Flowserve Corporation (FLS) Earnings

Management highlights

### Overall Financial Performance - Total Q2 2026 reported sales were $1.2 billion, down 2% reported / 3% organic YoY, modestly above management's prior expectations. Headwinds of 200 bps from Middle East disruption and 200 bps from 80-20 portfolio actions offset 100 bps of underlying organic growth. - Total bookings grew 26% YoY to $1.35 billion, with a book-to-bill ratio of 1.15x. Aftermarket bookings hit a record $699 million (up 12% YoY), marking the ninth consecutive quarter over $600 million. Original equipment bookings grew 44% YoY to ~$650 million. - Adjusted operating margin expanded 70 bps YoY to 15.3%, and adjusted EPS hit $0.95 (up 4% YoY), beating internal expectations. Adjusted gross margin expanded 100 bps YoY to 35.9%, the 14th consecutive quarter of YoY gross margin expansion. - Overall backlog grew 6% sequentially and 9% YoY (excluding the Trillium acquisition), creating a sales runway for 2027. ### End Market & Bookings Highlights - Growth was broad-based across end markets: Energy bookings up 48% Q2, 17% year-to-date (YTD); General Industries up 11% Q2, 3% YTD; Chemical up 7% Q2, 5% YTD; Power up 39% Q2, 7% YTD. Nuclear bookings exceeded $110 million in Q2, including a new large reactor award in Asia and multiple life extension awards in North America. ### Middle East Operational Update - The ongoing conflict created a 3 percentage point organic sales headwind YTD, totaling ~$60 million in lost sales, primarily impacting FCD's book-and-ship valve business. Cancellation rates remain immaterial, but delivery timelines are uncertain due to restricted site access and delayed customer acceptance of shipments. - Modest restoration activity is underway at damaged sites, with management estimating a $50 million incremental rebuild opportunity across late 2026 and 2027. Long-term, large incremental opportunities for redundant capacity, pipelines and storage are expected in the 2027-2030 period. ### Capital Allocation & Strategic Actions - The $500 million Trillium Valve acquisition closed on June 30, 2026, aligned with FlowServe's 3D strategy to expand leadership in nuclear and power generation flow control. Full 80-20 analysis of Trillium is complete, with margin expansion expected in 2027 (modest 2027 sales headwind from 80-20 portfolio actions). - A small non-core product line divestiture is expected to close in Q3 2026, and FlowServe completed acquisition of remaining joint venture equity in a Middle East entity to strengthen direct customer access. - YTD 2026, FlowServe returned $80 million to shareholders ([$55 million in dividends, $25 million in share repurchases in Q2 at an average price of $67 per share, plus an additional $25 million in repurchases in July 2026). Net leverage stands at 1.8x, maintaining a healthy balance sheet for future allocation.

Guidance

- **Full Year 2026**: Management modestly lowered organic sales guidance to -1% organic growth, with total reported sales growth of ~3% (including 300 bps net benefit from acquisitions/divestitures and 100 bps benefit from foreign exchange). - Adjusted EPS guidance range was raised to $4.05 - $4.20, up from the prior low end, reflecting strong YTD performance and expected double-digit adjusted EPS growth for the full year. Full year adjusted operating margin expansion is still expected to be ~100 bps, and full year free cash flow conversion is projected at ~90% of adjusted net earnings. - Organic bookings growth is still expected to be mid-single digits for the full year, with current YTD growth of 8% putting the full year target on track. - The Trillium acquisition is expected to be roughly neutral to 2026 adjusted EPS after accounting for incremental financing costs, with 85% of Trillium sales allocated to FCD and 15% to FPD starting in Q3. - **Second Half 2026**: Organic sales growth is expected to be ~5% YoY, accelerating from the first half. 80-20 portfolio headwinds from the first half are expected to abate, and the Middle East run rate headwind is expected to persist at the same level as the first half. Adjusted operating margins are expected to expand sequentially, partially offset by the margin profile of Trillium backlog converting to sales. - **Third Quarter 2026**: Roughly flat organic sales growth with mid-single-digit total sales growth. Adjusted operating margins are expected to expand modestly from Q2, with net earnings expected to be similar to Q2 (including the impact of a higher expected tax rate).

