Flowserve - Earnings Call - Q3 2025

Executive Summary

• Q3 delivered strong margin expansion and EPS despite slightly softer revenue: adjusted EPS $0.90 (+45% YoY) on sales of $1.174B (+3.6% YoY); adjusted operating margin rose 370 bps to 14.8% and adjusted gross margin rose 240 bps to 34.8%.
• Mixed vs Street: EPS beat S&P consensus ($0.90 vs $0.80*), while revenue missed ($1.174B vs $1.206B*); EBITDA modestly above consensus ($184.1M* vs $181.2M*) as mix and cost actions offset OE softness (aftermarket resilience) [GetEstimates].
• Guidance raised again: FY25 adjusted EPS increased to $3.40–$3.50 (from $3.25–$3.40), while total sales growth trimmed to +4–5% (organic ~2%) and capex lowered to ~$75M.
• Strategic catalysts: announced divestiture of legacy asbestos liabilities (expected to close 4Q25; improves FCF by ~$15–$20M annually) and robust nuclear bookings (~$140M in Q3) tied to AI/data center-driven power demand.

What Went Well and What Went Wrong

What Went Well

• Margin execution: Adjusted operating margin reached 14.8% (+370 bps YoY); adjusted gross margin 34.8% (+240 bps YoY), reflecting Flowserve Business System and 80/20 actions.
• Aftermarket strength: Aftermarket bookings rose 6.3% YoY to $653.1M; Q3 marked the sixth consecutive quarter of >$600M aftermarket bookings, supporting resilience and mix.
• Nuclear and power momentum: Record ~$140M nuclear awards drove 23% YoY power bookings growth; management highlighted decades-long domain expertise and high barriers to entry underpinning attractive margins.

What Went Wrong

• Top-line vs estimates: Revenue of $1.174B missed S&P consensus ($1.206B*) on softer original equipment/project timing, especially in Middle East energy; OE bookings -4.9% YoY [GetEstimates].
• Segment mix pressure in Flow Control: FCD segment operating margin dipped to 12.3% from 13.2% YoY despite higher sales; SG&A and integration dynamics weighed, though sequential improvement noted with MOGAS.
• Reported volatility from one-offs: GAAP diluted EPS $1.67 included material non-operating items (e.g., merger termination payment credit in other income and discrete tax) that complicate comp; adjusted EPS more indicative of core ($0.90).

Transcript

Brian Ezzell (VP of Investor Relations)

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

Scott Rowe (President and CEO)

Thank you, Brian, and good morning, everyone. I'll start on slide three. The momentum we built in the first half of the year continued in the third quarter as we delivered exceptional results across bookings, margin expansion, earnings, and cash flow. We remain focused on driving growth while leveraging the Flowserve business system to accelerate margin expansion. With three quarters of the year now behind us, we have increased confidence in our ability to meet our 2025 objectives, and we are raising our adjusted EPS guidance range for the second time this year to $3.40-$3.50. The midpoint of our revised guidance represents a 31% increase from last year and an increase of more than 60% from 2023, and highlights consistent execution of our strategy and our confidence in the growth opportunities ahead. In the quarter, we delivered bookings of $1.2 billion and revenue growth of 4%.

We also continued our enduring margin expansion journey with adjusted gross margins increasing 240 basis points to 34.8%, while adjusted operating margins were 14.8%, driven by incremental margins of 115% during the quarter. Adjusted earnings per share was $0.90, an impressive increase of 45% compared to the prior year period. We also returned $173 million of cash to shareholders in the quarter, including $145 million of share repurchases. We have a healthy balance sheet, low leverage, and we continue to see improved cash flow performance from the business. This, coupled with what we viewed as a discounted share price relative to intrinsic value, makes repurchasing shares an attractive capital allocation decision. Later in the call, Amy will provide more detail on our full-year guidance and our approach to capital allocation.

She will also provide more details on the separately announced divestment of our legacy asbestos liabilities, which will further enhance our capital allocation optionality on a go-forward basis. I'm proud of all the Flowserve associates for continuing to navigate a dynamic environment while driving relentless execution of the Flowserve business system to expand margins, drive growth, simplify our product portfolio, and ultimately deliver enhanced value for our customers and shareholders. Now to slide four. Bookings for the quarter were $1.2 billion, improving sequentially by over $130 million and growing 1% versus the prior year. Our strong aftermarket franchise continued to deliver, with Q3 representing the sixth consecutive quarter of bookings greater than $600 million. In fact, two of the last three quarters have seen aftermarket bookings above $650 million. I remain excited about the opportunity to leverage our capabilities to drive further aftermarket growth.

Project activity in the quarter was steady and improved sequentially, with strong growth in the power markets and solid trends across most other markets. For the quarter, we delivered over $140 million of nuclear bookings, a record for the company. Our two largest bookings in the quarter were both nuclear awards related to two separate new reactors in Europe. Each of these bookings was approximately $30 million. Many of the project delays we saw in the second quarter did come to market in the third quarter. However, we continue to see some slowness in project timing for larger engineered projects, primarily in the energy market. Over the last five years, we have evolved Flowserve into a more resilient business. Ten years ago, large engineered projects often represented 20%+ of our bookings, which naturally led to more cyclicality based on project investment cycles.

