Flowserve Corp.’s (FLS Quick QuoteFLS - Free Report) bottom line beat estimates for the second consecutive quarter, reversing last year's earnings miss trend. The company’s first-quarter 2017 adjusted earnings of 25 cents per share topped the Zacks Consensus Estimate of 20 cents by 25.0%.

However, on a reported basis, the company’s earnings per share plunged 62.1% to 11 cents on a year-over-year basis. Precipitous top-line decline, owing to macroeconomic volatility as well as foreign currency headwinds, proved to be major drags for the bottom line.

Quarter in Detail

Revenues fell 8.8% year over year to $863.6 million. However, revenues surpassed the Zacks Consensus Estimate of $798 million. Low original equipment sales and poor sales of every segment across end markets, excluding Europe, proved to be a drag on the revenues. Also, foreign currency headwinds eroded sales by $10 million.

The company’s bookings totaled $958.2 million in first-quarter 2017, up 5.3% year over year at constant currency (cc). After-market bookings totaled $457 million and were also up 3% at cc. Growth in bookings came on the back of modest recovery in oil & gas industry and higher original equipment bookings.

Operating income of the company came in at $47.0 million, compared with $74.4 million recorded in the year-ago period. Foreign currency headwinds and lower gross profits acted as major dampeners for operating income performance. Also, adjusted gross margin contracted 180 bps to 31.5%, mainly attributable to poor top-line performance and lower margin projects.

Segmental Results

Engineered Product Division revenues were down 10.9% year over year to $422.0 million in the quarter. Negative currency translation effects, along with lower original equipment sales in the Americas and Africa, crippled the sales of this segment. However, bookings were up 8.6% year over year to $460.9 million, primarily due to modest recovery in the oil and gas, and chemical industries. The increase in customer original equipment bookings acted as a major catalyst.

Sales at the Flow Control Division declined 6.2% year over year to $280.4 million, hit by currency headwinds and soft customer original equipment sales in key end markets.

Bookings of this segment totaled $309.8 million, flat year over year. While decreased customer bookings in the general industries proved to be a drag on bookings, this was largely offset by increase in bookings from the oil and gas, and power generation industries.

Moreover, Industrial Product Division sales were down 9.7% year over year to $178.4 million. Foreign currency headwinds, along with low original equipment sales, resulted in the decline across all main geographies. Furthermore, bookings totaled $206.7 million, flat year over year. Dismal bookings in power generation and chemical industries offset the improvements in the oil and gas industry.

Restructuring Initiatives

Currently, the company is following its $400 million multi-year investment, which is anticipated to result in savings of $195 million in 2017. In 2018, savings from the full annualized program are expected at $230 million. These investments are aimed at streamlining management structure, reducing manufacturing costs and implementing cost-saving measures for the overall optimization of the cost structure.

The company also expects to trim its workforce by 15–20% and manufacturing footprint by 30% compared with the 2015 level, as well as shift manufacturing to lower cost regions, under this $400 million worth of restructuring initiative.

In relation to the restructuring efforts, Flowserve spent about $11 million in first-quarter 2017, which, in turn, led to incremental savings of $28 million. It remains optimistic about completing the $400-million program in 2017. It will likely incur an expense of $155 million and make additional savings of $70 million.

Also, under the restructuring program, Flowserve announced the divestiture of the Gestra AG business unit to Spirax-Sarco Engineering plc for €186 million ($198.4 million). The sale is part of Flowserve’s broader strategy to improve focus on core business, and optimize its product portfolio and manufacturing footprint.

Spirax-Sarco Engineering, a leading provider of steam system solutions, has signed a conditional sale and purchase agreement to acquire Gestra AG and associated businesses from Flowserve. The deal, subject to certain customary conditions, is expected to close during second-quarter 2017.

Balance Sheet & Cash Flow

Flowserve ended the quarter with cash and cash equivalents of $325.8 million compared with $367.2 million as of Dec 31, 2016. On Mar 31, 2017, the company’s long-term debt totaled $1477.5 million, down from $1,485.3 million as of Dec 31, 2016.

Flowserve’s net cash flow, provided by operating activities, came in at $3.9 million at the end Mar 31, 2017, in contrast to the cash used by operating activities of $5.7 million recorded in the prior-year period.

2017 Outlook

Flowserve has reiterated its 2017 guidance and continues to expect adjusted earnings per share guidance to lie in the band of $1.55–$1.85. It estimates revenues to decline in the range of 6–14%.

The company does not anticipate any major turnaround in the current geopolitical, end market and macro uncertainties for 2017. Factors including currency rates, commodity prices, expected bookings and market volatility are likely to put pressure on both the top- and bottom-line performances for this year.

To Conclude

Flowserve started 2017 on a healthy note, with both top- and bottom-line beats. Relative stability of oil at around the level of $45–$50 over the past couple of quarters is a major positive for the company. It appears that Flowserve’s orders are finally showing signs of bottoming out, signaling brighter days ahead. Going forward, we believe stabilization in core aftermarket activities bode well for long-term growth of the company.

Other key strengths include strong operational model, solid productivity, and considerable aftermarket content and geographical diversity. In particular, the diligent restructuring efforts are starting to manifest themselves in substantial savings. Despite these positives, there is no denying the fact that the company’s waning top-line performance remains a major concern.

Flowserve’s biggest challenge comes in the form of capital spending constraints and aftermarket push outs. In the recent past, the company’s operations have suffered from project delays, rolling maintenance deferrals, and extended timelines for both order placement and delivery acceptance. We believe Flowserve will continue to witness challenging times throughout the first half of the year.

Stocks to Consider

Flowserve currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the broader sector include Applied Industrial Technologies Inc. (AIT Quick QuoteAIT - Free Report) , Donaldson Company, Inc. (DCI Quick QuoteDCI - Free Report) and The Middleby Corp. (MIDD Quick QuoteMIDD - Free Report) . While Applied Industrial sports a Zacks Rank #1 (Strong Buy), Donaldson and Middleby carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Applied Industrial Technologies has managed to beat estimates thrice in the trailing four quarters for a positive earnings surprise of 9.8%.

With three beats over the trailing four quarters, Donaldson has a positive average earnings surprise of 5.9%.

Middleby Corporation beat earnings in each of the trailing four quarters, resulting in an average surprise of 14.1%.

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