Fitch Upgrades Flowserve to 'BBB'; Outlook Stable
NEW YORK -- June 28, 2013
Fitch Ratings has upgraded Flowserve Corporation's (Flowserve) Issuer Default
Rating (IDR), senior unsecured bank facilities and senior unsecured notes to
'BBB' from 'BBB-'. The Rating Outlook is Stable. Approximately $900 million of
long-term debt is covered by the ratings.
KEY RATING DRIVERS
The rating upgrade reflects strong credit metrics of the company and solid
operating performance which includes improving margins and strong free cash
flow (FCF) generation. Debt/EBITDA remained within the lower half of
Flowserve's target range of 1.0x to 2.0x which provides flexibility at the
current rating level. The company should be able to complete the earlier
announced $1 billion share repurchase program without issuing additional long
The ratings are supported by Flowserve's strong operating performance
including historically positive FCF; good liquidity; growth opportunities
across all segments of the company; a substantial portion of higher-margin
aftermarket business; well-funded U.S. pension plans; and a sizable backlog.
In addition, Fitch notes Flowserve's technological capabilities, global
presence, product diversification, and strong competitive position.
Fitch expects Flowserve to generate $350 million - $400 million of FCF after
dividends annually over the next several years, driven by improvements in
working capital, reduction of the past due backlog, improving margins and
higher sales. Flowserve generated approximately $308 million of FCF in 2012,
significantly up from $41 million in 2011. The improved FCF was largely driven
by stabilization of the working capital requirements. Working capital
requirements should improve as the company delivers its past due backlog that
included projects booked in 2010 and 2011.
The company's strong FCF generation should be able to support its cash
deployment strategy which focuses on sizable capital expenditures to achieve
organic growth targets, return of 40% to 50% of two year average net income to
shareholders and medium sized bolt on acquisition. Fitch notes that the
company has financial flexibility in issuing additional debt before leverage
increases to the 2.0x level.
Rating concerns include Flowserve's cash deployment which focuses on share
repurchases and possible acquisitions; possible margin pressures due to higher
raw material costs and the impact of project delays; seasonal cash generation;
heavy cash requirements to support large swings in working capital;
cyclicality of the certain end-markets; and competitive pricing pressure
throughout the industry. None of these factors would be expected to negatively
affect existing ratings.
The company contributed $28.1 million to domestic and foreign qualified
pension plans in 2012 and expects to contribute $20 million to its qualified
U.S. pension plans and approximately $10 million to foreign plans in 2013. The
net underfunded status of Flowserve's plans at the end of 2012 was $210
million ($43 million in the U.S.; $167 million outside the U.S.). OPEB
liabilities totaled $35 million at the end of 2012 and 2011. Fitch does not
expect pension contributions to be a major part of cash deployment strategy.
Fitch expects Flowserve's revenues to increase by the mid-single digits in
2013 with improving margins driven by deliveries of higher margin backlog,
better sales mix of higher margin aftermarket sales and operating
improvements. During the first quarter of 2013, Flowserve's year-over year
revenues grew approximately 2%, reflecting growth in its Flow Control segment.
Flowserve achieved significant 1.7% year-over year margin improvements during
the first quarter of 2013 due to the strength of Flow Control segment and
rebound of Industrial Product segment. Economic weakness and challenging
financial markets in Europe are not expected to have a material impact on the
At March 31, 2013, Flowserve's leverage was approximately 1.3x. Flowserve
maintains good liquidity comprised of $170 million cash balance and $557
million in revolver availability ($850 million less a sum of $150 drawn and
$143 in outstanding LOC's). In addition, Flowserve maintains two European L/C
facilities which it utilizes for surety and performance bonds, bank and other
guarantees. Historically, Flowserve has generated strong FCF. Fitch expects
the company's FCF and liquidity to support approximately $400 million per year
spending on dividends, acquisitions and share repurchases. The company has a
conservative debt structure, with no significant maturities scheduled before
A large portion of Flowserve's cash is invested outside the U.S. but the
company does not currently plan to repatriate funds that could result in
adverse tax payments.
Fitch is not likely to consider a positive rating action due to Flowserve's
exposure to large project losses, cyclicality associated with the company's
long cycle infrastructure markets and potential margin pressures due to
increasing competition. A negative rating action could occur if pricing
pressure or higher costs lead to lower margins or if the company significantly
exceeds its leverage target through aggressive cash deployment for debt-funded
acquisitions or share repurchases.
Fitch upgrades Flowserve's ratings as follows:
--Issuer Default Ratings to 'BBB' from 'BBB-';
--Senior unsecured bank facilities to 'BBB' from 'BBB-';
--Senior unsecured notes to 'BBB' from 'BBB-.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
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David Petu, CFA, +1-212-908-0280
One State Street Plaza
New York, NY 10004
Eric Ause, +1-312-606-2302
Craig Fraser, +1-212-908-0310
Brian Bertsch, New York, +1 212-908-0549
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