Today, engineered projects remain an important part of our business, but this mix is typically around a mid-single-digit percentage of our bookings. The shift in mix is driving more consistency in our bookings and revenue, allowing us to manage more effectively through cycles. We have also sharpened our focus on capturing more aftermarket opportunities while selectively pursuing the most attractive engineered projects that deliver better margins and a healthy aftermarket entitlement. For the quarter, if we were to exclude engineered pump original equipment bookings, our bookings growth was an impressive 9% across the remaining portfolio. Turning to slide five, our end markets remain stable with strength in areas including traditional power and nuclear. Power demand continues to represent an exciting and significant opportunity, while general industries are benefiting from continued industrial build-out in emerging areas of opportunities like pharmaceuticals and food and beverage.

Mining has been an area of excitement for us, though project referrals have hampered bookings over the past 12 months. In the third quarter, we saw mining project activity start to pick up, with overall mining increasing over 60% versus last year. Within energy, asset utilization for large process industries remains elevated, and maintenance spending has continued as expected. Chemical remains our lowest growth in market. However, we were encouraged by improvement in North America Chemical in the quarter and the potential for an improved outlook in this space. With our year-to-date book-to-bill at 1.0 times and a strong project funnel, we are optimistic about delivering on a full-year book-to-bill of approximately 1.0 times. Additionally, our commitment to the Flowserve business system should drive growth in 2026 and beyond as we leverage commercial excellence and 80/20 principles to further grow our business.

Moving to slide six, let me take a moment to highlight the significant opportunities we see ahead in the power space and specifically nuclear. Our offering of pumps, valves, seals, and actuators plays an important role across the nuclear spectrum. Today, we have content in over 75% of the roughly 400 nuclear reactors operating across the globe. Our main steam isolation valves and actuators play a critical safety role in the nuclear island, with other types of valves used across the balance of the nuclear facility. Our pumps are often found in the turbine island, helping to ensure the cooling process runs as intended, with additional legacy pumps within the containment zone itself. Importantly, we have the critical quality assurance certificates and customer approvals necessary to leverage our technology across the global nuclear landscape.

We also maintain great relationships with key industrial partners and customers around the world, as Flowserve's nuclear equipment is essential to their operations. This set of key capabilities and domain expertise that we bring to the nuclear space makes us one of a few preferred vendors for pump, valve, seal, and actuation content worldwide, positioning Flowserve for leadership and nuclear flow control for decades to come. Moving to slide seven. Today, power represents roughly 7% of our revenue, with about half of that coming from traditional power and the other half coming from nuclear. Our bookings show an evolving picture with accelerating growth across all power and nuclear, growing at the fastest rate. On a year-to-date basis, our total power book-to-bill is 2.0 times. The expansion of artificial intelligence, cloud computing, data centers, and broad-scale electrification are creating significant growth for power broadly and specifically within nuclear power generation.

Looking forward, we see the potential for 40 new large nuclear reactors to be under construction in the next ten years across North America, Europe, and parts of Asia. In addition, technology for SMRs, or small modular reactors, continues to progress, and we believe this technology represents an additional growth driver as the expansion for the global nuclear fleet begins to accelerate. While the technology still is in the development phase, many of our SMR partners are making significant progress, and industry data suggests as many as 30 SMRs could be under construction in the next five years. The existing fleet of nuclear reactors is also aging, and we expect almost all existing large reactors will go through life extension upgrades over the next decade, providing further opportunity for Flowserve.

We are working very closely with nuclear power operators to refurbish and supply equipment to enable life extensions, power upgrades, refurbishments, and restarts of reactors that have previously shut down. Turning to slide eight, power and nuclear represents one of the most compelling multi-year growth opportunities for Flowserve. With our strong market position, differentiated product portfolio, and decades of domain expertise, we are exceptionally well positioned to capitalize on the accelerating investment in this space. As global electrification advances and new nuclear capacity expands to meet AI, data center, and energy security demands, we see a sustained growth cycle emerging, with nuclear becoming a larger contributor to our business over the next five to 10 years. Based on our current content opportunity of approximately $100+ million per gigawatt, we believe that nuclear flow control opportunity set could be $10+ billion over the next decade.

Importantly, nuclear carries attractive, accretive margins, offering the potential to drive substantial value creation for Flowserve over the long term. With the potential for double-digit growth in the nuclear and power and our non-power business benefiting from healthy demand and reindustrialization, we believe we are well positioned to continue driving long-term growth. Before I turn it over to Amy, I will conclude by saying that Flowserve is in a strategically advantaged position. We have a robust and expanding aftermarket franchise with additional upside and capture rates balanced by a diverse mix of industries that includes both high growth power demand opportunities and stable recurring end markets. The Flowserve business system is driving quantifiable improvement in execution and margin expansion, and we see significant runway ahead. Our cash flow generation continues to strengthen, enabling greater capital deployment and incremental returns to shareholders.

We remain focused on driving sustainable growth, expanding margins, and enhancing cash flow, all with the goal of delivering superior value for our shareholders. With that, I'll turn the call over to Amy.