Segment performance

FlowServe operates two product segments: FPD (Flow Pump Division) and FCD (Flow Control Division). - **FPD**: Bookings reached $938 million, up 30% year-over-year (YoY). Sales were $814 million, down 1% YoY. Adjusted gross margin expanded 100 basis points (bps) to 37.8%. Adjusted operating income grew 4% YoY to $173 million, with an adjusted operating margin of 21.3% (up 100 bps YoY). FPD contributed approximately 69.5% of total company Q2 2026 sales. - **FCD**: Bookings grew 18% YoY to $417 million. Sales were $357 million, down 4% YoY, primarily due to Middle East conflict headwinds and 80-20 portfolio actions. Adjusted gross margin expanded 30 bps to 31.1%. Adjusted operating income was $45 million, with an adjusted operating margin of 12.6% (up 40 bps YoY). FCD contributed approximately 30.5% of total company Q2 2026 sales.

Risks & headwinds

- Ongoing conflict in the Middle East continues to disrupt delivery timelines, suppress run-rate book-and-ship sales, elongate payment cycles and increase working capital requirements. Delayed resolution of the conflict could push more 2026 planned project sales into 2027 and extend headwinds to performance. - FCD margin expansion has lagged FPD due to under-absorption from lower Middle East volumes, and a faster-than-expected recovery in regional volumes is required to meet planned margin improvement targets for the full year. - Large long-cycle projects (including nuclear and LNG) require alignment of multiple government, utility and private stakeholders, which can delay project timing and award schedules relative to internal expectations. - Persistently high utilization in North American refining has pushed planned turnaround maintenance into future years, which could create a larger than expected drop in MRO activity if crack spreads decline and turnarounds are rescheduled concurrently. - Integration of the Trillium acquisition may take longer than expected and may not deliver the projected margin expansion benefits from 80-20 actions.

Analyst Q&A

• Q: Andy Kaplowitz (Citigroup) asked how broad the Q2 energy bookings acceleration was beyond the two noted LNG projects, if general industrial momentum is sustainable, and if bookings could exceed the mid-single digit 2026 target if the Middle East conflict resolves. /

  A: Scott Rowe responded that the quarter's $700 million record aftermarket bookings, driven by process improvements for faster quoting and delivery, is the biggest highlight and growth is sustainable. Four large (>=$20 million) projects booked in Q2, two in the Middle East, one Canadian LNG and one large Asian nuclear project, so large project activity was healthy but not over-concentrated. All end markets showed sequential and YoY growth, the project pipeline is up YoY and sequentially, giving good visibility for the back half, and management remains confident in hitting the mid-single digit full year bookings target, which sets up strong 2027 revenue growth.

• Q: Dean Dre (RBC Capital Markets) asked how management arrived at the $50 million Middle East restoration estimate, and if there was a total addressable market estimate for long-term energy security redundancy projects in the region. /

  A: Scott Rowe explained the $50 million figure comes from ongoing customer assessments of damaged sites, with gradually improving clarity despite limited site access; bookings will start in late 2026 and extend into 2027, and the figure could rise as more information becomes available. Management views long-term redundancy projects (pipelines, storage, incremental capacity) as a very large, material opportunity but is not ready to provide a formal TAM estimate, given the early stage of discussions. FlowServe is well positioned to win this work due to its large installed base, regional presence and long-standing customer relationships.

• Q: Mike Halloran (Baird) asked if the $60 million YTD Middle East headwind is expected to persist in the second half, and what drives the expected 3Q to 4Q organic sales ramp. /

  A: Amy Schwetz confirmed the $60 million YTD headwind is the expected run rate for the second half, with management assuming no improvement in muted regional run rate business. Two first half headwinds abate in the second half: 200 bps of 80-20 sales headwind in valves goes away, and first half North American MRO softness has subsided. The 3Q to 4Q ramp matches historical seasonality (similar to last year's 4% Q3 to Q4 organic ramp), and is supported by a 9% YoY increase in end-Q2 backlog (excluding Trillium) that will convert to 4Q revenue, plus continued strong aftermarket performance.

• Q: Adam Farley (Stifel) asked how delayed Middle East shipments impact 2026 working capital, and what drove FPD's strong Q2 margin expansion, with outlook for the back half. /

  A: Management confirmed Middle East delays have extended the cash conversion cycle by slowing shipments and elongating payment cycles for regional projects, but working capital performance still improved in Q2, and the company maintains active discipline to manage collections. FPD's 100 bps YoY margin expansion had no one-time items, driven by strength in high-margin aftermarket (which boosted mix) and strong project execution, consistent with the company's operational excellence and 80-20 playbook. Some mix moderation is possible in the back half as larger OE projects convert to revenue, but the overall margin expansion trend remains on track.