Flowserve Corp Q3 FY2025 Earnings Call

Good day and welcome to the quarter 2025 earnings call. Please note that this conference is being recorded. At this time, I'd like to turn the conference over to Brian Ezzell, Vice President, Investor Relations, Treasurer and Corporate Finance. Please go ahead.

Thank you, and good morning, everyone. Welcome to Flowserve's Third Quarter 2025 Business Update. I'm joined by Scott Rowe, Flowserve's President and Chief Executive Officer; and Flowserve's Chief Financial Officer, Amy Schwetz. Following Scott and Amy's prepared remarks, we'll open the call for questions. Turning to Slide 2. Our discussion will contain forward-looking statements that are based upon information available as of today. Actual results may differ due to risks and uncertainties. Refer to additional information, including our note on non-GAAP measures in our press release, earnings presentation, and SEC filings, which are available on our website. With that, I'll turn it over to Scott.

Thank you, Brian, and good morning, everyone. I'll start on Slide 3. The momentum we built in the first half of the year continued in the third quarter as we delivered exceptional results across bookings, margin expansion, earnings, and cash flow. We remain focused on driving growth while leveraging the Flowserve Business System to accelerate margin expansion. With three quarters of the year now behind us, we have increased confidence in our ability to meet our 2025 objectives and we are raising our adjusted EPS guidance range for the second time this year to $3.40 to $3.50. The midpoint of our revised guidance represents a 31% increase from last year, and an increase of more than 60% from 2023, highlighting consistent execution of our strategy and our confidence in the growth opportunities ahead. In the quarter, we delivered bookings of $1.2 billion and revenue growth of 4%. We also continued our enduring margin expansion journey with adjusted gross margins increasing 240 basis points to 34.8%. While adjusted operating margins were 14.8%, driven by incremental margins of 115% during the quarter. Adjusted earnings per share was $0.90, an impressive increase of 45% compared to the prior year period. We also returned $173 million of cash to shareholders in the quarter, including $145 million of share repurchases. We have a healthy balance sheet, low leverage, and we continue to see improved cash flow performance from the business. This, coupled with what we view as a discounted share price relative to intrinsic value makes repurchasing shares an attractive capital allocation decision. Later in the call, Amy will provide more detail on our full-year guidance and our approach to capital allocation. She will also provide more details on the separately announced divestment of our legacy asbestos liabilities, which will further enhance our capital allocation optionality on a go-forward basis. I'm proud of all the Flowserve associates for continuing to navigate a dynamic environment while driving relentless execution of the Flowserve Business System to expand margins, drive growth, simplify our product portfolio, and ultimately deliver enhanced value for our customers and shareholders. Now to Slide 4. Bookings for the quarter were $1.2 billion, improving sequentially by over $130 million and growing 1% versus the prior year. Our strong aftermarket franchise continued to deliver with Q3 representing the sixth consecutive quarter of bookings greater than $600 million. In fact, two of the last three quarters have seen aftermarket bookings above $650 million. I remain excited about the opportunity to leverage our capabilities to drive further aftermarket growth. Project activity in the quarter was steady and improved sequentially with strong growth in the power markets and solid trends across most other end markets. For the quarter, we delivered over $140 million of nuclear bookings, a record for the company. Our two largest bookings in the quarter were both nuclear awards related to two separate new reactors in Europe. Each of these bookings was approximately $30 million. Many of the project delays we saw in the second quarter did come to market in the third quarter. However, we continue to see some slowness in project timing for larger engineered projects, primarily in the energy end market. Over the last five years, we have evolved Flowserve into a more resilient business. Ten years ago, large-engineered projects often represented over 20% of our bookings, which naturally led to more cyclicality based on project investment cycles. Today, engineered projects remain an important part of our business, but this mix is typically around a mid-single-digit percentage of our bookings. The shift in mix is driving more consistency in our bookings and revenue, allowing us to manage more effectively through cycles. We have also sharpened our focus on capturing more aftermarket opportunities while selectively pursuing the most attractive engineered projects that deliver better margins and a healthy aftermarket entitlement. For the quarter, if we were to exclude engineered pump original equipment bookings, our bookings growth was an impressive 9% across the remaining portfolio. Turning to Slide 5. Our end markets remain stable with strength in areas, including traditional power and nuclear. Power demand continues to represent an exciting and significant opportunity while general industries are benefiting from continued industrial build-out in emerging areas of opportunities like pharmaceuticals, food, and beverage. Mining has been an area of excitement for us, though project