Executive Summary / Key Takeaways

• Strategic Transformation Driving Performance: Flowserve is undergoing a significant transformation, driven by its Flowserve Business System and 3D strategy (Diversification, Decarbonization, Digitization), which is accelerating margin expansion and cash flow generation, positioning the company for sustainable growth.
• Exceptional Margin Expansion & Cash Flow: The company has achieved adjusted operating margins of 14.8% in Q3 2025, reaching its 2027 targets well ahead of schedule. Strong operational execution led to $402 million in operating cash flow in Q3 2025, with a free cash flow conversion of 174% (excluding the Chart termination payment).
• Nuclear Power as a Key Growth Catalyst: Flowserve is uniquely positioned to capitalize on the accelerating investment in nuclear power, with record bookings and a projected $10 billion-plus flow control opportunity over the next decade, driven by global electrification and data center expansion.
• Disciplined Capital Allocation & De-risking: The termination of the Chart merger yielded a $266 million payment, and the recent divestiture of legacy asbestos liabilities for approximately $199 million in cash simplifies the capital structure, reduces volatility, and enhances future capital allocation flexibility.
• Robust Outlook Amidst Uncertainty: Despite a dynamic macroeconomic and tariff environment, Flowserve raised its adjusted EPS guidance for 2025 to $3.40-$3.50, representing a significant year-over-year increase, underpinned by a healthy backlog and ongoing strategic execution.

Setting the Scene: A Legacy Reimagined for Modern Industry

Flowserve Corporation, with a heritage stretching back to 1790, stands as a global leader in industrial flow management. The company's core business revolves around designing, manufacturing, distributing, and servicing precision-engineered pumps, valves, seals, and automation solutions critical to the movement, control, and protection of materials in essential global infrastructure industries. These include energy, chemical, power generation, water management, and general industrial applications such as mining, food and beverage, and pharmaceuticals. Flowserve's extensive global footprint, comprising manufacturing facilities and Quick Response Centers (QRCs) in over 50 countries, underpins its ability to provide localized support and drive customer investments.

The company's strategic direction is encapsulated in its "3D Strategy": Diversification, Decarbonization, and Digitization. This framework aims to accelerate growth by aligning Flowserve with global megatrends like energy security, regionalization, and electrification. The Flowserve Business System (FBS) serves as the operational backbone, driving consistency and excellence across the organization through pillars such as operational excellence, portfolio excellence (including the 80/20 complexity reduction program), and commercial excellence. This integrated approach is designed to enhance profitable growth, expand margins, improve customer experience, and build cycle resiliency.

Competitive Landscape and Differentiated Technology

Flowserve operates in a highly competitive industrial flow management market, contending with diversified industrial giants and specialized players. Key publicly traded competitors include Emerson Electric (EMR), Dover Corporation , SPX Corporation (SPXC), and Pentair (PNR).

Flowserve's competitive positioning is particularly strong in critical, high-stakes environments. The company holds content in over 75% of the approximately 400 nuclear reactors globally, establishing itself as one of a few preferred vendors for pump, valve, seal, and actuation content worldwide. This leadership is attributed to its critical quality assurance certificates, long-standing customer approvals, and deep domain expertise. Flowserve expects to maintain a significant share, around 50%, of cooling pumps and aims for the highest share of mainstream isolation valves in nuclear reactors. This contrasts with its limited presence in the Chinese nuclear market, which has shifted towards domestic supply.

Against its rivals, Flowserve's strengths lie in its global distribution and service networks, which foster strong customer loyalty and recurring aftermarket revenue. This network allows for faster response times, potentially leading to stronger pricing power in remote markets and mitigating integration risks that some competitors, like Dover (DOV), might face with acquisitions. Flowserve's proprietary technology in pump and valve designs, particularly for severe service and high-temperature environments, offers tangible benefits. For instance, its specialized flow control equipment is essential for projects like the Molten Salt Storage (MOS) plant in Denmark, which heats sodium hydroxide over 1300 degrees Fahrenheit to generate steam for electricity. This technology also has potential applications in concentrated solar power, carbon capture, and small modular nuclear reactors (SMRs).