Amy Schwetz (CFO)

Thank you, Scott, and good morning, everyone. Turning to slide nine, we delivered another strong performance in the third quarter, an outcome of our growth strategy and exceptional delivery through the Flowserve business system. The third quarter revenues were $1.2 billion, a 4% increase versus last year. In the quarter, organic sales were flat, while the MOGAS acquisition contributed three points of growth. We continue to see strong growth from aftermarket, while revenue from original equipment was slightly lower in the quarter due to the timing and composition of projects in the backlog. Our profit performance in the quarter demonstrates our execution focus. Adjusted gross margins increased 240 basis points, driven by actions taken under the Flowserve business system, including improvements in operational excellence, our 80/20 complexity reduction program, and improved cost performance. With additional leverage from SG&A, adjusted operating margins increased 370 basis points to 14.8%.

This represents the second consecutive quarter of operating margins within our long-term targeted range of 14%-16%, which we originally set out to deliver by 2027. Our ability to continue to deliver in this range well in advance of initial expectations is a testament to the more resilient business model we have created and an impressive execution by our associates around the world. Moving to the performance of our segments on slide ten, I'll start with FTD. FTD continues to deliver strong performance with another quarter of adjusted operating margins around 20%, in line with best-in-class peers. The 80/20 program is driving clear results for FTD, with the year-to-date benefits from 80/20 pacing ahead of our initial expectations coming into the year. Aftermarket also remains a strength, with bookings growing in the mid-single digits for the quarter.

We continue to improve our aftermarket capabilities, and we see further opportunity to capture more from our large base of installed equipment over time. Bookings in the quarter were negatively impacted by lower engineered pump projects, which Scott referenced earlier, as well as some year-over-year timing of project awards. Overall, FTD book-to-bill for the quarter was 1.02 times, a healthy level as we continue to grow the business, even with lower levels of large energy project activity. Turning to the FTD segment, we delivered strong performance in the quarter with bookings growth of 24%, sales growth of 7%, and adjusted operating margins expanding 230 basis points. Bookings in the quarter benefited from strong aftermarket growth, as well as a large nuclear award and project activity in the Middle East.

FTD adjusted gross margins increased 220 basis points year over year and 130 basis points sequentially, largely driven by improved execution and better performance from MOGAS. Combined with improved SG&A leverage and accelerated synergy realization from MOGAS, adjusted operating margins improved 410 basis points sequentially. For the quarter, MOGAS operating margins were accretive to FTD, consistent with our expectations for the business when it was acquired. The fabricated modules that hampered MOGAS and FTD margins in the first half of the year have been shipped, with the remaining exposure related to final installation and completion. With these projects largely behind us, synergies accelerating, and the MOGAS business now fully on the Flowserve business system, the team is focused on driving growth opportunities across the globe through our expanded offering of severe service ball valves. I'll add that Alice DiBiasio joined the company as our new President of FTD.

We're excited to have her on board and look forward to leveraging her unique set of industrial experiences across product management, software solutions, and engineering to continue the progress in FTD. Turning to slide 11, I'll take a moment to highlight one of the many areas of significant progress within the Flowserve business system. When we launched our 80/20 complexity reduction program in 2024, we had conviction around the opportunity to drive significant value and margin improvement over time. We were intentional with the approach, focusing on individual business units within our segments and ensuring we let data lead the way. From the start, we viewed this as a way of doing business, a process and not a project, and something we wanted to embed in our culture.

Our industrial pumps business unit was the first to come into the program and is now in its second year of driving 80/20 actions. The team has made tremendous progress on a number of 80/20 pillars. First, within industrial pumps, we reduced our original equipment SKU count by 45%, leading to a more efficient manufacturing process, less working capital, and importantly, better value for our customers. While the SKU reduction had some initial impact on top-line performance, the team has quickly pivoted to maximize opportunities with a core set of products. These target selling efforts led to a 21% increase in year-to-date bookings for key customers. By reducing SKUs and focusing efforts on our best products, the team has made a difference for both our customers and shareholders, improving gross margins by roughly 150 basis points compared to last year.

In addition to these efforts, the 80/20 program led us to a decision to divest a small gear pump business within the industrial pumps business unit. This decision was made using our analysis of the market opportunity, our right to win, and our ability to deliver profits in line with our expectations. After analyzing this business closely, we determined it was better off in someone else's hands. While this divestiture was immaterial to our overall financials, it is a decision that ultimately improves our profitability, working capital, and cash flow. We are focused on continuing to execute utilizing the 80/20 methodology, not only in industrial pumps but across our entire portfolio, and we'll share more details over time.

Turning now to slide 12, our continued focus on managing working capital and converting more profits into cash, combined with the merger termination payment, led to significant cash from operations of $402 million in the quarter. For the quarter, adjusting to exclude the net impact of the merger termination payment, our free cash flow conversion was an impressive 174%. As I look at our year-to-date cash flow performance, our improved working capital management under the Flowserve business system, and our healthy leverage level, I'm encouraged by our ability to allocate capital in growth-enhancing ways. In the quarter, we returned $173 million to shareholders, including $145 million of share repurchases. We continued share repurchases into October for an incremental $55 million, bringing our year-to-date repurchases through October to $253 million, with $200 million remaining on our share repurchase authorization.

