Flowserve Corp : Flowserve Corp. Reports Strong Fourth Quarter and Full Year 2006 Results
03/01/2007| 06:29pm US/Eastern
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Flowserve Corp. (NYSE: FLS) today timely filed its 2006 Annual Form 10-K
report with the Securities and Exchange Commission and reported
significantly stronger financial results for 2006. The Company's
announcement highlights record annual sales of $3.1 billion, record
annual income from continuing operations of $114 million, a
determination of no material weaknesses in internal controls at December
31, 2006 and a positive outlook for 2007. Also, as announced earlier
today, the Company has declared a $0.15 per share quarterly dividend,
payable on April 11, 2007 to shareholders of record as of the close of
business on March 28, 2007.
Highlights:
Full Year 2006 (All comparisons versus 2005)
At December 31, 2006, there were no material weaknesses in internal
controls over financial reporting
Record Bookings from continuing operations of $3.6 billion, up 23.4%
Record Backlog of $1.6 billion, up 64%
Record Sales of $3.1 billion, up 13.6%
Gross Profit of $1.0 billion, up 15.7%
Gross Margin improvement of 60 basis points to 32.9%
Operating Income of $240 million, up 20.5%, including realignment
charges of $13 million
Fully diluted EPS from continuing operations of $2.00, up $1.09 or 120%
Strong operating cash flow facilitated funding of $101 million
repayment of debt and other financing obligations, $36 million of
optional U.S. pension contributions and the repurchase of 1.3 million
shares ($63 million) in 4th quarter 2006 of
an approved 2 million share buyback
Net debt-to-capital ratio improved to 32.6% from 40.0%
Converted U.S. inventories from LIFO to FIFO. All financial
information in this release has been adjusted to reflect this change
in accounting for inventory
Fourth Quarter ?2006 (All
comparisons versus fourth quarter of 2005)
Record Bookings from continuing operations of $934 million, up 20.9%
Record Sales of $884 million, up 19.6%
Gross Profit of $287 million, up 19.1%
Gross Margin down 10 basis points to 32.5%, primarily due to a higher
mix of major project business versus aftermarket business in the Pump
division.
Operating Income of $63 million, up 10.2%, including realignment
charges of $12 million
Fully diluted EPS from continuing operations of $0.58, up $0.18 or 45%
2006 Form 10-K Filed
Flowserve timely filed its 2006 Form 10-K with the SEC today. ?Remaining
a current filer has been a core objective at Flowserve,?
said Flowserve President and CEO Lewis M. Kling. ?We
are very pleased to have come through on our commitments to file timely
and to eliminate material weaknesses in internal controls at December
31, 2006, while delivering strong and significantly improved financial
performance.?
Discussion and Analysis of Full Year 2006 Results (Comparisons to
2005)
Bookings from continuing operations for the full year 2006 increased by
23.4% to $3.6 billion, a Company record. The increase was driven by
strength in oil and gas, power and water markets, especially in North
America, China and the Middle East. Backlog at December 31, 2006
increased 64.0% to $1.6 billion, as the result of robust bookings, and
this improvement positions the Company for a considerably stronger 2007.
Sales for the full year 2006 increased by 13.6% to $3.1 billion, also a
Company record. The strong sales growth reflects brisk demand in the oil
and gas, power and water industries.
Gross Profit for the full year 2006 increased by 15.7% to $1.0 billion.
Gross Margin for the full year 2006 increased by 60 basis points to
32.9%. This margin improvement was largely due to increased sales (which
favorably impacted absorption of fixed costs), pricing increases and
more selectivity in accepting customer orders, plus successful supply
chain and Continuous Improvement Process initiatives.
SG&A for the full year 2006 increased by 14.4% to $783 million. This
increase reflects higher commissions from the record bookings,
additional sales and engineering personnel in support of the robust
sales levels, continued development of in-house compliance capabilities
and costs associated with expansion in Asia, as well as increased legal
fees and expenses. Costs of equity compensation increased as a result of
the adoption of FAS 123R for stock options and the increased share price
for restricted stock. SG&A in 2006 also includes realignment charges of
$13 million related to relocation of product lines and severance of
redundant personnel in certain locations, compared with approximately $2
million in 2005. SG&A also includes $6 million in stock modification
charges versus $7 million in 2005.
Income from continuing operations for the full year 2006 increased by
122% to $114 million, a Company record. In 2006, the Company benefited
from a reduction of $13 million in net interest costs, $8 million in
foreign currency gains in 2006 versus $7 million of foreign currency
losses in 2005 and the absence of the debt extinguishment charges of $28
million incurred in 2005 from the Company's
successful $1 billion refinancing at lower rates. In addition, the tax
rate in 2006 was 39.1%, compared to 44.1% in 2005.
