrete non-cash charge of $3.5 million in the company’s Industrial Product Division (IPD) segment weighed on the results.
The year-over-year improvement was driven by the company’s ‘One Flowserve’ initiative designed to strengthen its core business. This apart, the company has also been benefiting from its cost containing efforts and diligent operational execution. The continued growth in bookings and improvement in margin figures are also encouraging.
Quarterly Details
Total revenues came in at $1.20 billion, a decrease of about 2% from the past-year figure of $1.23 billion. Excluding the currency impact, revenues have inched down 0.7% year over year. Revenues also fell short of the Zacks Consensus Estimate of $1.29 billion. The decline is attributed to unfavorable currency translations, adverse shipment timings and prevailing softness in some of the emerging nations. Also, the company reported a year-over-year decline in two of its three segments.
However, Flowserve’s bookings increased 3.7% year over year to $1.3 billion driven by strength in both Original Equipment (OE) and Aftermarket businesses. On a constant currency basis, bookings marked an increase of 5.0%.
Segment Results
Engineered Product Division (EPD) revenues for the quarter decreased 4.7% year over year to $620.9 million. However, bookings for the segment increased 2.9% to $684.9 million.
Industrial Product Division (IPD) sales for the third quarter increased 4% year over year to $231.4 million whereas bookings for the segment inched up 0.8% year over year to $230.4 million.
Flow Control Division (FCD) revenues declined 1.9% year over year to $387.0 million. However, bookings surged 5% year over year to $392 million.
Margins
Gross margin for the quarter increased 60 basis points (bps) to 35%. Excluding a one-time negative impact from the IPD segment, the company’s gross margin came in at 35.3%, an increase of 90 bps year over year. The EPD segment’s gross margin was 35.1% (up 140 bps); the IPD segment’s gross margin was 26.2% (up 70 bps); while the FCD segment’s gross margin stood at 37% (down 40 bps). The rise in segmental gross margin was primarily due to significant growth in aftermarket and OE bookings, improvement in execution of operational plans and cost control initiatives. Operating margin increased 30 bps year over year to 16%. However, excluding the discrete non-cash charge in the IPD segment, operating margin stood at 16.3%, marking an increase of 60 basis points.
Balance Sheet and Cash Flow
The company ended the quarter with cash and cash equivalents of $162.9 million compared with $363.8 million as of Dec 31, 2013. Flowserve had long-term debt of $1.11 billion as of Sep 30, 2014 compared with $1.13 billion as of Dec 31, 2013.
The company’s net cash flow from operating activities was $126.2 million at the end of the nine-month period, compared with $108.9 million in the prior-year period.
Outlook
Flowserve remains optimistic about its growth prospects given the rising demand in the energy markets, strength in its aftermarket business, improvement in key end markets, the scope for strategic mergers and acquisitions as well as its diligent operational execution.
The company revised its 2014 earnings guidance to $3.65 to $3.85 a share from its earlier projection of $3.65 and $4.00 a share. This guidance reflects year-over-year growth of 7% to 13%. The Zacks Consensus Estimate for 2014 is currently pegged at $3.85.
The company now expects 2014 revenues to be flat year over year on a constant currency basis.
Zacks Rank
Flowserve currently has a Zacks Rank #3 (Hold). Better-ranked players in the same sector include Manitex International, Inc. (MNTX), Nordson Corporation (NDSN) and AO Smith Corp. (AOS). All three stocks hold a Zacks Rank #2 (Buy).
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