Looking ahead, we'll continue to allocate capital in a disciplined manner with continued commitment to our investment grade rating. On slide 13, in another example of our disciplined approach to capital allocation, we are excited to announce today that we have reached an agreement to divest our legacy asbestos liabilities. The transaction simplifies our capital structure, reduces volatility, and improves our annual cash flow, all of which will enhance our ability to focus capital allocation on growth opportunities. We have found a great partner for this transaction, and we look forward to closing the transaction in the fourth quarter. Turning to our outlook on slide 14, as a result of strong year-to-date performance and increased confidence in executing through the Flowserve business system, we have increased our earnings outlook for the second time this year.

We continue to deliver strong year-over-year margin expansion and now expect to deliver over 200 basis points of margin improvement for the full year. The midpoint of our full-year guidance represents a 31% increase in EPS year over year and an impressive increase of more than 60% since 2023. I'm proud of our teams, their strong delivery, and our focus on execution. In closing, our performance in the third quarter and year to date in 2023 has been outstanding. Adjusted EPS for the first three quarters of the year is up 31% versus prior year. Aftermarket growth is strong, margin expansion is accelerating, and cash flow performance continues to outpace historical levels. The 80/20 program is early in its lifecycle, but we are seeing tangible benefits with performance in the quarter in line with our long-term margin targets.

While we execute using the business system, we have been able to allocate capital to opportunistic share repurchases to drive shareholder value. These efforts, combined with healthy end markets and significant expansion in power, including nuclear, create a compelling opportunity for profitable growth in 2024 and beyond. We look forward to providing a more robust view of 2024, including our financial outlook for the year, on our fourth quarter earnings call. With that, I'll turn the call back over to the operator for Q&A.

Operator (participant)

Thank you. If you'd like to ask a question, please signal by pressing star one on your telephone keypad. If you're using speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that is star one to signal for a question, and we'll go right to Mike Halloran with Baird. Please go ahead.

Mike Halloran (Senior Analyst)

Thank you. Good morning, everyone.

Amy Schwetz (CFO)

Morning, Mike.

Mike Halloran (Senior Analyst)

Good morning. Could you put in context what you're seeing from an environment perspective? More of a pipeline funnel thought process. I know you mentioned some of the larger projects may be pushing to the side a little bit, a lower percentage of the portfolio today. If you think about what the underlying trajectory looks like, both from an order perspective, from a funnel perspective, how that's converting, are we talking about a framework on a forward basis, 2026 specifically, or however you want to think about it, that's pretty consistent with what your long-term thought process here is? Do you think there's something in the environment that pushes you one way or another relative to that framework?

Scott Rowe (President and CEO)

Sure, Mike. Let me start by just breaking this into aftermarket and then kind of our OE business because I think it's really important. On the aftermarket side, we delivered another very strong quarter at $650 million. That's two out of the last three now. We've got a streak going over $600 million a quarter now for many quarters. We feel really confident that that continues, right? That work is on the back of refinery utilization, chemical plant utilization, desalination plants operating, just general health of the macro environment allows that business to continue to grow. Additionally, we continue to drive our capture rate up. We're doing that through a lot of different levers in terms of making sure that we can be responsive to our customers. We're in the proximity with them with our quick response centers.

We're also doing really good things to make sure that we're providing the support and service. Ultimately, we think we can continue to grow that by moving more from just parts and service and repair to driving full-scale solutions. I would say long-term growth there is tremendous, and we feel really good about our ability to continue to capitalize on aftermarket. If you go to OE and projects, and we put this in the slides, this is becoming less important for us than ever before. Historically, this was roughly 20% of our business, so large kind of OE projects. Now we're talking roughly high single digits, less than 10% of our business. We're doing that deliberately. That's part of our diversification strategy. It's really something that we're looking to do to drive cycle resiliency as we go on the forward look.

With that said, we're still very much in the project game. We feel that the project environment is reasonably constructive. We talked in Q2 about project slippage. Some of those came to fruition in Q3. I would just say the Q3 environment was slightly more constructive than what we saw in Q2. On the forward look, if we break this down to end markets, you know we're obviously very excited about power and nuclear. We think that that is a significant growth rate going forward at a tune of double-digit growth. We put out some markers there that I can talk about maybe in a follow-up question. We also think the rest of the markets are generally in a good space. The other thing I would point to is in 2025, the Middle East energy projects are at a very low level. For us, it's roughly a five-year low.

We believe that that doesn't go down from here. There's a lot of opportunities in our funnel there. We just got to work through some of the larger projects and some of the diverse projects as we turn the corner to 2026. All of that said, I think we're in a good position to grow our business. The geopolitical and macro environment needs to settle down a little bit to give operators confidence in their ability to cost projects and ultimately move things over the financial investment decision line. Overall, we feel constructive about 2026 and beyond.

Mike Halloran (Senior Analyst)

Thank you for that. A follow-up question is just maybe a thought on pricing, how pricing looks in the marketplace, receptivity, competitive dynamics, and how we should think about price costs on a forward basis. Appreciate it.

Scott Rowe (President and CEO)

Sure. Yeah, and you can't talk pricing without tariffs, sadly. We've really hammered price in the U.S. on the back of all of the tariff changes. I think we've done three or four price increases this year. What we're finding is in the run rate business, the aftermarket business, our MRO replacement business, that price has been incredibly sticky. We're seeing the peer group and the other industrials doing very similar things that we're doing there. We feel very good that we're at a price cost neutral basis, if not slightly positive on the forward look. I'd say that's working. That obviously is more of a U.S. phenomenon than anything else. As we think about the project pricing, this has always been the case since I've been here.

