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Flowserve Beats Estimates in 3Q

FLS SSYS

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Flowserve Corporation (FLS - Analyst Report) reported third-quarter 2012 earnings per share of $2.07, beating the Zacks Consensus Estimate by a couple of cents and 9.5% higher than the year-ago level. Profits were primarily driven by solid top-line growth, operational progress and improved SG&A leverage. The company also witnessed record aftermarket backlog during the quarter.

Revenue

Total revenue in the quarter increased 3.9% to $1.17 billion. Excluding the currency impact of $75 million, revenue climbed 10.6% year over year. Sales increased due to increasing focus on leveraging additional operating improvement opportunities. Its strong aftermarket performance, focus on supply chain, operational excellence and disciplined cost management drove the quarter revenues.

Segment Results

Engineered Product Division (EPD) revenue for the quarter was $567.5 million, up 5.3% year over year (down 1.2% on constant currency basis), aided by strong aftermarket performance. This was offset somewhat by the sales mix shift to original equipment and product line mix. Bookings for the segment fell 2.4% on a constant currency basis to $553.7 million. Excluding the impact of currency, bookings grew 4.1%.

Industrial Product Division (IPD) sales for the third quarter came in at $243.6 million, a year-over-year increase of 18.6% (up 13% on constant currency basis). Higher sales of original equipments in the Asia Pacific and North America benefited the company, partly offset by sales decline in Europe. Sales of original equipments improved in the Asia Pacific and North America benefited the company, partly offset by sales decline in Europe. 

The IPD recovery plan has began to favorably impact the business with increased focus on supply chain, operational excellence, on-time delivery and disciplined cost management. Bookings for the segment surged 27% on constant currency basis to $283.5 million. Excluding the impact of currency, bookings spiked 34.6%, helped by the strength of original equipment orders in the oil and gas industry.

Flow Control Division (FCD) revenue was $394.7 million, reflecting an increase of 14.2% on a year-over-year basis (up 7.2% on constant currency basis). Higher sales in Asia Pacific, North America, the Middle East and Latin America aided the quarterly result but sales declines in Europe and Africa emerged as dampeners. The top line was primarily driven by strong oil and gas, chemical and general industry bookings.

Bookings for the segment fell 7% on a constant currency basis to $381.4 million. Excluding the impact of currency, bookings dipped 1.1%. The fall in the bookings was due to reduced original equipment bookings in the Middle East/Africa and Latin America, offset partly by an increase in Russia. 

Margins

Gross margin for the quarter contracted 20 basis points year over year to 33.4%. EPD segment’s gross margin was 33.9% (up 30 basis points) where as IPD segment registered a gross margin of 24.3% (up 70 basis points). The rise in segment gross margin was primarily driven by sales mix shift to aftermarket sales, improvement in execution and progress made in shipping low margin legacy backlog. 

FCD segment’s gross margin, however, declined 30 basis points to 35.4%; primarily due to a shift in product line mix and a less favorable sales mix between original equipment and aftermarket

Balance Sheet and Cash Flow

The company exited the quarter with cash and cash equivalents of $217.4 million compared to $337.4 million as of December 31, 2011. The company had a long-term debt of $879 million and a total equity of $2.03 billion.

The company exited the year with net cash flow from operating activities of $122.6 million compared with negative $150.1 million as of 30 September 2011.

Outlook

Concurrent with the earnings release, Flowserve narrowed its 2012 earnings guidance to $8.20-$8.70 per share compared with $8.00 to $8.80 per sharementioned earlier.

Flowserve Corporation, which faces stiff competition from Stratasys Inc. (SSYS - Analyst Report), retains a Zacks#2 Rank, implying a short-term Buy rating. Longer term, we maintain our Outperform recommendation on the stock.

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