Earnings Call Transcript - FLS Q2 2025

Operator, Operator

Good day, and welcome to the Flowserve Second Quarter 2025 Earnings Call. Today's 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.

Brian Ezzell, Vice President, Investor Relations, Treasurer and Corporate Finance

Thank you, and good morning, everyone. Welcome to Flowserve's Second 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. 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. I will now turn it over to Scott.

Robert Scott Rowe, President and Chief Executive Officer

Great. Thank you, Brian, and good morning, everyone. Before we talk about our outstanding second quarter results, I want to provide an update on the Chart merger. As we announced yesterday, we reached an agreement to terminate the proposed merger with Chart Industries. When we were first approached by Chart about the potential merger, we took a very disciplined approach to the discussion with a focus on ensuring the strong value creation opportunities offered by Flowserve would continue in the merger. This disciplined approach guided us through our decision-making process following the subsequent all-cash offer for Chart from Baker Hughes. Based on our assessment, further pursuing the merger would have been value diminishing to Flowserve shareholders given the additional cash, leverage, and diluted ownership required to continue the process. While we are disappointed in this outcome, we are confident that this decision was in the best interest of our shareholders and our company. As a result, Flowserve received a $266 million termination payment in accordance with our signed agreement. In the near term, we'll evaluate opportunities to deploy this capital to create value for our shareholders, including through share repurchases. Over time, we remain committed to a disciplined approach to capital allocation, including M&A. While the outcome wasn't what we wanted, we have no regrets in our decision to pursue this opportunity or with our decision to terminate the agreement. The Flowserve team and our Board of Directors were thoughtful, disciplined, and focused on our stakeholders throughout this engagement. And I believe we are in a better place today than ever before to capitalize on the opportunities in front of us. Let's now turn to Slide 3. We delivered exceptional second quarter earnings in a dynamic macro environment, demonstrating the focus and strong execution of our associates. We are encouraged by our momentum through the first half of the year, and we remain confident in our ability to execute at a high level even as the environment remains fluid. As a result, we increased our full year adjusted EPS guidance to $3.25 to $3.40, which at the midpoint represents an increase of more than 25% year-over-year. Looking at our second quarter results in detail, we delivered bookings of approximately $1.1 billion and revenue growth of 3% with adjusted gross margins expanding 260 basis points to 34.9%. Adjusted operating margins were 14.6%, resulting in impressive incremental margins of 94% during the quarter. While adjusted earnings per share was $0.91, the Flowserve Business System is taking hold across the organization, driving excellence through functional discipline and accountability within our operating divisions and business units. We continue to be laser-focused on expanding margins and driving profitable growth. All products are now fully utilizing the 80/20 framework, and we believe there are further opportunities to increase margins as we are still in the early phases of this program. For the full year, we now expect to expand adjusted operating margins 200 basis points year-over-year. Turning to Slide 4. We delivered solid bookings performance with our fifth consecutive quarter of aftermarket bookings above $600 million. Our focus on growing the Aftermarket business continues to pay dividends, and our high service levels are translating into improved aftermarket capture. Our largest award in the quarter was an $11 million nuclear aftermarket order for the ongoing upgrade of a nuclear power plant in North America. Additionally, in pumps, we secured our first production order related to a small modular nuclear reactor or SMR, which is a testament to Flowserve being a leader in the advanced nuclear technology space. Total nuclear bookings were nearly $60 million during the second quarter. We also booked several other smaller projects in the $5 million to $10 million range across different end markets. Second quarter bookings were largely driven by our core business of aftermarket MRO and short-cycle activities. This base business remained healthy in the quarter as customers continue to focus on uptime and facility utilization. Overall, our markets remain healthy and our project funnel continues to grow, though we did see approvals for a few projects pushed from the second quarter to the third quarter as customers assess the macro environment and tariff situation. By end market, we generated strong year-over-year growth in general industries of 9%. Energy and chemical bookings decreased as expected given 2 large Middle East awards totaling $150 million that did not repeat this year. We continue to see good opportunities in the Middle East with medium-sized projects across a variety of end markets. We were happy to sign an MOU with Honeywell to integrate our RedRaven digital offering into their asset performance management system called Forge. This exciting step forward validates the incredible technology we have developed and is an opportunity to significantly scale our RedRaven offering. Leveraging this partnership, we have the ability to serve large industrial facilities, enhancing efficiency and operating predictability for our customers while creating a recurring stream of revenue for Flowserve. We look forward to sharing more details as we make progress with our customers. Turning to Slide 5. While the macroeconomic environment continues to be dynamic, our end markets remain healthy. Asset utilization for large process industries remained steady and maintenance spending has continued as expected. Our project funnel remains healthy and increased sequentially in all of our end markets. In particular, the nuclear project funnel continues to grow and is at the highest level we have seen. While some new project approvals in the chemical and energy markets have been pushed out a quarter or 2, there have been no unusual backlog cancellations or significant change in activity to date. Our first half book-to-bill was a strong 0.99x. For the full year, we expect our book-to-bill ratio to be approximately 1.0x, assuming project approvals continue as expected. Our strong backlog of $2.9 billion continues to position us well for future growth in the second half of the year as well as into 2026. Our elevated backlog provides a comforting level of certainty in the current market environment. Turning to Slide 6. Trade policy continues to evolve, and we remain focused on building resiliency into our supply chain as well as responding as quickly as possible to the latest tariff changes. As we look at the tariff rates in place today, we estimate the annualized gross impact from these tariffs before any mitigating actions to be between $50 million to $60 million. This compares to the range we shared in April of $90 million to $100 million. We continue to actively shift sourcing around the globe, leveraging our regional structure to reduce the overall tariff impact for our customers. The pricing actions we took in response to tariffs are now fully in place with no noticeable impact to demand. We estimate the impact for tariffs to the second quarter, net of our mitigating actions were neutral to earnings, and our goal remains to be tariff impact neutral for the full year. I would like to conclude with the progress we are making with the Flowserve Business System. Operational excellence is now fully embedded with how we run our global manufacturing and is helping us deliver for our customers and our shareholders. Additionally, we are now executing 80/20 across all of our business units, and we believe there's significantly more opportunity as we decrease complexity in our product portfolio offering. Finally, we launched Commercial Excellence in the second quarter with the expectation that this program drives long-term profitable growth. We are excited about the tenets of the Commercial Excellence program, and we are confident in our ability to gain traction quickly. Let me now turn the call over to Amy to speak about our financials in greater detail. Amy?

