Flowserve Corp. (NYSE:FLS) Q4 2019 Earnings Conference Call - Final Transcript
Feb 18, 2020 • 11:00 am ET
R. Scott Rowe
of our Chinese facilities are now operational and back to work after a government mandated extension to the Lunar New Year holiday. We also have a large supplier network in China that provides products to our global Flowserve operations. These suppliers have also been impacted by the virus in the mandated quarantines throughout China.
While we have a flexible global supply chain, we do expect that the extended shutdown in China will have some impact on near-term supplier deliveries. We do expect the situation in China to have an impact on our ability to support our customers and defer some revenue in the first half of this year. Finally, we believe this epidemic will have a short-term impact on the demand for our products and services, but it's still too early to tell the magnitude at this time. We are fully focused on doing everything we can to minimize the impact of the situation.
Let me now turn to the financial highlights for the fourth quarter and the full year. Flowserve delivered fourth quarter adjusted EPS of $0.66 and $2.20 for the full year at the high end of our revised guidance range and a 26% improvement over full year 2018. The quality of our earnings continued to improve as transformation and net realignment charges of $36 million in 2019 represent a $59 million decrease versus prior year. Operating margins were roughly flat in the fourth quarter year-over-year, reflecting the higher sales mix of original equipment and larger project work. Our original equipment bookings growth rate of 13% in 2019 was more than four times greater than our aftermarket bookings growth rate. On a positive note, this outsized growth in OE bookings will continue to drive growth in aftermarket for years to come.
On a full year basis, gross and operating margins improved 100 basis points and 150 basis points respectively, as the progress of the transformation initiatives more than offset the mix challenges. We continue to target significant opportunities to drive further margin improvement through lean focus productivity initiatives, design-to-value product cost reduction, improved manufacturing planning, supply chain management and G&A cost control. Our continued focus on cash flow improvement drove Flowserve's free cash flow conversion to 85% of our adjusted net income, a significant improvement versus 46% in 2018. On a GAAP basis, our cash conversion was 97%. Increased operating income reduced realignment and transformation spending, improved working capital management and disciplined capital spending, all contributed to the increase in our cash flow.
Moving now to our segments. FPD continued to drive operational improvements in the fourth quarter, reflected by solid operating leverage on a 11.6% sales growth. Despite a 3% mix shift towards original equipment and increased project work, our transformation -driven productivity improvements drove adjusted gross and operating margin improvement of 60 basis points and 50 basis points respectively. For the full year, FPD delivered an impressive $70 million improvement in adjusted operating income on $83 million of increased revenue. Full-year bookings growth of 9% drove