The bigger the project, the more exciting or flagship the name of the customer or what it's doing, it seems to just attract more attention. There's always an element of competitiveness. That's kind of the nature of the game there. The EPCs make sure there's several bidders. I would say we're not seeing anything fundamentally different than what we've seen in the last couple of years or anything in my tenure here. We believe that the environment's constructive for us to be selective with our bidding, especially with the large pump projects. When we say selective, it's making sure that we have the right to win. We're working with customers that we know we can execute on. We know there's a large aftermarket content where they support that. Ultimately, bringing margins in that will drive value creation for Flowserve. I think we're in a good place there.

We're more focused on pricing than ever before. We feel we can be on the positive side of price cost as we go forward.

Operator (participant)

If you find that your question has been answered, you may remove yourself from the queue by pressing star two. We'll move next to Andy Kaplowitz with Citigroup.

Andy Kaplowitz (Analyst)

Good morning, everyone.

Scott Rowe (President and CEO)

Hey, Andy. Good morning.

Deane Dray (Analyst)

Scott, can you give us a little more color into the margin inflection you saw on FTD this quarter? How much of the improvement was MOGAS improving versus core FTD? You mentioned that both of your segments are in line to at least make the range of 16%-18% segment-adjusted operating margin that you set for FY 2027. As you know, FTD is already higher than that. Could that range end up being conservative?

Scott Rowe (President and CEO)

Sure. Maybe I'll hit the MOGAS piece because I was there last week. I'll let Amy talk about just the margin progression in general at FTD, and we can touch on the pump division as well. Look, MOGAS is going incredibly well. I was in their site last week with Alice, and we had a fantastic visit. I'd say some of the takeaways there is the integration has gone incredibly well. The Flowserve business system is fully embedded. When I mean business system, the operational excellence is in place. Shop floor daily management, problem solving, how we do inventory, all of that is now embedded and operating at a level that I would say is equivalent to the rest of the Flowserve peer group. We've really pushed the portfolio excellence side. They're on the 80/20 program now. We look at that as a severe service kind of ball valve offering.

We're now making, and we've been making, rationalization type decisions with our other offering. Now we're moving into commercial excellence. The commercial excellence is about driving growth and making sure that we get clean orders into the facility itself. I couldn't have been more pleased with the progress that they've made. In the quarter, MOGAS margins were accretive to FTD. As Amy said in the prepared remarks, the modules that had given us some concern and maybe a little bit of a, you know, were slower to deliver than what we had expected when we signed up the deal, those have now shipped in the third quarter. There's minimal revenue from the modules in Q4 and Q1, and that's associated with the installation and commissioning work. Now the focus is on bookings and driving growth. We're excited about what that product offering can be.

As a reminder to everybody, the end markets here are mining and refining. What we've seen in the mining space is that funnels increased. We had a pretty decent booking number in the quarter, but the outlook continues to improve. Structurally, we think that the end markets will support MOGAS growth. Leaning in with commercial excellence and the 80/20 principles, we believe that we'll get to that $200 million that we keep talking about. Lastly, I would just say this is a great example where we're applying the business system as part of an integration.

What we saw and what we've seen now is in a relatively short period of time, we can take a family-owned business that maybe wasn't highly focused on business process and turn that into something that we're extremely proud of that we know can drive enhanced margins to the FTD portfolio, but also drive enhanced growth with our customers and outlook here.

Amy Schwetz (CFO)

Yeah. Andy, I'd just add with respect to FTD, we improved 410 basis points sequentially. You don't do that without all boats rising within the FTD platform. We've been talking about some of the levers that we had available to us, whether or not that's operational excellence and some footprint decisions that had been executed in late 2024, going into 2025, as well as other tenets of the operational excellence program. 80/20 is taking hold in the platform. We're seeing that start to contribute as well. Obviously, the story behind MOGAS as well. We continue to think that there's runway with respect to FTD margins. Once again, with respect to FTD, obviously a great story, a great story there as well in terms of both platforms being within the range of their long-term targets, actually FTD being on the outside in a good way of that range.

I think we'll go through our annual planning process this year, knowing the additional levers that we have to pull from a margin expansion standpoint, both in 2026 and beyond. We'll look to reset those long-term targets in 2026.

Andy Kaplowitz (Analyst)

Thanks for that. Scott, you talked about that $10 billion nuclear flow control opportunity over the next decade. What do you think your share could be of that opportunity? Nuclear bookings per quarter, we know are lumpy, but they seem to be rising overall. I think they've averaged higher than your specific nuclear sales exposure that you mentioned, maybe close to high single digits of bookings, high single digit percentage of your bookings each quarter over the last year or so. Could they continue to average that amount or even more over the next couple of years?

Scott Rowe (President and CEO)

Sure. Let's look back first, and then we'll talk about the forward look. The nuclear bookings are rising. Power in general has been up double digits for us. We've had three quarters now over $100 million in the last of the last four quarters for our nuclear bookings. I would just say with all the noise in the nuclear space in a positive way, the noise in a positive way at all the recent announcements, we only see nuclear starting to move forward with a trajectory and an inflection that's higher than what we have today. We're incredibly excited about the nuclear opportunity. It's why we put three slides in our presentation. Maybe to frame up the $10 billion a little bit, we do have substantial share within the nuclear space. We're leveraging our domain expertise. We're leveraging our installed base.

