Executive Summary / Key Takeaways

• Flowserve delivered a strong start to 2025, with Q1 bookings up 18% year-over-year to $1.2 billion, driven by record aftermarket activity and significant growth in power and general industries, resulting in a 1.07x book-to-bill ratio.
• First quarter adjusted operating margin expanded by 190 basis points year-over-year to 12.8%, reflecting improved gross margins (32.3%) due to pricing actions, selective bidding, and operational efficiencies, despite increased SGA costs.
• The company reaffirmed its full-year 2025 guidance, targeting organic growth of 3% to 5% and adjusted EPS of $3.10 to $3.30, representing an 18% to 25% increase over 2024, underpinned by a near-record $2.9 billion backlog, accelerating benefits from the Flowserve Business System (FBS), and MOGAS synergies.
• Flowserve is actively mitigating the estimated $90 million to $100 million annualized gross impact of new tariffs through strategic pricing, supply chain optimization, leveraging its global footprint, and utilizing trade agreements, expecting full mitigation for the year despite potential timing mismatches.
• The 3D strategy (diversification, decarbonization, digitization) continues to drive growth, representing 31% of Q1 bookings, with particular strength in nuclear power and carbon capture, while the FBS, including the 80/20 complexity reduction program, is expected to contribute significantly to future margin expansion.

Flowserve Corporation, a company with a legacy stretching back over 200 years, stands as a world-leading manufacturer and aftermarket service provider of comprehensive flow control systems. Its precision-engineered pumps, valves, seals, automation, and services are critical to the movement, control, and protection of materials in essential global industries including energy, chemical, power generation, and general industrial sectors like water management and pharmaceuticals. Operating through two primary segments – the Flowserve Pumps Division (FPD) and the Flow Control Division (FCD) – Flowserve leverages a global footprint encompassing manufacturing facilities and Quick Response Centers (QRCs) in approximately 50 countries, supported by a portfolio of over 50 respected brand names.

In a competitive landscape characterized by diversified industrial players like Xylem (XYL), ITT Inc. (ITT), Pentair plc (PNR), and Emerson Electric Co. (EMR), Flowserve positions itself as a provider of mission-critical, highly engineered solutions with a strong emphasis on aftermarket services. While FCD ranks among the top three largest industrial valve suppliers globally, the market is fragmented, with competitors offering varying strengths in specific product areas, regional presence, or technological focus. Flowserve's strategic response to this environment is embodied in its 3D growth strategy – diversification, decarbonization, and digitization – and its operational framework, the Flowserve Business System (FBS). These initiatives aim to drive sustainable growth, enhance operational efficiency, and unlock margin expansion.

A key differentiator for Flowserve lies in its technological expertise, particularly in severe service applications and sealing technology. While specific quantifiable metrics for all core technologies are not detailed, the company's reputation is built on providing reliable equipment for demanding environments. Recent strategic technology acquisitions, such as the in-process R&D for submerged cryogenic pumps for LNG (acquired in Q2 2024) and the hydrogen distribution pumping technology (acquired in Q3 2022), highlight a focus on expanding capabilities in energy transition markets. The cryogenic pump technology, for instance, aims to fill a critical gap in the LNG process, with commercialization expected to open up a significant market opportunity. On the digital front, the Red Raven IoT offering is designed to instrument products for monitoring and predictive analytics, aiming to prevent unplanned downtime and optimize flow loops. While adoption is progressing, management sees an inflection point ahead, believing digital capabilities enhance the aftermarket offering and position Flowserve as a solutions provider. This technological foundation, coupled with a vast installed base and extensive global service network (155 QRCs), forms a significant competitive moat, particularly in the higher-margin aftermarket business.

Strong Start to 2025 Driven by Bookings Momentum and Margin Expansion

Flowserve began 2025 with robust performance, demonstrating the effectiveness of its strategic initiatives and operational improvements. For the three months ended March 31, 2025, the company reported sales of $1.14 billion, a 5.2% increase compared to $1.09 billion in the prior year period. This growth included negative currency effects of approximately $24 million.

Bookings were a significant highlight, soaring 18.1% year-over-year to $1.23 billion, up from $1.04 billion in Q1 2024. This resulted in a strong book-to-bill ratio of 1.07x. The bookings strength was broad-based, with notable increases of $88 million in general industries, $58 million in power generation, and $41 million in the energy industry, partially offset by a $4 million decrease in the chemical industry. Aftermarket bookings reached a record level of nearly $690 million, marking the fourth consecutive quarter above $600 million and underscoring the health of the installed base and the success of the company's aftermarket capture strategy. Project bookings also contributed, including a significant $50 million nuclear aftermarket order and a $42 million nuclear original equipment award.