deferrals have hampered bookings over the past 12 months. In the third quarter, we saw mining project activity start to pick up with overall mining increasing over 60% versus last year. Within energy, asset utilization for large process industries remains elevated and maintenance spending has continued as expected. Chemical remains our lowest growth end market. However, we were encouraged by improvement in North America Chemical in the quarter and the potential for an improved outlook in this space. With our year-to-date book-to-bill at 1.0x and a strong project funnel, we are optimistic about delivering on a full-year book-to-bill of approximately 1.0x. Additionally, our commitment to the Flowserve Business System should drive growth in 2026 and beyond as we leverage commercial excellence and 80/20 principles to further grow our business. Moving to Slide 6. Let me take a moment to highlight the significant opportunities we see ahead in the power space and specifically nuclear. Our offering of pumps, valves, seals, and actuators play an important role across the nuclear spectrum. Today, we have content in over 75% of the roughly 400 nuclear reactors operating across the globe. Our mainstream isolation valves and actuators play a critical safety role in the nuclear island with other types of valves used across the balance of the nuclear facility. Our pumps are often found in the turbine island, helping to ensure the cooling process runs as intended with additional legacy pumps within the containment zone itself. Importantly, we have the critical quality assurance certificates and customer approvals necessary to leverage our technology across the global nuclear landscape. We also maintained great relationships with key industrial partners and customers around the world as Flowserve's nuclear equipment is essential to their operations. This set of key capabilities and domain expertise that we bring to the nuclear space makes us one of a few preferred vendors for pump, valve, seal, and actuation content worldwide, positioning Flowserve for leadership and nuclear flow control for decades to come. Moving to Slide 7. Today, power represents roughly 7% of our revenue with about half of that coming from traditional power and the other half coming from nuclear. Our bookings show an evolving picture with accelerating growth across all power and nuclear, growing at the fastest rate. On a year-to-date basis, our total power book-to-bill is 2.0x. The expansion of artificial intelligence, cloud computing, data centers, and broad-scale electrification are creating significant growth for power broadly and specifically within nuclear power generation. Looking forward, we see the potential for 40 new large nuclear reactors to be under construction in the next 10 years across North America, Europe, and parts of Asia. In addition, technology for small modular reactors, continues to progress, and we believe this technology represents an additional growth driver as the expansion for the global nuclear fleet begins to accelerate. While the technology still is in the development phase, many of our small modular reactor partners are making significant progress, and industry data suggests as many as 30 small modular reactors could be under construction in the next 5 years. The existing fleet of nuclear reactors is also aging, and we expect almost all existing large reactors will go through life extension upgrades over the next decade, providing further opportunity for Flowserve. We are working very closely with nuclear power operators to refurbish and supply equipment to enable life extensions, power uprates, refurbishments, and restarts of reactors that have previously shut down. Turning to Slide 8. Power nuclear represents one of the most compelling multiyear growth opportunities for Flowserve. With our strong market position, differentiated product portfolio, and decades of domain expertise, we are exceptionally well positioned to capitalize on the accelerating investment in this space. As global electrification advances and new nuclear capacity expands to meet AI, data center, and energy security demands, we see a sustained growth cycle emerging with nuclear becoming a larger contributor to our business over the next 5 to 10 years. Based on our current content opportunity of approximately $100 million plus per gigawatt, we believe that nuclear flow control opportunity set could exceed $10 billion over the next decade. Importantly, nuclear carries attractive, accretive margins, offering the potential to drive substantial value creation for Flowserve over the long term. With the potential for double-digit growth in nuclear and power and our non-power business benefiting from healthy demand and reindustrialization, we believe we are well-positioned to continue driving long-term growth. Before I turn it over to Amy, I will conclude by saying that Flowserve is strategically advantaged. We have a robust and expanding aftermarket franchise with additional upside and capture rates, balanced by a diverse mix of industries that includes both high-growth power demand opportunities and stable recurring end markets. The Flowserve Business System is driving quantifiable improvement in execution and margin expansion, and we see significant runway ahead. Our cash flow generation continues to strengthen, enabling greater capital deployment and incremental returns to shareholders. We remain focused on driving sustainable growth, expanding margins, and enhancing cash flow, all with the goal of delivering superior value for our shareholders. With that, I'll turn the call over to Amy.

