Flowserve Corp. has announced record first quarter results in earnings per share (EPS), sales and operating income in its Form 10-Q report for the first quarter of 2009 filed with the Securities and Exchange Commission. The company announced that first quarter fully diluted EPS and operating income growth were up 8% and 23%, respectively, over the first quarter of 2008. This growth significantly outpaced quarterly sales growth of 3%, compared to the same quarter of 2008. Record first quarter sales increased to $1.02 billion, up 3%, or 13% excluding negative currency effects of $101 million. Flowserve also posted a quarterly operating margin of 14.4%, including realignment charges, or 15.3% excluding realignment charges. Bookings for the first quarter were $968 million, down 32%, or 21% excluding negative currency effects of $102 million and the impact of a 2008 large project order of $74 million for specialty thrusters used to position offshore oil platforms.
Additionally, the company reaffirmed its 2009 full year EPS target range forecast of between $6.75 and $7.50, including up to $40 million, or approximately $0.50 per share, in realignment charges.
First Quarter of 2009 (all comparisons versus the first quarter of 2008 unless otherwise noted):
"Although our first quarter bookings were affected by some uncertainty in our end-markets for projects and aftermarket business, our bidding opportunities have remained very active, our pipeline of large project opportunities is good and our aftermarket bookings are stable," said Lewis Kling, Flowserve President and Chief Executive Officer. "And, we are remaining cautiously optimistic about bookings for the rest of 2009 as we saw pump bookings begin to strengthen in March, when compared to the first two months of the year."
Kling added, "We are proud that we finished the first quarter with a continued strong backlog, as our 'book-to-bill' ratio (the relationship between new orders and sales) for the period was 0.95. Further, while our bookings were down from the all-time record first quarter of 2008 results, they were approximately at the quarterly booking levels during all of 2007. Given the productivity and efficiency improvements that we have made to our operating platform since 2007, we are confident of our 2009 earnings power, especially given the significant increase in our backlog since 2007."
Discussion and analysis of the first quarter of 2009 financial results (all comparisons versus the first quarter of 2008 unless otherwise noted)
Fully diluted first quarter 2009 EPS increased to a first quarter record $1.64 per share, up 8%. EPS was higher primarily due to an increase in sales of 3% along with successful operational excellence practices, that drove an improvement in gross margin of 110 basis points and a reduction of 140 basis points for SG&A expenses as a percentage of sales, which increased operating income by 23%.
EPS includes the negative impact of a relatively stronger U.S. Dollar in the current quarter compared to stronger foreign currencies in the comparable quarter. This exchange rate volatility drove $10 million in expenses from foreign currency compared with a net gain of $12 million in 2008.
"As previously announced, we have undertaken a realignment initiative aimed at reducing non-strategic assets, eliminating redundant manufacturing and improving our overall cost structure, thereby improving operating efficiency. These activities should better position our business for future success and represents another step in our ongoing efforts in SG&A reduction as percentage of sales," said Mark Blinn, Flowserve Senior Vice President, Chief Financial Officer and Latin America Operations. "As we continue to execute on our realignment strategies, we are confident that we will begin to see early returns on our initiatives in the second half of 2009."
Bookings for the first quarter were $968 million, down 32%, or 21% excluding negative currency effects of $102 million and the impact of a 2008 large project order for thrusters of $74 million. The decrease is primarily related to the oil and gas and general industries markets, and reflects customers’ responses to concerns regarding ongoing disruptions in the credit and capital markets, global economic conditions, recent uncertainty in oil and gas prices and the re-evaluation of customer budget assumptions for certain projects, thereby delaying certain expected orders. The decrease in bookings for the oil and gas industry is partially attributable to $74 million of a large project order for thrusters for offshore platforms recorded in the first quarter of 2008 that decreased to a nominal amount in the first quarter of 2009.
Backlog decreased only 5% to $2.67 billion from $2.83 billion at December 31, 2008. The decrease includes negative currency effects of approximately $79 million and cancellations of only $15 million related to orders booked in 2008.
Sales grew to $1.02 billion, up $31 million, an increase of 3%, or 13% excluding negative currency effects of approximately $101 million. The increase is largely attributable to higher sales by the Flowserve Pump Division (FPD) arising from its strong backlog. On a company-wide basis, original equipment sales increased approximately 5%, while aftermarket sales were comparable to the same period in 2008.
Gross profit increased to $368 million, up $22 million or 6%. Gross margin increased by 110 basis points to 35.9%. The increase reflected higher sales volumes, which positively impacted fixed cost absorption, improved pricing on orders booked during 2008 and cost savings from operational excellence programs, partially offset by $6 million of realignment charges.
SG&A expenses as a percentage of sales decreased 140 basis points to 22.0%. The improvement was primarily attributable to leverage from higher sales and cost containment initiatives. SG&A expenses, in total, decreased to $225 million, down $7 million or 3%. The SG&A decrease is attributable to the impact of currency benefits of approximately $18 million, partially offset by $4 million of realignment charges.
Operating income increased significantly to $147 million, up $28 million or 23%. The operating income increase includes negative currency effects of approximately $24 million. Operating income benefited from higher sales, significantly improved gross profit and leverage of SG&A expenses, partially offset by $10 million in realignment charges. Operating margin increased 240 basis points from 12.0% to 14.4%, including realignment charges, or 15.3% excluding realignment charges.