Profitability saw meaningful improvement. Gross profit increased by $30.3 million, or 8.9%, to $369.3 million, leading to a gross profit margin expansion of 110 basis points to 32.3% from 31.2% in Q1 2024. This margin improvement was primarily attributed to the favorable impact of previously implemented sales price increases and an improved selective bidding approach. However, these gains were partially offset by higher annual incentive compensation, increased realignment charges ($8.7 million vs. $7.2 million in Q1 2024), and amortization related to the MOGAS acquisition ($3.5 million in amortization of acquired inventory and intangibles).

Selling, general and administrative expenses (SGA) increased by $14.8 million, or 6.5%, to $243.2 million. As a percentage of sales, SGA increased slightly to 21.2% from 21.0%. The increase in SGA was driven by higher annual incentive compensation, increased bad debt expense ($2.2 million), the absence of a $2.0 million reversal of Russia-related expenses recorded in Q1 2024, and MOGAS acquisition and integration costs ($1.3 million) and intangible amortization ($1.3 million). These increases were partially offset by decreased research and development costs ($3.1 million) and lower realignment charges ($2.8 million decrease in SGA-related realignment charges).

Operating income grew by $18.8 million, or 16.6%, to $131.9 million, resulting in an operating margin expansion of 110 basis points to 11.5% from 10.4% in the prior year period. This margin expansion demonstrates solid operating leverage on the increased revenue and improved gross profitability.

Segment performance reflected these trends. FPD delivered revenue of $783.1 million (up 1.8%) and bookings of $852.9 million (up 21.2%). FPD's adjusted operating margin was a strong 17.7%, an increase of 280 basis points year-over-year, driven by favorable mix, increased productivity, and strong project management. FCD reported revenue of $364.1 million (up 13.6%) and bookings of $376.0 million (up 10.2%). FCD's adjusted operating margin was 8.6%, a decrease of 220 basis points year-over-year. Management noted that a higher proportion of tariff exposure impacts the FCD segment, and MOGAS acquisition/integration costs and intangible amortization also weighed on FCD margins in the quarter.

Net earnings attributable to Flowserve Corporation were $73.9 million, or $0.56 per diluted share, compared to $74.2 million, or $0.56 per diluted share, in Q1 2024. While net earnings were flat, adjusted earnings per share saw a significant increase (though not explicitly quantified in the Q1 10-Q or call, prior guidance implied a substantial jump). The effective tax rate for the quarter was 18.3%, down from 20.5% in the prior year, primarily due to U.S. discrete items.

Cash flow from operations for the three months ended March 31, 2025, was a use of $49.9 million, compared to cash provided of $62.3 million in the same period of 2024. This decrease was primarily driven by changes in working capital, notably increased cash used by accounts receivable, contract assets, accounts payable, and accrued liabilities. The timing of annual performance-based incentive compensation payout, which occurred in Q1 2025 versus Q2 2024, significantly impacted accrued liabilities. Days sales outstanding (DSO) increased to 82.0 days from 76.0 days, while inventory turns improved to 3.6 times from 3.3 times. Despite the Q1 cash use, management expects significant improvement in cash from operations and working capital efficiency throughout the year, targeting full-year cash flow to adjusted net earnings conversion of 90% or more.

Strategic Execution and Competitive Positioning

Flowserve's strategic framework, centered around the 3D strategy and the Flowserve Business System (FBS), is actively shaping its competitive positioning and driving performance. The 3D strategy – diversification, decarbonization, and digitization – aligns the company with key global megatrends. Diversification efforts are targeting attractive markets like specialty chemicals and mining, exemplified by the MOGAS acquisition which adds severe service valves and exposure to mining. Decarbonization includes supporting energy transition through carbon capture, biofuels, and LNG, as well as capitalizing on the growing nuclear power market. Digitization, through offerings like Red Raven, aims to enhance aftermarket services and provide value-added solutions. In Q1 2025, 3D bookings represented 31% of the total, highlighting their increasing contribution.

The FBS, launched in 2024, provides a consistent operating framework across the organization, focusing on operational excellence, portfolio excellence, and commercial excellence. Operational excellence initiatives are credited with improving delivery consistency and enhancing margins. Portfolio excellence includes the complexity reduction (CORE) program, which began in Q4 2024 and continued in Q1 2025 as part of the 2025 Realignment Programs. This program focuses on product rationalization and continuous improvement, with management expecting it to benefit gross margins by 50 basis points or more at the Flowserve level in 2025 and accelerate thereafter, contributing to the target of 200+ basis points of margin expansion from Portfolio Excellence by 2027.

