Relational Investors Raises Stake in Flowserve Corp. (FLS) to 5.65%
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In a 13D filing earlier on Flowserve Corp. (NYSE: FLS), Ralph Whitworth's Relational Investors disclosed a 5.65%, or 3,086,789 share, stake in the company. This is up 49.44% from the 2,065,605 shares held at the end of the latest quarter ending March 31, 2012.
The firm said they believe the shares are undervalued and does not adequately reflect the potential for significant earnings and cash flow growth. They said improvements in a number of areas will further enhance the Company’s equity valuation.
Relational Investors said since their initial investment in February 2012 they have maintained a dialogue with management.
Strategic Positioning
The Reporting Persons believe strategic investments made by the Company over the last three years to improve its high margin aftermarket product and service offerings are underappreciated. The Company’s aftermarket business represents 40% of total company revenues and has exhibited lower volatility and significantly higher margins than its original equipment revenues. The Reporting Persons believe the Company’s plan to expand its aftermarket presence will reinforce earnings growth stability and margin improvement. The Reporting Persons believe that the Company’s strategic position will enable it to capitalize on a recovery in its core end markets.
Operational Improvements
The Reporting Persons believe that improvements in profit margins will be increasingly important to creating superior equity value. At its investor presentation on February 1, 2012, the Company announced its long-term margin improvement and growth targets. Recent meetings between representatives of the Reporting Persons and the Company’s executive management have increased the Reporting Persons’ confidence that the management team is intently focused on achieving its stated long-term profit margin improvement target of 250 basis points. The Reporting Persons are confident management is focused on SG&A expense reduction, bidding discipline, profitability improvement of its Industrial Products Segment, and the successful implementation of its “One Flowserve” and sourcing initiatives.
Capital Structure
In recent weeks the Company has taken significant steps to optimize its capital structure. According to the Company’s Form 10-Q as of March 31, 2012, the Company maintained $173 million in cash and short-term investments with $500 million in outstanding debt. On May 31, 2012, the Company announced a program to increase its target gross leverage ratio to 1.0x — 2.0x total debt to EBITDA to fund an expanded stock repurchase program of $1 billion. On June 14, 2012, the Company announced an accelerated share purchase program for $300 million which will be funded through cash on hand, existing revolver capacity, and proceeds from a new $250 million term loan. The Reporting Persons believe that over time the discipline reflected in these initiatives will contribute to long-term shareholder value. The recent announcements reinforce the Company’s confidence in its growth and margin improvement targets and will be accretive to earnings in the near term.
Capital Allocation Discipline
The Reporting Persons believe the Company has substantially completed the investments necessary for its strategic positioning. Therefore, a larger portion of excess cash flows in future periods will be available for distribution to shareholders through dividends and share repurchases. The Reporting Persons believe that Company’s excess cash position along with the expected annual future cash flows make capital allocation an increasingly important component of equity value creation. The Reporting Persons have been communicating with the Company to help ensure its capital structure is optimized and that the Company has in place capital allocation processes and disciplines to ensure the cash balance and future free cash flows are allocated to the highest and best return alternatives. Based on the Company’s current valuation, the Reporting Persons believe share repurchases represent a low-risk, high-return hurdle against which all alternative uses of capital must be benchmarked.
The Reporting Persons intend to closely monitor the Company’s progress in each of these areas and may modify their plans accordingly.
The Reporting Persons may exercise any and all of their respective rights as shareholders of the Company in a manner consistent with their equity interests. The Reporting Persons and their representatives and advisers intend to continue from time to time to discuss the Company and its performance with members of the Company’s board and management. In addition, the Reporting Persons may communicate with other shareholders, industry participants and other interested parties concerning the Company. Although the Reporting Persons do not have any current plans, other than the monitoring and communication program outlined above, the Reporting Persons may in the future decide to seek representation on the Company’s board of directors. Among other factors, the Reporting Persons will consider the Board’s oversight of the execution of operational improvements and capital allocation strategies for maximizing shareholder value as major factors in its decision of whether or not to nominate independent director candidates.
The Reporting Persons may from time to time (i) acquire additional Shares (subject to availability at prices deemed favorable) in the open market, in privately negotiated transactions or otherwise, or (ii) dispose of Shares at prices deemed favorable in the open market, in privately negotiated transactions or otherwise. The Reporting Persons may formulate plans or proposals for, and may from time to time explore, or make proposals relating to, transactions or actions which relate to or would result in any of the matters specified in clauses (a) through (j) of Item 4 of Schedule 13D.