Amy B. Schwetz, Chief Financial Officer

Thank you, Scott, and good morning, everyone. Turning to Slide 7. The strong second quarter is another data point in demonstrating both the execution focus and the potential to be realized of the Flowserve business. We delivered second quarter revenue of $1.2 billion, adjusted operating margin of 14.6% and $0.91 of adjusted earnings per share, representing 25% earnings growth versus the prior year period. I want to thank our associates for their efforts, which were critical to delivering exceptional results during the quarter. Overall, revenues grew 3% versus the prior year period with the Mogas acquisition and foreign currency benefiting revenues by 260 and 110 basis points, respectively, while organic sales decreased about 100 basis points. Our 80/20 program is driving significant benefits to gross profits. However, the actions we have taken to reduce SKU counts were a modest headwind to organic growth in the quarter. Aftermarket revenues grew 7%, driven by continued aftermarket capture, while original equipment sales decreased 2%, driven by lower engineered-to-order work in the quarter. Shifting to margins. We generated an adjusted gross margin of 34.9%, representing a 260 basis point year-over-year increase, and our seventh consecutive quarter of sequential margin improvement. In the quarter, adjusted gross margins benefited from strong execution of the Flowserve Business System with benefits from our 80/20 complexity reduction program proving to be a tailwind in the quarter. The quarter also benefited from favorable product mix within original equipment sales and higher aftermarket sales in the FPD segment. We believe the continued execution of the Flowserve Business System positions us well to further expand margins. Higher adjusted gross margins, coupled with consistent SG&A as a percentage of sales led to adjusted operating margin expanding 210 basis points versus the prior year period to 14.6% and represented exceptional incremental margins of 94%. Adjusted operating income was $174 million, a 20% increase versus last year. Our adjusted tax rate for the quarter was 17.1%, driven by discrete tax benefits from foreign operations. The change in tax rate versus the prior year period favorably impacted adjusted EPS by approximately $0.05. Altogether, we delivered robust earnings per share of $0.91 for the second quarter. Turning to our segments and starting with FPD on Slide 8. FPD delivered solid bookings with growth in general industries, but lower bookings than last year, driven by the nonrecurrence of certain large projects and some project pushouts to the back half of the year. FPD grew sales 1% versus the prior year, driven by continued strength in aftermarket activity. We are particularly pleased with adjusted gross margin performance of 36.8%, an increase of 390 basis points compared to last year, driven by our 80/20 program, increased productivity, and favorable mix. These results translated into FPD delivering an outstanding adjusted operating margin of 20.3%, a 340 basis point increase versus the prior year period. We have made tremendous progress in FPD in the first half adjusted operating margins of 19%. FPD is now operating at margins similar to best-in-class industrials, and yet we still see opportunities to increase FPD margins from here. While margins may vary modestly quarter-to-quarter, largely driven by mix, we see an opportunity for FPD operating margins to be at 20% or more over time, which would be well above the long-term targets we had previously established to deliver by 2027. Turning to FCD on Slide 10. In the quarter, FCD delivered bookings growth of 2% and sales growth of 7%, driven by Mogas. FCD adjusted gross and adjusted operating margins were 30.8% and 12.2%, respectively. Mogas unfavorably impacted FCD adjusted operating margins by roughly 260 basis points, largely due to the fabricated modules business and, to a lesser extent, inventory write-offs, which together resulted in an operating loss for Mogas. We have not bid on or accepted any fabricated modules orders since acquiring the Mogas business. And after we ship the last remaining order, we do not expect to continue this type of activity, which is consistent with our plans at acquisition. While the results are lower than we expected, we recognize the acquisition is still in early days, and the synergy realization is on track. We remain excited about the long-term outlook for Mogas, which expands our offerings in the attractive mining and minerals end markets and enhances our diversification efforts. To be clear, FCD margins are not meeting our margin expectations. However, we are executing on the same elements of the Flowserve Business System that have yielded exceptional results for FPD, and we believe we'll do the same here. It's important to note that absent Mogas, FCD adjusted gross margins increased 180 basis points versus prior year. Turning now to cash flow on Slide 10. We delivered strong cash from operations of $154 million during the quarter, driven primarily from robust earnings generation. As expected, days sales outstanding improved sequentially due to increased receipts from milestone billings and accrued liabilities was a modest source of cash following last quarter's performance-based incentive compensation payout. Overall, adjusted primary working capital as a percent of sales was 30.1%. Working capital efficiency remains an opportunity and a priority. We expect continued improvement from our cash from operations in the second half of the year. For the quarter, capital expenditures were $17 million and resulted in strong free cash flow of $138 million and a free cash conversion ratio of 115%. For the full year, we continue to expect a free cash flow to adjusted net earnings ratio of 90% or more. Other uses of cash during the second quarter included nearly $60 million for dividends and share repurchases combined. Importantly, we closed the quarter with a net debt to adjusted EBITDA ratio of 1.25x, our lowest level in the last decade, providing significant flexibility for capital allocation choices. It's important to note that with our current leverage level, the $266 million break fee represents an opportunity to allocate capital. As we have demonstrated, we will be thorough and disciplined in approach, including consideration of shareholder returns. We currently have over $200 million remaining under our share repurchase authorization. Turning to our 2025 outlook on Slide 11. While the environment continues to evolve, we delivered robust first half results and remain focused and committed to growth, margin expansion, and cash flow generation in the second half of the year. As a result, we are increasing our earnings guidance, including an adjusted operating margin expansion of 200 basis points and adjusted earnings per share of $3.25 to $3.40. The macro environment has resulted in some bookings and revenue deferrals, and we now expect organic sales growth to range from 3% to 4%, a modest decrease from our prior guidance of 3% to 5%. So back half organic growth is expected to be higher than the first half organic growth. With the weakening of the U.S. dollar, we also expect the impact from currency rates to be neutral to slightly positive to growth and earnings for the full year. We also expect this year's tax rate to be 20%, a modest improvement versus our prior guidance of 21%, driven by discrete benefits from foreign operations. Lastly, we expect the Mogas operations to now contribute approximately $0.08 to full year adjusted EPS. Turning to the progression of earnings. We expect to deliver higher earnings in the second half of the year compared to the first half, driven by increased revenues, but tempered somewhat by a higher tax rate and a more normalized mix composition versus that in the second quarter, which we expect to modestly impact back half gross margins. Specifically, we would expect Q3 revenue to be similar to Q2 and to include the aforementioned shift in mix. Revenue in Q4 will experience the traditional ramp with incremental volume benefiting operating income with margins increasing sequentially from Q3 levels. On a year-over-year basis, we continue to expect gross and operating margin expansion in both the third and fourth quarters. Additionally, our annual true-up of certain incurred but not reported liabilities is expected to occur in the third quarter, though this true-up will be excluded from our adjusted results in 2025 and going forward. We continue to expect the fourth quarter to be our highest earnings quarter driven by the acceleration of growth, acquisition synergies, and our 80/20 program results. In summary, I am proud of our first half results and believe we are well positioned to drive year-over-year earnings growth in the second half of the year. Let me now turn the call back to Scott.

