Flowserve’s focus on cost savings
In 2Q16, Flowserve (FLS) realized cost savings of ~$27 million through its realignment program. For 2016, FLS’s management expects incremental savings of ~$100 million.
In 2Q16, FLS has expensed $20 million related to realignment efforts. For 2016, the company expects to incur realignment charges of ~$160 million.
Since 2014, Flowserve has been focusing extensively on expense control mechanisms. The company has realigned its portfolio of businesses according to market conditions. This has helped it to remain profitable while containing rising costs in an uncertain and volatile environment.
Global volatility has affected companies across sectors. In 2Q16, FLS was able to keep its gross margins at 32.7%, a fall of 130 basis points compared to 34.0% in 2Q15. The above chart depicts FLS’s efforts to cut costs via realignment investments. FLS is targeting $350 million in annualized savings by late 2017, including SIHI realignment. SIHI is FLS’s acquired Industrial Product division of SIHI Group (SIHI).
Flowserve’s cost saving initiatives
Flowserve’s management is implementing a $350 million restructuring plan between 2015 and 2017. This includes shrinking its manufacturing facilities by 30% by shifting them to low-cost destinations. This will help FLS to save on costs, as it derives ~61% of its revenue from overseas operations.
This will benefit FLS, as the aftermarket parts business is lucrative and quite sticky. This will further enable FLS to gain a local advantage while cushioning its significant exposure to the oil and gas segment.
Similarly, FLS undertook integration and realignment initiatives to bring SIHI’s operating margins in line with its Industrial Product segment.
In 2015, the Industrial Product segment’s adjusted gross margin fell by 300 basis points to 24.4% due to the inclusion of SIHI. SIHI’s operating margin is less than that of the segment.
Disciplined cost control helped sustain Flowserve’s Industrial Product segment’s overall gross margins. In 2Q16, the Industrial Product segment’s gross margins stood at 25.8% compared to 27.5% in 2Q15.
Investors who want to trade in the industrials sector may want to invest in the Industrial Select Sector SPDR ETF (XLI). General Electric (GE), 3M Company (MMM), and Honeywell International (HON) are among the top ten holdings of the fund. They account for 11.7%, 5.5%, and 4.9% of the fund’s total holdings, respectively.
In the next article, let’s read about why Flowserve reduced its earnings guidance following its 2Q16 results.