In the competitive arena, Flowserve leverages its global footprint and extensive service network as key advantages. While competitors like Emerson Electric may lead in broader automation and digital integration speed, Flowserve's differentiated technology in severe service and sealing, coupled with its deep domain expertise and local presence (155 QRCs), provides a strong position, particularly in the aftermarket. The company's ability to offer reliable, efficient products (e.g., through proprietary sealing technology) and responsive local service helps maintain high aftermarket capture rates, a critical component of its business model and a higher-margin revenue stream.

Financially, Flowserve's recent performance shows strong profitability compared to some peers, with TTM net margins around 6.12% and operating margins around 10.72%, demonstrating effective cost management and pricing power. While some competitors like ITT and Emerson may show higher ROE or faster revenue growth, Flowserve's focus on operational efficiency and margin expansion through FBS initiatives aims to improve these metrics. The company's disciplined approach to large project bidding, prioritizing profitable work with preferred customers, also supports margin expansion, contrasting with competitors who may prioritize volume.

The current macroeconomic environment, particularly evolving trade policies and tariffs, presents a significant challenge. Management estimates the annualized gross impact of new tariffs before mitigation to be between $90 million and $100 million. However, Flowserve is actively implementing mitigation strategies, including strategic pricing actions (a typical annual increase plus an additional increase in March 2025 to specifically offset tariffs), leveraging its global manufacturing and supply chain network to optimize sourcing and production locations, and utilizing trade agreements. Management is confident that these actions will fully mitigate the tariff impact for the year, although the timing of cost impacts and mitigation benefits may lead to some margin pressure in the second half of 2025.

Outlook and Risks

Flowserve reaffirmed its full-year 2025 guidance, projecting organic sales growth of 3% to 5% and adjusted earnings per share in the range of $3.10 to $3.30. This guidance implies an 18% to 25% increase in adjusted EPS compared to 2024. The outlook is supported by a near-record backlog of $2.9 billion at the end of Q1 2025, which provides good revenue visibility, particularly for the first half of the year. Management expects Q2 2025 results to be similar or slightly better than Q1, with the second half of the year contributing a higher portion of earnings, consistent with historical seasonality, driven by accelerating benefits from the FBS and MOGAS synergies.

Key assumptions underpinning the guidance include the continuation of healthy end market conditions and relatively steady flow control demand throughout the year. The guidance also incorporates the expected impact of tariffs and the planned mitigation actions. While recent weakening of the U.S. dollar could provide a modest tailwind to sales, the full-year impact from currency translation is expected to range from a 100 basis point headwind to roughly neutral.

Despite the positive outlook, several risks warrant investor attention. Macroeconomic uncertainty, including potential recessionary pressures and the unpredictable nature of trade policies and tariffs, could impact customer spending and project timelines. Geopolitical risks, particularly in regions where Flowserve has significant operations or customer exposure (like the Middle East), could disrupt business. Supply chain disruptions and volatile raw material prices remain potential challenges to operational efficiency and margins. The highly competitive market environment necessitates continuous innovation and execution to maintain market share and pricing power. Integration risks associated with the MOGAS acquisition, while managed, could impact expected synergies. Furthermore, the company's exposure to litigation, including asbestos claims, and the potential for increased deferred tax asset valuation allowances or changes in tax laws (like Pillar Two) could affect financial results.

Flowserve's liquidity position appears sound, with $540.8 million in cash and cash equivalents and $662.2 million available under its revolving credit facility as of March 31, 2025. Management believes existing liquidity and expected cash flows will be sufficient to meet business needs. Capital allocation priorities include funding operations, capital expenditures ($80 million to $90 million estimated for 2025), dividends, share repurchases ($258.8 million remaining authorization), and disciplined M&A.

Conclusion

Flowserve's first quarter 2025 results underscore a narrative of operational momentum and strategic execution driving improved financial performance. The company's deliberate focus on its 3D growth strategy is yielding tangible results in bookings, particularly within the high-margin aftermarket and emerging areas like nuclear power. Simultaneously, the implementation of the Flowserve Business System, with its emphasis on operational and portfolio excellence, is translating into meaningful margin expansion, positioning the company well against competitors.

While the macroeconomic environment presents uncertainties, notably concerning tariffs and potential shifts in customer spending, Flowserve appears proactive in implementing mitigation strategies, leveraging its global scale and operational discipline. The reaffirmed 2025 guidance, projecting significant EPS growth, reflects management's confidence in the durability of demand, the strength of the backlog, and the accelerating benefits from internal initiatives and the MOGAS acquisition. For investors, the story is one of a mature industrial company effectively revitalizing its operational core and strategically aligning its portfolio with long-term growth trends, aiming to deliver enhanced profitability and shareholder value despite external headwinds. The path towards the 2027 targets seems increasingly achievable, supported by a clear roadmap focused on continued execution and strategic capital deployment.