Fitch Rates Flowserve's Proposed Senior Unsecured Notes 'BBB(EXP)'
NEW YORK -- October 28, 2013
Fitch Ratings has assigned Flowserve Corporation's (Flowserve) proposed $300
million senior unsecured notes a rating of 'BBB(EXP)'. Fitch expects Flowserve
to use the proceeds to repay the current balance of approximately $196 million
on its revolving credit facility and for general corporate purposes. Fitch's
ratings currently cover $1.1 billion of debt and will cover approximately $1.2
billion of long-term and short-term borrowings giving effect to the offered
notes and the expected repayment of the balance outstanding on the revolving
credit facilities. Flowserve's full rating list follows at the end of this
KEY RATING DRIVERS
Fitch's ratings reflect the company's strong credit metrics and solid
operating performance which includes improving margins and strong free cash
flow (FCF) generation. The company's leverage (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. Including the net debt impact from
the proposed senior unsecured notes and the expected debt reduction, Fitch
expects Flowserve's leverage to increase to approximately 1.4x, up from 1.3x
as of Sept. 30, 2013 and 1.2x at the end of 2012.
As of Sept. 30, 2013, Flowserve's liquidity of $649 million was comprised of a
$114 million cash balance and $535 million in revolver availability ($850
million less a sum of $196 million drawn and $118 million in outstanding
LOCs). On Oct. 4, 2013, company amended its credit agreement effectively
increasing the revolving credit facility from $850 million to $1 billion and
extending its maturity by one year to Oct. 4, 2018. The amendment immediately
increased Flowserve's liquidity by $150 million. Fitch expects the company's
liquidity will increase by $196 million once Flowserve repays the outstanding
balance of the credit facility in connection with the issuance of the notes.
Fitch expects Flowserve's liquidity will be approximately $1 billion at the
end of 2013.
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 $282 million of FCF for the
last 12 months (LTM) ended Sept. 30, 2013, slightly down from $308 million FCF
generated in 2012.
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, the return of 40% to 50% of two year average net
income to shareholders and medium sized bolt on acquisitions. Fitch notes that
the company has financial flexibility in issuing additional debt before
leverage increases to the 2.0x level. Fitch expects the company's FCF and
liquidity to support approximately $400 million per year of spending on
dividends, acquisitions and share repurchases. The company has a conservative
debt structure, with no significant maturities scheduled before 2017.
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 certain end-markets; and competitive pricing pressure
throughout the industry.
The company contributed $20 million to its qualified U.S. pension plans in the
first nine months of 2013 and does not plan to make additional contributions
in the fourth quarter of 2013. The company plans to contribute approximately
$10 million to foreign plans in 2013. Flowserve contributed $28.1 million to
domestic and foreign qualified pension plans in 2012. 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 three quarters of 2013, Flowserve's year-over
year revenues grew approximately 4%, mostly driven by growth in its Engineered
Product Division segment. Flowserve achieved a significant 1.6 percentage
point year-over year margin improvement during the first three quarters of
2013 mostly driven by the strength of the Flow Control segment. Economic
weakness and challenging financial markets in Europe are not expected to have
a material impact on the company's performance.
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 currently rates Flowserve and its debt as follows:
--Issuer Default Rating 'BBB';
--Senior unsecured bank facilities 'BBB';
--Senior unsecured notes 'BBB'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology: Including Short-Term Ratings and Parent and
Subsidiary Linkage' (Aug. 5, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
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David Petu, CFA, +1 212-908-0280
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Eric Ause, +1 312-606-2302
Craig Fraser, +1 212-908-0310
Brian Bertsch, +1 212-908-0549
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