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Inside Flowserve’s Margins: Can the Cost Savings Continue?

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Flowserve’s Progress on cost cutting

Since 2014, Flowserve Corporation (FLS) has been focusing extensively on expense control mechanisms. The company has realigned its portfolio of businesses by making it the right size for market conditions. This has helped them to remain profitable while containing rising costs in an uncertain and volatile environment.

Global volatility has affected companies across sectors. In 1Q16, FLS was just able to keep its gross margins at 33.3%, which is 170 basis points lower than its 35.0% in 1Q15. The chart below shows that FLS is trying hard to cut costs from realignment investments. FLS is targeting $230 million in annualized savings by 2018.

Inside Flowserve's Margins: Can the Cost Savings Continue?

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Flowserve’s cost saving initiatives

In 1Q16, FLS has focused on execution along with tight cost-control measures. The Engineered Product division saw its gross margin drop by 90 basis points to 33.3%. This was primarily due to lower sales.

Similarly, the Industrial segment undertook integration and realignment initiatives to bring SIHI Group’s operating margins in line with its industrial segment (FLS has acquired the Industrial product division of SIHI Group). In 1Q16, the adjusted gross margin of this division decreased by 250 basis points to 26.2%, primarily due to decreased sales.

Investors looking for exposure to industrials can invest in the Vanguard Industrials ETF (VIS) and the iShares US Industrials ETF (IYJ). Major holdings in VIS include General Electric (GE) at 12.5%, 3M Co (MMM) at 4.5%, and United Technologies (UTX) at 3.7%.

In the next part, we’ll take a look at Flowserve’s cash flows.

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