Research: Rating Action: Moody’s Affirms Flowserve Baa3 Senior Unsecured Rating and Changes Outlook to Stable

New York, April 04, 2022 — Moody’s Investors Service (“Moody’s”) has affirmed the Baa3 senior unsecured rating and (P)Baa3 senior unsecured rating of Flowserve Corporation (“Flowserve”), and changed the outlook from negative to stable.

Rating affirmation and change in outlook to stable reflect Moody’s expectation of steady improvement in operating results, amid sustained demand, stable higher oil prices and good execution operational.

Moody’s has taken the following actions:

Statement:

..Issuer: Flowserve Corporation

….Multiple seniority shelf, confirmed (P)Baa3

….Senior Regular Unsecured Bond/Debenture, Confirmed Baa3

Outlook Actions:

..Issuer: Flowserve Corporation

….Outlook, changed to stable from negative

RATINGS RATIONALE

The Baa3 rating reflects Moody’s expectation to improve financial and operational performance after a period of weaker results. Moody’s expects the company’s growing backlog (primarily from secondary market activity) and bookings, driven by improving end market fundamentals, to drive higher revenue and earnings growth. strong in 2023, with Flowserve also leveraging its operational efficiency improvements. The company has made progress in improving its flexibility to manage the effects of lower oil prices and economic cycles, particularly through more disciplined cost management and go-to-market strategies.

However, in the near term, Flowserve will remain somewhat weakly positioned relative to its rated industry peers, particularly on margins and debt-to-EBITDA metrics, through 2022. particular for large original equipment (OE) projects, remained cautious despite improving macroeconomic conditions and rising oil prices following the pandemic-induced economic slowdown. The company is also facing margin pressures from inflation in labor, freight and material costs amid supply chain headwinds. These headwinds will likely continue for some time. Nonetheless, with price increases, strengthening demand and Flowserve reaping the benefits of its realignment activities, credit metrics should improve over the next 12-18 months.

Flowserve’s centralized and more flexible cost structure and operational footprint positions it well competitively to benefit from pent-up demand in the oil and gas market, its largest market, and other industrial markets. The company’s large installed base of equipment is a source of recurring revenue. The revenue mix is ​​favorably tilted towards higher margin aftermarket products and short cycle OE products. However, an increase in revenues from longer-cycle projects over time will likely temper the pace of margin expansion. Moody’s believes Flowserve’s results will remain highly correlated to oil prices, particularly their effect on end-market spending. However, cyclicality is tempered by the company’s diversity of sales by region and its desire to expand its product line into less cyclical markets (e.g. water) with good longer-term growth prospects. and support customers in their energy transition.

The stable outlook reflects Moody’s expectation of steadily improving margins and a debt-to-adjusted EBITDA ratio that will fall to around 3.5x in 2022 and further towards 3x through 2023, driven by earnings growth and to debt reduction. Given the company’s vulnerability to oil prices and the energy and industrial cycles, the stable outlook also hinges on Flowserve maintaining conservative financial policies. This includes maintaining a strong cash balance and balance sheet discipline regarding potential acquisitions or shareholder compensation.

Moody’s expects the company to maintain strong liquidity. The company’s healthy cash balances (approximately $660 million as of December 31, 2021) and an undrawn revolving credit facility of $800 million remain essential to manage uncertain operating conditions amid growing geopolitical risks, lingering effects of the pandemic and supply chain issues. Flowserve’s cash flows are generally weighted in the second half of the year, with the majority of cash inflows being generated in the fourth quarter. The company continues to focus on efficient working capital management to spread the cadence of entries over four quarters.

FACTORS THAT MAY LEAD TO IMPROVEMENT OR DEGRADATION OF RATINGS

The rating could be lowered with a sustained acceleration or decline in bookings and/or order backlog, an inability to improve the EBITA margin towards 10% and a debt/EBITDA ratio which should remain above 3.25x. A deterioration in free cash flow, a significant decline in cash on hand or a sharp reduction in the availability of borrowings under the revolving credit facility could also cause a deterioration.

The rating could be improved with sustained and significant organic revenue growth, an EBITA margin that should remain equal to or greater than 15%, a debt/EBITDA ratio maintained at or below 2.5x, and/or a cash flow ratio of available cash/debt close to 15% . Reduced vulnerability to oil prices through diversification would also be viewed favorably.

The main methodology used in these ratings is Manufacturing published in September 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1287885. You can also visit the rating methodologies page on www.moodys.com for a copy of this methodology.

Flowserve Corporation is a manufacturer and service provider of complete flow control systems for the global infrastructure markets. Products include pumps, valves, seals, automation and aftermarket services supporting oil and gas, chemical, power generation, water management and other general industrial markets . Revenue was approximately $3.5 billion for the fiscal year ended December 31, 2021.

REGULATORY INFORMATION

For details on key rating assumptions and Moody’s sensitivity analysis, see the Methodological Assumptions and Sensitivity to Assumptions sections in the Disclosure Form. Rating symbols and definitions from Moody’s are available at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security, this announcement provides certain regulatory information regarding each rating of a subsequently issued bond or note of the same series, category/class of debt, security or under a program for which ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a media provider, this announcement provides certain regulatory information relating to the credit rating action on the media provider and each particular credit rating action for securities whose credit ratings are derived from the support provider’s credit rating. For the provisional ratings, this press release provides certain regulatory information relating to the provisional rating assigned, and to a final rating that may be assigned after the final issuance of the debt, in each case where the structure and conditions of the transaction n have not changed prior to the final rating being assigned in a way that would have affected the rating. For more information, please see the ratings tab on the respective issuer’s issuer/entity page on www.moodys.com.

For all relevant securities or rated entities receiving direct credit support from the lead entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action , the associated regulatory information will be that of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to the jurisdiction: Ancillary services, Disclosures to the rated entity, Disclosures to be provided by the rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued without modification as a result of such disclosure.

These notes are solicited. Please refer to Moody’s Policy on the Designation and Assignment of Unsolicited Credit Ratings available on its website www.moodys.com.

The regulatory information contained in this press release applies to the credit rating and, if applicable, the outlook or rating revision relating thereto.

Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis are available at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.

The worldwide credit rating on this credit rating announcement was issued by one of Moody’s affiliates outside the EU and is approved by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main. -le-Main 60322, Germany, in accordance with Article 4(3) of Regulation (EC) No 1060/2009 on credit rating agencies. Further information on the EU approval status and which Moody’s office issued the credit rating is available at www.moodys.com.

The worldwide credit rating on this credit rating announcement has been issued by one of Moody’s affiliates outside the UK and is approved by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the United Kingdom. . Further information on the UK endorsement status and the Moody’s office that issued the credit rating is available at www.moodys.com.

Please check www.moodys.com for updates on changes to the lead rating analyst and Moody’s legal entity that issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory information for each credit rating.

Yvonne Njogu
Vice President – Senior Analyst
Corporate Finance Group
Moody’s Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
United States
JOURNALISTS: 1 212 553 0376
Customer service: 1 212 553 1653

Dean Diaz
Associate General Manager
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Customer service: 1 212 553 1653

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