Thank you, Scott, and good morning, everyone. Turning to Slide 9. We delivered another strong performance in the third quarter, an outcome of our growth strategy and exceptional delivery through the Flowserve Business System. Third quarter revenues were $1.2 billion, a 4% increase versus last year. In the quarter, organic sales were flat, while the Mogas acquisition contributed three points of growth. We continue to see strong growth from aftermarket, while revenue from original equipment was slightly lower in the quarter due to the timing and composition of projects in the backlog. Our profit performance in the quarter demonstrates our execution focus. Adjusted gross margins increased 240 basis points, driven by actions taken under the Flowserve Business System including improvements in operational excellence, our 80-20 complexity reduction program, and improved cost performance. With additional leverage from SG&A, adjusted operating margins increased 370 basis points to 14.8%. This represents the second consecutive quarter of operating margins within our long-term targeted range of 14% to 16%, which we originally set out to deliver by 2027. Our ability to continue to deliver in this range well in advance of initial expectations is a testament to the more resilient business model we have created and an impressive execution by our associates around the world. Moving to the performance of our segments on Slide 10. I'll start with FPD. FPD continues to deliver strong performance with another quarter of adjusted operating margins around 20%, in line with best-in-class peers. The 80/20 program is driving clear results for FPD with the year-to-date benefits from 80/20 pacing ahead of our initial expectations coming into the year. Aftermarket also remains a strength with bookings growing in the mid-single digits for the quarter. We continue to improve our aftermarket capabilities, and we see further opportunity to capture more from our large base of installed equipment over time. Bookings in the quarter were negatively impacted by lower engineered pump projects, which Scott referenced earlier, as well as some year-over-year timing of project awards. Overall, FPD book-to-bill for the quarter was 1.02x, a healthy level as we continue to grow the business even with lower levels of large energy project activity. Turning to the FCD segment. We delivered strong performance in the quarter with bookings growth of 24%, sales growth of 7%, and adjusted operating margins expanding 230 basis points. Bookings in the quarter benefited from strong aftermarket growth as well as a large nuclear award and project activity in the Middle East. FCD adjusted gross margins increased 220 basis points year-over-year and 130 basis points sequentially, largely driven by improved execution and better performance from Mogas. Combined with improved SG&A leverage and accelerated synergy realization from Mogas, adjusted operating margins improved 410 basis points sequentially. For the quarter, Mogas operating margins were accretive to FCD, consistent with our expectations for the business when it was acquired. The fabricated modules that hampered Mogas and FCD margins in the first half of the year have been shipped with the remaining exposure related to final installation and completion. With these projects largely behind us, synergies accelerating and the Mogas business now fully on the Flowserve Business System, the team is focused on driving growth opportunities across the globe through our expanded offering of severe service fallouts. I'll add that Alice DeBiasio joined the company as our new President of FCD. We're excited to have her on board and look forward to leveraging her unique set of industrial experiences across product management, software solutions, and engineering to continue the progress in FCD. Turning to Slide 11. I'll take a moment to highlight one of the many areas of significant progress within the Flowserve Business System. When we launched our 80/20 complexity reduction program in 2024, we had conviction around the opportunity to drive significant value and margin improvement over time. We were intentional with the approach focusing on individual business units within our segments and ensuring we let data lead the way. From the start, we have viewed this as a way of doing business, a process, and not a project, and something we wanted to embed in our culture. Our Industrial Pumps business unit was the first to come into the program and is now in its second year of driving 80/20 actions. The team has made tremendous progress on a number of 80/20 pillars. First, within Industrial Pumps, we reduced our original equipment SKU count by 45%, leading to a more efficient manufacturing process, less working capital, and importantly, better value for our customers. While the SKU reduction had some initial impact on top-line performance, the team has quickly pivoted to maximize opportunities with a core set of products. These target selling efforts led to a 21% increase in year-to-date bookings for key customers. By reducing SKUs and focusing efforts on our best products, the team has made a difference for both our customers and shareholders, improving gross margins by roughly 150 basis points compared to last year. In addition to these efforts, the 80/20 program led us to a decision to divest a small gear pump business within the Industrial Pumps business unit. This decision was made using our analysis of the market opportunity, our right to win, and our ability to deliver profits in line with our expectations. After analyzing this business closely, we determined it was better off in someone else's hands. While this divestiture was immaterial to our overall financials, it is a decision that ultimately improves our profitability, working capital, and cash flow. We are focused on continuing to execute utilizing the 80/20 methodology, not only in Industrial Pumps but across our entire portfolio, and we'll share more details over time. Turning now to Slide 12. Our continued focus on managing working capital and converting more profits into cash, combined with the merger termination payment, led to significant cash from operations of $402 million in the quarter. For the quarter, adjusting to exclude the net impact of the merger termination payment, our free cash flow conversion was an impressive 174%. As I look at our year-to-date cash flow performance, our improved working capital management under the Flowserve Business System, and our healthy leverage level, I'm encouraged by our ability to allocate capital in growth-enhancing ways. In the quarter, we returned $173 million to shareholders, including $145 million of share repurchases. We continued share repurchases into October for an incremental $55 million bringing our year-to-date repurchases through October to $253 million, with $200 million remaining on our share repurchase authorization. Looking ahead, we'll continue to allocate capital in a disciplined manner with continued commitment to our investment-grade rating. On Slide 13, in another example of our disciplined approach to capital allocation, we are excited to announce today that we have reached an agreement to divest our legacy asbestos liabilities. The transaction simplifies our capital structure, reduces volatility and improves our annual cash flow, all of which will enhance our ability to focus capital allocation on growth opportunities. We have found a great partner for this transaction, and we look forward to closing the transaction in the fourth quarter. Turning to our outlook on Slide 14. As a result of strong year-to-date performance and increased confidence in executing through the Flowserve Business System, we have increased our earnings outlook for the second time this year. We continue to deliver strong year-over-year margin expansion and now expect to deliver over 200 basis points of margin improvement for the full year. The midpoint of our full-year guidance represents a 31% increase in EPS year-over-year and an impressive increase of more than 60% since 2023. I'm proud of our teams, their strong delivery, and our focus on execution. In closing, our performance in the third quarter and year-to-date in 2025 has been outstanding. Adjusted EPS for the first three quarters of the year is up 31% versus the prior year. Aftermarket growth is strong, margin expansion is accelerating, and cash flow performance continues to outpace historical levels. The 80/20 program is early in its life cycle, but we are seeing tangible benefits with performance in the quarter in line with our long-term margin targets. And while we execute using the business system, we have been able to allocate capital to opportunistic share repurchases to drive shareholder value. These efforts, combined with healthy end markets and significant expansion in power, including nuclear, creates a compelling opportunity for profitable growth in 2026 and beyond. We look forward to providing a more robust view of 2026, including our financial outlook for the year on our fourth quarter earnings call. And with that, I'll turn the call back over to the operator for Q&A.

