Flowserve Ahead of Zacks Consensus

Flowserve Corp. (FLS) reported second quarter 2010 earnings per share from continuing operations of $1.72, exceeding the Zacks Consensus Estimate of $1.65.  Earnings per share, excluding realignment charges of 10 cents, were higher primarily due to an improvement in gross margin by 30 basis points and a reduction of $30 million in SG&A expenses compared with the prior-year quarter.

Order bookings increased to $1.13 billion, up 9.5% or 10.6%, excluding currency benefits. The book-to-bill ratio of 1.18 resulted in increased backlog for the second consecutive quarter and was supported by large projects. Aftermarket order bookings were $449 million, up 10% year over year and represented 40% of total orders won in the quarter.

Sales declined to $961 million, down 11.9% or 10.6%, excluding currency effects. This was below the Zacks Consensus Estimate for revenues of $1 billion. Lower revenues were a result of reduced 2009 order booking levels.

Gross profit decreased to $343 million, down $43 million from prior-year level. Gross margin increased by 30 basis points to 35.7%. Operating income, including realignment charges of $7.6 million, was down 8.1% to $146 million.  Operating margin increased 60 basis points to 15.2% and was aided by benefits of realignment, supply chain management and steady aftermarket business.

SG&A expenses, as a percentage of sales, improved 20 basis points to 20.9% and fell $30 million year over year. The decrease in SG&A expenses, as a percentage of sales, was primarily due to savings realized from the company's cost containment and realignment initiatives.

The significant appreciation of the U.S. dollar against the Euro in the second quarter of 2010 and the resulting impact on cash flow hedges had a considerable net adverse effect on net earnings. The company expects an adverse currency impact in the second half of the financial year.

Segment Details

FSG Engineered Product Division (EPD)

Order bookings for the second quarter of 2010 were $631.1 million, up 7.2%. EPD sales for the second quarter of 2010 were $524.5 million, a decrease of $55.8 million including negative currency effects of $1 million.

FSG Industrial Product Division (IPD)

Order bookings for the second quarter of 2010 were $214.3 million, an increase of $12.3 million. Sales for the quarter of 2010 were $198.6 million, a decrease of $43.0 million, including negative currency effects of $4 million.

Flow Control Division (FCD)

Order bookings for the second quarter of 2010 were $324.9 million, an increase of $51.0 million. Sales for the quarter of 2010 were $268.8 million, a decrease of $33.7 ,including a negative currency impact of $5 million.

Guidance

The company reaffirmed its 2010 full year EPS target range of $6.35 to $7.15, which includes the previously announced full impact of up to $20 million, or approximately 26 cents per share, in realignment costs and an estimated after-tax charge of around $8.6 million, or approximately 15 cents per share, related to the Venezuelan currency devaluation.

We currently have a Neutral recommendation on Flowserve Corp.

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