"Other expense" decreased by $26 million to a net expense of $9 million, as compared with income of $17 million for the same period in 2008. The decrease was primarily due to $10 million of foreign currency expenses in 2009 as compared to a net gain of $12 million in 2008, reflecting volatility in foreign exchange rates.
"Our continued focus on operational efficiencies and cost reductions translated into an operating margin improvement of 240 basis points to 14.4%, or 15.3% excluding realignment charges," said Kling. "By managing our operational excellence initiatives and running our business more efficiently, we continue to strengthen our operating platform, driving improved margins and strong earnings to our shareholders, which in this economic climate is a testament to our global business model and the overall commitment of our workforce."
Flowserve Pump Division
FPD bookings for the first quarter 2009 were $550 million, a decrease of $340 million, down 38%, or 32% excluding the impact of negative currency effects of approximately $58 million. Bookings of original equipment decreased 51%, which represents most of the total decrease. The original equipment decrease was driven by a decline across all industries, but primarily the oil and gas and general industries markets, including $74 million of thruster orders for the oil and gas industry recorded in the first quarter of 2008. Aftermarket bookings decreased 13%, including a $13 million decrease in commissioning (start-up) spares for major projects. Aftermarket bookings rebounded to a higher level in March than the first two months of the year. On a year-over-year basis, excluding the negative currency effects and large thruster orders in the first quarter of 2008, the overall decrease would be 25.0%.
FPD sales for the first quarter of 2009 were $600 million, an increase of $39 million, up 7%, or 16% excluding negative currency effects of approximately $53 million, partially offset by incremental sales provided by Niigata Worthington of $15 million, which was acquired on March 1, 2008. Sales of original equipment increased 14%, while aftermarket sales were comparable to the same period in 2008. Original equipment sales growth reflects execution in successfully shipping a portion of the strong order backlog growth in the oil and gas and power markets of FPD in 2008. FPD gross profit increased to $199 million, up $24 million or 14% including incremental gross profit from Niigata of $4 million. Gross margin for the first quarter of 2009 increased 200 basis points to 33.1%, reflecting improved absorption of fixed costs, improved pricing and cost savings from continuous improvement process (CIP) initiatives. These gains were partially offset by $3 million of realignment charges and an original equipment mix shift to 61% from 57% in the prior year.
Operating income for the first quarter of 2009 increased to $104 million, up $25 million or 32% including negative currency effects of approximately $14 million. The significant increase was primarily attributable to the $24 million increase in gross profit, combined with a $1 million decrease in divisional SG&A expense, including approximately $8 million of currency benefits. Operating margin improved substantially from 14.0% to 17.3%.
Flow Control Division
FCD Bookings for the first quarter of 2009 were $303 million, a decrease of $87 million, down 22%, or 14% excluding negative currency effects of approximately $32 million. The decrease was generally attributable to weakness in the chemical and general industries markets in North America and Europe, Middle East and Africa (EMA).
FCD sales for the first quarter of 2009 were $297 million, a decrease of $3 million, down 1%. Excluding negative currency effects of approximately $34 million, sales increased by 10.3%. Sales in Europe and North America fell due to softness in general industries. These decreases were partially offset by sales growth in Asia Pacific, related to strength in the petrochemical, power and oil and gas markets in China, as well as other increases in Canada, the Middle East and Latin America.
FCD gross profit increased to $107 million, up $1 million or 1%. Gross margin improved 70 basis points to 36.1%. Gross margin improvement reflected material cost savings, favorable product mix, manufacturing efficiencies and improved utilization of sourcing and production from low cost regions.
Operating income increased to $48 million, up $5 million or 10% including negative currency effects of approximately $7 million. The increase was primarily due to $1 million improvement in gross profit and reduced SG&A, which decreased $5 million, including $7 million of currency benefits. Operating margin improved 160 basis points from 14.4% to 16.0%.
Flow Solutions Division
FSD bookings for the first quarter of 2009 were $133 million, a decrease of $38 million, down 22%, or 15% excluding negative currency effects of approximately $12 million. The decrease was primarily attributable to decreased original equipment bookings across all regions, partially offset by increased aftermarket bookings in Asia Pacific and Latin America.
FSD sales were $144 million, a decrease of $7 million, down 5%. Decreased sales of original equipment in EMA and North America were partially offset by increased original equipment and aftermarket sales in Latin America and Asia Pacific. Excluding negative currency effects of approximately $14 million, sales increased 5% over the prior period.
FSD gross profit was $62 million, down $4 million or 6%. Gross margin for the first quarter of 2009 decreased 40 basis points to 43.4%. The decrease was principally the result of $3 million in realignment charges, partially offset by a sales mix shift to higher margin aftermarket business.
Operating income for the first quarter of 2009 decreased to $21 million, down $6 million or 23% including negative currency effects of approximately $3 million. FSD operating margin declined 350 basis points to 14.4%, driven primarily by $6 million in realignment charges.
"Despite the uncertainty in the global markets, our solid first quarter performance increases our confidence in our ability to meet our 2009 EPS target range of between $6.75 and $7.50, including up to $0.50 per share in realignment charges," said Kling. "And, we believe that those realignment expenditures should reduce our annual on-going cost structure by an equivalent amount in 2010 and beyond. Given the strength of our established product portfolio and global platform for our infrastructure markets, our recent acquisition of the Calder business for the desalination market and our new products for emerging alternative energy technologies, our future continues to look bright."
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