Robert Scott Rowe, President and Chief Executive Officer

Thanks, Amy. We'll now turn to Slide 12. Looking ahead, I remain excited about our ability to drive significant value for our shareholders. We are executing from a clear position of strength with significant momentum. Global demand for our mission-critical flow control products and solutions remains robust, and our 3D strategy has us positioned to deliver sustained growth. The Flowserve Business System is accelerating performance across the organization, and we see further opportunities to drive growth, productivity, and margin expansion to unlock further value. Our strong free cash flow generation positions us to invest in innovation and strategic initiatives to support our customers' evolving needs across the industrial spectrum. In closing, on Slide 13, our end markets remain healthy, and our execution is the best I have seen so far with more opportunities for improvement. We continue to deliver towards our 2027 margins and EPS targets and are well positioned to deliver strong performance for the full year in 2025. The midpoint of our updated adjusted EPS guidance represents an impressive 27% increase versus last year. And combined with the significant EPS growth we delivered in 2024, we are positioned to grow adjusted EPS nearly 60% since 2023. I'm proud of our associates and their hard work to deliver significant value for our shareholders, and we look forward to continuing to do so in the future. With that, I'll turn the call over to the operator to open up questions and answers.

Operator, Operator

We'll take our first question from Andy Kaplowitz with Citigroup.

Andrew Alec Kaplowitz, Analyst

Scott, can you give more color into the bookings environment and your expectation for book-to-bill around 1 for the year, which I think would imply bookings slightly over 1 for the second half. So maybe talk about the visibility towards those bookings? Are you seeing any evidence that some of the delayed projects you saw in Q2 are starting to move forward again in Q3? And I think you mentioned the funnel is up sequentially. Any way to quantify what the funnel actually looks like?

