Flowserve (FLS) Q2 FY26 earnings call: guidance and Q&A

Flowserve reported exceptional bookings of $1.35 billion in Q2 FY26, a 26% increase year-over-year, resulting in a book-to-bill ratio of 1.15x. Aftermarket bookings reached a record of nearly $700 million, up 12% year-over-year, marking the ninth consecutive quarter above $600 million. Original equipment bookings also saw significant growth, up 44% to approximately $650 million. This strong performance was broad-based across end markets, with energy bookings up 48%, general industries up 11%, chemical up 7%, and power bookings up 39%. The overall project pipeline expanded sequentially and year-over-year, providing good visibility for the second half of the year, and backlog grew 6% sequentially and 9% year-over-year (excluding Trillium).

The ongoing conflict in the Middle East presented a headwind in Q2, primarily affecting operational activity and equipment delivery timing. Year-to-date, Middle East sales declined by approximately $60 million, a 3 percentage point headwind to organic sales, disproportionately impacting the FCD segment. While the company anticipates continued challenges in the second half, it sees significant long-term opportunities. A rebuild opportunity of approximately $50 million is expected in late 2026 and into 2027, and substantial incremental opportunities for redundant pipelines and storage facilities are anticipated in the 2027-2030 timeframe, leveraging Flowserve's large installed base and market share in the region.

Flowserve closed the acquisition of Trillium Valve Division on June 30, which aligns with its 3D strategy, enhances its leadership in flow control, and expands its service capabilities and global installed base. Integration is underway, expected to drive meaningful margin enhancement in 2027, though with some sales headwind in 2027 due to 80/20 actions. The company also acquired the remaining equity of a joint venture in the Middle East to strengthen direct customer service. Capital allocation remains disciplined, balancing reinvestment, M&A, and shareholder returns, with $80 million returned to shareholders year-to-date, including $55 million in dividends and $25 million in share repurchases in Q2.

The Flowserve Business System, including 80/20 actions, commercial excellence, and operational excellence, continued to drive strong financial performance. Adjusted gross margin expanded 100 basis points to 35.9%, marking the 14th consecutive quarter of year-over-year expansion, and adjusted operating margin expanded 70 basis points to 15.3%. This margin expansion was achieved despite lower sales volumes, reflecting improved commercial discipline and mix benefits. The company is on track to expand adjusted operating margin from 9.5% in 2023 to an expected 16% in FY26, progressing towards its 2030 target of 20%.

The nuclear sector remains a strong growth vector for Flowserve, with bookings over $110 million in Q2, including awards for new large reactors in Asia and life extension projects in North America. First-half nuclear awards were up 34%. The company is optimistic about continued growth from existing reactors, new build activity, and the accelerating pace of small modular reactors (SMRs). The Trillium acquisition further enhances Flowserve's position, increasing its entitlement per reactor from approximately $100 million to $115 million, positioning it well for future opportunities in this critical end market.

Flowserve updated its full-year guidance, modestly lowering its organic sales outlook to down approximately 1% due to the Middle East conflict, but raising the low end of its adjusted EPS guidance to $4.05-$4.20, reflecting strong year-to-date performance. The company expects year-over-year performance to accelerate in the second half, with organic sales growth of approximately 5%, driven by a larger backlog, continued aftermarket strength, and increasing project activity. Q3 is anticipated to have roughly flat organic sales growth and modestly expanding adjusted operating margins.