The company's Gas pack ZE seal technology enables emissions reduction of up to 80% from blowdowns and standstill conditions, directly supporting customers' decarbonization goals. Furthermore, Flowserve is commercializing an LNG and cryogenic pump, which has completed testing and is expected to reach the market in the second half of 2025, already supporting aftermarket services in LNG. Differentiated technologies like its Flex pressure exchange device and hydrogen pump are expected to contribute premium margins.

In the realm of digitization, Flowserve's RedRaven digital offering provides advanced monitoring and prediction capabilities. A recent Memorandum of Understanding (MOU) with Honeywell to integrate RedRaven into Honeywell's Forge asset performance management system aims to significantly scale this offering. This partnership will serve large industrial facilities, enhancing efficiency and operating predictability for customers while creating a recurring revenue stream for Flowserve. This focus on combining extensive domain expertise with analytical and modeling tools uniquely positions Flowserve to address complex flow control challenges, differentiating it from competitors who may have broader digital portfolios but lack Flowserve's specialized industrial focus.

While Flowserve excels in service reliability and customized solutions, it acknowledges that the project business is inherently competitive, with larger projects attracting multiple bidders. In the traditional power market, the environment is more competitive, necessitating a selective bidding approach. Flowserve's strategy is to focus on projects where it has a "right to win," can execute effectively, and can secure a healthy aftermarket entitlement.

The Flowserve Pumps Division (FPD) has been a standout performer, delivering adjusted operating margins around 20% in Q3 2025, aligning with best-in-class industrial peers and exceeding its 2027 long-term target range.

Financial Performance and Operational Excellence

Flowserve's recent financial performance reflects the tangible impact of its strategic initiatives and the Flowserve Business System. For the three months ended September 30, 2025, the company reported sales of $1.17 billion, an increase of 3.6% compared to the prior year. Gross profit reached $380.3 million, translating to a gross profit margin of 32.4%. Operating income stood at $79.3 million, with an operating margin of 6.7%. Net earnings attributable to Flowserve Corporation were $219.6 million, resulting in diluted earnings per share of $1.67.

Year-to-date for the nine months ended September 30, 2025, sales were $3.51 billion, up 3.8% from the previous year. Gross profit was $1.16 billion, achieving a gross profit margin of 33%. Operating income for the period was $357.8 million, with an operating margin of 10.2%. Net earnings attributable to Flowserve Corporation were $375.2 million, yielding diluted earnings per share of $2.85.

A key highlight is the significant margin expansion. Adjusted gross margins increased 240 basis points in Q3 2025, driven by the Flowserve Business System, including operational excellence, the 80/20 complexity reduction program, and improved cost performance. Adjusted operating margins expanded 370 basis points to 14.8% in Q3 2025, marking the second consecutive quarter within the long-term targeted range of 14% to 16%, originally set for 2027. This early achievement underscores the effectiveness of the company's operational improvements.

The Flowserve Pumps Division (FPD) has been a standout performer, delivering adjusted operating margins around 20% in Q3 2025, aligning with best-in-class industrial peers and exceeding its 2027 long-term target range. The 80/20 complexity reduction program within FPD's Industrial Pumps business unit, for example, led to a 45% reduction in original equipment SKU count, improving gross margins by approximately 150 basis points and increasing year-to-date bookings for key customers by 21%. FPD's aftermarket bookings also demonstrated mid-single-digit growth in Q3 2025, contributing to a healthy book-to-bill ratio of 1.02x.

The Flow Control Division (FCD) also showed strong progress, with bookings growth of 24% and sales growth of 7% in Q3 2025. Adjusted operating margins expanded 230 basis points, benefiting from improved execution and accelerated synergy realization from the MOGAS acquisition. MOGAS, acquired in October 2024, proved accretive to FCD's operating margins in Q3 2025, consistent with expectations. The challenges from the fabricated modules business, which had unfavorably impacted MOGAS and FCD margins in the first half of 2025, have largely been addressed with shipments completed, reducing future exposure.

Liquidity remains robust. Flowserve reported $833.8 million in cash and cash equivalents and $715.4 million available for borrowings under its Second Amended and Restated Credit Agreement as of September 30, 2025. Cash flows provided by operating activities for the nine months ended September 30, 2025, surged to $506.1 million, a substantial increase from $228 million in the prior year, primarily due to improved working capital management. The company's net debt to adjusted EBITDA ratio stood at a decade-low of 1.25x in Q2 2025, providing significant capital allocation flexibility.

