Flowserve Corp. (FLS Quick QuoteFLS - Free Report) reported second-quarter 2016 adjusted earnings of 57 cents per share, missing the Zacks Consensus Estimate of 61 cents by 6.6%. Also, adjusted EPS declined 28.7% on a year-over-year basis from the year-ago tally of 80 cents.

Lackluster top-line performance owning to macroeconomic concerns and foreign currency headwinds weighed on the bottom line.

Quarter in Detail

Revenues fell 11.7% year over year to $1,026.2 million but surpassed the Zacks Consensus Estimate of $998 million. Apart from lower sales across all the three sub-segments, negative currency effects caused revenues to decline by $23 million. Poor original equipment sales across all geographies were largely attributable to the top-line decline in the quarter.

The company’s bookings totaled $975 million in the second quarter of 2016, down 12.6% year over year at constant currency (cc). Aftermarket bookings totaled $480 million, up 2.3% at cc. Bookings were affected by negative currency effects of approximately $28 million. Also, prolonged softness in the oil and gas industry and general and power generation industries affected customer original equipment bookings, adding to the woes.

Flowserve’s adjusted operating margin declined 300 basis points (bps) to 11.7% on a year-over-year basis, largely on account of foreign currency headwinds. Also, adjusted gross margins were down 130 bps to 32.7%. Decreased sales, unfavorable impacts of short-term operational inefficiencies and lower margin projects were major dampeners for gross margin.

Segmental Results

Engineered Product Division revenues in the quarter decreased 10.3% year over year to $511.8 million. Negative currency translation effects along with weak original equipment sales in Latin America, North America and Asia Pacific were the factors behind the revenue decline. Also, bookings were down 19.1% year over year to $465.5 million, mainly due to currency headwinds, volatility in oil & gas markets and softness in general and chemical industries.

Sales at the Flow Control Division declined 11.0% year over year to $317.2 million, hit by currency headwinds and soft customer original equipment sales in Asia Pacific, North America, Latin America and Europe. Bookings fell 12% year over year to $312.9 million, owing to lower orders from chemical and oil and gas industries in North America and the Middle East.

Also, Industrial Product Division sales were down 17.6% year over year to $215.0 million. Foreign currency headwinds coupled with low original equipment sales resulted in the decline across all main geographies. However, bookings were up 3.4% to $212.3 million, mainly on the back of improved bookings in chemical, water management and general industries.

Restructuring Initiatives

Flowserve had previously announced a $125 million realignment program aimed at reducing headcount and closing non-profit facilities. Through this program, the company intends to streamline its managerial structure, reduce manufacturing costs and implement cost-saving measures. During fourth-quarter 2015, the company had expanded this realignment program to improve its operational structure. Overall, this combined $350 million program is projected to garner cost savings of $125 million in 2016 and another $185 million in 2017.

The company is well on track to achieve its goals, and during second-quarter 2016, it raked in $27 million of savings and expects to realize full-year incremental savings of $100 million. Since the beginning of the restructuring program, Flowserve has been working on two-thirds of the manufacturing facilities for closing, repurposing or selling them.

The company’s program expenses amounted to $20 million in second-quarter 2016 and it expects to incur another $160 million as realignment charges in full-year 2016. Going forward, Flowserve is optimistic about the competency of this realignment program and believes it will close or sell a number of redundant manufacturing facilities, thereby slashing total headcount by 15–20% by the end of next year.

Balance Sheet & Cash Flow

Flowserve ended the quarter with cash and cash equivalents of $266.0 million compared with $310.3 million as of Mar 31, 2016. On Jun 30, 2016, Flowserve’s long-term debt was $1,543.5 million, down from $1,573.4 million at the end of Mar 31, 2016.

The company’s net cash flow provided by operating activities totaled $3.2 million for the 3 months ended Jun 30, 2016, down significantly from the cash from operating activities of $18.1 million in the prior-year period.

Outlook Narrowed

On account of the current challenges, Flowserve has narrowed its 2016 adjusted earnings per share guidance to $2.40 to $2.60 from the previous $2.40–$2.75. However, the company reiterated its revenue guidance and continues to expect a 7–14% year-over-year decline, including a 2% impact from foreign currency headwind.

Also, Flowserve expects its full-year 2016 adjusted EPS to improve toward the second half of the year, reflecting benefits from normal seasonality, timing of realignment savings and backlog shipments.

Going forward

The second-quarter earnings miss marks a hat-trick of misses for Flowserve. The present market scenario signals that Flowserve’s near-term prospects are likely to remain challenged for the remaining part of the year. Broad-based capital spending decline, followed by reduced activity in oil and gas markets, are manifesting themselves into reduced revenues, orders and absence of middle and larger sized projects for the company.

Despite these negatives, most of the realignment programs undertaken by the company look promising but tangible gains from the same are expected in the second half of 2016. We believe that the company’s strong market share, focus on cost control, strategic restructuring, high operational excellence and increased earnings leverage bode well for long-term growth. Also, the transition toward a favorable mix is expected to offset some of the negatives.

Flowserve currently carries a Zacks Rank #3 (Hold). Better-ranked players in the same sector include Illinois Tool Works Inc. (ITW Quick QuoteITW - Free Report) , Ingersoll-Rand PLC (IR Quick QuoteIR - Free Report) and Luxfer Holdings PLC (LXFR Quick QuoteLXFR - Free Report) . All the three stocks carry a Zacks Rank #2 (Buy).

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