We're leveraging the partnerships and the quality certifications that we have around the world that put us in the forefront and allow us the opportunity to do this work as we go forward. I would just say the barriers to entry here are really, really high, right? The quality plans and what our customers are looking for are pumps and valves and actuators that will work for the 30-year planning life. They take it very, very seriously. Getting an in-stamp in the U.S. is incredibly hard. We just feel like we're in a great position to carry on with this work with companies that we've worked for for decades. We're excited about the prize. We did put some kind of market share numbers in there, and it's to orient folks. There's roughly 400+ nuclear reactors out there in the world today. We have equipment in 75% of those.

We called out some geographies because it is important. In North America and Europe, we do incredibly well. We do really well in Korea. We believe we can do well in India as they're going forward. Those are the areas that we'll target. Obviously, China is a massive market and growing more reactors than any other region at this point. With China, we have installed base in the early reactors and the early facilities. Over time, they've shifted to a more nationalistic approach on all of their equipment. That's why we've deliberately kind of excluded that as we talk about our numbers. As you build to the kind of the $10 billion prize, we put some numbers out there, around 40 reactors in the next 10 years that could have up to $100 million of content for Flowserve. We talk about SMRs progressing and moving forward.

We believe we're well positioned with what we think are some of the winners in the SMR technology. There is a large contribution in the $10 billion number on the back of SMR. Our aftermarket today is roughly $100 million of bookings a year. That number only grows with our increased installed base. We feel very comfortable that that continues, if not grows, pretty aggressively over the 10-year period. Finally, on the last category there would be extensions and re-rates, and then kind of where we're bringing assets back to life. This week, both Google and Brookfield announced two projects of bringing existing sites back online over time. I would just say those are incredible opportunities for Flowserve. One of those examples, we have pumps and valves installed, and we will absolutely be a part of that project.

The other one, the pumps and valves that we did manufacture got pushed to a different site, or actually two different sites. We're confident that we'll pick back up that work. We feel like we're in an advantaged position. We've got the expertise, and we're leaning in to make sure that we'll position our offering to capture the full benefit of this nuclear growth.

Andy Kaplowitz (Analyst)

Appreciate all the color.

Operator (participant)

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

Deane Dray (Analyst)

Thank you. Good morning, everyone.

Scott Rowe (President and CEO)

Good morning, Deane.

Deane Dray (Analyst)

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

Amy Schwetz (CFO)

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

Deane Dray (Analyst)

Great to hear. Amy, just sticking with the free cash flow, it's outstanding this quarter. You were clearly, you laid out how you were excluding the windfall from the deal termination. Is there anything else within the free cash flow, the working capital, any kind of improvements that you would cite there? What does this mean for free cash flow for the year? Because it looks this puts you ahead of a plan.

Amy Schwetz (CFO)

Yeah. I think that as we look at free cash flow now, we're targeting something at the 100% level or a little bit better. I think for us, really, free cash flow starts with margin expansion. That's the quickest way to improve free cash flow for any company. Working capital has been a huge focus, and we've made some improvements there. The 80/20 is actually helping us with the process. Even decisions that we made during the quarter around the small divestiture pay dividends in terms of simplifying the inventory that we need to keep on hand. I'll just point out with working capital, and if I didn't remind you, Scott would remind me to remind you that our work is not done. We continue to have a substantial amount of improvement that can be made in this area, and we are focused on it.

We are focused on it at the leadership team level, at the platform level, and at the BU level. We're going to continue to do everything that we need to do to make free cash flow a real strength for Flowserve and its investors.

Scott Rowe (President and CEO)

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

Deane Dray (Analyst)

Yeah, that's really great to hear. Congrats on the progress to date. Thank you.

Amy Schwetz (CFO)

Thanks.

Operator (participant)

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

Damian Karas (Analyst)

Hey, good morning, everyone.

Scott Rowe (President and CEO)

Good morning.

Damian Karas (Analyst)

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

Scott Rowe (President and CEO)

Yeah, I think it might be helpful to just kind of walk through the life of a new-built nuclear reactor. I would just say these are very different than even kind of an oil and gas project or a water project or anything like that. The amount of years on the front end to get the process dialed in fully and to ensure that the quality requirements are at a place that they're comfortable with is multi-years. When we went and worked on a new reactor, the time horizon for us is somewhere in that kind of four to five-year mark before we can start shipping equipment. Those first three years are all about engineering and quality.

I just feel like as we go forward and we think about the folks that are designing these types of reactors, you know that's a Westinghouse, it's your EDF, it's your Korean nuclear authorities, for them to make a change in terms of what they've been doing historically and introduce a new supplier, it's really, really difficult to do. The barriers to entry here are incredibly high. With that said, obviously we have to perform. We have to perform with delivery. We have to perform with increasing our capacity to support the nuclear growth. We've got to perform with our ability to be competitive to allow their financial decision to get over the line. Again, we've worked with these players for decades. We're very confident in our ability to retain that type of work, if not grow that work. We're leaning in on our opportunities.

We're making sure that we can support the industry, and we're making sure that we can support our customers in the regions where they're operating.

