What Flowserve (FLS) Said on Its Q3 Earnings Call

Key Points

• Strong orders and margins: Third-quarter bookings rose 14% to $1.4 billion, driving a record $3.5 billion backlog. Adjusted operating margin expanded to 16.5%, while adjusted EPS increased 19% to $1.07.
• Middle East disruption reduced sales expectations: The conflict created an estimated $40 million quarterly sales headwind, prompting Flowserve to forecast full-year organic sales growth of negative 1.5% to 2.5%. The company still expects total sales growth of 2% to 3%.
• Profit outlook and capital returns improved: Flowserve raised its full-year adjusted EPS outlook to $4.10–$4.20 and returned $78 million to shareholders during the quarter. However, delayed shipments and slower collections reduced expected full-year free-cash-flow conversion to about 80% of adjusted net earnings.

Flowserve NYSE: FLS reported third-quarter results marked by double-digit bookings growth, margin expansion and higher adjusted earnings, while revising its full-year sales outlook to reflect escalating disruption in the Middle East.

Bookings rose 14% year over year to $1.4 billion, including 8% organic growth, and the company finished the quarter with a record $3.5 billion backlog, up 20% from a year earlier and 4% sequentially. Adjusted operating margin increased 170 basis points to 16.5%, while adjusted earnings per share rose 19% to $1.07.

Sales totaled $1.24 billion, increasing 5% on a reported basis but declining 1% organically. Chief Executive Officer Scott Rowe said the organic sales result reflected the Middle East conflict and the company’s 80/20 portfolio actions. The Middle East created an approximately $40 million sales headwind during the quarter, somewhat greater than Flowserve had expected.

Bookings Strength Led by Aftermarket, Energy and Power

Aftermarket bookings increased 11% to $728 million, exceeding $700 million for the first time and representing the fifth consecutive quarter above $650 million. Original equipment bookings climbed 17% to $656 million, supported by power and nuclear demand, broader project activity and one larger energy award.

Rowe said Flowserve’s commercial-excellence initiatives, including faster quoting, account planning and opportunity management, have begun to improve order win rates and automated lead-generation conversions. He said the company expects its installed base, quick-response-center network and local service capabilities to support continued aftermarket growth.

Energy bookings grew 40% in the quarter and 25% year to date. The company cited a Middle East refinery upgrade and additional bookings tied to a large Canadian LNG project. While elevated utilization rates at large process facilities have supported demand, Rowe said some customers, particularly in North America, are deferring non-critical maintenance and larger turnarounds.

Power bookings rose 23% in the quarter and 12% year to date, aided by nuclear and traditional generation activity as well as the Trillium acquisition. Nuclear bookings exceeded $115 million, primarily driven by life-extension project awards in the United States. Rowe said Flowserve sees near-term nuclear opportunities in Asia and Eastern Europe, while U.S. programs appear to be progressing more slowly.

General Industries bookings declined 8% in the quarter, largely because of a difficult prior-year comparison, according to management. Within that market, pharmaceutical, water and mining activity grew. Flowserve also said it sees an emerging opportunity in data-center cooling as larger facilities shift toward liquid-cooling systems, though Rowe said it is too early for the company to size that potential market.

Middle East Disruption Prompts Sales Outlook Cut

Conditions in the Middle East became more challenging late in the third quarter and worsened in October, Flowserve said. Customer site access and equipment acceptance have affected deliveries and run-rate product and service work, and the company expects the disruption to continue in the fourth quarter.

Flowserve said cancellation rates in the region remain immaterial, although a few projects in its pipeline have shifted into 2027. Management also said it now believes the potential rebuild opportunity from damaged assets exceeds its prior estimate of about $50 million, though the timing will depend on customer readiness, site access and regional conditions.

“We do not necessarily need peace in the Middle East for our business to start growing,” Rowe said during the question-and-answer session. He said a reduction in hostilities could allow repair work, normal plant operations and potential resilience investments in pipelines and storage to proceed. The company expects most of the related rebuild opportunity to occur in 2027.

Chief Financial Officer Brian Ezzell said Flowserve now expects full-year organic sales to decline 1.5% to 2.5%, reflecting lower Middle East book-and-ship activity and a modest effect on global aftermarket activity as process industries operate at high utilization rates. The company forecast total sales growth of 2% to 3% for the year.

Margins, Cash Flow and Capital Returns

Adjusted gross margin expanded 190 basis points to 36.7%. Ezzell attributed the operating-margin improvement to aftermarket mix, 80/20 benefits and operational execution, partly offset by higher selling, general and administrative expenses.

• Flowserve Pump Division bookings rose 15% to $940 million, while adjusted operating margin expanded 220 basis points to 21.8%.
• Flow Control Division bookings increased 13% to $446 million, while adjusted operating margin was unchanged at 16.3%.
• Flow Control margins faced roughly 100 basis points of pressure from Middle East disruption, according to Ezzell, along with a smaller effect from the pre-synergy Trillium acquisition.

The company generated $144 million of operating cash flow and $127 million of free cash flow in the quarter, equal to 92% conversion of adjusted net earnings. However, delayed Middle East shipments and somewhat slower collections led Flowserve to lower its full-year free-cash-flow conversion expectation to approximately 80% of adjusted net earnings.

Flowserve returned $78 million to shareholders during the quarter through $28 million in dividends and $50 million in share repurchases. Year-to-date repurchases totaled $75 million. Its board also increased the company’s share repurchase authorization to $500 million.

EPS Outlook Raised as Company Targets Further Margin Progress

Despite the reduced sales outlook, Flowserve raised the low end of its full-year adjusted EPS forecast. The company now expects adjusted EPS of $4.10 to $4.20, with the midpoint representing 14% growth and approximately 150 basis points of annual margin expansion.

For the fourth quarter, Flowserve expects mid-single-digit organic sales growth and low-double-digit total sales growth, driven by backlog conversion, aftermarket strength, a smaller headwind from 80/20 actions and Trillium’s contribution. The company expects fourth-quarter adjusted operating margin to improve sequentially.

Rowe said the company remains on track for roughly 16% adjusted operating margin this year and continues to target 20% by 2030. Flowserve expects additional benefits from portfolio simplification, Trillium integration, manufacturing productivity and further facility consolidation, with management saying its 80/20 program could provide at least two more years of margin improvement.

About Flowserve (NYSE:FLS)

Flowserve Corporation is a global manufacturer of flow-control equipment and related services. The company designs, produces and services pumps, valves, mechanical seals and associated systems used to move, control and protect fluids in industrial processes.

Its products and services support applications across the energy, chemical and petrochemical, water, pharmaceutical, mining, power and general industrial markets. Flowserve also provides aftermarket services, including equipment repair, maintenance, upgrades and replacement parts, helping customers improve the reliability and efficiency of their operations.

Headquartered in Irving, Texas, Flowserve serves customers through manufacturing, sales and service operations in North America, Europe, Asia and other international markets.

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