Flowserve Beats Zacks Estimate

Flowserve Corporation (FLS - Analyst Report) reported fourth-quarter 2010 earnings per share from continuing operations of $2.09, surpassing the Zacks Consensus Estimate of $1.98. For 2010, earnings per share from continuing operations was $7.03, outpacing the Zacks consensus Estimate of $6.91.

During 2010, the company benefited from its realignment initiatives, which helped it to reduce its costs. Flowserve also expanded its global presence as it increased its business activities in the blooming Asian, Middle Eastern and Latin American markets.

Total Revenue

Total revenue in the quarter declined by 4.9% year over year to $1.14 billion. Excluding negative currency impact of $33 million, sales decreased by 2.1%. On a constant currency basis, total bookings in the quarter increased by 9.8% to $1.03 billion.  

For 2010, total revenue was $4.23 billion, a decrease of 7.6% year over year. Excluding negative currency impact of $32 million, sales decreased by 6.9%. Declined shipping volumes and difficult pricing environment witnessed from the beginning of 2009 affected the results of 2010.

Segment Results

FSG Engineered Product Division (EPD) revenue for the quarter was $585.1 million, a decrease of 10.8% (8.7% on constant currency basis). FSG Industrial Product Division (IPD) was $219.2 million, a decrease of 4.0% (7.4% on constant currency basis). Flow Control Division (FCD) revenue was $327.8 million, a decrease of 12.6% (16.0% on constant currency basis).

Margins

Gross margin for the quarter was 33.7%, down 40 basis points year over year. Excluding realignment charges and effects of Valbart acquisition, gross margin came in at 35.1%. Operating margin increased by 90 basis points to 14.4% or was 16.1% before the impact of realignment charges and Valbart acquisition.

Segment wise, EPD operating margin was 19.0% (up 220 basis points), IPD was 9.6% (down 180 basis points) and FCD was 14.6% (down 340 basis points).

Balance Sheet and Cash Flow

Cash and cash equivalents was $557.6 million at the end of 2010 compared with $654.3 million at the end of 2009. Cash exceeded total debt by $30 million at the end of the year. Total equity amounted to $2.11 billion.

Net cash flow from operating activities was $355.8 million in 2010 compared with $431.3 million in 2009.

Outlook

Flowserve expects its 2011 earnings per share to be in the range of $7.10 to $8.00.

The company believes the difficult pricing environment faced in 2010 will continue in the initial period of 2011, making the first half of the year more challenging than the second half of the year. Flowserve expects the first quarter of 2011 to see increased earnings pressure from absorption, reallocation of costs and dilutive effects from the Valbart acquisition. However, the company contends to offset these challenges through its focus on increasing shipping volumes and aftermarket business, expected savings from realignment activities, performing efficiently and improving business operations.

Through its investments in China, India, the Middle East and Brazil, the company expects to maintain its strong margin performance ahead. The company is constructing a number of new production facilities in these regions, with many projects already been completed. 

Flowserve Corporation is a world leading manufacturer and aftermarket service provider of comprehensive flow control systems. The company develops and manufactures precision-engineered flow control equipment, such as pumps, valves, and seals, for critical service applications that require high reliability. The company uses its manufacturing platform to offer a broad array of aftermarket equipment services, such as installation, advanced diagnostics, repair, and retrofitting. The company uses a footprint of Quick Response Centers (QRCs) around the globe to deliver these aftermarket services. Major competitors of Flowserve are ITT Corporation (ITT - Analyst Report), John Crane Inc. and Metso Corporation.

We currently maintain our Neutral rating on Flowserve with a Zacks #4 Rank (short-term Sell recommendation) over the next one-to-three months.

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