Robert Scott Rowe, President and Chief Executive Officer

Sure. The market is somewhat uncertain right now. In the second quarter, the macroeconomic situation and tariffs affected some project spending, causing delays. It’s understandable that operators want clear financial returns before making decisions. This isn't overly surprising for us. On a positive note, our run rate and aftermarket business have been extremely strong, with no slowdown observed in Q2, and we don't anticipate that changing moving forward. In the first half of the year, our book-to-bill ratio was 0.99, and we believe it will reach 1.0 for the full year, suggesting slightly better than 1.0 in the second half. Currently, the project funnel is increasing sequentially, indicating that opportunities are available. Just to clarify, that funnel represents a one-year outlook extending to the second half of 2026. Our teams employ a bottom-up approach, and we wouldn't commit to a 1.0 forecast without the visibility to back it up. There is some risk due to ongoing uncertainty in the trade environment, leading to cost unpredictability for projects. We are closely monitoring this situation, especially as it significantly affects our energy and chemical sectors. In contrast, the general industries sector seems strong, and we experienced appealing bookings in that area. Power bookings also remain robust. Recently, we've seen some projects advance to financial decision-making in Q3, and we are optimistic about securing some valuable contracts in that timeframe. Given the current landscape, we feel as prepared and confident as possible to achieve a 1.0 based on what we know today.

Amy B. Schwetz, Chief Financial Officer

Yes. And Andy, the only thing that I would add to that is as we look at July activity, Scott referenced really no large project orders were placed in the second quarter. And this month already, we've seen a large project order sort of the size of the 3 that were in the $11 million to $12 million range in the third quarter combined. So we feel pretty good about that project funnel delivering in the third quarter.

Andrew Alec Kaplowitz, Analyst

Very helpful. And then, Scott or Amy, just we understand that Mogas is diluting FCD margin, but how should we think about the potential improvement in the segment moving forward? Obviously, you disclosed the 260 basis points in Q2, but how do we think about ongoing pressure from Mogas? And stepping back as Scott, as you know, FCD used to have similar or maybe even better margin than FPD. So what will it take or in what time frame can margin FCD get back closer to the levels of FPD?

Robert Scott Rowe, President and Chief Executive Officer

Yes. For a long time, FCD had the higher margin. So maybe I'll let Amy walk through the margin and kind of how we see it and then the Mogas impact, and then I'll kind of summarize that.

Amy B. Schwetz, Chief Financial Officer

Yes. And I think you're right, Andy. To truly understand the performance, you have to look at organic FCD and Mogas somewhat separately right now. The organic FCD had a solid quarter. We still want to see more margin expansion than where we're at, but gross margins did improve 180 basis points and OI improved 140 basis points year-on-year, excluding Mogas. As we look at the Mogas side of the business, really 3 issues impacted the quarter and give us some confidence that this is a temporary issue. We focused a lot on this module, this fabricated module business. That's one we absolutely planned on discontinuing or not continuing once these orders shipped. And so they're working through the system really in the first 3 quarters of this year. But it's taken a little bit longer and cost a bit more to ship that final module than we'd expected. And so that's really the first item factoring their performance. And then the second is really around project bookings that have been slower in really the last 9 months than we would have anticipated. That has impacted their backlog a bit, but it's also impacted bookings and project revenues in the first half of the year. We do have visibility to elevated project bookings over the next 12 months. And I think we remain really excited about the exposure that Mogas overall gives us to the Mining and Minerals business. And so we remain pretty committed to that. And I'd say, overall, the integration is going well. So really synergy realization, which we've needed to overcome some of these issues is right on track, right where we wanted to be. And so I would say it's been a little messy in our first 6 months of ownership, but we're really excited about the continued options and future of Mogas that it gives us, not just within that business but for cross-selling.

Robert Scott Rowe, President and Chief Executive Officer

Yes. And then I'll just add, first on Mogas. Mogas is a good business. We've got to get these fabricated modules through the system, and we'll start to clear that toward the end of the year. And then secondly, the project bookings have to come through. And the mining and minerals industry is actually really strong. We've got visibility to those orders as we go forward. And so we feel really good about the Mogas business. It's just we got to clear through some of these things that we identified in due diligence. And then back to FCD in its aggregate, in theory, Mogas should be accretive to the FCD overall financials. And so we'll start to see that play out in 2026 and beyond. And like you said, Andy, we do believe and we are definitely leaning toward making sure that the gross margins in FCD are back to where we saw historically in that kind of the mid-30s to kind of mid- to high 30s, if you will, on the gross margin side. And we have the playbook. The Flowserve Business System, the operational excellence, the 80/20 has delivered incredible results on the FPD side. We're running that exact same playbook in FCD. We started a little bit later. And so they were always going to be a little bit of a lag behind the FPD progress, but the Mogas is definitely impacting them more. I will now be spending more time with our FCD team than I would have done prior to our announcement yesterday. And so I'll be in Europe on Monday morning with the team and going through a couple of their sites and making sure that we are doing the right things. And so we do have a lot of confidence in that team and definitely look forward to a second half of improved margins.

Operator, Operator

We'll go next to Deane Dray with RBC Capital Markets.

Deane Michael Dray, Analyst

I want to discuss the implications of the recent Chart experience. From our perspective, the deal made sense when it was announced, and its termination is equally logical. That chapter is now closed. However, we have gained more insight into Flowserve's growth ambitions. Does this mean those ambitions will be abandoned, or are you looking for another deal? I'm glad to hear that you can now focus entirely on the business and will spend more time with the FCD team, which is a positive step. But what can you tell us about these growth ambitions and how they will develop moving forward?

Robert Scott Rowe, President and Chief Executive Officer

Sure. Deane, let me just start with a couple of comments that you said at the beginning because I do think they're important. And I put this in the prepared remarks. And while we are disappointed in the outcome, we believe this business is in a really good place. We were always bought into the strategic logic of the combination, right, the flow and the thermal management. And there is something there that we thought we could do that was truly transformational in the space. I am proud of our team and our Board to remain disciplined in the early negotiations and getting to a deal, but also in our ability to exit and terminate the deal in a successful way. And obviously, that results in a $266 million breakup fee that enhances our balance sheet, and we've received that money to date. And so that's in our bank account, and we are looking to how to deploy that properly. Additionally, we were able to secure a supply agreement with Chart that really was kind of on the back of some of the revenue synergies that we were talking about with the combination. We wanted to make sure the Flowserve product got pulled through. And so we've got a multi-year supply agreement to progress that forward. And so as we think forward, right, we're not going to shy away from M&A, and I'm going to let Amy talk about kind of how we think about that and what it looks like. But what I'd say is the other thing that we demonstrated here is that we can make progress while the corporate team looks at mergers and acquisitions. And we delivered an incredibly strong quarter despite the fact that we were in a small group of our corporate team was involved in pulling off a transaction and starting to build a very robust integration plan. And so that gives me confidence that we can do things a little bit differently here that we can lean in. But I'd also say we're going to do that incredibly thoughtfully, and we're going to be incredibly disciplined. But Amy, do you want to pick up on that?

Amy B. Schwetz, Chief Financial Officer

Yes. I would say that our approach to using mergers and acquisitions to drive shareholder value remains the same as before we announced the acquisition. We look for transactions that align with our strategy focused on diversification, decarbonization, and digitization. Ideally, these acquisitions will come with an appealing aftermarket opportunity for us to leverage. We aim for transactions that show strong financials, driving growth in both margins and cash flow, while also ensuring we maintain a healthy balance sheet and an investment-grade rating. We have demonstrated discipline in this approach, and you can certainly expect that to continue. It’s important to take a moment to reflect after this, but the Chart transaction highlights three aspects of our process. While most of our future opportunities will be smaller, we are open to larger transactions if the potential for value creation is substantial. We will remain disciplined, as shown by our decision to avoid pursuing this deal at any cost. Additionally, we successfully progressed the deal, made the announcement, and began integration planning while delivering an excellent performance in Q2. This indicates that our Flowserve Business System is well developed, allowing parts of the organization to focus on strategic opportunities without hindering the growth of our core business. This is one of the reasons we feel confident that M&A will be a key part of our strategy moving forward.

Deane Michael Dray, Analyst

Look, I really appreciate all that context and color. And I think Scott made my second question to Amy, just the idea of how does M&A play out from here. So that counts my 2 questions. I appreciate all the color.

Robert Scott Rowe, President and Chief Executive Officer

Thank you.

Operator, Operator

We'll go next to Damian Karas with UBS.

Damian Mark Karas, Analyst

Amy, you mentioned the FPD segment margin, but I meant to refer to the FCD and the opportunity to maintain it above 20%. I'm interested to know what the key factors are that you see for further improvement after the progress you've already achieved.

Amy B. Schwetz, Chief Financial Officer

Yes, I want to celebrate our strong finish for the quarter in the FPD segment, especially regarding our margin performance, with gross margins and operating margins both exceeding 20%. We are confident that we can maintain and build on this level due to a couple of key factors. First, the initiatives our teams are pursuing, particularly in aftermarket capture, are positively impacting our margin expansion. Additionally, we are in the early stages of the 80/20 strategy, and we’ve begun to see results come in faster than expected, though there's still more work to be done. We have urged the FPD team to focus on growth, which is why we initiated our Commercial Excellence programs. With operating margins in the range of 18% to 20%, we are committed to continuing to grow this business for our Flowserve shareholders.

Robert Scott Rowe, President and Chief Executive Officer

I'll add a third lever, which is technology. We've discussed some truly unique technology in the pump sector. We have a pressure exchange device named Flex and a differentiated hydrogen pump. We're also commercializing an LNG and a cryogenic pump. Each of these will have premium margins due to the advanced technology incorporated into them. As we progress toward commercialization and growth, this will positively impact us. We are incredibly proud of the strides the FPD team has made. They are highly focused and we are excited about the path ahead.

Damian Mark Karas, Analyst

I think I'm mixing up the Ps, Cs, and Ds, Scott. I apologize. You knew what I meant. I wanted to ask about the nuclear bookings, which you mentioned were at $60 million this quarter. That's obviously a step down from the $100 million plus you've referenced in previous quarters. Is that primarily due to timing, or should we interpret anything else from that? It seems like since last quarter, there have been more positive headlines regarding future nuclear activity.

Robert Scott Rowe, President and Chief Executive Officer

The nuclear orders are definitely variable. They can vary in size, with some orders in the $10 million to $15 million range, but the larger ones typically range from $30 million to $100 million. The variability is primarily due to project timing. These orders can be challenging to finalize, not due to a lack of confidence in winning them, but because it requires thorough documentation and navigating a complex technical process with the customer. Therefore, I wouldn't read too much into the $60 million figure compared to the previous three quarters at $100 million. The market remains highly attractive, and our pipeline is at its highest level ever. This fluctuation is simply a matter of timing and order variability, but we remain optimistic about the nuclear segment's future. Additionally, I would like to highlight that we have secured our first commercial contract for a small modular nuclear reactor, which we mentioned in our prepared remarks. We've been heavily involved in technology development and have established several partnerships to ensure our technology is well-prepared for SMR applications. In this quarter, we achieved our first contract to supply the primary coolant pumps for SMR technology, positioning us favorably in both traditional nuclear power and the emerging SMR market.

Operator, Operator

We'll take our next question from Nathan Jones with Stifel.

Nathan Hardie Jones, Analyst

I guess I'll start on the Commercial Excellence. I mean you talked about starting the Commercial Excellence pillar of your 80/20 initiatives in the second quarter. Can you maybe talk a little bit more about what that involves for Flowserve, how you're deploying that? I assume this probably focuses a little more on FPD to start with, with FCD needing probably some more margin work before it pursues growth. But just any more color you can provide us around that.

Robert Scott Rowe, President and Chief Executive Officer

Sure. Yes. Let me start on kind of why Commercial Excellence is so important. And then I'm going to let Amy jump in, as she's our executive sponsor for Commercial Excellence. But really, as we think about the Flowserve Business System and kind of the progress there, we really had to get operational excellence going in and making sure that we're delivering for our customers in the right way. And so we feel really good about that progress and the sustainability of that program. And then as you know, last year, we doubled down on portfolio excellence, which is where we embed the 80/20 program. We're now fully into that kind of second year of 80/20. We've got all product lines in there. And by definition, when you look at 80/20, you start to call out some of your products. And that puts some downward pressure on revenue. And so while we are focused with our customers on our top products that make sense for Flowserve and for our customers, there are things that are coming out of the system. And so the natural progression is then the commercial excellence to make sure that our whole organization is leaning in toward growth and making sure that we can kind of pick up some of the loss from the 80/20 program as we cut products out. And so this is the right thing to do. We're at the right time, and I'll let Amy kind of talk through some of the tenets of Commercial Excellence.

Amy B. Schwetz, Chief Financial Officer

Yes. And Scott touched on this, but really, the goal is to use enhanced commercial performance to offset revenue reduction from 80/20 decisions. And so we don't lose sight as an organization of the goal to grow. And so the pillar is intended to really cover all elements of the commercial life cycle. And so that's opportunity generation all the way through kind of post-shipment support and recovery, and it is supposed to be covered channel management, pricing, incentives, use of analytics to drive better performance within the organization. And I think what's really cool is as we've seen the progress that we've made around portfolio and operations, the organization is really excited about strengthening our capabilities in these areas. So we've launched pilots this summer around the program and would expect to start to see results being demonstrated in our 2026 bookings levels. It's something that Scott and I are going to be very focused on going into our annual operating planning. And I think what's great about this is I'm sponsoring the program, but really, the program is being led by our commercial leaders with a lot of input from the people on the ground who are helping our customers on a daily basis. And so we're excited to see what comes next year.

Nathan Hardie Jones, Analyst

And does this start in FPD and will move to FCD maybe as it progresses through its simplification initiatives?

Amy B. Schwetz, Chief Financial Officer

So we started this across the commercial organization. And so we've gotten the input from both FPD and FCD commercial organizations and businesses as we move forward. But you are correct, Nathan, that we're much more focused on growth in FPD than we are in FCD at this point in time. And so that means the pilots that are being launched in both programs are specifically addressed to sort of improve elements of the business that we think that we can drive marginality through focusing on.

Nathan Hardie Jones, Analyst

I just have one clarification on the dilution you're seeing in Mogas. Are the last of the modular units scheduled for delivery in the third quarter of this year? Is that what I understood? Could you also provide some insight into the potential margin expansion that might occur simply by not having to deliver those units?

Robert Scott Rowe, President and Chief Executive Officer

Yes, I'll address the timing, and then I'll let Amy discuss the margin. We have one large fabrication project that is significantly advanced, at over 90 percent completion. Unfortunately, we will need until early 2026 to fully wrap this up. We won't see much revenue from it by the end of this year, although there will be a small amount left. The team is diligently working to finalize this and deliver it to our customer. As you know, this follows percentage of completion accounting, so the revenue impact will be minimal. However, we will feel the effects in the second half of the year and slightly in the first quarter.

Amy B. Schwetz, Chief Financial Officer

Yes. To put it in perspective, Nathan, we had some discrete charges as we progress towards completing the last module in the second quarter. Generally, the margin differential between the rest of the Mogas portfolio and the modules is between 1,000 and 1,500 basis points.

Operator, Operator

We'll go next to Mike Halloran with Baird.

Michael Patrick Halloran, Analyst

I just want to clarify what happened with the orders and ensure I understand what has or hasn’t changed. Is it correct to say that there was a dip in the second quarter and that your expectations for the second half of the year are mostly consistent with before? Alternatively, what has changed in your expectations for the second half of the year from an order perspective compared to three or six months ago?

Robert Scott Rowe, President and Chief Executive Officer

Sure. I’ll start with what hasn’t changed, which is the aftermarket maintenance, repair, and operations business. It continues to perform well; utilization is strong, and customers are purchasing parts to service our equipment. We didn’t observe any changes in the second quarter. There was a significant order in the first quarter, so it’s important to normalize for that when looking sequentially. Overall, the $600 million in aftermarket performance is very robust, and we don’t anticipate a slowdown in the second half of the year. However, in the second quarter, we saw delays in project bookings. Due to the macroeconomic environment, including tariffs and uncertainty regarding costs, larger projects, mainly in the energy and chemicals sectors, paused for clarity on the broader market and cost considerations. Many of these projects are facing delays of about one or two quarters, with some possibly taking longer. The outlook for the second half of the year appears solid based on what we see today. In the past two to three weeks, the overall macro situation seems to have improved a bit, leading us to feel more optimistic about project progress in the latter half of the year compared to a month ago. However, I should note that there was a change in the tariff situation this morning, introducing some uncertainty into the mix. While I believe that the environment is becoming more favorable, there are still potential messages that could steer us back into uncertainty. It’s a challenging environment to predict, particularly regarding our customers’ perspectives on projects. We are maintaining close communication with them. Our opportunity pipeline is substantial, and based on our current knowledge, discussions, and where our funnel stands, we anticipate that the book-to-bill ratio for the full year will land around 1.0.

Michael Patrick Halloran, Analyst

And then just a follow-up on the pricing side of things, just kind of a twofold question. One, how is pricing in the marketplace tracking from a competitive perspective? Any issues as you manage through all these, call it, geopolitical tariff headwinds? And then secondarily, just a comment on what the margins in the backlog look like and if that's still tracking the right way. I appreciate it.

Robert Scott Rowe, President and Chief Executive Officer

Yes, I will address the first part, and then Amy can discuss margins and backlog. We have been aggressive with our pricing this year. We mentioned in our prepared remarks that the price increases have not significantly affected demand. The list price will be more affected in our run rate business, such as parts, products going through distribution, and the MRO business. We are very confident that our pricing strategies have been effective, and in some instances, they've exceeded our expectations. In the project business, whenever there is uncertainty regarding project timing or potential declines, our competitors become more competitive. As a result, we are also becoming more competitive in our project bids, ensuring that we maintain the right cost structure for our customers. This has made the environment slightly more competitive. While it hasn't turned adversarial, it does require our teams to work harder to source materials effectively, eliminate unnecessary engineering costs, and utilize standard products, which is something we are well aware of. Our engineered pumps team has excelled over the past year in selective bidding, ensuring we secure both the projects and margins we deserve. We are actively discussing how to present our best bids to avoid losing any opportunities. Overall, the pricing environment remains positive, though we are noticing some increased competition in certain areas.

Amy B. Schwetz, Chief Financial Officer

Yes. And the only thing that I would add to that is I think in terms of backlog, we're in a really good place from a margin perspective. A couple of things that I'd point out there, just one, with the 80/20 program, more and more embedded in the business. We're selling the right products. We're selling the products that we know that we can make money on in the market. The second piece was something that Scott touched upon, which is our out margins on large projects have been very positive. And so it's something that is allowing us to sharpen our pencil, but also giving us a great deal of comfort that when we continue to execute at the levels that we're executing today that we're going to continue to see the positive margin trends.

Operator, Operator

We'll go next to Saree Boroditsky with Jefferies.

Jae Hyun Ko, Analyst

This is James on for Saree. So I wanted to touch on 80/20. Can you kind of provide an update on where you kind of stand in 80/20 journey? And how much of like 200 basis points of margin expansion this year is kind of attributable to it? And is there a timing difference on implementation between FPD and FCD?

Robert Scott Rowe, President and Chief Executive Officer

We're making good progress with the program, which we started at the beginning of last year. FPD led the way among our business units, but now all five product business units are fully engaged with the 80/20 initiative. The business unit leaders have shown great discipline in establishing their segmentation and following the methodology. Two of our business units are now in their second year, and they've successfully conducted a second segmentation, making significant strides. While we haven't specified the exact contribution of 80/20 to margin improvement, it has positively influenced our efforts, and we see further opportunities to increase margins across our portfolio. Historically, companies that have implemented similar programs have achieved about 100 basis points of improvement annually, and that's our goal as we advance through the program. We're confident in meeting that expectation based on our current execution levels.

Amy B. Schwetz, Chief Financial Officer

Yes. And James, just a little color in terms of how I think about it at the 200 basis points of operating margin expansion that we're targeting for this year, that would be between 50 and 100 basis points of improvement from 80/20. So we're getting close to that run rate that we want to be at as a company.

Jae Hyun Ko, Analyst

Great. And I guess as a follow-up, you noted a sequential increase in project funnel. So how does this compare on a year-over-year basis? And where are you seeing like strengths and weaknesses in the end markets?

Robert Scott Rowe, President and Chief Executive Officer

I don't have the exact year-on-year funnel data, but I can say that the overall funnel is in a very healthy state. We're optimistic that the funnel positions us to achieve the necessary bookings, aiming for slightly over 1.0 in the second half of the year. We're focused on enhancing the funnel opportunities, and the power side is definitely improving. We need to continue to ensure we're tracking projects effectively to see ongoing growth.

Operator, Operator

We'll go next to Joe Giordano with TD Cowen.

Joseph Craig Giordano, Analyst

Scott, I’m interested in how you manage the situation with the Chart and the lack of a Chart. As a leader, how do you communicate this internally to your employees? You need to convey that this is transformative and represents the future direction of the company. It may be disruptive, and some people might be affected. Now, we’re stating that this is the future for us, not what was previously thought. While I believe the financial community understands this, it becomes a different conversation when it comes to motivating your team internally. How do you handle that?

Robert Scott Rowe, President and Chief Executive Officer

I appreciate the question. We've released many videos globally on relatively short notice. From day one, we maintained open communication with our teams. We never overreacted. While we're excited about Chart, our message to the teams was to stay focused and do their jobs. Chart didn't have businesses in mechanical seals, pumps, or valves, so those leading our operations and products were not significantly affected. This allowed us to continue progressing our business and achieve a strong second quarter. Some people in corporate functions may have felt nervous about the transaction, but we engaged in transparent discussions about potential outcomes and emphasized our commitment to treating everyone with respect, regardless of the situation. I believe in having open conversations and ensuring active communication. We released a video yesterday morning, had our leadership team meeting this morning, and will hold a global town hall right after this earnings call. We will reach many people, and I plan to travel to visit our sites to ensure our teams are engaged and performing well. I believe we've done a great job with our culture, which is one of Flowserve's strengths. I'm proud of our team for their hard work for our customers and for Flowserve.

Amy B. Schwetz, Chief Financial Officer

And I'd just comment that when your M&A is an extension of your strategy, you may be explaining the size of a transaction or there may be a surprise that you're doing something of the scale that the merger was. But I think there is comfort throughout the organization that we've said what our strategy would be around the 3Ds and the transactions that we have announced to date have been in keeping with that. And so it's a fork in the road for sure, but I wouldn't necessarily call it a full-on change in direction.

Joseph Craig Giordano, Analyst

That's fair. And just my second one, I don't want to belabor Mogas, it's a small company within a large company, but I think the expectation initially was something around $200 million in revenue. I think it's way lower than that. So maybe some color on what's driving that. And then just within the context of the FCD, and I know it's earlier stage in the margin journey than FPD. But is there something inherently more challenging in taking costs out of FCD relative to FPD, like something in the cost structure inherent there? Or is it just purely timing and just working at it?

Robert Scott Rowe, President and Chief Executive Officer

Yes, I will discuss Mogas revenue while Amy will cover the margins. We have indicated that Mogas is a $200 million business, and we are optimistic about reaching and exceeding that target. Amy noted that the project side of Mogas has been subdued since the latter half of last year and into the early part of this year, which has affected our overall revenue negatively. However, I want to highlight two points. First, the aftermarket segment of Mogas has been performing exceptionally well and continues to grow. Some of the project timing issues I previously mentioned regarding Flowserve also apply to the mining and minerals projects that Mogas excels in. We now have a clearer outlook, as we are observing increased activity in mining and mineral extraction. Consequently, our project pipeline has significantly improved in the latter half of this year and moving into 2026. Our objective remains a $200 million revenue target, and we will soon complete our last fabricated module. The aftermarket margins are strong, and the original equipment and project margins are aligning well, contributing positively to the overall FCD portfolio.

Amy B. Schwetz, Chief Financial Officer

We remain deeply committed to restoring FCD's margins to more historic levels and resetting expectations accordingly. There is nothing fundamentally preventing us from achieving those levels again. Historically, FCD was more exposed to the upstream business compared to other divisions of Flowserve, and as that segment has shifted, we've removed high-cost sites from our portfolio. This has contributed to some challenges in recent years, but we believe those difficulties are now behind us, which should provide some positive momentum. Aside from this transition, no significant structural changes have occurred within the business, and we are confident that we have addressed these issues over the past couple of years.

Operator, Operator

This does conclude today's question-and-answer session. At this time, I'd like to turn the call back to Brian for any additional or closing remarks.

Brian Ezzell, Vice President, Investor Relations, Treasurer and Corporate Finance

Great. Thank you, everyone, for joining the call today. We look forward to seeing many of you at conferences in the rest of the quarter and then providing another update following Q3. If you do have any questions or follow-ups, please reach out to the Investor Relations team. We'll be happy to talk you through anything. In the meantime, we hope you have a great day.

Operator, Operator

This does conclude today's conference. We thank you for your participation.