Flowserve(FLS) - 2024 Q3 - Quarterly Report

PART I – FINANCIAL INFORMATION Financial Statements The company's financial statements for the period ended September 30, 2024, show significant growth compared to the prior year, with net earnings and diluted EPS increasing for both the quarter and nine-month period, alongside growth in total assets and equity, and improved operating cash flow Condensed Consolidated Statements of Income (Q3) | Indicator (In thousands, except per share) | Q3 2024 | Q3 2023 | | :--- | :--- | :--- | | Sales | $1,133,087 | $1,094,718 | | Gross Profit | $357,067 | $317,694 | | Operating Income | $103,192 | $70,256 | | Net Earnings Attributable to Flowserve | $58,382 | $46,156 | | Diluted EPS | $0.44 | $0.35 | Condensed Consolidated Statements of Income (Nine Months) | Indicator (In thousands, except per share) | Nine Months 2024 | Nine Months 2023 | | :--- | :--- | :--- | | Sales | $3,377,458 | $3,155,399 | | Gross Profit | $1,062,132 | $937,285 | | Operating Income | $337,575 | $224,090 | | Net Earnings Attributable to Flowserve | $205,218 | $124,126 | | Diluted EPS | $1.55 | $0.94 | Condensed Consolidated Balance Sheets Highlights | Indicator (In thousands) | Sept 30, 2024 | Dec 31, 2023 | | :--- | :--- | :--- | | Cash and cash equivalents | $611,745 | $545,678 | | Total current assets | $2,869,787 | $2,703,777 | | Total assets | $5,274,558 | $5,108,719 | | Total current liabilities | $1,440,366 | $1,438,576 | | Total equity | $2,105,521 | $1,975,051 | Condensed Consolidated Statements of Cash Flows (Nine Months) | Indicator (In thousands) | Nine Months 2024 | Nine Months 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $227,960 | $131,140 | | Net cash used by investing activities | ($54,112) | ($48,377) | | Net cash used by financing activities | ($107,380) | ($32,091) | | Net change in cash and cash equivalents | $66,067 | $45,487 | Note 1: Basis of Presentation and Accounting Policies This note outlines the basis of presentation for the unaudited condensed consolidated financial statements, detailing significant corporate activities including divestitures, acquisitions, and the wind-down of Russian operations - On May 4, 2024, the company divested its NAF AB subsidiary, a control valves business, resulting in a pre-tax and after-tax loss of $13.0 million[20] - On October 15, 2024, Flowserve acquired MOGAS Industries for a cash purchase price of $290.0 million, plus a contingent earnout of up to $15.0 million, with MOGAS reporting approximately $166 million in sales in 2023[22] - The company continues to wind down operations in Russia following the Russia-Ukraine conflict, with impacts to date not being material to the business[20] Note 2: Revenue Recognition Revenue is primarily recognized at a point in time, disaggregated by segment and source, with North America as the largest market, and the company reports significant remaining performance obligations Revenue by Segment & Source (Nine Months Ended Sept 30, 2024) | (In thousands) | FPD | FCD | Total | | :--- | :--- | :--- | :--- | | Original Equipment | $869,799 | $781,006 | $1,650,805 | | Aftermarket | $1,490,949 | $235,704 | $1,726,653 | | Total | $2,360,748 | $1,016,710 | $3,377,458 | Revenue by Geography (Nine Months Ended Sept 30, 2024) | Geography (In thousands) | Revenue | | :--- | :--- | | North America | $1,373,187 | | Europe | $627,147 | | Asia Pacific | $574,036 | | Middle East and Africa | $560,044 | | Latin America | $243,044 | - As of September 30, 2024, the company had approximately $924 million in remaining performance obligations for contracts exceeding one year, expecting to recognize $195 million in the remainder of 2024 and $729 million in 2025 and beyond[38] Note 10: Legal Matters and Contingencies The company faces numerous asbestos-related lawsuits, with 8,111 active claims as of September 30, 2024, and an estimated liability of $115.4 million, acknowledging potential material adverse impacts Asbestos Claim Activity (Nine Months Ended) | Claim Status | Sept 30, 2024 | Sept 30, 2023 | | :--- | :--- | :--- | | Beginning claims | 8,236 | 8,139 | | New claims | 1,936 | 1,749 | | Resolved claims | (2,280) | (1,868) | | Ending claims | 8,111 | 8,107 | Estimated Asbestos Liability (In thousands) | Period | Amount | | :--- | :--- | | Beginning balance, Jan 1, 2024 | $102,903 | | Asbestos liability adjustments, net | $23,740 | | Cash payment activity | ($7,089) | | Ending balance, Sept 30, 2024 | $115,367 | Note 16: Realignment Programs The company's 2023 Realignment Programs continued into 2024, incurring $36.4 million in charges for the nine months ended September 30, 2024, as part of an anticipated $123 million total investment to consolidate operations and reduce costs 2023 Realignment Program Charges (In thousands) | Period | Q3 2024 | Q3 2023 | Nine Months 2024 | Nine Months 2023 | | :--- | :--- | :--- | :--- | :--- | | Total Charges | $8,955 | $22,194 | $36,356 | $50,624 | - The total anticipated investment in evaluated and initiated realignment activities is approximately $123 million, with $37 million being non-cash[87] - From the program's inception through September 30, 2024, the company has incurred total charges of $102.4 million[95] Management's Discussion and Analysis (MD&A) Management discusses the company's strong performance, driven by its 3D