Fully diluted EPS from continuing operations for the full year 2006 was
$2.00 per share. EPS as reported includes a $0.15 per share impact
related to the previously noted realignment charges of $13 million,
related primarily to product line relocation and severance.
Cash flow from operations remained strong in 2006, enabling the
repayment of $101 million in debt, repurchase of 1.3 million shares of
common stock for $63 million, pension plan contributions of $46 million
globally and capital expenditures of $74 million to improve operational
capabilities.
Flowserve also continued to expand in its core markets both globally and
by market segment in 2006. Oil and gas and power markets continued to
fuel the greatest segment growth, with the Middle East and Asia Pacific
regions leading the way geographically. ?We
see robust opportunities in the Middle East and Asia Pacific regions,
and we continued to build the infrastructure to capitalize on these
opportunities during 2006?, said Mr. Kling. ?The
development of our new plants in China and India plus our work to build
a major aftermarket training, repair and service center for our products
in Saudi Arabia are two key examples of how we are positioning the
Company to succeed in these markets,? Mr.
Kling went on to say.
Discussion and Analysis of 4th
Quarter Results (Comparisons to 4th
quarter 2005)
Consolidated bookings from continuing operations for the 4th
quarter of 2006 continued to grow at a strong pace, up 20.9% to $934
million. Sales growth increased by 19.6% to $884 million. ?I
am very pleased with the Company's
performance for the year and for the 4th
quarter in particular,? said Mr. Kling. ?To
achieve this level of bookings and sales in the fourth quarter is a
testament to our management team's solid
execution and an indication of our bright prospects for the future.?
Gross Profit for the 4th quarter of 2006
increased by 19.1% to $287 million, whereas Gross Margin declined by 10
basis points to 32.5%. A shift in sales mix to higher levels of large,
more complex project business in the Pump Division contributed to the
slight decline, partially offset by realization of margin improvements
in the Flow Control Division. Kling noted that ?We
are pleased by the increase in project business which builds our
installed base and attractive aftermarket opportunities.?
Selling, General and Administrative expense (SG&A) for the 4th
quarter of 2006 increased by 21.5% to $227 million, including $12
million of realignment charges associated with relocation of product
lines and severance of redundant personnel in certain locations,
compared with approximately $2 million in 2005. The increase was also
driven by increased headcount in support of the higher sales and
bookings levels, plus related travel and incentive compensation expense,
as well as higher legal fees and expenses. ?We
have initiatives underway to reduce SG&A costs while ensuring that we
still properly support the growth in our business,?
said Flowserve CFO Mark A. Blinn.
Income from continuing operations for the 4th
quarter was $33 million, an increase of $11 million or 50%, due
primarily to higher sales, improved pricing and successful operational
excellence initiatives.
Fully diluted earnings per share (EPS) from continuing operations for
the 4th quarter was $0.58, reflecting the
increase in income described above, up $.18 or 45%. EPS as reported
includes a $0.12 per share impact related to the realignment charges
previously described.
Flowserve Pump Division (FPD)
Bookings for the 4th quarter of 2006 increased
29.2% to $565 million. Bookings for the full year 2006 increased 34.0%
to $2.1 billion. Bookings of original equipment, as a percent of total
bookings, increased to 61.5% in the 4th
quarter of 2006 from 58.7% in the 4th quarter
of 2005. Bookings of original equipment for the full year 2006, as a
percent of total bookings, increased to 62% from 57% in 2005, due
primarily to an increase in large project business. 2006 original
equipment bookings grew 46%, aftermarket bookings grew 18% versus 2005.
This type of project success provides FPD with increased aftermarket
opportunity in the future, which has historically been more profitable
than original equipment. The bookings increase is attributable to
strength in the oil and gas, power, and water industries.
Sales for the 4th quarter of 2006 increased
24.3% to $501 million. Sales for the full year 2006 increased by 15.7%
to $1.6 billion, following an extended period of pump bookings growth.
Original equipment sales, as a percent of total sales, increased to 58%
in the 4th quarter of 2006 from 53% in the 4th
quarter of 2005.
Full year original equipment increased as a percent of total sales to
57% from 53% in 2005, principally driven by oil and gas sales in the
Middle East and North America.