We'll go right to Michael Halloran with Baird.

Would you put in context what you're seeing from an environment perspective, more of a pipeline funnel thought process? I know you mentioned some of the larger projects may be pushing to the side a little bit, a lower percentage of the portfolio today. But if you think about what the underlying trajectory looks like, both from an order perspective, from a funnel perspective, how that's converting? Are we talking about a framework on a forward basis, '26 specifically or however you want to think about it, that's pretty consistent with what your long-term thought process here is? Or do you think there's something in the environment that pushes you one way or another relative to that framework?

Sure, Mike. Let me start by separating this into aftermarket and original equipment business because it's really important. On the aftermarket side, we delivered another strong quarter at $650 million, marking two out of the last three quarters with performance over $600 million. We are confident this trend will continue due to refinery utilization, chemical plant utilization, desalination plants operating, and the overall health of the macro environment supporting our growth. Additionally, we are improving our capture rate through various initiatives that enhance our responsiveness to customers, including our quick response centers, while also ensuring we provide excellent support and service. Ultimately, we aim to grow by shifting from just parts and service to delivering comprehensive solutions, which gives us tremendous long-term growth potential in the aftermarket. Turning to original equipment and projects, we noted that this segment is becoming less critical for us than ever before. Historically, large original equipment projects comprised about 20% of our business, but now it's down to high single digits, less than 10%, which is a deliberate choice in our diversification strategy. This aims to enhance cycle resilience as we move forward. Despite this shift, we remain active in the project arena, and we anticipate a reasonably constructive project environment. In the past quarter, there was some project slippage that materialized in Q3, which was slightly more positive than Q2. Looking ahead, we're particularly optimistic about power and nuclear sectors, expecting significant double-digit growth in these areas. We also see generally favorable conditions in the other markets. Additionally, Middle East energy projects are currently at a five-year low, but we believe this will stabilize and offer many opportunities in our pipeline as we address some larger and diverse projects heading into 2026. In summary, we are well-positioned for growth, although the geopolitical and macro environment needs some stabilization to foster confidence among operators in their project costs and financial investment decisions. Overall, we feel positivity about 2026 and beyond.

And then follow-up question is just maybe a thought on pricing. How pricing looks in the marketplace, receptivity, competitive dynamics, and how we should think about price cost on a forward basis? Appreciate it.

Sure. Yes. You can't talk pricing without tariffs sadly. And so we've really hammered price in the U.S. on the back of all of the tariff changes. I think we've done three or four price increases this year. What we're finding is in the run rate business, the aftermarket business, our MRO replacement business, that price has been incredibly sticky. We're seeing the peer group and the other industrials doing very similar things that we're doing there. And we feel very good that we're at a price cost neutral basis, if not slightly positive on the forward look. And so I'd say that's working, and that obviously is more of a U.S. phenomenon than anything else. And then as we think about the project pricing, this has always been the case since I've been here. The bigger the project, the more exciting or flagship the name of the customer or what it's doing, it seems to just attract more attention and there's always an element of competitiveness. And so that's kind of the nature of the game there, the EPCs make sure there's several bidders. But I would say we're not seeing anything fundamentally different than what we've seen in the last couple of years or anything in my tenure here. And so we believe that the environment is constructive for us to be selective with our bidding, especially with larger pump projects. And when we say selective, it's making sure that we have the right to win. We're working with customers that we know we can execute on. We know there's a large aftermarket content where they support that, and then ultimately bringing margins in that will drive value creation for Flowserve. And so I think we're in a good place there. We're more focused on pricing than ever before, and we feel we can be on the positive side of price cost as we go forward.

We'll move next to Andy Kaplowitz with Citigroup.

Scott, can you give us a little more color into the margin inflection you saw in FCD this quarter? How much of the improvement was Mogas improving versus core FCD? And you mentioned that both of your segments are in line to at least make the range of 16% to 18% segment adjusted operating margin that you set for FY '27. But as you know, FPD is already higher than that. So could that range end up being conservative?

