Flowserve(FLS) - 2020 Q3 - Quarterly Report

PART I Item 1. Financial Statements Presents unaudited condensed consolidated financial statements for Q3 and YTD 2020/2019, showing declines in sales and net earnings Condensed Consolidated Statements of Income (3 Months Ended Sep 30) | Indicator | 2020 (in thousands) | 2019 (in thousands) | | :--- | :--- | :--- | | Sales | $924,301 | $995,709 | | Gross profit | $285,209 | $332,853 | | Operating income | $87,322 | $104,578 | | Net earnings attributable to Flowserve | $51,003 | $59,842 | | Diluted EPS | $0.39 | $0.45 | Condensed Consolidated Statements of Income (9 Months Ended Sep 30) | Indicator | 2020 (in thousands) | 2019 (in thousands) | | :--- | :--- | :--- | | Sales | $2,742,826 | $2,871,517 | | Gross profit | $821,375 | $939,761 | | Operating income | $154,977 | $282,193 | | Net earnings attributable to Flowserve | $59,433 | $166,243 | | Diluted EPS | $0.45 | $1.26 | Condensed Consolidated Balance Sheets (as of Sep 30, 2020 and Dec 31, 2019) | Account | Sep 30, 2020 (in thousands) | Dec 31, 2019 (in thousands) | | :--- | :--- | :--- | | Total current assets | $2,806,145 | $2,506,747 | | Total assets | $5,173,576 | $4,938,277 | | Total current liabilities | $1,093,582 | $1,117,442 | | Total liabilities | $3,469,733 | $3,165,936 | | Total equity | $1,703,843 | $1,772,341 | Condensed Consolidated Statements of Cash Flows (9 Months Ended Sep 30) | Cash Flow Activity | 2020 (in thousands) | 2019 (in thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $115,629 | $143,223 | | Net cash used by investing activities | ($34,160) | ($4,503) | | Net cash provided by (used by) financing activities | $178,972 | ($195,545) | | Net change in cash and cash equivalents | $250,198 | ($73,834) | Notes to Condensed Consolidated Financial Statements Details financial statement explanations, including accounting policies, data revisions, revenue, debt, legal contingencies, and realignment programs Note 1. Basis of Presentation and Accounting Policies Discusses unaudited statements, impact of COVID-19 and oil market volatility, and adoption of new CECL accounting standard - The company's performance has been challenged by the macroeconomic impacts of the COVID-19 pandemic and oil market volatility, leading to significant decreases in customer capital spending and lower bookings in the first nine months of 2020[26] - On January 1, 2020, the company adopted the new credit loss standard (CECL), resulting in a noncash cumulative effect after-tax adjustment to retained earnings of $7.3 million[28] Note 2. Revision to Previously Reported Financial Information Details correction of accounting errors for asbestos claims, leading to revision of 2019 financial information - Accounting errors related to unasserted asbestos claims (IBNR liability) were identified and corrected, with the cumulative effect leading to a revision of previously issued financial information for 2019[32] Impact of Revision on Q3 2019 Net Earnings | Item | As Reported (in thousands) | Adjustment (in thousands) | As Revised (in thousands) | | :--- | :--- | :--- | :--- | | Net earnings attributable to Flowserve | $68,442 | ($8,600) | $59,842 | | Diluted EPS | $0.52 | ($0.07) | $0.45 | Note 3. Revenue Recognition Disaggregates revenue by segment, source, and geography, with Q3 2020 total revenue at $924.3 million Disaggregated Revenue by Source (Q3 2020 vs Q3 2019) | Revenue Source | Q3 2020 (in thousands) | Q3 2019 (in thousands) | | :--- | :--- | :--- | | Original Equipment | $479,423 | $508,111 | | Aftermarket | $444,878 | $487,598 | | Total | $924,301 | $995,709 | Disaggregated Revenue by Geography (Q3 2020 vs Q3 2019) | Geography | Q3 2020 (in thousands) | Q3 2019 (in thousands) | | :--- | :--- | :--- | | North America | $341,717 | $413,464 | | Latin America | $53,411 | $59,020 | | Middle East and Africa | $112,375 | $111,703 | | Asia Pacific | $218,063 | $214,999 | | Europe | $198,735 | $196,523 | - As of September 30, 2020, the aggregate transaction price allocated to unsatisfied performance obligations was approximately $435 million, with $130 million expected to