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Text: We appreciate you participating in our conference call today to discuss Flowserve's First Quarter 2021 Financial Results.
These statements are based upon forecasts, expectations and other information available to management as of May 4, 2021, and they involve risks and uncertainties, many of which are beyond the company's control.
We are pleased with our strong start to 2021.
Flowserve's adjusted earnings per share of $0.28 increased over 47% compared to last year's first quarter.
And our bookings for the first three months of 2021 were up by over 16% compared to the average of last year's final three quarters.
We were especially encouraged with this performance given that our first quarter results are traditionally lower.
Given what we saw in the first quarter, we believe that we are off to a strong start in 2021.
In the last two earnings calls, we indicated that we believe our end markets are well positioned for a post-pandemic recovery, and our first quarter results support this belief.
Although the various regions and countries we serve are on different trajectories in terms of vaccinations, infection rates, return to mobility and overall economic recovery, we are confident that the world is making steady progress as economies emerge from this global pandemic.
As a result, we have started to see these green shoots of activity translate into sequential bookings growth.
Assuming vaccines continue to roll out globally, and COVID issues subside without new setbacks, we are confident in our ability to deliver substantial year-over-year bookings growth in 2021.
With an improving environment, combined with our Flowserve 2.0 growth initiatives, we were encouraged to book $945 million in the first quarter, which represented over 15% growth sequentially and was driven primarily by increased MRO and aftermarket activity.
As we move through the quarter, our bookings by month tracked the overall pandemic progress.
January was slow, February improved but was impacted by severe cold weather in the Gulf Coast and March activity steadily increased.
In total, our bookings growth this quarter exceeded our original expectations.
The market inflection seems to have begun a quarter or two earlier than we had anticipated.
While North America led the increased activity levels, we delivered sequential bookings growth in all of our served regions.
In addition to increased aftermarket and MRO-related activity, we were pleased that project bookings levels approached approximately 85% of 2020's first quarter.
We saw a number of smaller projects get awarded with the largest of these in the $10 million to $15 million range.
We also experienced good diversity in our end markets and geographic regions, which highlights the comprehensive nature of our reach and offering.
These projects included a nuclear upgrade in Korea, a pipeline in Central America, a refinery in Mexico and a chemical plant in Asia.
The impact of the February winter storms forced us to close our Texas and Louisiana operations for about a week.
But we did see increased repair and replacement work in the storm's aftermath which drove an estimated $20 million of incremental repair in replacement business as we supported more than 30 customer installations in the region.
Flowserve's QRC footprint and our proximity to impacted customers uniquely positioned us to assist them in getting back online quickly and efficiently.
In addition, our channel partners and distributors also received unplanned storm-related business from a variety of end markets, including water and power, that should benefit us in future periods as they reorder and restore their inventory positions.
Despite damage and power outages to their own homes, our associates were committed to providing the necessary equipment and services to support our customer base and restore their critical operations.
We are confident that helping our customers in a time of need will result in stronger relationships and increased future business for Flowserve.
There is still work to be done at some of our customers' facilities to restore their operations to normal conditions.
We anticipate additional bookings at about the same level as we saw in February and March to continue throughout the second quarter related to the storm impact.
Turning now to our end markets and booking outlook.
Our discussions with customers indicate increasing optimism.
Rising utilization levels across industrial assets should result in an increase in their spending levels to maintain uptime and address pent-up maintenance activity that was deferred throughout 2020.
We continue to believe that the aftermarket and MRO will lead the early phases of the recovery throughout the year.
Project activity is also beginning to pick up and we expect this to increase as the year progresses.
Currently, our project funnel is about 12% higher than a year ago, and the compare period includes many of the projects that were placed on hold due to the pandemic.
We expect many of these delayed projects to progress toward funding in the coming quarters.
Opportunities are apparent across all end markets, but we expect general industry in chemical projects to lead the return to growth in a recovering economic environment.
In conclusion, it was a strong start to the year, both at our bookings and financial results.
We believe our end markets remain well positioned to benefit from the recovering economic environment.