Sure. I'll start with Mogas since I was there last week, and then I'll let Amy discuss the overall margin progression at FCD, and we can also touch on the Pump division. Mogas is performing exceptionally well. During my visit with Alice last week, we had a great experience. One key takeaway is that the integration has gone incredibly smoothly. The Flowserve Business System is fully implemented, including operational excellence, daily management, problem-solving, and inventory practices, all functioning at a level comparable to the rest of the Flowserve peer group. We've made substantial progress in portfolio excellence, and they're currently on the 80/20 program, which focuses on our severe service ball valve offerings. We've been making rationalization decisions regarding our other products and are now shifting our focus to commercial excellence. This is centered on driving growth and ensuring we receive clean orders at the facility. I am very pleased with the advancements they've made. In the last quarter, Mogas margins positively contributed to FCD. As Amy noted earlier, the modules that had caused some concern due to delays have now shipped in the third quarter. There will be minimal revenue from those modules in Q4 and Q1, which relates to installation and commissioning. Going forward, our focus is on bookings and fostering growth, and we are optimistic about the potential of that product line. The end markets are mining and refining, and we've seen an increase in opportunities within the mining sector. We had a solid booking figure this quarter, and the outlook keeps getting brighter. Therefore, we believe the end markets will support Mogas growth, and by applying commercial excellence along with the 80/20 principles, we are confident we can reach that $200 million target we've mentioned. Additionally, this integration highlights how we're implementing the business system effectively. In a relatively short period, we've transformed a family-owned business that previously lacked strong business processes into an entity we can be proud of, capable of enhancing margins for the FCD portfolio while also driving growth and better serving our customers.

Yes. And Andy, I'd just add with respect to FCD, we improved 410 basis points sequentially. You don't do that without all boats rising within the FCD platform. And we've been talking about some of the levers that we had available to us, whether or not that's operational excellence and some footprint decisions that had been executed in late 2024 going into 2025, as well as other tenets of the operational excellence program. 80/20 is taking hold in the platform. We're seeing that start to contribute as well. And then obviously, the story behind Mogas as well. And so we continue to think that there's runway with respect to FCD margins. And then once again, with respect to FPD, obviously, a great story there as well in terms of both platforms being within the range of their long-term targets, actually FPD being on the outside in a good way of that range. And so I think we'll go through our annual planning process this year, knowing the additional levers that we have to pull from a margin expansion standpoint, both in 2026 and beyond, and we'll look to reset those long-term targets in 2026.

Scott, you mentioned the $10 billion nuclear flow control opportunity available over the next decade. What do you estimate your share of that opportunity might be? Regarding nuclear bookings per quarter, we know they can be inconsistent, but they appear to be increasing overall. They seem to have averaged higher than your reported nuclear sales exposure, likely around a high single-digit percentage of bookings each quarter over the past year. Do you believe they can continue to average that amount or potentially exceed it over the next couple of years?

Sure, let's first look back and then discuss future prospects. Nuclear bookings are increasing, with our power segment showing a double-digit growth. We have achieved over $100 million in nuclear bookings for three out of the last four quarters. Despite the various developments in the nuclear sector, we're optimistic that it will continue to evolve positively. We're very excited about the nuclear opportunity, as reflected in our presentation. To clarify about the $10 billion potential, we hold a significant share in the nuclear industry. We're utilizing our expertise, established infrastructure, and strong partnerships to advance our objectives. The barriers to entry in this field are quite steep, as our customers expect highly reliable pumps, valves, and actuators that are designed to last for a 30-year lifespan. Securing approval in the U.S. is very challenging, but we believe we're well-positioned to succeed with our long-time collaborators. We're enthusiastic about the potential ahead. We mentioned some market share statistics: currently, there are over 400 nuclear reactors globally, with our equipment present in 75% of them. We perform exceptionally well in North America and Europe, and we are optimistic about opportunities in Korea and India moving forward. China represents a significant market, as it is currently increasing its number of reactors the fastest. Though we have a presence in earlier Chinese reactors, recent shifts in their policies have limited our involvement there, which is why we've excluded that from our projections. Regarding our $10 billion target, we anticipate there could be about 40 new reactors in the next decade, generating up to $100 million in content for Flowserve. We see promise in small modular reactor technologies and expect them to significantly contribute to our $10 billion goal. Our aftermarket bookings currently stand at around $100 million annually, and we expect this to grow alongside our installed base. Lastly, there are opportunities in extending existing operations. Recently, Google and Brookfield announced projects to bring existing sites back online, which we view as excellent prospects for Flowserve. We have supplied pumps and valves for these projects and are confident we can continue to contribute. Overall, we believe we are in a strong position with our expertise, prepared to capitalize on the anticipated growth in the nuclear sector.

Our next question comes from the line of Deane Dray with RBC Capital Markets.

I'll start with congratulations on the announcement regarding the legacy asbestos. It's such a smart move here. We've seen companies do this successfully. And if you just take us through, like, am I correct that you paid something less than $200 million to resolve this? And could you just clarify what the cash flow implications are?