Gross margin for the 4th quarter of 2006
decreased 210 basis points to 28.8% reflecting a higher proportion of
project-related shipments, which are historically more competitively bid
than aftermarket business. Gross Margin for the full year 2006 of 28.3%
remained flat. Benefits from improved absorption of fixed costs, as well
as process efficiency and supply chain initiatives, were offset by
aforementioned shift in sales mix to original equipment, which
historically carries a lower margin. For the year ended 2006, original
equipment sales increased 23% and aftermarket sales increased by 8%
versus the same period in 2005.
Operating Income for the 4th quarter of 2006
decreased by 6.3% to $59 million. The decrease is attributable to the
higher proportion of original equipment sales, plus increased SG&A
resulting from sales and engineering headcount, sales incentive
compensation, third party commissions and travel expenses in support of
increased bookings and sales. Operating Income for the 4th
quarter of 2006 also includes a $5 million realignment charge for
severance associated with the reduction of redundant personnel in
Europe. Operating Income for the full year 2006 increased by 15.3% to
$173 million. The increase in Gross Profit of $62 million was partially
offset by increased commission and travel expense, costs related to
increased stock compensation and higher information technology project
costs.
Flow Control Division (FCD)
Bookings from continuing operations for the 4th
quarter of 2006 increased 7.7% to $255 million. Bookings from continuing
operations for the full year 2006 increased by 13.3% to $1.1 billion.
The increase is primarily attributable to continued strengthening of
several key end-markets. Continued strength in the process valve market
resulted from growth in the Asian chemical and coal gasification
industries, as well as broad strength in the North American and Middle
Eastern oil and gas markets.
Sales for the 4th quarter of 2006 increased by
15.4% to $267 million. Sales for the full year 2006 increased by 11.2%
to $995 million. The increase is primarily attributable to the same
reasons as the FCD bookings growth.
Gross Margin for the 4th quarter of 2006
increased 260 basis points to 33.1%. The increase in Gross Profit of $18
million and related margin are due to the increase in sales, which
favorably impacted FCD's recovery of fixed
manufacturing costs, FCD's progress in
attaining margin improvements and a large specific warranty charge in
2005. Gross Margin for the full year 2006 increased 180 basis points to
34.0% in 2006. The increase was primarily driven by increased sales,
coupled with improved pricing, through an implementation of broad-based
price increases in the latter-half of 2005.
Operating Income for the 4th quarter of 2006
increased 35.8% to $26 million. The 4th
quarter improvement in gross profit was partially offset by higher SG&A
costs, driven by $5 million of realignment charges associated with the
relocation of product lines to different facilities, $4 million of
selling costs due to the increase in sales and bookings and other costs
associated with increased headcount needed to support higher business
levels. Operating Income for full year 2006 increased by 25.8% to $116
million. The increase is primarily driven by the improvement in Gross
Profit of $51 million, partially offset by higher SG&A. For 2006,
approximately $7 million of realignment charges were recognized in SG&A
associated with the relocation of product lines to different facilities
and $9 million of higher selling costs.
Flow Solutions Division (FSD)
Bookings for the 4th quarter of 2006 increased
by 16.7% to $129 million. Bookings for the full year 2006 increased by
9.0% to $505 million. The increase in bookings is due to strong project
and original equipment growth as well as robust end-user markets.
Success in the end-user market continues to be a strength based on the
FSD business model, which places a premium on servicing customers
locally through an increasingly larger network of Quick Response Centers
(QRCs).
Sales for the 4th quarter of 2006 increased by
12.8% to $131 million and sales for full year 2006 increased by 11.9% to
$497 million, both driven by aftermarket and original equipment sales
growth in the oil and gas, chemical, and mineral and ore processing
industries.
Gross Margin for the 4th quarter of 2006
decreased 150 basis points to 42.0% on higher sales compared with the 4th
quarter of 2005. This change reflects higher project shipments in the 4th
quarter. Gross Margin for the full year 2006 increased 20 basis points
to 44.1%, as a result of various operational excellence initiatives,
implementation of price increases and strong aftermarket growth.
Operating Income for the 4th quarter increased
3.9% to $22 million. 4th quarter of 2005
included approximately $2 million of severance costs. Operating Income
for the full year 2006 increased 12.6% to $99 million. The positive
impact of FSD's global capacity expansion due
to the growing QRC network contributed to the increase.
Internal Controls Update
During 2006, the Company remediated all the material weaknesses reported
at December 31, 2005. ?We have come a long
way in our effort to improve our internal controls as proven by our
achievement of no material weaknesses. In 2007, we still plan to
continue to improve our control environment while also continuing to
reduce the costs of this work,? said Mr.