While we expect to see COVID flare-ups in some regions, like what we're seeing in India today, we are optimistic that with increasing vaccinations, the world is beginning to move in the right direction, which will ultimately help support our ability to deliver bookings growth.
We are very pleased with our financial results in the first quarter.
Our adjusted earnings per share was up significantly compared to last year, and the margins we delivered in our SG&A levels continue to reflect the benefit of the decisive cost actions we took in 2020 and the ongoing Flowserve 2.0 transformation program.
For the first quarter, we delivered solid results, including an adjusted earnings per share of $0.28, which represents an increase of nearly 50% versus prior year.
On a reported basis, earnings per share of $0.11 included $0.08 of realignment, $0.04 of costs related to early retirement of debt and $0.05 of below-the-line FX currency impact.
As a reminder, with our focus on improving the quality of our earnings, we are now including 2021 transformation costs in our adjusted earnings in contrast to prior years when this expense was adjusted out.
First quarter revenue of $857 million was down 4.1% versus the prior year primarily driven by the 10% sales decline in original equipment, including FPD's 15% original equipment decrease.
We were pleased to see modest aftermarket sales growth as revenue of $450 million increased 2%, with both FPD and FCD contributing.
Our first quarter performance was largely driven by the significant cost actions we took in the middle of 2020 as well as ongoing transformation-driven operational improvements and a 400 basis point mix shift toward higher-margin aftermarket revenue, partially offset by increased under-absorption.
Adjusted gross margin of 30.4% was roughly flat versus prior year and the sequential quarter, driven by FPD's 60 basis point increase offset by FCD's 170 basis point decline, both as compared to 2020's first quarter.
On a reported basis, first quarter gross margin decreased 50 basis points to 29.3% due primarily to absorption headwinds and higher realignment costs versus the first quarter of 2020.
First quarter adjusted SG&A decreased $34 million to $194 million versus prior year and was largely flat on a sequential basis.
As a percent of sales, first quarter adjusted SG&A declined 290 basis points year-over-year.
The decisive cost actions we took in mid-2020 and our ongoing focus on cost control drove the improvement.
Reported SG&A decreased $47 million versus prior year, where in addition to cost action benefits, adjusted items were down $13 million compared to the first quarter of 2020.
We delivered a $20 million increase in adjusted operating income in the first quarter, a strong performance considering the $36 million decrease in revenue.
As a result, adjusted operating margin improved 250 basis points versus last year to 8.1%, driven by the previously mentioned cost actions, ongoing operational progress and the mix shift to higher-margin aftermarket products and services.
FPD and FCD improved 230 and 60 basis points to 10.3% and 10.4%, respectively.
First quarter reported operating margin increased 380 basis points year-over-year to 6.5%, including the roughly $12 million reduction of adjusted items.
Our first quarter adjusted tax rate of 23.2% is in line with our full year guidance of 22% to 24%.
Turning now to cash and liquidity.
Our first quarter cash balance of $659 million decreased $436 million compared to the year-end 2020 level.
The primary use of cash was for debt reduction, with the $407 million payment to retire the remaining portion of our euro notes.
Additionally, we returned over $30 million to shareholders through dividends and share repurchases.
Our ability to both pay down debt and return cash to shareholders underscores the strength of our balance sheet and our focus on value creation through capital allocation.
Total debt at quarter end was $1.3 billion compared to over $1.7 billion at year-end.
Compared to last year's first quarter, gross debt is down over $50 million, while the cash balance is up over $35 million.
Flowserve's quarter end liquidity position remained strong at over $1.4 billion, including $742 million of availability under our undrawn senior credit facility.
First quarter free cash flow was approximately $25 million.
And for the second year in a row and only the third time in the last 15 years, Flowserve delivered positive free cash flow in the first quarter.
This trend is an indication that our focus on cash management is delivering results.
As is typical, working capital was a use of cash in the first quarter of $40 million driven primarily by a reduction in accounts payable.
Inventory was also a use of $17 million, but I was pleased that our focus and improved processes to control inventory drove a 60% reduction versus last year's first quarter use.
