Wednesday, industrial pump and valve maker Flowserve Corp. (FLS) reported third-quarter earnings that were almost flat with the comparable quarter last year, despite a 9% drop in sales. Earnings per share for the quarter, however, increased 1% and came in above Street estimates. Separately, the company also lowered its full year earnings guidance and announced plans to expand its realignment initiatives.
Net income attributable to the company for the third quarter was $116.94 million, almost flat compared to $117.05 million in the corresponding period last year. However, net earnings to common shareholders increased 1% to $2.07 per share from $2.04 per share in the same period last year, and include realignment charges of $0.05 per share.
On average, eight analysts polled by Thomson Reuters expected the company to report earnings of $2.00 per share for the quarter. Analysts' estimates typically exclude special items.
According to the company , its per share earnings in the third-quarter of 2009 EPS was favorably impacted by lower weighted average common shares outstanding at September 30, 2009 resulting from share repurchasing program, a 100 basis point improvement in operating margin and cost containment initiatives.
The impact on third quarter 2009 EPS growth from foreign currency hedging gains and reduced net interest expense was offset by a higher tax rate resulting from discrete tax benefits in the third quarter 2008 that did not recur. Savings generated in the third quarter 2009 from realignment activities was approximately $10 million.
Quarterly sales declined 9% to $1.05 billion from $1.15 billion in the year-ago quarter. Excluding negative currency effects of $47 million, sales for the quarter declined 5% over the year-ago period. Eight Street analysts expected the company to report sales of $1.11 billion for the quarter.
Segment wise, Flowserve Pump Division sales were $637 million, flat with the previous year, or up 5% excluding negative currency effects of $31 million. Sales in the company's Flow Control Division declined 20% to $294 million. Flow Solutions Division Sales were $136 million, down 20% from the prior year period.
Flowserve gross margin increased 150 basis points to 36.6%, including realignment charges of 20 basis points. Gross profit declined to $385.2 million from $404.9 million a year earlier. Operating margin increased 100 basis points to 15.3% from 14.3%, including increased legal costs and realignment charges of 110 basis points. Operating income declined to $161.2 million from $164.5 million in the same period last year.
Selling, General & Administrative Expense or SG&A decreased to $227 million, from $244 million in the prior year period. SG&A, as a percentage of sales, increased 50 basis points to 21.6%, including increased legal costs of $7.5 million related to the pending resolution of the 2003 shareholder class action litigation and realignment charges, together representing 90 basis points as a percentage of sales.
Bookings for the third quarter were $975 million, down 29% over the prior year period, reflecting customers' responses to lingering disruptions in the credit and capital markets. Backlog at the end of the quarter decreased 6% to $2.66 billion from $2.83 billion at December 31, 2008. The decrease includes positive currency effects of approximately $90 million and cancellations of $35 million of orders booked in the prior year.
Mark Blinn, Flowserve president and chief executive officer, said, "we received orders of approximately $1 billion for the quarter, and we continue to see strong emerging market and aftermarket opportunities, plus continued bidding activity for attractive major project orders... Assuming the timing of some major project releases, we expect that our fourth quarter bookings will be improved sequentially over the third quarter."
For the nine-month period, net earnings declined to $317.5 million or $5.63 per share from $328 million or $5.68 per share in the same period last year. Sales dropped to $3.17 billion from $3.30 billion in the year-ago period.
Separately, Flowserve said as part of its previously announced realignment initiatives, it improved its global cost structure and manufacturing efficiency through headcount reductions and several facility closures. The company said it achieved benefits of about $17 million year to date and delivering a projected full year run rate savings of about $60 million, on about $41 million of planned initial 2009 realignment expense.
Flowserve plans to expand these realignment initiatives involving additional charges of up to $30 million, or about $0.40 in EPS, in the remainder of 2009 and up to $15 million in 2010. The initiatives are expected to add an additional $50 million of annual run rate savings, the majority of which will be structural in nature, with the expected additional benefits generally beginning in the latter half of 2010, the company said.
The company believes that the previously and newly announced realignment initiatives together should provide full annual run rate savings of approximately $110 million.
Looking ahead, the company lowered its earnings forecast for 2009 to $7.20 to $7.50 per share, now including up to about $0.90 per share of realignment charges, compared to its prior forecast of $7.15 to $7.75, which included up to about $0.50 in realignment charges. Currently, analysts expect the company to earn $7.57 per share for 2009.
FLS declined $4.10 or 3.96% and closed Wednesday's regular trading at $99.43 on a volume of about 1 million. In extended trading, FLS declined further $8.68 or 8.73% and traded at $90.75. The stock has traded between $37.18 and $108.85 during the past year.
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