Flowserve(FLS) - 2022 Q3 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Financial Statements This section presents Flowserve Corporation's unaudited condensed consolidated financial statements as of September 30, 2022 Condensed Consolidated Statements of Income The company reported a slight sales increase in Q3 2022 but decreased net earnings and diluted EPS for both the quarter and the nine-month period Condensed Consolidated Statements of Income (Q3, in thousands, except per share) | Indicator | Q3 2022 | Q3 2021 | | :--- | :--- | :--- | | Sales | $872,881 | $866,118 | | Gross Profit | $239,577 | $253,492 | | Operating Income | $24,217 | $57,362 | | Net Earnings Attributable to Flowserve | $38,400 | $49,785 | | Diluted EPS | $0.29 | $0.38 | Condensed Consolidated Statements of Income (Nine Months, in thousands, except per share) | Indicator | Nine Months 2022 | Nine Months 2021 | | :--- | :--- | :--- | | Sales | $2,576,161 | $2,621,604 | | Gross Profit | $699,053 | $782,630 | | Operating Income | $91,918 | $185,628 | | Net Earnings Attributable to Flowserve | $67,359 | $109,218 | | Diluted EPS | $0.51 | $0.83 | Condensed Consolidated Balance Sheets Total assets decreased to $4.51 billion as of September 30, 2022, primarily due to a reduction in cash, while total equity also declined Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $351,870 | $658,452 | | Inventories, net | $779,449 | $678,287 | | Total current assets | $2,223,784 | $2,388,677 | | Total assets | $4,505,988 | $4,749,768 | | Liabilities & Equity | | | | Total current liabilities | $1,091,686 | $1,131,805 | | Long-term debt due after one year | $1,232,248 | $1,261,770 | | Total liabilities | $2,814,229 | $2,912,423 | | Total equity | $1,691,759 | $1,837,345 | Condensed Consolidated Statements of Cash Flows Operating activities shifted to a net cash outflow of $109.5 million for the nine months ended September 30, 2022, leading to a significant decrease in cash and cash equivalents Net Cash Flows (Nine Months Ended Sep 30, in thousands) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash flows (used) by operating activities | $(109,485) | $151,107 | | Net cash flows (used) by investing activities | $(45,647) | $(38,713) | | Net cash flows (used) provided by financing activities | $(111,778) | $272,344 | | Net change in cash and cash equivalents | $(306,582) | $361,995 | - The significant shift in operating cash flow from a $151.1 million source in 2021 to a $109.5 million use in 2022 was driven by changes in working capital, including a $151.9 million increase in inventories and a $78.4 million increase in accounts receivable[22] Notes to Condensed Consolidated Financial Statements The notes provide detailed explanations of financial statements, including the impact of the Russia-Ukraine conflict, debt structure, and asbestos-related litigation liabilities - In response to the Russia-Ukraine conflict, the company ceased all operations in Russia and recorded a $20.2 million pre-tax charge in Q1 2022, covering asset reserves, contra-revenue for canceled contracts, and exit costs[25] - The company identified and corrected an accounting error related to operating lease expenses, recording an incremental $6.4 million of expense in Q3 2022[28] - As of September 30, 2022, the company had an estimated asbestos liability of $101.6 million for pending and future claims[65] - The company's Realignment Program, initiated in 2020 to reduce costs, has incurred $93.7 million in charges from inception to date, against an anticipated total investment of approximately $95 million[84][97] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, highlighting increased bookings but decreased sales and gross margin Executive Overview This overview describes Flowserve's business and addresses ongoing impacts from the COVID-19 pandemic, the Russia-Ukraine conflict, and an improved market environment - The company is responding to the COVID-19 pandemic's effects, which include supply chain delays, labor constraints, and inflationary pressures, taking proactive steps like building inventory and qualifying alternative suppliers[25][107][110] - Due to the Russia-Ukraine conflict, Flowserve ceased operations in Russia in March 2022, resulting in a $20.2 million pre-tax charge in Q1 2022, with the company expecting to substantially complete its exit by the end of 2022[117] - Despite challenges, bookings increased 19.3% in the first nine months of 2022 compared to 2021, indicating a meaningful improvement in customer spending, although project-based oil and gas spending has not fully returned to pre-pandemic levels[116] Results of Operations Consolidated results for the first nine months of 2022 show decreased sales and operating income despite increased bookings, primarily due to negative currency effects and margin pressures Bookings and Sales (in millions) | Period | Bookings 2022 | Bookings 2021 | % Change | Sales 2022 | Sales 2021 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Q3 | $1,223.3 | $911.6 | +34.2% | $872.9 | $866.1 | +0.8% | | Nine Months | $3,346.7 | $2,805.7 | +19.3% | $2,576.2 | $2,621.6 | -1.7% | - Backlog increased by 29.9% to $2.60 billion at September 30, 2022, compared to year-end 2021, despite a $139 million negative currency impact and $25.2 million in cancellations related to Russia[126] Profitability Analysis (Nine Months Ended Sep 30, in millions) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Gross Profit | $699.1 M | $782.6 M | | Gross Profit Margin | 27.1% | 29.9% | | Operating Income | $91.9 M | $185.6 M | | Operating Margin | 3.6% | 7.1% | - Q3 sales were negatively impacted by approximately $30 million due to operational interruptions from a new ERP system implementation at certain North America quick response centers[126] Liquidity and Capital Resources The company maintains a solid liquidity position with $351.9 million in cash and $157.3 million available under its credit facility, despite a decrease in cash from operating activities - Cash and cash equivalents decreased by $306.6 million during the first nine months of 2022 to $351.9 million[163] - Operating activities used $109.5 million in cash, a significant shift from providing $151.1 million in the prior-year period, mainly due to increased investment in inventory and higher accounts receivable[163] - The company has an available borrowing capacity of $157.3 million under its Senior Credit Facility as of September 30, 2022, and borrowed an additional $45.0 million on October 14, 2022[165][167] - The company has $96.1 million remaining under its share repurchase authorization as of September 30, 2022[166] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from foreign currency fluctuations and the LIBOR transition - The company is exposed to foreign currency risk as a substantial portion of its operations are outside the U.S., using foreign exchange forward contracts and cross-currency swaps to mitigate this risk, with $399.6 million in notional value of forward contracts as of Sep 30, 2022[176] - The company is addressing the cessation of LIBOR, with its Amended and Restated Credit Agreement including provisions for determining a successor rate, though the final outcome and potential impact are still uncertain[175] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2022 - Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2022[180] - No material changes to the company's internal control over financial reporting occurred during the quarter ended September 30, 2022[181] PART II – OTHER INFORMATION Item 1. Legal Proceedings The company is involved in various legal proceedings, primarily asbestos-related lawsuits - The company is a defendant in ordinary routine lawsuits and governmental proceedings, with the most significant being asbestos-related claims, further detailed in Note 10 to the financial statements[185] Item 1A. Risk Factors No material changes to the company's previously disclosed risk factors have occurred since the 2021 Annual Report - No material changes in risk factors have occurred since the company's 2021 Annual Report[186] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company did not repurchase shares in Q3 2022, with $96.1 million remaining for future repurchases - No shares were repurchased under the publicly announced program during Q3 2022[187] - As of September 30, 2022, $96.1 million remains available for future repurchases under the existing authorization[187] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including corporate by-laws and certifications - The filing includes certifications from the Principal Executive Officer and Principal Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act[191] - Exhibits include amended and restated versions of the Executive Officer Severance Plan and the Annual Incentive Plan[191]