Accounts receivable and contract liabilities were sources of working capital cash this quarter.
Taking a look at primary working capital as a percent of sales, we saw 110 basis point sequential increase to 29.6%, again, driven primarily by accounts payable and a lower top line.
Although our backlog increased over $30 million, we were pleased that inventory, when including contract assets and liabilities, decreased $4 million versus the fourth quarter of 2020.
As we continue to drive the integration and utilization of enterprisewide business planning systems across our operations and functions, we have direct line of sight on consistent improvement in our working capital metrics throughout the year.
And importantly, we remain confident in achieving free cash flow conversion in excess of 100% in 2021.
Turning now to our outlook for the remainder of 2021.
Based on our strong first quarter bookings and visibility into improving end markets, Flowserve increased and tightened our adjusted earnings per share guidance range for the full year to $1.40 to $1.60 per share and reaffirmed all other guidance metrics.
We now expect full year 2021 bookings to increase mid-single digits versus our prior outlook of low single digits.
And further expect the majority of this increase to occur in our aftermarket and shorter cycle MRO original equipment products where associated revenue may be recognized in 2021.
Based on the expected increase in short-cycle activity, we now expect the revenue decline in the 3% to 5% range versus our initial guide of down 4% to 7%.
The adjusted earnings per share target range continues to exclude expected realignment expenses of approximately $25 million as well as below-the-line foreign currency effects and the impact of potential other discrete items which may occur during the year.
On a quarterly basis, we expect our adjusted earnings per share to increase sequentially over the course of 2021 as we see the benefit of our first quarter bookings flow through and from the expected increase in short-cycle activity.
With our Flowserve 2.0 transformation program and its elements now embedded in our operations and functional teams, we expect 2021 transformation expenses of roughly $10 million, representing a decline of over 50% versus the prior year.
As previously mentioned, we are now including these costs in our adjusted earnings per share guidance.
Additional guidance components remain unchanged with expected net interest expense in the range of $55 million to $60 million and an adjusted tax rate between 22% and 24%.
Lastly, looking at cash.
As is historically the case, we expect free cash flow will be weighted to the second half of the year, largely in the fourth quarter.
Major planned cash usages this year include the recently completed retirement of our euro notes and an expectations to return over $100 million to shareholders through dividends and share repurchases.
We also intend to invest in our business as we return to the growth aspects of our Flowserve 2.0 program, including capital expenditures in the $70 million to $80 million range which includes spending for enterprisewide IT systems to further consolidate our ERP platform and support our transformation-driven productivity improvements.
In conclusion, based on our first quarter performance, we are more optimistic than ever about the opportunities in 2021.
Our end markets are likely improving at a rapid pace.
Our balance sheet remains strong and our operational and cost discipline has us well positioned for margin expansion and free cash flow generation as revenues grow.
I want to wrap up today with some comments around two key strategic priorities.
Our ongoing Flowserve 2.0 transformation and how Flowserve will support energy transition.
Let me first provide an update on our Flowserve 2.0 transformation progress.
In 2020, the pandemic-driven downturn dictated that we focus heavily on cost reduction.
We shifted our efforts and accelerated the cost reduction aspects of the transformation last year.
Additionally, we continue to progress our strategy to improve our overall enterprisewide IT systems.
These improvements in the overall rationalization are improving our visibility, streamlining our operations and improving our overall productivity.
All of these enhancements support the new Flowserve 2.0 operating model.
As our new operating model takes hold throughout the enterprise, we expect to continue to deliver margin and productivity improvements throughout the business.
As we look to fully embed the transformation into our operations by the end of 2021, I am confident that our Flowserve 2.0 process improvements will continue to provide benefit to Flowserve and our customers for years to come.
All of the fundamentals are now in place to fully leverage the expected market recovery.
During 2021, our transformation priorities are focused primarily on growth, including an improved customer experience, accelerated product innovation and further market penetration.
With our strengthened operating model, we are also better positioned to pursue value-added partnerships, and we are more confident in our ability to integrate potential acquisitions.