be recognized in the remainder of 2020[48] Note 7. Debt Details significant debt structure changes, including a new $500 million senior note offering and credit facility amendment - In September 2020, the company completed a public offering of $500.0 million in 3.50% Senior Notes due 2030[66] - A portion of the proceeds from the new notes was used to fund a partial tender offer of $191.4 million for the 1.25% EUR Senior Notes due 2022[66] - The company amended its Senior Credit Agreement to provide greater flexibility, including replacing the existing leverage ratio covenant with a modified version through December 31, 2021[67] Note 11. Legal Matters and Contingencies Discusses asbestos-related lawsuits, revised estimation, and recording of a $101.1 million IBNR liability Asbestos Claims Activity | Period | Beginning Claims | New Claims | Resolved Claims | Ending Claims | | :--- | :--- | :--- | :--- | :--- | | Nine Months 2020 | 8,345 | 1,672 | (1,706) | 8,346 | | Nine Months 2019 | 8,619 | 1,671 | (2,027) | 8,277 | - The company re-evaluated its accounting for asbestos-related matters and, with the assistance of an actuary, recorded a liability for pending and future unasserted claims (IBNR) at a central estimate of approximately $101.1 million, with an estimated insurance receivable of $87.5 million[172] Note 13. Shareholders' Equity Details dividend declarations and share repurchase activities, with $113.6 million remaining for repurchases Dividends Declared Per Share | Period | 2020 | 2019 | | :--- | :--- | :--- | | Three Months Ended Sep 30 | $0.20 | $0.19 | | Nine Months Ended Sep 30 | $0.60 | $0.57 | - The company repurchased 1,057,115 shares for $32.1 million during the first nine months of 2020, with no repurchases in Q3 2020, and $113.6 million of capacity remains under the current share repurchase program[83][84] Note 17. Realignment and Transformation Programs Outlines the '2020 Realignment Program' and 'Flowserve 2.0 Transformation', with total charges of $88.3 million YTD - In Q2 2020, the company initiated the '2020 Realignment Program' to reduce workforce costs and optimize manufacturing, with an anticipated total investment of approximately $75 million[97] - The 'Flowserve 2.0 Transformation' program, launched in 2018 to drive operational excellence, continues to incur expenses, primarily for professional services[99] Total Realignment and Transformation Charges | Period | 2020 (in thousands) | 2019 (in thousands) | | :--- | :--- | :--- | | Three Months Ended Sep 30 | $12,177 | $9,852 | | Nine Months Ended Sep 30 | $88,324 | $20,212 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses financial performance, COVID-19 impact, segment results, strong liquidity, and critical accounting policy changes Executive Overview Overview of Flowserve's business, detailing COVID-19 impact on demand, 21.2% Q3 bookings decline, and cost-saving measures - The COVID-19 pandemic and volatile oil prices have led to a significant decrease in customer capital spending, resulting in a 21.2% decline in bookings in Q3 2020 compared to Q3 2019[118][134] - The company has implemented cost savings measures, including realignment activities, a hiring freeze, and cuts in discretionary spending, targeting approximately $100 million in cost reductions for 2020[122] - The outlook for Q4 2020 anticipates an approximate 20% decline in bookings and a 10% decline in revenue compared to Q4 2019[123] Results of Operations Analyzes consolidated and segment results, showing Q3 2020 sales decreased 7.2% to $924.3 million and gross margin declined Consolidated Bookings and Sales (in millions) | Metric | Q3 2020 | Q3 2019 | % Change | | :--- | :--- | :--- | :--- | | Bookings | $806.1 | $1,023.4 | -21.2% | | Sales | $924.3 | $995.7 | -7.2% | - Gross profit margin for Q3 2020 decreased to 30.9% from 33.4% in Q3 2019, primarily due to a sales mix shift to lower-margin original equipment sales[135] - SG&A expense for Q3 2020 decreased by 12.9% year-over-year, driven by cost-saving initiatives in response to COVID-19 and realignment savings[139] - The effective tax rate for the nine months