Sure. So one, thanks, Deane. This was something that we were excited to get done. It just made sense given our cash position and obviously puts us in a great position going forward to have a more simplified approach to capital allocation. And so we think that the benefits will range from a cash flow perspective between $15 million and $20 million a year going forward. We do have about $200 million, $199 million of cash that we will allocate to the sale in the fourth quarter of the year. But for us, this is about really simplification of the capital structure, doing an 80/20 on the administrative work that we do in the Flowserve corporate office and taking out some volatility for our investors in the process.

It's great to hear. Amy, regarding the free cash flow, it’s impressive this quarter, and you clearly mentioned how you were excluding the windfall from the deal termination. Is there anything else in the free cash flow or working capital that you would point out? What does this indicate for the annual free cash flow, as it seems to position you ahead of your plan?

Yes. So I think that as we look at free cash flow now, we're targeting something at the 100% level or a little bit better. I think for us, really free cash flow starts with margin expansion. That's the quickest way to improve the free cash flow for any company, but working capital has been a huge focus. And we've made some improvements there. 80/20 is actually helping us with the process, even decisions that we made during the quarter around the small divestiture paid dividends in terms of simplifying the inventory that we need to keep on hand. But I'll just point out with working capital. And if I didn't remind you, Scott would remind me to remind you that our work is not done. And so we continue to have a substantial amount of improvement that can be made in this area, and we are focused on it. We are focused on it at the leadership team level. We're focused on it at the platform level and at the business unit level. And so we're going to continue to do everything that we need to do to make free cash flow a real strength for Flowserve and its investors.

And Deane, just to reiterate, we talked about this last month, but 80/20 helps on working capital dramatically plus the operational excellence program. And so we're not done. We've made progress. We're not celebrating our working capital numbers right now. But we feel like we're moving in the right direction in a very positive manner.

We go next to the line of Damian Karas with UBS.

Scott, I appreciate your comments on the certifications required to compete in nuclear pumps and valves. But I just wanted to ask how you're thinking about the profitability of these awards? When I just think about how your industry has sometimes behaved in the past, it's gotten pretty competitive when you have these mega growth cycles, just like thinking about past oil and gas booms where the OE margins were slim to none. So could you maybe just talk a little bit about where you are projecting these nuclear awards you've been winning to line up kind of relative to the rest of your project base? And just as the capacity build-out for nuclear continues, how you're thinking about how to price that in your bidding process?

I believe it would be beneficial to discuss the timeline for a new nuclear reactor. These projects differ significantly from oil and gas or water-related projects. It takes several years upfront to finalize the process and ensure the quality standards are met. When we secure a new reactor project, we typically expect a timeline of about four to five years before we can start shipping equipment. The initial three years focus heavily on engineering and quality. Considering the entities involved in designing these reactors, such as Westinghouse, EDF, and Korean nuclear authorities, making changes to their established processes and accepting a new supplier is extremely challenging due to high barriers to entry. Nevertheless, it is crucial for us to deliver, increase our capacity to accommodate the growth in nuclear, and remain competitive to facilitate financial decisions. We have been collaborating with these stakeholders for many years, and we are confident in our ability to retain existing projects and grow our involvement. We are committed to supporting the industry and our customers in their operational regions.

Yes. And Damian, I'd just add one thing from a color perspective. I was with our sales leadership team on the pump side as well as our BU leaders last week. And there is focus on two things in this space. One, making sure that we have the resources in place to support these opportunities, and that includes adding nuclear expertise at the corporate level within Flowserve, but it also means that we're making sure that we remain competitive and that we're doing things to not be complacent about our cost structure where we can to really continue to protect this business, the margins, and keep those barriers to entry as strong as we can.

That's all really helpful. And I wanted to ask a follow-up question on the asbestos transaction. Are you anticipating that is going to have any impact on your cost of financing? And curious what you plan to do with this newfound increased balance sheet flexibility?

Sure. From a financing perspective, I would say it's credit enhancing, but given the size, it may not be significantly impactful. Overall, Flowserve is in a position where we have more capital allocation opportunities than ever before. We've already made some decisions in the fourth quarter, including opportunistic share repurchases in October and allocating just under $200 million towards this transaction. What we've done over the past several quarters reflects our disciplined approach. We're focused on growth and earnings-enhancing opportunities in our capital allocation. Our strategy will depend on the specific environment. Buying back shares recently has made sense, and we intend to keep that option open. We still have about $200 million of authorization available for our share repurchase plan. At the same time, we are interested in growing the business. As Scott mentioned, the recent developments with Mogas and their adoption of our Flowserve Business System give us confidence that pursuing M&A, with our strict value creation criteria, can be a powerful approach for capital allocation moving forward.

We'll go next to the line of Brett Linzey with Mizuho Securities.

Congrats. I wanted to come back to the energy business and apologies if I missed it, I jumped on late, but the bookings down 19%. I was just hoping you could drill down a bit on some of the moving pieces there. And does any of the quoting in that segmentation inform this could be snapping back in the coming quarters here?