Blinn.
LIFO to FIFO
In the 4th quarter of 2006, the Company
completed its change in accounting for U.S. inventory from LIFO to FIFO.
The change increased net earnings for the years ended December 31, 2006
and 2005 by $6.0 million and $5.2 million, respectively, or $0.10 and
$0.09 per diluted share, respectively. It also increased both total
assets and total shareholders' equity at December 31, 2005 by $21.6
million. All prior period financial information included herein has been
retrospectively adjusted to reflect this change.
2007 Outlook
Mr. Kling expressed a positive outlook for 2007. He said, ?We
believe that we are taking market share. And, we continue to see record
levels of bookings based on the strength of our products, our global
operational capabilities, the talent of our global sales team and the
continued strength of our markets.? Mr. Kling
added, ?We expect our 2007 sales to grow
double digits in percentage to a range of $3.4 billion to $3.6 billion.
We also see further improvement in our gross margins of 25 to 50 basis
points since our operational excellence initiatives should gain further
traction.?
Mr. Blinn added that, ?Our SG&A has increased
in the past couple of years as we have incurred higher costs to complete
our restatement and to further develop in-house capabilities. Further,
we have added additional sales resources and engineers to support our
business growth. However, we now believe that we have stabilized our
cost structure and are well-positioned to realize reduction
opportunities. These opportunities include volume leverage, reduced
travel, headcount management and operational excellence programs
executed at both the corporate and divisional levels. Bottom line, we
expect a 175 to 250 basis point improvement in SG&A as a percentage of
sales in 2007.?
Summary
Mr. Kling concluded that, ?We are extremely
pleased with the performance of the Company during 2006 and believe that
the Company has the momentum to significantly improve this performance
going forward. Our record backlog, successful operational excellence
initiatives and robust market opportunities all bode quite well for 2007.?
Conference Call
The conference call will take place on Friday, March 2, at 10:00 AM
CST (11:00 AM EST)
Lewis Kling, President and Chief Executive Officer, and Mark Blinn,
Chief Financial Officer, will be presenting.
This call can be accessed at Flowserve's
website at www.flowserve.com
under the Investor Relations section.
Flowserve Corp. is one of the world's leading providers of fluid motion
and control products and services. Operating in 56 countries, the
Company produces engineered and industrial pumps, seals and valves as
well as a range of related flow management services.
Safe Harbor
SAFE HARBOR STATEMENT: This release includes forward-looking statements.
Forward looking statements are all statements that are not statements of
historical facts and include, without limitation, statements relating to
our business strategy and statements of expectations, beliefs, future
plans and strategies and anticipated developments concerning our
industry, business, operations and financial performance and condition.
The words ?believe?,
?seek?, ?anticipate?,
?plan?, ?estimate?,
?expect?, ?intend?,
?project?, ?forecast?,
?predict?, ?potential?,
?continue?, ?will?,
?may?, ?could?,
?should?, and
other words of similar meaning are intended to identify forward-looking
statements. The forward-looking statements made in this presentation are
made pursuant to safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements involve
known and unknown risks, uncertainties and other factors that, in some
cases, are beyond our control. These risks, uncertainties and factors
may cause our actual results, performance and achievements, or industry
results and market trends, to be materially different from any future
results, performance, achievements or trends expressed or implied by
such forward-looking statements. Important risks, uncertainties and
other factors that could cause actual results to differ from these
forward-looking statements include, but are not limited to, the
following: delays in future reports of the Company's
management and outside auditors on the Company's
internal control over financial reporting and related certifications;
continuing delays in the Company's filing of
its periodic public reports and any SEC, NYSE or debt rating agencies'
actions resulting there from; the possibility of adverse consequences of
the pending securities litigation; the possibility of adverse
consequences related to the investigations by the SEC and foreign
authorities regarding our participation in the United States
Oil-for-Food program; the possibility of adverse consequences of
governmental tax audits of the Company's tax
returns, including the upcoming IRS audit of the company's U.S. tax
returns for the years 2002 through 2004; the Company's
ability to convert bookings, which are not subject to nor computed in
accordance with generally accepted accounting principles, into revenues
at acceptable, if any, profit margins, since such profit margins cannot