ended Sep 30, 2020 was 47.2%, a significant increase from 25.3% in the prior year, mainly due to the establishment of a valuation allowance against certain deferred tax assets[148] Liquidity and Capital Resources Details strong liquidity of $1.7 billion, cash flow from operations, and major financing activities - As of September 30, 2020, the company had approximately $1.7 billion of liquidity, consisting of $921.2 million in cash and cash equivalents and $745.9 million of available borrowings under its Senior Credit Facility[169] - Net cash provided by operating activities decreased to $115.6 million for the first nine months of 2020, compared to $143.2 million for the same period in 2019[165] - Financing activities provided $179.0 million in cash, primarily from the issuance of $498.3 million in new senior notes, offset by a $191.3 million debt payment, $78.1 million in dividends, and $32.1 million in share repurchases[165][166] Critical Accounting Policies and Estimates Highlights a significant change in accounting policy for asbestos-related liabilities, establishing an IBNR estimate - The company changed its critical accounting policy for estimating asbestos-related liabilities, now including an estimate for incurred but not reported (IBNR) claims, which was determined to be probable and reasonably estimable[170][172] - Based on an actuarial study, the company recorded a liability for pending and future asbestos claims at a central estimate of approximately $101.1 million, covering the period through 2049[172] Item 3. Quantitative and Qualitative Disclosures About Market Risk Discusses primary market risk from foreign currency fluctuations and mitigation strategies, with a $16 million sensitivity impact - The company is primarily exposed to market risk from foreign currency exchange rate fluctuations and uses foreign exchange forward contracts and net investment hedges to manage this risk[181][182] - A sensitivity analysis at September 30, 2020, showed that a 10% change in foreign currency exchange rates would have impacted net earnings by approximately $16 million for the nine-month period[182] Item 4. Controls and Procedures Management concluded disclosure controls and procedures were effective, with no material changes in internal controls - Based on an evaluation as of September 30, 2020, the Principal Executive Officer and Principal Financial Officer concluded that the company's disclosure controls and procedures were effective[185] - There were no material changes in the company's internal control over financial reporting during the third quarter of 2020[186] PART II – OTHER INFORMATION Item 1. Legal Proceedings Incorporates by reference Note 11's discussion of legal proceedings, primarily asbestos-related claims - The company is party to legal proceedings as described in Note 11 to the condensed consolidated financial statements, which is incorporated by reference[190] Item 1A. Risk Factors No material changes to previously disclosed risk factors, though COVID-19 could amplify existing risks - There have been no material changes in risk factors from those discussed in the 2019 Annual Report and subsequent filings, though the COVID-19 pandemic could amplify existing risks[177][191] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No share repurchases under the program in Q3 2020, with $113.6 million remaining for future repurchases Share Repurchase Activity (Q3 2020) | Month | Total Shares Purchased | Average Price Paid per Share | Shares Purchased as Part of Publicly Announced Program | | :--- | :--- | :--- | :--- | | July | 22,600 | $30.31 | 0 | | August | 2,242 | $30.80 | 0 | | September | 595 | $28.16 | 0 | | Total | 25,437 | $30.30 | 0 | - As of September 30, 2020, the company had $113.6 million of remaining capacity under its current share repurchase program[192] Item 6. Exhibits Lists all exhibits filed with the Form 10-Q, including CEO/CFO certifications and XBRL data files - Exhibits filed include CEO and CFO certifications (31.1, 31.2, 32.1, 32.2), an amendment to the Credit Agreement (10.1), and XBRL interactive data files[201] Signatures