strategy, increased bookings and sales, improved gross margin, robust liquidity, and the strategic acquisition of MOGAS - The company is focused on its "3D Strategy" of diversification, decarbonization, and digitization to accelerate growth[107] - On October 15, 2024, the company acquired MOGAS Industries for $290.0 million to enhance its severe service valve offerings and aftermarket opportunities, particularly in the mining industry[106] - The 2023 Realignment Programs are expected to achieve annualized cost savings exceeding $100 million upon completion of initiated activities[110] Results of Operations Consolidated sales and bookings increased, driving backlog growth, while gross profit margin expanded significantly due to favorable pricing and volume, leading to a surge in operating income Bookings and Sales (In millions) | Indicator | Q3 2024 | Q3 2023 | Nine Months 2024 | Nine Months 2023 | | :--- | :--- | :--- | :--- | :--- | | Bookings | $1,203.6 | $1,067.5 | $3,487.2 | $3,234.7 | | Sales | $1,133.1 | $1,094.7 | $3,377.5 | $3,155.4 | - Backlog increased by 3.3% to $2,783.8 million at September 30, 2024, compared to December 31, 2023[119] Profitability Metrics | Indicator | Q3 2024 | Q3 2023 | Nine Months 2024 | Nine Months 2023 | | :--- | :--- | :--- | :--- | :--- | | Gross Profit Margin | 31.5% | 29.0% | 31.4% | 29.7% | | Operating Margin | 9.1% | 6.4% | 10.0% | 7.1% | Business Segments The Flowserve Pumps Division (FPD) experienced a significant surge in Q3 bookings and expanded operating margin, while the Flow Control Division (FCD) saw sales growth despite a slight decrease in bookings, maintaining a stable operating margin Flowserve Pumps Division (FPD) Q3 Results (In millions) | Indicator | Q3 2024 | Q3 2023 | Change | | :--- | :--- | :--- | :--- | | Bookings | $886.6 | $734.7 | +20.7% | | Sales | $782.1 | $766.2 | +2.1% | | Segment Operating Income | $109.3 | $78.3 | +39.6% | | Operating Margin | 14.0% | 10.2% | +380 bps | Flow Control Division (FCD) Q3 Results (In millions) | Indicator | Q3 2024 | Q3 2023 | Change | | :--- | :--- | :--- | :--- | | Bookings | $318.4 | $330.5 | -3.7% | | Sales | $353.1 | $330.7 | +6.8% | | Segment Operating Income | $46.7 | $43.5 | +7.4% | | Operating Margin | 13.2% | 13.2% | 0 bps | Liquidity and Capital Resources The company maintains strong liquidity with increased cash and improved operating cash flow, further enhancing financial flexibility through an amended credit agreement and projected capital expenditures - Cash and cash equivalents increased to $611.7 million as of September 30, 2024, from $545.7 million at December 31, 2023[154] - Net cash from operating activities for the nine months ended September 30, 2024, was $228.0 million, a 74% increase from $131.1 million in the same period of 2023[154] - On October 10, 2024, the company amended its credit agreement, increasing its Term Loan from $300 million to $500 million and extending the maturity to October 10, 2029[156] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is foreign currency exposure, mitigated by forward contracts with a notional value of $644.5 million, and a 10% adverse change would impact net earnings by approximately $19 million - The company uses foreign exchange forward contracts to hedge transactional currency exposure, with an aggregate notional amount of $644.5 million outstanding as of September 30, 2024[165] - A sensitivity analysis shows a 10% adverse change in foreign currency exchange rates would have impacted net earnings by approximately $19 million for the first nine months of 2024[166] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2024, with no material changes to internal control over financial reporting during the quarter - The Principal Executive Officer and Principal Financial Officer concluded that the company's disclosure controls and procedures were effective as of September 30, 2024[167] - No material changes to the company's internal control over financial reporting occurred during the third quarter of 2024[168] PART II – OTHER INFORMATION Legal Proceedings The company is involved in legal proceedings, primarily asbestos-related claims detailed in Note 10, with no other ordinary course litigation expected to materially impact financial position or cash flows - The company incorporates by reference the disclosures in Note 10, "Legal Matters and Contingencies," which details ongoing asbestos-related litigation[171] Risk Factors No material changes to the company's risk factors have occurred since the 2023 Annual Report on Form 10-K, directing investors to prior filings for comprehensive risk discussions - No material changes in risk factors have occurred since the company's 2023 Annual Report[172] Unregistered Sales of Equity Securities and Use of Proceeds In Q3 2024, the company repurchased 82,785 shares for $3.9 million, with total repurchases reaching 423,785 shares for $20.1 million for the nine months, leaving $279.9 million available under the repurchase authorization Share Repurchase Activity (Q3 2024) | Month | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | July | 613 | $50.01 | | August | 5,382 | $48.15 | | September | 0 | N/A | | Total | 82,785 (including public program) | N/A | - As of September 30, 2024, the company had $279.9 million of remaining capacity under its share repurchase program[173]