Amy Schwetz (CFO)

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

Damian Karas (Analyst)

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

Amy Schwetz (CFO)

Sure. Probably from a financing perspective, I would say it's credit enhancing, but given the size, probably not too terribly impactful. I think overall we find ourselves in a position at Flowserve where we have more opportunities for capital allocation than ever before. We've made some of those decisions in the fourth quarter already with some opportunistic share repurchases in October, as well as earmarking a little under $200 million towards this transaction. I think what you've seen us do over the last several quarters is pretty indicative of the disciplined approach that we'll take. We're focused on sort of growth opportunities and earnings-enhancing opportunities around capital allocation. It's going to be environmental specific. It made a lot of sense for us to buy back shares over the last few months. We'll continue to keep that at the ready.

We've got about $200 million of authorization still available to us under our share repurchase plan. Over time, we're also interested in growing the business. As Scott pointed out, the kind of the MOGAS turning point in the third quarter, their adoption of the Flowserve business system, us now turning our attention to really growing that business over time gives us more and more confidence that M&A utilizing our strict criteria around value creation can be a powerful tool for us over time with respect to capital allocation.

Damian Karas (Analyst)

Thank you for all your thoughts. Best of luck with everything.

Scott Rowe (President and CEO)

Thank you.

Operator (participant)

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

Brett Linzey (Analyst)

Hey, good morning all. Congrats.

Scott Rowe (President and CEO)

Good afternoon.

Brett Linzey (Analyst)

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

Scott Rowe (President and CEO)

Sure. Yeah. When we think about the compare versus last year, it was a difficult comp. We had three large projects in the Middle East that were all energy a year ago, and those didn't repeat this year. I think that's the easiest way to describe that. Energy on the OE side for us is primarily Middle East. It's a lot of that kind of midstream processing and storage, and then also on the downstream side. We had a lot of activity last year, and quite frankly, we're in a little bit of a lull right now with the Middle East energy type project bookings. With that said, I feel confident that there is work to do in the Middle East.

There are a lot of plans to move forward with some of the investments that have already been made public but have been delayed in terms of that project timing. We're incredibly well positioned to capitalize on that growth. I would say with just a little bit of stability in the system, maybe oil pricing coming back a little bit to provide them a little bit more cash flow to fund new projects, we could see a positive trajectory here in 2026 and beyond.

Brett Linzey (Analyst)

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

Scott Rowe (President and CEO)

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

Brett Linzey (Analyst)

Okay, great. Thanks for the detail.

Operator (participant)

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

Nathan Jones (Equity Analyst)

Good morning, everyone.

Scott Rowe (President and CEO)

Hey, good morning, Nathan.

Nathan Jones (Equity Analyst)

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

Scott Rowe (President and CEO)

Yeah. Nathan, I'll point to slide six where we talk about the current market share, and I'll try to give some color on the go-forward basis. Of the 416 reactors that are out there, we have content in 75% of that. That could be a pump, it could be a valve, it could be our in-seals, but we're very well positioned. In my comments earlier, we do really well in North America with the Westinghouse technology. We do really well in Europe with Westinghouse and EDF technology. We do really well in Korea. Where we don't do well today is in China. Historically, we have done well in China, but just because of their policy and moving to domestic supply, even though we have a strong presence in China, we typically will not win the new Chinese work.

If you think on the go-forward basis, who is involved with the forward North America growth, the forward Europe growth, what's happening in potentially India, in China, or sorry, in Japan and in Korea, we're incredibly well positioned there with those operators. On the valve side, I would be disappointed if we did not have the highest share of mainstream isolation valves where we have the primary product globally for the main safety valve in all of the nuclear reactors. We have a large content on the cooling pumps. We put a number out there at kind of a 50%. I think we can maintain that on a go-forward basis. We are moving back into some of the reactors with the primary cooling pumps within the reactor itself.

We haven't done that work in a long time, just given the lack of some of the newer builds, but we're starting to secure our position there. I fundamentally believe that our market share could actually go up as we reposition some of our products to take on the balance of plant. I think you could expect us to be a market leader here, certainly within pumps and valves on the go-forward basis.

Nathan Jones (Equity Analyst)

The $10 billion excludes China?

Scott Rowe (President and CEO)

We did not put China in our estimates.

Nathan Jones (Equity Analyst)

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

Scott Rowe (President and CEO)

I think that's fair, yes.

Nathan Jones (Equity Analyst)

Okay, I think that gives a bit more color on potential win rates. I'll leave it there. Thanks for taking the question.

Scott Rowe (President and CEO)

Okay. Thank you, Nathan.

Operator (participant)

We go next to Joe Giordano with TD Cowen. Please go ahead.

Joe Giordano (Analyst)

Hey, good morning, guys.

Scott Rowe (President and CEO)

Good morning.

Joe Giordano (Analyst)

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

Scott Rowe (President and CEO)

Yeah, those are really important questions. Let me start with capacity, and then we'll go to our customers and how we think about that. On the capacity side, you know, we've been doing this for decades. We have a designated facility for valves in North America. We have a designated facility for pumps in Europe. We can expand capacity at both of those sites. We're looking at making a nuclear center of excellence where we can put all of our product together into a site that then allows us to leverage the engineering, the project management, the quality, and things like that. I would say we're confident in our ability to ramp. Back to some of my previous comments on this, when you win an award, you've got three years of kind of office type work and engineering and quality before you start delivering the equipment.

