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Why Flowserve Is Consolidating Its Manufacturing Facilities

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Jun. 21 2016, Updated 9:04 a.m. ET

Focus on cost savings

Since 2014, Flowserve (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 FLS remain profitable while containing rising costs in an uncertain and volatile environment.

The recent global volatility has certainly affected companies across sectors. In 2015, FLS was able to keep its gross margins at 32.6%, a decline of 260 basis points from 35.2% in 2014. The chart below shows how FLS is trying hard to cut costs from realignment investments. FLS is targeting $230 million annualized savings by 2018.

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Flowserve’s cost-saving initiatives

Flowserve’s management has implemented a $400 million restructuring plan for 2015–2017. This includes shrinking its manufacturing facilities by 30% by shifting them to low-cost destinations. This should help FLS save on costs, as it derives approximately 61% of revenues from overseas operations.

This initiative should benefit additionally FLS because the aftermarket parts of its business are lucrative and quite sticky, and this would further enable FLS to get a local advantage while cushioning its significant exposure to the oil and gas segment. In 2015, FLS’s engineered product division contributed 48.5% to sales and 54.0% to operating profits. The fall came on account of limited new projects and fierce competition on the pricing front.

Integration and realignment initiatives

Similarly, in its Industrial Products segment, the company undertook integration and realignment initiatives to bring SIHI’s (FLS acquired the Industrial Product division of SIHI Group in 2014) operating margins in line with its own Industrial Products segment. In 2015, this segment’s adjusted gross margin dropped by 300 basis points to 24.4% after the inclusion of SIHI. The operating margins of SIHI are less than that of FLS’s industrial product segment. This cost control helped improve the segment’s overall gross margins.

Investors interested in trading industrials can invest in the Industrial Select Sector SPDR ETF (XLI). General Electric (GE), 3M Co (MMM), and Honeywell International (HON) are among the top ten holdings of XLI, accounting for 11.72%, 5.52%, and 4.85%, respectively.

Now let’s analyze Flowserve’s order book.

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