Sure. Yes. When we think about the compare versus last year, it was a difficult comp. We had three large projects in the Middle East that were all energy a year ago, and those didn't repeat this year. And so I think that's the easiest way to describe that. Energy on the original equipment side for us is primarily Middle East. It's a lot of that kind of midstream processing and storage and then also on the downstream side. And we had a lot of activity last year. And quite frankly, we're in a little bit of a lull right now with the Middle East energy type project bookings. With that said, I feel confident that there is work to do in the Middle East, there are a lot of plans to move forward with some of the investments that have already been made public but have been delayed in terms of that project timing. And so we're incredibly well positioned to capitalize on that growth. And I would say, with just a little bit of stability in the system, maybe oil pricing coming back a little bit to provide them a little bit more cash flow to fund new projects, we could see a positive trajectory here in 2026 and beyond.

Yes, that's great. And I appreciate the detail on nuclear. I guess thinking about the content and some of the ramp over the first three years, is there anything to be aware of in terms of development costs and how that might play out as you're ramping for some of these opportunities? Or do you think you can simply just repurpose some of the R&D to these areas?

Yes. For us, it's a relatively low development cost. We are working with some of the small modular reactors on maybe some modifications to our existing products to support a slightly different reactor. But overall, this is not big dollars for us in terms of needing to redevelop our products. And so a lot of this is just making sure that we're meeting the current requirements and that we can adapt to what's happening in the space. And so I wouldn't expect to see from us any massive incremental expense to make sure that we're positioned to win this work.

We'll go next to the line of Nathan Jones with Stifel.

I guess I'll dig a little bit more on the nuclear side of it. $10 billion of flow control opportunity over 10 years. Maybe looking for a little bit more color on what your expected market share is? I know Andy asked about it, but I'll see if we can get a little bit more color on it. I mean, when you look at large utility scale reactors that have been out there for decades now, I'm sure you understand what your market share is on that, maybe a little less so on the small modular reactors given they're really still under development. But I'm just hoping you could give us any color on what your expected win rate on that kind of $10 billion worth of content over that time period was because 5% market share is very different from 50% market share of that opportunity.

Yes. So Nathan, I'll refer to the current market share. Of the 416 reactors that exist, we provide content for 75% of them. This includes pumps, valves, and seals, positioning us very well. We perform strongly in North America with Westinghouse technology and in Europe with both Westinghouse and EDF technology, as well as in Korea. However, our performance in China has declined due to their policy shift towards domestic supply, impacting our ability to win new contracts there, despite our established presence. Looking ahead, we are well positioned for growth in North America, Europe, India, Japan, and Korea with our operators. On the valve side, I would expect us to maintain a leading share of mainstream isolation valves since we have a significant stake in safety valves for nuclear reactors globally. We estimate a 50% share of cooling pumps and believe we can sustain this moving forward. We are also re-entering the market for primary cooling pumps within reactors. Although we haven't engaged in that work recently due to fewer new builds, we are beginning to solidify our position again. I believe our market share has the potential to increase as we reposition some products to address the overall plant balance. You can expect us to be a market leader, especially in pumps and valves, in the future.

And so the $10 billion excludes China?

We did not put China in our estimates.

Got it. I would figure the biggest ticket item coming out of here would be the pump at that greater than 50% of currently operating reactors with Flowserve pumps would probably be reflective of the biggest dollar opportunity. Is that correct?

I think that's fair. Yes.

Okay. I think that gives a bit more color on potential win rates. So I'll leave it there.

We go next to Joe Giordano with TD Cowen.

So I think we all appreciate the need for the power gen pickup here and nuclear is a logical way to do this. Like, as you chase this business, we're throwing around a lot of numbers, right, all the companies, like $80 billion here, $100 billion there, all these gigawatts. Like how do you, one, like can we build all this stuff? And two, how do you have to think about who's backstopping this? Like on the SMR side, we're talking a lot of new companies making big commitments with like no revenues at this point. So how do you kind of judge where you want to chase and like how solid is the ground that you're walking on when you do it?

Those are really important questions. Let me start with capacity, and then we'll talk about our customers and how we approach that. Regarding capacity, we've been in this business for decades. We have a dedicated facility for valves in North America and another for pumps in Europe, both of which can expand. We're considering creating nuclear Centers of Excellence to consolidate our products at a single site, which will allow us to leverage engineering, project management, quality, and other aspects effectively. I am confident in our ability to ramp up production. As I mentioned earlier, when we secure an award, there is typically about three years of office work, engineering, and quality assurance before we start delivering equipment. This gives us considerable visibility to ensure we have the necessary capacity. Additionally, we are actively investing in our suppliers to ensure they are equipped to support us in delivering as expected. I am very confident in our ability to expand capacity and keep pace with the industry, at least for now. On the customer side, this landscape is quite dynamic, with announcements occurring frequently about various players. Major investments are being made by companies like Brookfield, Google, and Amazon to ensure these reactors can be operational and contribute to future energy needs. We are selective in our partnerships and have brought on a nuclear expert with decades of experience, including work with the NRC and the White House. He is assisting us in carefully choosing where to allocate our resources and efforts. We have identified a few customers on our slide, but we've been methodical in our approach to avoid overextending our business development and engineering resources as we look toward the future.