Strategic Initiatives and Outlook

Flowserve's strategic initiatives are designed to capitalize on favorable market dynamics and enhance long-term value. The 3D strategy is yielding results, with diversified and decarbonization bookings growing 36% in 2024, driven by nuclear and new energy activities. The company's RedRaven digital offering, now integrated with Honeywell (HON)'s Forge system, is poised to scale, creating a recurring revenue stream and enhancing customer efficiency.

The company's outlook for 2025 is optimistic, reflecting increased confidence in its execution capabilities. Flowserve has raised its adjusted EPS guidance for the second time this year to a range of $3.40 to $3.50. The midpoint of this revised guidance represents a 31% increase from 2024 and over 60% increase from 2023. Management anticipates expanding adjusted operating margins by 200 basis points year-over-year for the full year. Organic sales growth is projected to be between 3% and 5%, with the MOGAS acquisition expected to contribute an additional 300 basis points to reported net sales growth. MOGAS operations are also expected to benefit adjusted earnings by an estimated $0.16 in 2025, including $7 million in cost synergy benefits. Flowserve expects a full-year book-to-bill ratio of approximately 1.0x, supported by a strong project funnel. Capital expenditures for 2025 are estimated to be between $75 million and $90 million, focused on strategic initiatives and operational efficiency.

A significant opportunity lies in nuclear power, driven by global electrification, AI, and data center expansion. Flowserve recorded a record $140 million in nuclear bookings in Q3 2025, and its total power book-to-bill is 2.0x year-to-date. The company projects a $10 billion-plus nuclear flow control opportunity over the next decade, anticipating 40 new large nuclear reactors and up to 30 SMRs under construction, alongside life extension upgrades for existing reactors. Nuclear projects carry attractive, accretive margins, making this a compelling multi-year growth driver.

Flowserve's capital allocation strategy remains disciplined. The $266 million termination payment from the Chart (GTLS) merger and the recent divestiture of legacy asbestos liabilities (involving approximately $199 million in cash to the buyer) significantly enhance financial flexibility. The asbestos divestiture is expected to improve annual cash flow by $15 million to $20 million. The company returned $173 million to shareholders in Q3 2025, including $145 million in share repurchases, and has $200 million remaining on its share repurchase authorization.

Risks and Challenges

Despite the positive outlook, Flowserve operates in a dynamic environment with inherent risks. The macroeconomic landscape, particularly trade policy actions and higher import tariffs, introduces uncertainty. Flowserve estimates the annualized gross impact of new tariffs, before mitigation, to be between $90 million and $100 million. While the company is actively mitigating these impacts through pricing actions, supply chain repositioning, and leveraging its global footprint, a mismatch in timing between these actions and order delivery, particularly for the FCD segment, could create margin pressure.

Project timing for larger engineered projects, especially in the energy end market, has experienced some slowness, and the geopolitical and macro environment needs to stabilize to instill greater confidence in operators for financial investment decisions. The project business remains competitive, with larger projects attracting more bidders. Furthermore, while the divestiture of asbestos liabilities reduces future volatility, the company's historical exposure to such claims highlights the unpredictable nature of litigation. Cash flows could also be adversely affected by a decrease in global economic growth, reduced customer capital spending, and fluctuations in foreign currency exchange rates and interest rates.

Conclusion

Flowserve is in the midst of a profound industrial renaissance, strategically transforming its operations and market approach to capitalize on secular growth trends. The Flowserve Business System, coupled with the 3D strategy, is demonstrably driving superior financial performance, evidenced by early achievement of 2027 margin targets and robust cash flow generation. The company's strong competitive position in the high-growth nuclear power sector, underpinned by its differentiated technology and extensive global service network, provides a compelling long-term growth narrative.

While macroeconomic uncertainties and tariff-related headwinds persist, Flowserve's proactive mitigation strategies, disciplined capital allocation, and de-risking initiatives, such as the asbestos liability divestiture, strengthen its financial resilience. The company's raised 2025 EPS guidance and healthy backlog signal continued momentum. Flowserve's commitment to operational excellence and technological leadership positions it to deliver sustained value for investors, making it a compelling consideration for those seeking exposure to a transforming industrial leader.