For more notable holders of Flowserve Corp. stock click here. For more information on Relational Investors click here.
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The firm said they believe the shares are undervalued and does not adequately reflect the potential for significant earnings and cash flow growth. They said improvements in a number of areas will further enhance the Company’s equity valuation.
Relational Investors said since their initial investment in February 2012 they have maintained a dialogue with management.
Strategic Positioning
The Reporting Persons believe strategic investments made by the Company over the last three years to improve its high margin aftermarket product and service offerings are underappreciated. The Company’s aftermarket business represents 40% of total company revenues and has exhibited lower volatility and significantly higher margins than its original equipment revenues. The Reporting Persons believe the Company’s plan to expand its aftermarket presence will reinforce earnings growth stability and margin improvement. The Reporting Persons believe that the Company’s strategic position will enable it to capitalize on a recovery in its core end markets.
Operational Improvements
The Reporting Persons believe that improvements in profit margins will be increasingly important to creating superior equity value. At its investor presentation on February 1, 2012, the Company announced its long-term margin improvement and growth targets. Recent meetings between representatives of the Reporting Persons and the Company’s executive management have increased the Reporting Persons’ confidence that the management team is intently focused on achieving its stated long-term profit margin improvement target of 250 basis points. The Reporting Persons are confident management is focused on SG&A expense reduction, bidding discipline, profitability improvement of its Industrial Products Segment, and the successful implementation of its “One Flowserve” and sourcing initiatives.
Capital Structure
In recent weeks the Company has taken significant steps to optimize its capital structure. According to the Company’s Form 10-Q as of March 31, 2012, the Company maintained $173 million in cash and short-term investments with $500 million in outstanding debt. On May 31, 2012, the Company announced a program to increase its target gross leverage ratio to 1.0x — 2.0x total debt to EBITDA to fund an expanded stock repurchase program of $1 billion. On June 14, 2012, the Company announced an accelerated share purchase program for $300 million which will be funded through cash on hand, existing revolver capacity, and proceeds from a new $250 million term loan. The Reporting Persons believe that over time the discipline reflected in these initiatives will contribute to long-term shareholder value. The recent announcements reinforce the Company’s confidence in its growth and margin improvement targets and will be accretive to earnings in the near term.
Capital Allocation Discipline
The Reporting Persons believe the Company has substantially completed the investments necessary for its strategic positioning. Therefore, a larger portion of excess cash flows in future periods will be available for distribution to shareholders through dividends and share repurchases. The Reporting Persons believe that Company’s excess cash position along with the expected annual future cash flows make capital allocation an increasingly important component of equity value creation. The Reporting Persons have been communicating with the Company to help ensure its capital structure is optimized and that the Company has in place capital allocation processes and disciplines to ensure the cash balance and future free cash flows are allocated to the highest and best return alternatives. Based on the Company’s current valuation, the Reporting Persons believe share repurchases represent a low-risk, high-return hurdle against which all alternative uses of capital must be benchmarked.
The Reporting Persons intend to closely monitor the Company’s progress in each of these areas and may modify their plans accordingly.
The Reporting Persons may exercise any and all of their respective rights as shareholders of the Company in a manner consistent with their equity interests. The Reporting Persons and their representatives and advisers intend to continue from time to time to discuss the Company and its performance with members of the Company’s board and management. In addition, the Reporting Persons may communicate with other shareholders, industry participants and other interested parties concerning the Company. Although the Reporting Persons do not have any current plans, other than the monitoring and communication program outlined above, the Reporting Persons may in the future decide to seek representation on the Company’s board of directors. Among other factors, the Reporting Persons will consider the Board’s oversight of the execution of operational improvements and capital allocation strategies for maximizing shareholder value as major factors in its decision of whether or not to nominate independent director candidates.
The Reporting Persons may from time to time (i) acquire additional Shares (subject to availability at prices deemed favorable) in the open market, in privately negotiated transactions or otherwise, or (ii) dispose of Shares at prices deemed favorable in the open market, in privately negotiated transactions or otherwise. The Reporting Persons may formulate plans or proposals for, and may from time to time explore, or make proposals relating to, transactions or actions which relate to or would result in any of the matters specified in clauses (a) through (j) of Item 4 of Schedule 13D.
For more notable holders of Flowserve Corp. stock click here. For more information on Relational Investors click here.
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Relational Investors LLC, Ralph V. Whitworth, Dividend, 13D, Stock Buyback, Earnings
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