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Flowserve (FLS) Beats on Q4 Earnings & Revenue Estimates

Flowserve Corp. FLS posted an earnings beat in fourth-quarter 2016, marking a reversal to the miss trend set over the trailing four quarters. The company's fourth-quarter 2016 adjusted earnings of 72 cents per share topped the Zacks Consensus Estimate of 65 cents by 10.8%.

However, on a reported basis, the company's earnings per share fell 7.4% to 50 cents on a year-over-year basis. Precipitous top-line decline owing to macroeconomic volatility as well as foreign currency headwinds proved to be major drags for the bottom line.

For full-year 2016, the company's adjusted earnings per share came in at $2.19, down 28.7% year over year.

Quarter in Detail

Revenues fell 16.6% year over year to $1074.6 million. However, revenues surpassed the Zacks Consensus Estimate of $1067 million. Apart from lower sales across all three sub-segments, negative currency impact also dragged down revenues.

For full-year 2016, the company's top line declined by 12.5% to $3991.4 million compared to the year-ago tally. Weak original equipment sales across all geographies (except Middle East) were largely attributable to the top-line decline.

The company's bookings totaled $908 million in fourth-quarter 2016, down 4.2% year over year at constant currency (cc). After-market bookings totaled $446 million and were also flat at cc. Bookings were also hit by negative currency impact. In addition, prolonged softness in the oil and gas industry and the chemical and general industries hurt customer original equipment bookings, aggravating the decline.

Operating income of the company came in at $107.8 million compared with $136.8 million recorded in the year-ago period. Foreign currency headwinds and lower gross profits resulted in operating loss. Also, adjusted gross margins contracted 20 bps to 33.2%. Dismal sales, unfavorable impact of short-term operational inefficiencies and lower margin projects were major dampeners.

Segmental Results

Engineered Product Division revenues were down 19.9% year over year to $553.4 million in the quarter. Negative currency translation effects, along with lower aftermarket and original equipment sales in key end markets, mainly stemmed the revenue decline. Additionally, bookings were down 5.0% year over year to $437.0 million, primarily due to currency headwinds, and softness in oil & gas and general industries.

Sales at the Flow Control Division declined 12.6% year over year to $318.2 million, hit by currency headwinds and soft customer original equipment sales in key end markets. Bookings fell 8.5% year over year to $304.1 million, owing to lower orders from the oil and gas industry.

Moreover, Industrial Product Division sales were down 13.6% year over year to $221.4 million. Foreign currency headwinds, along with low original equipment sales, resulted in the decline across all main geographies. Furthermore, bookings were down 4.6% to $188.5 million, chiefly because of dismal bookings in the oil & gas, power generation and chemical industries.

Flowserve Corporation Price, Consensus and EPS Surprise

Flowserve Corporation Price, Consensus and EPS Surprise | Flowserve Corporation Quote

Restructuring Initiatives

Currently, the company is following its $400-million multi-year investment, which is anticipated to result in savings of $195 million in 2017. In 2018, savings from the full annualized program are expected at $230 million. These investments are aimed at streamlining management structure, reducing manufacturing costs and implementing cost-saving measures for the overall optimization of the cost structure.

The company also expects to trim its workforce by 15-20% and manufacturing footprint by 30% compared with the 2015 level, as well as shift manufacturing to lower cost regions, under this $400 million worth of restructuring initiative.

In relation to the restructuring efforts, the company spent about $34 million in fourth-quarter 2016, which in turn led to incremental savings of $12 million. For full-year 2016, it incurred an expenditure of $104 million as realignment charges and this resulted in savings of $93 million. Flowserve remains optimistic to complete the $400-million program in 2017. It will likely incur an expense of $155 million and result in $70 million of additional savings.

Balance Sheet & Cash Flow

Flowserve ended the quarter with cash and cash equivalents of $367.2 million compared with $366.4 million as of Dec 31, 2015. On Dec 31, 2016, the company's long-term debt totaled $1,485.3 million, down from $1,560.6 million as of Dec 31, 2015.

The company's net cash flow provided by operating activities came in at $227.6 million for the 12-month period ended Dec 31, 2016, significantly below $418.1 million recorded in the prior-year period.

2017 Outlook

Concurrent with the fourth-quarter 2016 results, Flowserve offered its 2017 guidance. The company expects adjusted earnings per share guidance to lie in the band of $1.55-$1.85. Flowserve estimates revenues to decline in the range of 6-14%.

Flowserve does not anticipate any major turnaround in the current geopolitical, end market and macro uncertainties for 2017. Factors including currency rates, commodity prices, expected bookings and market volatility are likely to put pressure on both the top- and bottom-line performances for this year.

To Conclude

Flowserve's unexpected fourth-quarter earnings beat will provide some respite to investors, given the softness in energy markets. However, waning sales remain a pressing concern for the company. We believe that the company's focus on cost management and efficiency enhancing initiatives will help it offset macro woes to some extent. Savings from the restructuring actions and stabilization of aftermarket bookings look promising.

However, macroeconomic woes, which have been plaguing the most well managed companies in the industrial space, will continue to bother the company for most of 2017. It is also feared that oil & gas spending declines in both upstream and midstream channels, along with capital spending deferrals, will act as major spoilsport for the Zacks Rank #3 (Hold) company.

Stocks to Consider

Some better-ranked stocks in the broader sector include Chart Industries Inc. GTLS , II-VI Incorporated IIVI and Applied Industrial Technologies Inc. AIT . While Chart Industries and II-VI Incorporated sport a Zacks Rank #1 (Strong Buy), Applied Industrial carries a Zacks Rank #2 (Buy).

Chart Industries has generated an impressive positive average earnings surprise of 548.5% in the trailing four quarters, beating estimates all through.

II-VI Incorporated has registered a remarkable positive average surprise of over 59.2% for the four trailing quarters, driven by four remarkable consecutive beats. You can see the complete list of today's Zacks #1 Rank stocks here .

Applied Industrial Technologies has managed to beat estimates thrice in the trailing four quarters, for a positive earnings surprise of 6.2%.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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