You do have lots of visibility in terms of making sure that you've got the capacity. The other thing I would just say is on the supply chain, that is an area that we're working today to make sure that we are investing in our suppliers to ensure that they can come along on the journey with us to participate and allow us to deliver as expected. I'm highly confident in our ability to expand capacity and to keep up with the industry, at least at this point in time. On the customer side, you know this is a dynamic landscape, and there's announcements it feels like every week or every month in terms of some of the players here. Obviously, it's attracting a lot of money.

Names like Brookfield and Google and Amazon are funding and backing some of these projects with large dollars just to make sure that these reactors can get back online and be a part of the power on a go-forward basis. With that said, we have been selective in who we are working with. We have hired what I'll call a nuclear expert that worked with the NRC for a couple of decades and then worked in the White House. He is helping us to be really selective on where we put our resources and where we put our efforts. We identified a few of those customers on our slide here. I would say on the SMR side, we've narrowed that list down to kind of 10-12 players that we're actively engaged with that we believe will be successful in the long run.

I don't think we'll be 100% right there, but if we're at least 60% or 70% right on who we've chosen, then we're in a really, really good place from a partnership perspective. I'd say we've been very methodical about our approach and making sure that we're not overburdening some of our business development and engineering resources on the front end of this to get locked in into the future.

Joe Giordano (Analyst)

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

Scott Rowe (President and CEO)

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

Amy Schwetz (CFO)

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

Scott Rowe (President and CEO)

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

Joe Giordano (Analyst)

On the backlog conversion?

Amy Schwetz (CFO)

On the backlog conversion, I would say overall, last year you started to see this in the context of our backlog with that ticking down to kind of mid-80s overall for Flowserve. I think we'll see that continue in some ways around the nuclear portfolio. I will say that is being slightly offset by the strength of our aftermarket business. Our aftermarket business, which converts relatively quickly, is at historical highs, and we're continuing to be focused on that. Those two tend to offset a bit, but I would say there's probably slight pressure on backlog conversion with the nuclear content.

Joe Giordano (Analyst)

Thanks, guys.

Operator (participant)

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

Andrew Obin (Analyst)

Hi, yes. Good morning. Can you hear me?

Scott Rowe (President and CEO)

Yeah, we can hear you.

Andrew Obin (Analyst)

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

Scott Rowe (President and CEO)

Yeah, I think in the quarter for the traditional power, it might just be a little bit of a timing impact. We are seeing investments in all forms of power. You're seeing coal-fired power plants get extended where we have a lot of content on both pumps and the valves. We're seeing new kind of single-cycle, combined cycle plants going forward where we may not have as much content, but we do have content there. I would say this phenomenon is happening all over the world. We're excited about that opportunity. It is a more competitive type environment. We've got to be really selective in terms of making sure that we can get the right product in front of the right customers, the folks that value our aftermarket.

I just say we're a little bit more selective here just given the broader kind of competitive offering with the traditional power set.

Andrew Obin (Analyst)

Gotcha. Just to help us understand, you know last year bookings grew 9%. This year, bookings are sort of flattish. How do we think about the relationship, you know given that you're changing a business model? How should we think about the relationship between bookings and revenue? Just how do this year's bookings translate into hitting the 5% revenue target next year, right? Because the 9% bookings growth last year hasn't really flowed through the P&L stop line. No complaints about results.

Scott Rowe (President and CEO)

Yeah, I'll let Amy talk about the conversion to revenue. I'll talk a little bit about the growth. We're obviously right at kind of a book to bill at 1.0, which is what we're committing to, and the growth this year on bookings is lower. We said this earlier, but a lot of that, you know.

East kind of OE project business has come down. When we think about the rest of the business, all other aspects excluding kind of OE Middle Eastern or OE energy projects have grown at 9%. We actually feel like we're doing a nice job growing and leaning into that growth. We need that kind of energy bookings to come back in 2026 to get us back to what we want. The last thing I would say is on the commercial excellence in 80/20, the teams are incredibly focused on growth. Commercial excellence is 100% about growth and aligning the sales organization the right way with the right incentive structure and the right project pursuit strategy and all of that good stuff to capture more share. On 80/20, we're now starting to move more and more into the growth side of 80/20.

We showed some numbers with our industrial pumps that's growing our target selling accounts at 21% this year. I do feel like that we can, with this kind of renewed commercial excellence and the 80/20 focus, we get back to this kind of 5% kind of, you know, over time, a 5% growth rate feels right for me.

Amy Schwetz (CFO)

Yeah. The only thing I'm going to add there is I think overall our conversion rates on sort of this quicker-turn business is actually improving over time. The efforts that we've made around commercial excellence are reducing, or around operational excellence, are actually reducing our lead times. That combined with our aftermarket strength, which we have no intention of slowing the intensity of those efforts, does help with conversion. As Scott pointed out, with the overall health of a number of the end markets that we're focused on, in addition to the efforts around commercial excellence and target selling, we see those things in conjunction with some Middle East opportunities, not just in traditional energy, but within power and water moving into 2026, as sort of more than offsetting headwinds that we see from 80/20.

Andrew Obin (Analyst)

Thank you.

Operator (participant)

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

Brian Ezzell (VP of Investor Relations)

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

Operator (participant)

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