And then as a follow-up on that, are there any obvious gaps in the portfolio where you can tuck in new products that would be like specifically geared towards nuclear? And is it fair to think that given your commentary about the timing, like as you guys report in the coming years, would we expect like the percentage of delivery over the next 12 months out of backlog to kind of move down commensurate with the amount of bookings you're doing in this sector?

Yes, I'll let Amy hit the backlog conversion. I'll start with the other one.

Yes. So I think from a capital allocation standpoint, as we look at attractive end markets, nuclear is certainly one of them. We try and take a pretty good product approach for all we do on the M&A front. And so that sort of starts with mapping what we have, what we don't have. And although we are pleased with our product portfolio at this point in time, I think there's always ways that we can look to strengthen that portfolio through M&A.

Yes. And so I think the thing for us is we may have some pumps on a facility, we may have a mainstream isolation valve, but not have the control valves or not have the butterfly valves. And so really, the focus is making sure that we can package more of our content together as we work on these new projects. And so that's the effort right now. There's a huge opportunity in front of us. And then to Amy's point, what we are looking to do is potentially on the programmatic M&A side acquire other companies that may have the certifications and may have that installed base already in there where you're not having to work through some of those barriers to entry that I talked about before.

On backlog conversion, overall, last year saw a decline in our backlog, dropping to the mid-80s for Flowserve. I believe this trend will continue, particularly with our nuclear portfolio. However, this is being somewhat balanced by the strength of our aftermarket business, which converts fairly quickly and is currently at historical highs. We remain focused on that aspect. While these two elements tend to offset each other, there is likely to be some slight pressure on backlog conversion related to the nuclear content.

We'll take our final question from Andrew Obin with Bank of America.

Can you hear me?

Yes, we can hear you.

Excellent. So just nuclear bookings have been great. But if you look at underlying power bookings ex-nuclear, it seems that they've been quite weak this year. I think we calculate down high teens. What is this a reflection of? And does core power pick back up because I would imagine the power gen trend is broader than nuclear? Yes.

I believe that in the past quarter for traditional power, we may have experienced some timing issues. There are investments happening across all types of power. For example, we're seeing extensions of coal-fired power plants, where we have significant involvement with both pumps and valves. We're also observing new single cycle combined cycle plants being developed, where our presence may be less substantial, but we still have some involvement. This trend is occurring globally, and we're enthusiastic about the opportunities it presents. The environment is becoming more competitive, so we need to be very strategic in ensuring we present the right products to the right customers, particularly those who appreciate our aftermarket services. Therefore, we are being more selective due to the increased competition in the traditional power sector.

Got you. And just to help us understand, last year, bookings grew 9%. This year, bookings are sort of flat. So how do we think about the relationship, given that you're changing a business model? How should we consider the relationship between bookings and revenue? And how did this year's bookings translate into achieving the 5% revenue target next year, right? Because the 9% bookings growth last year has really flowed through the P&L as top line. And no complaints about...

I'll let Amy discuss the conversion to revenue while I touch on our growth. We are aiming for a book-to-bill of 1.0, which reflects a decrease in bookings this year. A significant reason for this is the decline in our Middle East OE project business. However, looking at the rest of our operations, excluding OE energy projects, we have seen a 9% growth. We believe we are making good progress in capturing that growth. We need energy bookings to rebound in 2026 to achieve our targets. Additionally, our teams are highly focused on growth through commercial excellence, which is aimed at aligning our sales organization with appropriate incentives and project strategies to increase market share. We're also shifting our 80/20 strategy towards growth, as evidenced by a 21% increase in target selling accounts for our industrial pumps this year. With our renewed focus on commercial excellence and the 80/20 strategy, I believe a sustained growth rate of around 5% is achievable over time.

Yes. I believe our conversion rates for quicker turn business are improving over time. Our efforts in commercial excellence are reducing our lead times. Combined with our strong aftermarket performance, which we intend to maintain, this enhances our conversion. As Scott mentioned, the overall health of several end markets we are focused on, along with our efforts in commercial excellence and targeted selling, will help us take advantage of Middle East opportunities, not only in traditional energy but also in power and water as we move into 2026, which should more than offset the challenges we see from the 80/20 strategy.

We have no further questions. I'll turn the call back to Brian Ezzell for any additional or closing remarks.

Great. Well, thank you, everyone, for joining the call today. We look forward to seeing many of you at upcoming conferences and investor events. And then, of course, we'll provide another update early next year. In the meantime, if you have any questions, please feel free to reach out to the Investor Relations team, and we'll be happy to talk through anything. And with that, we hope you have a great day.

This concludes today's conference. We thank you for your participation. You may disconnect at this time.