An important aspect of Flowserve's strategy in the coming years will be driven by the expected growth investment related to energy transition.
The energy transition theme is real, and we expect investments to rapidly increase in the near-term to support this global call to action.
We believe Flowserve is well positioned with our current portfolio to benefit from increased spending from our customers to achieve their carbon reduction targets and energy efficiency goals.
Energy transition has been at play for much of the last two decades.
However, 2020 served as a pivotal year, and began first with COVID, been an acceleration of investments in alternative sources of energy and further driven by social, political and regulatory changes.
These multifactor dynamics are accelerating the transition, resulting in increased urgency across the industrial sector and especially within the energy sector.
Our approach to energy transition includes: first, supporting our existing customers and markets by delivering energy efficiency through systems, automation, uptime and a life cycle view plan.
Second, we are scaling our flow control solutions for emerging and new value chains in gasification, carbon capture, hydrogen, energy storage, and non-fossil fuel energy sources.
And finally, by evolving flow control into autonomous flow using data and science to monitor, diagnose and correct through built-in intelligence, utilizing our recently launched RedRaven platform.
As part of our first quarter bookings, we participated in projects related to biodiesel, concentrate solar power, carbon capture and energy efficiency.
And we believe that this is just the beginning.
As an example, in the third quarter of 2020, we introduced a new liquid ring compressor designed specifically for flare gas and other vapor recovery.
This product positions us to support our customers' greenhouse gas emission-reduction goals through the production of blue hydrogen in carbon capture.
Since introduction, we have already received over $30 million of orders for the product, and we see growing demand for years to come.
The more conversations I have with our customers about their energy transition plans, the more excited I get about the opportunities that energy transition can offer Flowserve.
We are making good progress on developing our go-to-market strategy, and we are currently working closely with a few select customers to demonstrate and prove how our suite of capabilities can help them to drive efficiency and reduce emissions.
In addition to our current customers, we also believe energy transition will provide opportunities across the industrial spectrum, including end markets where we currently have limited scale, like water, food and beverage, cement, steel and mining.
We expect the largest near-term opportunities for Flowserve will be helping our existing customers achieve improved energy efficiency and reduced emissions.
We believe that our flow control expertise across pumps, valves and seals, combined with enhanced data analytics, can dramatically improve our customers' energy consumption and reduce carbon emissions.
We are also actively developing technology to expand our presence in other forms of energy, including solar, hydrogen and lithium mining and processing.
Overall, we feel that Flowserve is uniquely positioned to help our customers today and grow our business through the energy transition.
In January, we launched our RedRaven IoT offering, which can further instrument pumps, valves and seals to provide the capability to assist our customers with a data-driven approach on how to improve their operations, increase asset uptime and reduce associated energy consumption.
We are really pleased with the market's response to our IoT offering.
Since the rollout of RedRaven, we have been awarded, on average, one new contract or site installation per week and the pipeline of interesting parties continues to build.
The first quarter provided us a better start to the year than we previously expected, with bookings inflecting earlier and at a higher level than we initially assumed in our February guidance.
With an improved outlook for the remainder of the year, we feel confident in our ability to raise our adjusted earnings per share guidance.
We have improved visibility to market growth and are confident in our ability to execute.
We believe we are firmly in recovery from the pandemic-driven downturn.
Additionally, many countries around the world are announcing significant infrastructure spending plans that will inevitably include flow control equipment.
And finally, we are confident in our longer-term outlook and see energy transition as a significant growth opportunity for Flowserve.
After three years of hard work on our Flowserve 2.0 transformation program, we are now operating at a higher level and we are well positioned to transition to growth.
I am confident that we'll capitalize on the opportunities ahead of us and create value for our shareholders and other stakeholders.

user
flowserve q1 adjusted earnings per share $0.28.
q1 adjusted earnings per share $0.28.
q1 earnings per share $0.11.
raised full-year 2021 revenue and adjusted earnings per share guidance, reaffirmed all other metrics.
sees 2021 adjusted earnings per share $1.40 - $1.60.

assistant