be assured nor be necessarily assumed to follow historical trends;
changes in the financial markets and the availability of capital;
changes in the already competitive environment for the Company's
products or competitors' responses to the Company's
strategies; the Company's ability to
integrate acquisitions into its management and operations; political
risks, military actions or trade embargoes affecting customer markets,
including the continuing conflict in Iraq, uncertainties in certain
Middle Eastern countries such as Iran, and their potential impact on
Middle Eastern markets and global petroleum producers; the Company's
ability to comply with the laws and regulations affecting its
international operations, including the U.S. export laws, and the effect
of any noncompliance; the health of the petroleum, chemical, power and
water industries; economic conditions and the extent of economic growth
in the U.S. and other countries and regions; unanticipated difficulties
or costs associated with the implementation of systems, including
software; the Company's relative geographical
profitability and its impact on the Company's utilization of foreign tax
credits; the recognition of significant expenses associated with
realigning operations of acquired companies with those of Flowserve; the
Company's ability to meet the financial
covenants and other requirements in its debt agreements; any terrorist
attacks and the response of the U.S. to such attacks or to the threat of
such attacks; technological developments in the Company's
products as compared with those of its competitors; changes in
prevailing interest rates and the Company's
effective interest costs; and adverse changes in the regulatory climate
and other legal obligations imposed on the Company. It is not possible
to foresee or identify all the factors that may affect our future
performance or any forward-looking information, and new risk factors can
emerge from time to time. Given these risks and uncertainties, you
should not place undue reliance on forward-looking statements as a
prediction of actual results. All forward-looking statements included in
this news release are based on information available to us on the date
of this news release. We undertake no obligation to revise or update any
forward-looking statement or disclose any facts, events or circumstances
that occur after the date hereof that may affect the accuracy of any
forward-looking statement.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
Year Ended December 31,
2006
2005
2004
Sales
$ 3,061,063
$ 2,695,277
$ 2,522,489
Cost of sales
(2,053,761)
(1,824,716)
(1,759,331)
Gross profit
1,007,302
870,561
763,158
Selling, general and administrative expense
(782,503)
(684,271)
(605,145)
Net earnings from affiliates
14,820
12,533
8,066
Operating income
239,619
198,823
166,079
Interest expense
(65,688)
(74,125)
(80,407)
Interest income
7,607
3,399
1,939
Loss on early extinguishment of debt
(694)
(27,744)
(2,708)
Other income (expense), net
6,432
(8,351)
(14,055)
Earnings before income taxes
187,276
92,002
70,848
Provision for income taxes
(73,238)
(40,583)
(42,097)
Income from continuing operations
114,038
51,419
28,751
Discontinued operations, net of tax
-
(31,846)
(4,694)
Gain (loss) from sale of discontinued operations, net of tax
994
(2,499)
3,012
Net earnings
$ 115,032
$ 17,074
$ 27,069
Net earnings per share:
Basic:
Continuing operations
$ 2.04
$ 0.93
$ 0.52
Discontinued operations
0.02
(0.62)
(0.03)
Net earnings
$ 2.06
$ 0.31
$ 0.49
Diluted:
Continuing operations
$ 2.00
$ 0.91
$ 0.52
Discontinued operations
0.02
(0.61)
(0.03)
Net earnings
$ 2.02
$ 0.30
$ 0.49
CONSOLIDATED BALANCE SHEETS
December 31,
(Amounts in thousands, except per share data)
2006
2005
ASSETS
Current assets:
Cash and cash equivalents
$ 67,000
$ 92,864
Restricted cash
3,457
3,628
Accounts receivable, net
551,815
472,946
Inventories, net
547,373
416,413
Deferred taxes
95,027
97,947
Prepaid expenses and other
38,209
26,034
Total current assets
1,302,881
1,109,832
Property, plant and equipment, net
442,892
397,622
Goodwill
851,123
834,863
Deferred taxes
25,731
33,754
Other intangible assets, net
143,358
146,251
Other assets, net
103,250
91,342
Total assets
$ 2,869,235
$ 2,613,664
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable
$ 412,869
$ 316,713
Accrued liabilities
458,230
377,352
Debt due within one year
8,050
12,367
Deferred taxes
4,887
5,044
Total current liabilities
884,036
711,476
Long-term debt due after one year
556,519
652,769
Retirement obligations and other liabilities
408,094
396,013
Commitments and contingencies
Shareholders' equity:
Series A preferred stock; none at December 31, 2006, $1.00 par
value, 1,000 shares authorized, no shares issued at December 31,
2005
-
-
Common shares, $1.25 par value
73,289
72,018
Shares authorized ? 120,000
Shares issued ? 58,631 and 57,614,
respectively
Capital in excess of par value
543,159
477,201
Retained earnings
582,767
467,735
1,199,215
1,016,954
Treasury shares, at cost ? 2,609 and 1,640
shares, respectively
Recommend:
