Earnings Call Transcript - FLS Q1 2026

Operator, Operator

Good day, and welcome to the Flowserve First Quarter 2026 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Brian Ezzell, VP of Investor Relations. Please go ahead, sir.

Brian Ezzell, VP of Investor Relations

Thank you, and good morning, everyone. Welcome to Flowserve's First Quarter 2026 Business Update. I'm joined by Scott Rowe, Flowserve's President and Chief Executive Officer; and Flowserve Chief Financial Officer, Amy Schwetz. Following Scott Rowe'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. I 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 the call over to Scott.

Scott Rowe, President and Chief Executive Officer

Thank you, Brian, and good morning, everyone. I'd like to begin by thanking our associates around the world for their hard work, disciplined execution and resilience in a highly dynamic environment. Our first quarter results reflect their continued focus on execution as we delivered strong adjusted operating margin expansion of 230 basis points and adjusted earnings per share growth of 18%, including the net benefit of tariffs and other unanticipated items in the quarter that Amy will discuss in more detail. While bookings and sales were impacted by events in the Middle East, we maintain our full year adjusted EPS outlook of $4 to $4.20, which at the midpoint represents 13% growth over 2025. We continue to advance our strategy and leverage the Flowserve Business System to unlock greater potential across the company. As we announced in late March, Matt Cooper, who formerly led our Industrial pumps business unit, has been promoted to lead the FPD division. I'm excited to have Matt in this role where he can leverage his customer relationships, knowledge of the business system and international experience to continue driving strong performance for the division. Let's turn to bookings on Slide 4. Bookings in the first quarter were $1.15 billion, down 6% from the prior year period. Our first quarter book-to-bill was 1.07x. We delivered healthy aftermarket bookings of $680 million in the quarter. As anticipated, aftermarket was down modestly on a year-over-year basis against a very strong prior year comparison that included a large nuclear order. On a sequential basis, aftermarket bookings were in line and represented the eighth consecutive quarter above $600 million. Our focus on expanding the aftermarket business continues to deliver results as we drive higher capture rates across our installed base. Within our original equipment business, January and February started with softer-than-expected bookings largely related to our run-rate MRO business and some smaller projects pushing out to later in the year. We saw these trends improve in March back to levels we anticipated, with strong commercial activity in the market. The softer start to the quarter, coupled with dynamics in the Middle East resulted in lower original equipment bookings in the quarter. I'll provide more insight on the Middle East in a moment, though it's important to note that absent the estimated $50 million headwind related to customer delays in the region, bookings for the quarter were largely in line with our expectations. Our focus on diversification within the 3D strategy has positioned Flowserve to manage through dynamic market conditions better than ever. In the quarter, we received more than $110 million of nuclear awards including 2 projects larger than $20 million each. Nuclear and traditional power continue to represent attractive strategic growth markets for us. Turning to Slide 5. I'll provide an update on how we have been responding to the situation in the Middle East. Our number one priority is employee safety and supporting our roughly 800 associates across manufacturing facilities and QRC locations in the region. I'm proud of the resilience and focus our teams have displayed as they continue to deliver for our customers. We are taking the necessary actions to manage through the near-term disruption, while positioning the business to respond effectively as we see incremental demand. First quarter sales and earnings were negatively impacted by disruptions in the region, largely driven by the shutdown of the logistics system and the inability to get to customer sites at the height of the conflict. Though conditions in the region remain dynamic, our ability to operate has improved under the recent ceasefire with temporary work positives implemented as needed based on safety considerations. We are proactively adapting our supply chain to address transportation delays, inflationary pressures and the potential for broader disruption. The progress we have made through the Flowserve Business System over the past several years has enabled us to operate with greater discipline, better visibility and more flexibility across our global network. We are dynamically repositioning the supply chain, leveraging our broader supply base and utilizing our regional and global footprint to respond quickly as conditions evolve. As we look forward, we have assumed that these disruptions seen in the first quarter continue for some period. Over time, we see significant opportunity to support our customers' critical infrastructure needs. We have a large installed base across the region and a legacy of strong customer relationships. We anticipate that asset restarts and rebuilding activity will begin later in the year with accelerated opportunities for additional infrastructure investment across the region. Energy security is also expected to be of increasing importance across the globe, and our teams are working diligently to assist customers as they plan for these incremental investments. Turning to Slide 6. I'll provide some perspective on the broader market outlook. Despite the disruption in the Middle East, the underlying fundamentals across our end markets remain healthy, and we continue to see meaningful growth opportunities for near and longer term. The outlook for power remains very favorable with global electricity demand continuing to support significant investment in both traditional power and nuclear generation. In general industries, ongoing developments in sectors such as mining, pharmaceuticals, food and beverage and water continue to represent a meaningful opportunity for growth. Within energy, utilization rates and maintenance activity across large process facilities have remained strong, with North American utilization increasing in March due to higher crack spreads. Our large installed base and ability to increase capture rates continues to support a constructive outlook for Flowserve, even as some larger project work has been slower to materialize given the geopolitical uncertainty. And while chemical remains our lowest growth end market, we continue to expect modest improvement over the course of the year. Looking ahead, our 12-month project funnel remains robust and expanded across all end markets, both sequentially and year-over-year. We are encouraged by bookings trends exiting the first quarter and by the awards we received in April. We have good visibility in the commercial opportunities and believe mid-single-digit bookings growth remains achievable for the full year. We also believe the current geopolitical environment could drive increased investment in energy security and diversification globally, providing another long-term tailwind for Flowserve. In addition, as one of the leading suppliers of flow control solutions in the Middle East, we expect to play an important role in reconstruction activities across industrial complexes as stability returns to the region. We are prepared to respond quickly and support our customers as these opportunities develop. Turning to Slide 7. The Flowserve Business System continues to be a key driver of our performance. The progress we have made across operational excellence in 80/20 has helped us improve how we run the business, reduce complexity and driven steady, sustainable margin expansion. Operational excellence continues to strengthen our core execution capabilities and improve performance across the organization. We have improved data and material flow, optimized inventory and unlocked significant cash for the business. Increased supply chain reliability and enhanced delivery performance are also helping us better serve our customers. Furthermore, we continue to execute our footprint rationalization program, which further supports our efforts to reduce fixed costs, improve operational performance and deliver further value for our customers. As we move into the third year of the 80/20 program, we continue to simplify our product offering across the business, including meaningful SKU and model reductions. We believe these actions will further sharpen our focus, improve efficiency and strengthen our operating model. While we continue to advance our commercial excellence initiatives, we have now trained hundreds of employees and provided them with the tools and processes to build greater capability and consistency across our commercial organization, which we believe is creating the foundation for long-term sustainable growth. The business system is the key to delivering on our long-term financial targets and I couldn't be more pleased with the progress that we are making and the impact it is having on growth and margin expansion. In summary, the fundamentals of our business and end markets remain robust, and I am pleased with our execution and the progress we made during the quarter. We are taking the necessary actions to successfully navigate the current environment, and we remain confident in the near- and longer-term growth opportunities we see across the business. As we move through the year, we anticipate even stronger opportunities to deliver value for our customers and our shareholders supported by our integral role in building and maintaining critical infrastructure around the world. With that, I'll turn the call over to Amy.

Amy Schwetz, Chief Financial Officer

Thank you, Scott, and good morning, everyone. Turning to Slide 8. We delivered a solid first quarter performance in a complex operating environment. Our results demonstrate Flowserve's durable business model and the disciplined execution of our associates. We continue to make progress on our stated margin expansion objectives. Adjusted gross margin increased 370 basis points to 37.2%, marking our 13th consecutive quarter of year-over-year adjusted gross margin expansion. Adjusted operating margin was 15.1%, up 230 basis points from the prior year period, with positive incrementals on lower sales. These results drove adjusted EPS of $0.85, an 18% increase versus the first quarter of 2025. First quarter results, both reported and adjusted were impacted by three items not originally anticipated when we provided guidance in February. First, EPS included a $0.19 benefit from AEFA tariffs for which we have filed for refunds following the U.S. Supreme Court's decision in February. This benefit was partially offset by the $0.06 negative impact of an item arising from a taxing authority in Latin America related to prior years. In addition, we estimate that the disruption in the Middle East negatively impacted reported and adjusted EPS by approximately $0.06. Altogether, these unanticipated items resulted in a net $0.07 benefit included in the first quarter results. Turning to sales. First quarter revenue was $1.1 billion, down 7% versus the prior year period with a 360 basis point foreign currency translation benefit and a 20 basis point contribution from acquisitions. We anticipated a modest sales decline in the quarter, which was further hampered by an estimated 200 basis points from the disruption in the Middle East. Sales were also impacted by the slower start in January and February run-rate bookings that Scott mentioned earlier. Aftermarket sales grew 4% in the quarter, driven by the continued momentum in capturing more business from our large installed base. The aftermarket strength was offset by an 18% decline in original equipment revenue, which was largely expected given the difficult year-over-year comparison in the first quarter as well as slower backlog conversion as nuclear becomes a larger mix of our portfolio. Turning to Slide 9. Both segments benefited from strong execution under the Flowserve Business System and we continue to see tangible improvement from our 80/20 and operational excellence initiatives. In FPD, we delivered another quarter of strong margin expansion with adjusted gross margin up 300 basis points year-over-year to 37.7%, and adjusted operating margin up 140 basis points to 19.1%. FPD bookings were $774 million, down 9% versus the prior year. Revenue was $745 million, down 5% as lower shippable original equipment backlog more than offset the 5% growth in aftermarket. FPD exited the quarter with a book-to-bill of 1.04x. In FCD, adjusted gross margin was 35.2%, up 480 basis points year-over-year, and adjusted operating margin was 15.9%, an increase of 370 basis points. FCD remains focused on margin improvement with the first quarter profitability highlighting continued progress. FCD bookings were $374 million, roughly flat with the prior year as 10% growth in aftermarket bookings was offset by a decline in original equipment awards. FCD revenue was $328 million, down 10% versus the prior year period, with the majority driven by 80/20 activities. FCD ended the quarter with a book-to-bill of 1.4x. Turning to cash flow on Slide 10. Cash from operations was a use of $43 million in the first quarter. This result was in line with our expectations and consistent with 2025 performance and was primarily driven by temporary seasonal working capital requirements, along with modest headwinds from the Middle East. First quarter cash flow is typically our lowest quarter of the year, and we expect improvement through the balance of 2026. We remain focused on working capital management and expect full year free cash flow conversion of 90% or more of adjusted net earnings. Our balance sheet remains very healthy with net leverage of approximately 1.2x at quarter end, an improvement versus the year ago comparison, providing significant flexibility for capital allocation. In addition, in April, we amended our credit agreement, extending the maturity by 5 years and increasing revolver capacity to further enhance our financial flexibility. Turning to Slide 11. We remain confident in our ability to expand profits and create value for our shareholders in an evolving environment. Our end markets remain robust overall. And while the Middle East conflict may cause some short-term fluctuations, ongoing investment in the region along with rebuild activity creates meaningful opportunity. As it relates to our full year outlook, our guidance assumes the current Middle East situation continues, with the key assumptions including that military operations do not materially escalate, that we are able to maintain operations and that the flow of materials into our Middle East operations continues albeit with some delays, and that secondary supply chain disruptions do not materialize. We recognize the potential for a much wider range of outcomes from the conflict that could have implications on our business and our organization expects to remain nimble as we navigate the coming weeks and months. With this backdrop, we now expect organic sales to range from a 1% decline to a 2% increase, resulting in our total sales growth outlook of 3% to 6%. As a reminder, total sales growth includes approximately 300 basis points of benefit from acquisitions, including the anticipated midyear closure of the Trillium Valves acquisition. At the same time, despite a more challenging Middle East outlook, we are reaffirming our expectation for approximately 100 basis points of adjusted operating margin expansion as well as our adjusted EPS guidance of $4 to $4.20 per share for the full year. Our EPS guidance reflects the net impact of the first quarter unanticipated items that I referenced earlier. In addition, our outlook for the balance of the year also includes roughly $0.07 of expected impact from the ongoing conflict in the Middle East, contemplating modestly lower bookings, while the conflict continues and some modest delay in logistics timelines potentially offset by rebuild activity. At the midpoint, our guidance represents another year of double-digit growth versus prior year's adjusted EPS. In terms of quarterly phasing, we expect original equipment bookings to accelerate in the second half of the year, driven by increased project activity and rising nuclear investment and the potential for rebuild activity in the Middle East, and we remain confident in our ability to expand the aftermarket capture. As Scott noted, we came into the year anticipating increased Middle East project bookings in the second half of 2026. It's too early to know exactly how the conflict in the Middle East could impact these assumptions. To date, customers have indicated projects are expected to move forward, but we know some projects could slip to 2027. That said, we believe rebuild activity could provide more momentum through the balance of the year. Importantly, we view any disruption as relatively short term in nature with no anticipated impact to the underlying demand environment or the opportunity to deliver on our 2030 growth and earnings targets. Quarterly, year-over-year performance will accelerate as we move through the year, and we estimate the previously announced Trillium acquisition will close near midyear. We continue to anticipate first half revenue will be more impacted by headwinds from 80/20 and backlog composition, each of which will begin to abate in the second half. Given the headwind from the Middle East, Q2 sales are expected to be down low to mid-single digits in comparison to prior year. And second quarter earnings are expected to be similar to the first quarter. Let's turn to Slide 12 to close out the prepared remarks. We delivered strong execution in the first quarter in a dynamic operating environment. We are continuing to build on the momentum of the Flowserve Business System with a growth strategy aligned to powerful global megatrends that we believe support long-term demand for our products and solutions. At the same time, we are proactively managing the situation in the Middle East while remaining focused on serving our customers and executing with discipline across the business. Looking ahead, our 2026 outlook calls for double-digit adjusted EPS growth, and we are continuing to make meaningful progress towards our 2030 financial targets. With that, I'll turn the call back to the operator for Q&A.

Operator, Operator

We'll take our first question from Mike Halloran with Baird.

Michael Halloran, Analyst (Baird)

So a couple of ones. First, the wholesale channel versus retail channel. Maybe talk a little bit about the dynamic, a little more detail about the dynamic going on there, how you feel you're positioned? And I know you referenced potentially doing a little bit more work on that side. What does that entail? And how do you think you can make sure you're capitalizing on the ongoing trend?

Scott Rowe, President and Chief Executive Officer

Yes, Mike, I think you broke up at the beginning of that question. Can you say that again?

Michael Halloran, Analyst (Baird)

Yes. Sorry. Apologies. Apologies. Let me reframe the question. Orders mid-single digit for the year, how do you get comfortable with that uptick in the back half of the year all else equal?

Scott Rowe, President and Chief Executive Officer

That's a really good question.

Michael Halloran, Analyst (Baird)

And more importantly, is it as simple as if you strip out the first quarter or the first two months of the year, you're kind of on trend outside of the Middle East given what you saw in March?

Scott Rowe, President and Chief Executive Officer

Yes. So I can absolutely talk through that, and it's a great question. And we talked about January and February being a little bit soft on the book and ship. But I think on a very positive note, our March numbers were in line with expectations. And in the prepared remarks, I talked about that we had a nice— we're seeing nice activity in that kind of in-and-out business in April. And so that gives us a lot of confidence as we continue through the year here that we think we have slightly elevated bookings. And then the other aspect here that's super important is our project funnel. And in my prepared remarks, I talked about the project funnel being up year-on-year and sequentially, and that project funnels across all of our end markets. Now obviously, it is an incredibly dynamic situation. And I would say on the project timing, there is so much uncertainty in terms of what could happen here. But I would say we're seeing projects move forward. We're not seeing them get canceled. And our teams, when we talk about a bottoms-up roll-up, are very confident in the customer discussions that these go forward at some point in the year. And so I would expect more of a back-half-weighted project year for us, which is what we talked about in the fourth quarter earnings call. But overall, today, we continue to feel confident in the mid-single-digit bookings growth year-over-year.

Michael Halloran, Analyst (Baird)

So the follow-up is maybe frame that in terms of next year. Now obviously, it's still early. I'm not trying to give guidance for next year. But I think the loose question is, when you sit here today and you compare yourself to three months ago, four months ago, how do you feel about '27, '28 today relative to before? I mean it seems like you were thinking about this as maybe some incremental opportunity once the dust settles plus incremental confidence in what you're doing internally. But I'd like to understand because, obviously, there'll have to be puts and takes here, lots of moving pieces. As we get through this, how does this all bounce out?

Scott Rowe, President and Chief Executive Officer

Yes, sure. It was obviously a very noisy quarter with the Middle East disruption and some of the geopolitical activities. With that said, resolution in the Middle East is important to all of my comments here. And so Amy talked about our assumption that will be impacted in Q2, but at some point, we return to somewhat of a more normal environment. When and if that happens, then we feel really good about our continued progress toward our long-term 2030 targets that we put out at the end of Q4. And that included mid-single-digit growth and included continued margin expansion every year. And so today, despite all of the dynamics in Q1, I would say the year is shaping up to position us very nicely into 2027 and on a nice trajectory and path to achieve our 2030 goals.

Amy Schwetz, Chief Financial Officer

Yes. And the other thing, just to add to that, Mike, a little bit, is muted in the numbers because of original equipment in the first quarter, we saw really nice bookings growth in both segments on the aftermarket side. And continuing to push that aftermarket business and gaining strength there only serves us as we look out into future years.

Operator, Operator

We'll now take our next question from Andy Kaplowitz with Citi.

Jose, Analyst (Citi) - on for Andy Kaplowitz

Maybe to start with the 10% organic revenue decline in the quarter. That was a larger drop than we were forecasting. On the slides, you mentioned that Middle East disruptions impacted Q1 sales by 2% and I think, Amy, you talked about some lower book-to-ship impacts in January, February as well as an 80/20 walkaway impacts. But it'd be helpful if you guys could walk through each of those to bridge the decline in the quarter as well as how you're thinking about those dynamics carrying over into Q2?

Amy Schwetz, Chief Financial Officer

Yes. So maybe just to start, a modest decline was expected for us in the quarter. We knew that kind of coming into the year. But we were further impacted by the couple of things that you mentioned, the Middle East disruption and a softer start to our run-rate MRO business that occurred in January and February, primarily in North America. And so the Middle East disruption was approximately 2% or 200 basis points year-over-year. And I'll just comment that as we look at the North American MRO run rate, we normalized in the month of March, which gives us some comfort going into the second quarter that we're better positioned. And original equipment was also up against a pretty strong comp, particularly if you look at the large engineered-to-order projects that we had included in the first quarter of last year. So backlog conversion was lower because of the nuclear component of the business. And as a reminder, conversion of our year-end backlog was expected to be around 76% entering the year versus historical levels in the mid- or higher due to that nuclear component. So I think we're feeling good about the way we ended the quarter and about the opportunities that are out there on the book-to-ship business, which gives us some comfort going into the second quarter.

Scott Rowe, President and Chief Executive Officer

And I'll just add that the teams are incredibly focused on winning work that can ship in a relatively shorter period of time. And those nuclear awards are fantastic, and we'll get great revenue and margin on those. But typically, they won't show up in the first year. The teams are really focused through the commercial excellence process on winning work that drives revenue and continues our progress towards growth.

Jose, Analyst (Citi) - on for Andy Kaplowitz

Very helpful. I appreciate the color there. And then maybe as a follow-up, maybe we can spend a couple of minutes on FCD. If we remove the tariff recovery from the quarter, it does seem like margins were weaker year-over-year. I understand there's elements of fixed price and lower volumes in the quarter. But was there anything else in the quarter that you'd call out? Or maybe you can also give some more color on what 80/20 actions you guys are implementing and how you're expecting that to show up for the FCD margin?

Amy Schwetz, Chief Financial Officer

Yes. So Jose, you hit on it with respect to the volumes, which were expected to be lower in Q1 due to 80/20 impacts. And if you'll recall, we started the journey on 80/20 a little bit later. And so we anticipated seeing some headwinds in the first half of the year from 80/20. Gross margins were basically flat with lower volume in the first quarter of the year, which we took as a very positive sign given the impact of the reduced volume. I think that if we look at where bookings were in the quarter, sequentially stronger than Q4, we feel good about that volume challenge abating as we go into the second quarter of the year and we're confident for the full year that we'll be at 100 basis points or more in terms of margin expansion at the operating margin line. So the business is fundamentally healthy. We're continuing to improve efficiency and reduce complexity and we think there's further opportunity with operational excellence and roofline consolidation. And I'll say that these actions related to operational excellence and roofline have only accelerated since the beginning of the year.

Operator, Operator

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

Nathan Jones, Analyst (Stifel)

I guess I'll start by following up on the margin side of it. It looks like if you take out the tariff recoveries, FPD down 20 basis points on a 10% revenue decline, which is really very good, I think. And the FCD margins down 110 basis points on a similar revenue decline, which is probably also pretty good. So maybe you can talk about the impacts on margins. What was the volume impact and the deleveraging that you would have got from lower volume versus the improvements that you've made to get to that if we exclude the tariff recoveries, which are really a one-time item?

Scott Rowe, President and Chief Executive Officer

Yes, I would say I'll start and Amy can jump in here. I think if you exclude tariffs and the Mexico tax item because those weren't in the year also excluded there, and if you take both of those out but keep the Middle East disruption in there and what I'll call the things that the team is working on, your FPD margins actually expand in the year versus last year to roughly kind of 70 to 100 basis points. And then as we talked about with FCD, you're a little bit lower on the decline of about 100 basis points. But if you take that to the gross margin line, we're very confident on the 80/20 and the operational excellence coming through and continuing to drive margin expansion. In the organic business, we're not backing away from our ability to expand margins at that 100 basis points this year. And that's organically, excluding those kind of one-time items. And Amy hit this with the FCD side, but it's really the whole business. We've got the operational excellence moving. We're driving great results from just a productivity standpoint and how we're running the different manufacturing sites, but it's also allowing us to move quicker to our roofline consolidation program. So we've got several activities that happened last year and some that are in progress this year as well, and those activities continue to accelerate. The 80/20 program is now in the third year, and we're seeing tremendous results there. There's definitely tailwinds from the 80/20 program as we continue to work through that methodology and do the right things on SKU reduction, but also on the pricing side. We've been very selective on where we price and making sure that we're pricing in accordance with that philosophy and driving the right things to expand margins. So net-net, we feel good about our margin progression and the continuation here as we go throughout the year.

Amy Schwetz, Chief Financial Officer

Yes. And the only thing I'll add there, Nathan, is that FPD was more impacted by the Middle East conflict in terms of revenues and operating income. And although the run-rate business was a little bit softer to begin the year, I think that the team was anticipating the lower volume just based on the shippable backlog. And so I think had planned really well to adapt to that situation and be in a position to maintain or grow margins in the first quarter, as Scott indicated.

Nathan Jones, Analyst (Stifel)

Just to confirm, you said the tax item is actually in the segment income.

Amy Schwetz, Chief Financial Officer

It is.

Scott Rowe, President and Chief Executive Officer

It is. It's in the FPD segment. And again, kind of an out-of-period item and something the FPD team really doesn't control.

Nathan Jones, Analyst (Stifel)

Got it. Can you talk about the potential here for improving demand in the Middle East from the reconstruction of things whenever we get around to that? And if you have any ideas or thoughts on when we might see that demand begin to impact Flowserve results?

Scott Rowe, President and Chief Executive Officer

Absolutely. I can talk about the first part of the question. The second part is a little bit harder on timing. On the first part, as you know, Nathan, we have an unbelievable installed base in the Middle East. We probably have more pumps than any other provider in the world across the various countries in the region, including pumps installed in Iran. On the valve side, we have a massive presence across the facilities there. Inevitably, anything that you see on the news in terms of damaged equipment and assets, Flowserve has been impacted or involved in that. The teams are working incredibly closely with our customers. First and foremost is making sure our associates are safe, and we're keeping them out of harm's way. But the second priority is making sure that our customers can continue to operate. We're involved in critical infrastructure that's supporting their economy and supporting commodity prices, and we're doing some things that would be a little bit different than the normal day-to-day business to make sure that we're 100% supporting that work. Right now, it's about emergencies, it's about call-offs. It's being incredibly responsive. At some point, you move to reconstruction activities. Today, I would say the damage assessments are different depending on the level of damage. We're already preparing some quotes to help customers on rebuild activities. The timing of that is just not known right now. It depends on when they get comfortable to bring people back into the region, when they get comfortable about bringing people on to site. Everyone is concerned about individual safety. So I think if the ceasefire prevails and things start to settle down, then that rebuilding activity obviously happens a little bit sooner. There's a third category here on what's the future of the Middle East and the role of the different countries there providing further energy assurance around the world, but also assurance and security within their country. I believe that you'll see more projects ultimately come into the Middle East and, as we talked about in Q4, we thought the Middle East bookings were going to be a very positive year for us, mostly back-half weighted. I still think that is the case. I think we'll get some restoration activity, we'll get some of the work that we had planned on, and I think some of that may get reprioritized. But I think net-net, the Middle East is a benefit for us for the full year bookings.

Operator, Operator

We'll now take our next question from Joe Giordano with TD Cowen.

Joseph Giordano, Analyst (TD Cowen)

Before I get into like real questions, just a quick confirmation clarification type stuff. When you say mid-single-digit bookings growth, I just want to understand, you're not adjusting for like Middle East headwinds, right? That's inclusive of the Middle East disruptions, we still think that. And when you talk about margins up 100 bps, that's stripping out the tariff benefit and the tax thing and not adjusting for mix, right? So that's inclusive of mine. Just want to confirm those.

Scott Rowe, President and Chief Executive Officer

Correct. We'll confirm both. So the Middle East disruption would be in my comments on mid-single digit growth. So year-on-year, without all things in, we still believe that we can grow those bookings. On the margin side, 100 basis points, excluding the one-offs of tariffs and Mexico tax.

Joseph Giordano, Analyst (TD Cowen)

Okay. Good. Starting with the January, February kind of air pocket there in the business, I'm just a little surprised like when we did the fourth quarter call, that was February, and you guys definitely had a pretty positive confidence tone there. Like was that not evident at the time when we had that last call that this business in January was like way under where you're targeting?

Scott Rowe, President and Chief Executive Officer

Yes. Joe, I'll start with, look, we've got much better visibility in our business than ever before with the system upgrades, and we can see weekly bookings and activity. When we did the call, we basically had a month of January numbers, and we had some positive indicators that that would start to improve, and we just didn't see that pick up in February. So we didn't feel it was prudent to sound the alarm given one data point from the month of January. Unfortunately, it didn't pick up in February, but we did see that increase back to what I'd call our normal run rate in March, and we've confirmed that again in April. Right now, that run rate activity looks pretty robust and on our planning levels.

Joseph Giordano, Analyst (TD Cowen)

Okay. Fair enough. And then if I think about the second half, is there anything in the full year guide at this point kind of hedging against geopolitical risks being potentially extended? Now we're talking about extended blockades and maybe targeted strikes again. So curious, like you have the impact in Q2 kind of message here. Is Q3 just assume that we're back at like full run rate in that region?

Amy Schwetz, Chief Financial Officer

So I don't know that it assumes that we're back at full run rate, Joe. But I think that what it does allow for is, one, giving us more time to react to the situation and address supply chain and customer relationships and get back to a new normal. And it also allows for some opportunities that we might see around the rebuild. At this point in time, there are a lot of different outcomes; we can't predict geopolitical events. So we felt best to go quarter-by-quarter here. But I do think that we have more levers to pull from a mitigation factor in the second half of the year as we adapt to the changes.

Scott Rowe, President and Chief Executive Officer

I'll just reiterate, Joe. It's a dynamic time. We get different viewpoints almost on a daily basis, and we're trying to give our best view for the back half of the year given what we know today.

Operator, Operator

We will now take our next question from Deane Dray with RBC Capital Markets.

Analyst (on for Deane Dray), Analyst (RBC) - on for Deane Dray

In terms of — it's been another great quarter in terms of bookings in nuclear. I was just wondering, could you give us some more detail on your nuclear backlog at this stage? And I guess, I would assume the project funnel is also increasing in terms of nuclear opportunities.

Scott Rowe, President and Chief Executive Officer

Yes. I'll let Amy talk about the backlog and kind of how that converts, and then I can talk about the funnel and the forward look.

Amy Schwetz, Chief Financial Officer

Yes. So I would say, if you look at going back to where we were at to start the year at about $2.9 billion of backlog with 76% of that shippable over the next 12 months, it's safe to assume that the lion's share of that 24% of backlog is nuclear. And so that only grows with what we saw in the first quarter bookings at about $110 million of nuclear awards.

Scott Rowe, President and Chief Executive Officer

And then on the forward look, we're booking roughly $100 million a quarter. A lot of that is on the back of supporting existing assets — rates, life extensions of those assets and really making sure that the nuclear plants will be around and productive for years to come. As we've stated before, we've got an unbelievable installed base and entitlement in those existing assets. That work is relatively steady, and we're seeing more and more of these rerates and life extensions as we go forward. The other category is the new traditional reactors, and we still are incredibly optimistic that traditional nuclear reactors continue to move forward, both in Europe and the United States in parts of Asia. There may be a little bit of slowdown in the Middle East, but ultimately it will come back. We're incredibly well positioned with the customers to make sure that our content is on those new builds. For the United States, there are a lot of stakeholders — the U.S. government, local state governments, EPCs and the utilities themselves — so it's a complex equation in terms of timing. But in the last quarter, we've seen advancements in terms of those discussions, and we're getting more and more optimistic that the U.S. moves forward with a new nuclear program build-out. In Europe, we're actively in pursuit of several new reactors and are more optimistic that that will happen within the year. We're also working with a select group of SMR providers; the technology continues to advance and we keep winning awards on prototype and engineering contracts to help with design. I'm optimistic that SMRs are part of the future, though timing on scaled multi-site work is still a couple of years away.

Analyst (on for Deane Dray), Analyst (RBC) - on for Deane Dray

I really appreciate the color. I guess the follow-up for me would be in terms of Trillium, you mentioned timing closing towards midyear. Any additional insight on synergy opportunities you're seeing? I know it's still early days of the transaction.

Amy Schwetz, Chief Financial Officer

Early days. The teams have met a couple of times to sit down and one, just go through day-one actions, but also think about synergies. I think we're probably a couple of months out before we're confident talking about what those synergies will be as we move forward. But based on those conversations and our knowledge of their product and the industries they've served, we were even more excited today than we were two or three months ago about this acquisition, and we're looking forward to welcoming them to our team.

Operator, Operator

We'll take our next question from Joe Ritchie with Goldman Sachs.

Joseph Ritchie, Analyst (Goldman Sachs)

So look, I fully recognize that for refining specifically, like crack spreads are long-term positive when they start to widen. I guess just from a near-term perspective, how is that potentially going to change your customer behavior? And I'm really thinking about your aftermarket business. Could they run their refineries a little bit longer? Does that create any type of air pocket in growth in the coming quarters? What are your customers saying about maintenance on their refineries today?

Scott Rowe, President and Chief Executive Officer

That's a good question. Right now, North American refiners are doing really well with higher utilization and higher crack spreads driving profitability. Typically, when you see that, customers don't want to do an extended turnaround and want to maximize profits. We're seeing some turnarounds that were scheduled in the spring get moved out into probably the fall, so we'll have a little headwind on the turnaround season. With that said, we're seeing an uptick in emergency or call-off work for a pump or a valve or a mechanical seal that's necessary to keep operations running. Our view today is that's probably neutral as we work through the year, and we'll have a better understanding in the next month or two because we're only a couple months into this. We have great relationships with North American refiners, we're watching this closely, and we're committed to making sure that they stay up and run at a high level. In Europe, the dynamic is similar, though they're a bit more schedule-driven on maintenance, so less impact there.

Joseph Ritchie, Analyst (Goldman Sachs)

Got it. That's super helpful, Scott. And I guess my second question is just on the organic growth ramp into the second half of the year. I know you built a little bit of backlog in the first quarter, some of that being nuclear. But the ramp probably implies a little over $100 million in organic revenue growth in the second half of the year. How do we square that ramp to feel good about that mid-single-digit organic number embedded in the guide?

Amy Schwetz, Chief Financial Officer

We have a lot of confidence in the setup for the second half. Remember that last year we saw a more normalized level of original equipment revenue in the second half versus the first half. Our confidence is driven by that dynamic, but it's also supported by the funnel, our customer discussions, the run rate we saw in March, some encouraging April awards we've seen and a higher backlog at the end of Q1. It's important that we continue to accelerate the nuclear and broader project activity in the second half, but we think the fundamentals are there to drive that type of revenue expansion.

Operator, Operator

We'll now take our next question from Steve Volkmann with Jefferies.

Steve Volkmann, Analyst (Jefferies)

Business started out the year as weak as it did. Was it sort of related to weather or specific projects? Or just maybe a little more color on that?

Scott Rowe, President and Chief Executive Officer

I think this is mostly a North America phenomenon. It really depends on buying behaviors and budgets. January is always an interesting time for us in terms of whether customers start to spend money straight out of the gate. I don't think it's highly unusual, but it lasted a little longer than we were anticipating and expected. Think of large installations around the U.S. not spending the amount of money we were expecting in the Jan-Feb time frame. We saw that start to pick up in March, and we're at a healthy level and expectations in April so far.

Steve Volkmann, Analyst (Jefferies)

Okay. All right. And then maybe switching gears, how should we think about the opportunities for SG&A leverage? Is there anything you can do to reduce SG&A, maybe specifically in FCD, but more broadly if appropriate?

Amy Schwetz, Chief Financial Officer

Certainly, as we looked at volumes coming into the year, we're focused on making sure SG&A is scalable. We think we've got the right organizational structure for that. The start of the year has made us sharpen our pencils to make sure we're doing all that we need to do from an SG&A perspective. I'd expect SG&A to be sort of flat as we make our way into the second quarter with volumes coming up slightly from a revenue perspective, which will improve our leverage from an SG&A perspective and continue to improve over the course of the year.

Scott Rowe, President and Chief Executive Officer

We're always looking at ways to drive efficiency and cost reduction and this year is no different. We'll continue to make sure that we're driving our SG&A as efficiently as possible as we think about what's in front of us in 2026 and beyond.

Operator, Operator

We will now take our last question from Amit Mehrotra with UBS.

Analyst (on for Amit Mehrotra), Analyst (UBS) - on for Amit Mehrotra

Just one quick question on margins. The adjusted gross margins, how much of that was benefit from the one-time items versus the 80/20 just trying to parse that through. And then on MRO, have any of your customers changed any plans for new capacity additions or expansions — any tangible examples or anything you can speak to?

Scott Rowe, President and Chief Executive Officer

I'll hit the second part first. We operate around the globe and have customers in many regions. With the dynamics in the Middle East, we're seeing customers consider doing things differently, potentially accelerating projects or increasing capacity in some cases, largely around energy security. We're seeing customers talk about expansion or new projects, which we weren't necessarily expecting at the beginning of 2026. We're early in this, but right now we're optimistic we'll start to see different types of work emerge that we hadn't expected earlier in the year.

Amy Schwetz, Chief Financial Officer

Excluding tariffs and the tax authority item that we discussed, gross margins were above 35%, so about 35.1%, an expansion of about 160 basis points year-over-year. If you look at the impacts by segment and the three big items we talked about — tariffs, the tax authority impact and the Middle East disruption — those items pretty much offset in FPD. So the FPD margin, absent those three items, is roughly what we reported. On the FCD side, there was benefit from the tariff that is baked into those numbers on a net basis.

Operator, Operator

It appears there are no further telephone questions. I'd like to turn the conference back to our presenters for any additional or closing comments.

Scott Rowe, President and Chief Executive Officer

Thanks for your time this morning. As always, the Investor Relations team is available to discuss if you have more questions. We will look forward to speaking with you again following our second quarter.

Operator, Operator

And once again, that does conclude today's conference. We thank you all for your participation. You may now disconnect.